The global financial crisis of 2008 saw economies, corporate profits and share prices under significant pressure; this created a large number of opportunities for investors to buy classic recovery shares, companies with strong business franchise, which had been indiscriminately sold off because of a focus on short-term profits.
These included Somero, the UK-listed global leading manufacturer of equipment for levelling concrete. Selling to the construction industry, it sold off as the industry fell out of bed during the crisis, with construction projects cancelled and businesses focused on cash flow.
Shares in Somero fell to as low as 10p in 2009 as profits vanished, but the underlying business franchise remained strong. As demand subsequently recovered, the business became profitable again.
From the low point which saw the company’s market cap fall to £10 million, it now makes £10 million in profits annually, and its share price has climbed to over £4 a share.
The housing market has traditionally been a play on the UK economy and during the financial crisis demand for new housing fell and the housebuilders that had taken on debt in the good times prior to the crisis found themselves under a lot of pressure as the industry went into a cyclical downturn; rights issue were required by many housebuilders to shore up balance sheets.
Housebuilders such as Barratt Developments therefore saw their share prices fall sharply as profits fell and rights issues were announced.
We purchased a number of housebuilders in 2009 and 2010 (including Barratts and Telford Homes) as the industry re-financed itself and started to benefit from a stabilising market and cheaper housing land; we paid on average less than 100p buying Barratt Developments with the shares now trading above 500p. We have exited most of our UK housebuilders over the last couple of years as a full recovery has been delivered.
US housebuilders were similarly impacted by the GFC, and having both a global and UK fund, we looked for opportunities to play the same trade overseas.
As with the UK businesses in the sector, some companies saw such sharp falls that share prices started trading at a significant discount to book value.
One such name was D.R. Horton, one of the US’ largest homebuilders. At its low point its shares dropped to $7 a share (£5.32), but they are now worth $40.
US gaming law change
In 2009, in the aftermath of changes to rules which had banned online gambling in the US, we bought a company called Neovia, later to become Paysafe.
In internet payments platform, it had sold off sharply amid the move by the US government to ban internet betting.
We saw the selloff as an opportunity to gain exposure, at a very attractive level, to an on-line payments platform with very strong underlying infrastructure which had been impacted far too heavily by a one-off event. While they are all the rage today, back then on-line payments was very new, and the chance to buy it at around 20-30p was too good to miss out on.
Over time it expanded to new markets in Asia Pacific and Europe, building up its franchise until it was taken private for 590p.
The supercyle for commodities carried on throughout the GFC, and it was only when emerging market growth peaked in 2011-12 that businesses linked to commodities - such as miners – really started to struggle.
Over the next few years the sector suffered heavy falls as over-supply built up during the boom, and weakening demand for commodities - particularly from China - hurt commodity producers.
There were numerous companies which declined but one of our key picks was Anglo American. Anglo was singled out by investors because of concerns about its balance sheet, but we observed the company’s actions around cost-cutting and its attempts to take production out of the market, as well as its review of its asset bases.
It subsequently sold its less profitable sites and strengthened its balance sheet, and having seen shares fall to 250p in 2016, we bought in aggressively amid its self-help strategy.
The shares now trade around £17.50 and we still hold it in our portfolios.
European sovereign debt crisis
The sovereign debt crisis in Europe hit a number of countries’ equity markets very hard, in particular Italy’s.
We had always liked the franchise power of football clubs, even though the profit models are never that attractive, and amid the height of the crisis shares in Juventus fell as low as €0.20.
We made some comparisons to other cubs – such as Arsenal FC – analysing the comparative franchise value of the two teams, and felt that Juventus had a similar franchise value, with at least as much success as Arsenal on the field.
Nonetheless, Juventus’ market cap was just €300 million at the low point, versus Arsenal which was valued at €1.5 billion (£1.3 billion). The clubs generated similar revenues so there was a huge valuation gap, and we decided to invest, paying between €0.20 and €0.40 for shares.
Today, following a significant re-rating, that valuation gap has been closed, with Juventus trading at around €1.60.