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Jupiter: Why You'll Find Stocks We Don't Like in our Fund

Jupiter's James Clunie thinks several stocks in his portfolio will fall in value - and he will profit when they do

Emma Wall 15 September, 2016 | 3:32PM

“A good fund manager must have an edge to beat the market, and mine is shorting stocks,” says Jupiter Absolute Return fund manager James Clunie.

Focusing on single stock selection, the data-driven manager has picked companies he believes will fall in value, and places shorts – a type of bet which profits when a share price falls – in both bull and bear markets to great effect.

“We have been in a bull market for the past seven years, conditions which my skill set is perhaps not best placed for,” says Clunie. “I like a generally drifting market – which is what we are in now. Come the bear market, I’ll be very happy.”

Despite the less-applicable skill set, Clunie has made money in the rally, up 17% over the past three years compared to the FTSE 100’s 16.2% gain. Prior to his landing at Jupiter Clunie ran the SWIP UK Flexible Strategy Fund, where the fund returned 23% in the three years to April 2013. 

When deciding which stocks to short Clunie says he looks for a catalyst; a decline in sales, poor results, a “clear reason for the share price to decline”. The trick is having patience, but also knowing when to quit. Unlike long-only portfolios of stock holdings where you can only ever lose the value of the share you bought, there is no bottom to a short loss.

Four Big Shorts Picked by Clunie

Caterpillar (CAT)

Morningstar equity analysts rate this engine and equipment maker overvalued. Analyst Kwame Webb says Caterpillar's brand and product portfolio have been carefully assembled over the past 100 years to create the largest construction and mining equipment manufacturer in the world. In a push to realise research and development and production efficiencies, Caterpillar has become the largest or second-largest manufacturer of virtually every product it makes while generating a 15% pre-tax return on tangible assets.

But the firm has recently negatively revised its 2016 outlook to $40 billion of sales and $3.55 of earnings per share from a prior outlook for $42 billion of sales and $3.70 earnings per share.

Deere & Co (DE)

Founded in 1837 as a blacksmith's shop, Deere's brand name is synonymous with agricultural equipment. It generates 80% of sales from agricultural equipment and greater than 50% of sales from the North American farm equipment market. The brand is built on industry-leading agricultural research and development, or R&D, spending and an unmatched North American agricultural dealer network. Morningstar equity analysts currently rate the stock as undervalued.

Netflix (NFLX)

Netflix posted disappointing second-quarter subscriber adds in both the international and U.S. segments in July, leading Morningstar equity analyst Neil Macker to rate the stock as slightly overvalued.

From its origins as a DVD rental by mail service, Netflix has morphed into a pioneer in streaming video on demand and the largest online video provider in the US. The stock has an economic moat rating of narrow from analysts, based on intangibles and a network effect resulting from the use of Big Data stemming from the firm's massive subscriber base in the US. Already the largest provider in the U.S., Netflix is expanding rapidly into markets abroad.

Tesla (TSLA)

Morningstar analysts rate Tesla Motors as undervalued. “We continue to see Tesla’s stock with option value that is based on what the firm can do many years, if not decades, from now so quarterly results are often overdone in the press,” said senior equity analyst David Whiston.

Tesla has the momentum and charging infrastructure to be the dominant electric vehicle firm, but analysts do not see it having mass-market volume for at least another decade. Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, as the prices are too high.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Caterpillar Inc95.48 USD-0.07
Deere & Co108.62 USD0.83
Jupiter Absolute Return55.56 GBP-0.41-
Netflix Inc143.25 USD0.33
Tesla Motors Inc257.00 USD0.39
About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk