Fund Managers' Favourites: European Bargains

Fund manager Barry Norris from Argonaut Capital Partners discusses his three favourite European stocks 

Alanna Petroff 31 August, 2012 | 10:12AM
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In the video series, "Fund Managers' Favourites", Morningstar speaks with UK-based fund managers to learn about their top investment picks. In this video, Morningstar journalist Alanna Petroff speaks with Barry Norris from Argonaut Capital about three of his favourite European investments.


Alanna Petroff: Many investors have been shunning Europe because of concerns about the single currency and also stagnant growth. However, some people are still interested in Europe and one of them joins me today. His name is Barry Norris and he is a partner at Argonaut Capital Partners, and he runs the Argonaut European Alpha Fund, which is Bronze rated by Morningstar.

So, Barry let's go over your investment strategy and why you're in Europe?

Barry Norris: Well, we at Argonaut specialize in European equities and our investment strategy is essentially based on finding companies that have got sustainable and growing profits and dividends, and we invest in them when those valuations are very attractive relative to other opportunities. So, at the moment in Europe the outlook for corporate profits is mixed. So, there are some companies doing very, very well, other companies that are struggling. I think the key thing is, is to find the companies that are doing well and invest in them, and to ignore the ones that aren't doing so well.

Petroff: Okay. So, now let's go over three of the companies that you think are going to be doing well in the future and we’ve seen they have done well in the past. So, let's start with your top three picks and we'll go with Nestle first.

Norris: Well, we look at Nestle, which is Europe's biggest company, as almost the world's cheapest low-risk asset. So, if one looks at its balance sheet, it’s extremely strong. It's rated as a stronger credit than nearly every sovereign in the world. And then we look at its dividend, which is 3.8%. It’s important to note that it hasn't actually cut its dividend in 57 years. And over the last 17 years, it's grown its dividend at an average annual rate of 12%, which over 17 years adds up to a 600% increase in its dividend.

And I think investors should note that you don't get that sort of growth from investing in cash or bonds, you only get the benefits of compound growth from investing in equities. And so, if we look at that dividend yield and think that the company can continue to grow that dividend yield at 12%, which we think it can, then in 10 years the yield on Nestle shares is going to be 11.5% and your average yield over the next 10 years is going to be 7%. So, if we put that in the context of a world where it's very, very difficult to find yielding assets which have fairly low risk, we think it's amazingly attractive.

Petroff: Now, let's move onto North Atlantic Drilling, which is your second top pick.

Norris: Yes, North Atlantic Drilling is a pure play rig owner in Norway. So, at the moment there is a lot of oil being found on the Norwegian continental shelf. As a result, oil companies need to rent out oil rigs to drill for that oil. Norway is a very attractive market, because the rigs have to be specially made for the Norwegian market and very few companies have access to capital like North Atlantic Drilling to order some new-builds. So, the company trades on a P/E of about 6, the dividend yield is 11%. We think as a result of rising rates for renting out rigs and the delivery of a few new-build opportunities, that the company can grow its earnings by at least 50% over the next couple of years.

Petroff: Let’s move on to your third choice then, Unibail and that’s in France. Tell me a little bit more about that.

Norris: Unibail is Europe’s biggest property company. It owns prime office and shopping centers all over Europe, so it’s is very well diversified geographically and through its customers. We think the company is attractive from two aspects; one is, its cost of debt is very, very low by virtue of its strong balance sheet and its size. So, Unibail is able to borrow money at just 2% and that’s, obviously, in an industry where many people don't have access to capital. So that allows it to grow its own business and to make acquisitions at attractive rates.

I think, secondly, we think, property in the right places is actually a very attractive asset at the moment, because not only is it defensive in terms of regular cash flows, good dividends, but also, of course, if central banks print a lot of money and we get an economic recovery its likely to result in a pickup of inflation as well and real-estate is a very good hedge against that inflation.

Petroff: Okay. So, now let’s go over the key risks for each of these companies because even though you love them, there are still risks involved with each, so let’s start with Nestle.

Norris: Almost the biggest risk in Nestle is that the world normalizes and it loses its slow and steady characteristics as investors overlook it in favour of racier things. 

Petroff: Okay and what about North Atlantic Drilling?

Norris: Well, I think although the company is fairly low risk in comparison to other companies in its sector by virtue of its cash flows, which are locked up on three to four-year contracts, inevitably if the oil price were to fall precipitously then the rates that it could rent out its new-build rigs would be lower than perhaps we would like.

Petroff: Okay and for Unibail as well.

Norris: Well, I think just extreme macroeconomic events. In a very strong economic recovery, perhaps some of its competitors could access capital at as cheap rates as Unibail. But then in a sort of depression style scenario, even blue-chip customers in prime locations might not be able to afford to pay the rents anymore.

Petroff: Okay. So, where the economic situation is right now is benefiting Unibail, but to go possibly one way or the other would be potentially detrimental.

Norris: Correct.

Petroff: Okay. Thank you very much for joining me today.

Norris: Thank you.

Petroff: That was Barry Norris from Argonaut Capital. And I’m Alanna Petroff. You have been watching Morningstar.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Nestle SA99.21 CHF-1.01Rating
Unibail-Rodamco-Westfield Act. SIIC ET STES FONC.EUROP.55.26 EUR-0.18Rating
VT Argonaut European Alpha A GBP Acc330.88 GBP-0.48Rating

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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