Market volatility creates significant opportunities for active investors like Milford, who invest in specific companies rather than simply investing in the whole market. In the short-term, outside events can cause shares to move in step, as we saw when markets dropped sharply during February and March this year. Over time, business fundamentals such as earnings resiliency and quality are better indicators of future performance.
Here are three companies Milford identified as investment opportunities during the COVID-19 lockdowns and continue to hold in many of our funds.
Increased fast food consumption – Collins Foods (CKF.ASX)
Collins is the largest operator of KFC franchises in Australia, with most of their restaurants in Queensland and Western Australia. During February and March, Collins’ share price dropped by more than 55 percent. Our experience with Restaurant Brands (RBD.NZX) during the GFC demonstrated that weaker consumer sentiment doesn’t necessarily translate to less demand for fried chicken. We considered KFC franchisees’ earnings were more resilient than the market appreciated, given:
i) Drive-thru, takeaway and delivery account for about 80 percent of Australian KFC sales;
ii) Many restaurants that might otherwise compete for the casual dining dollar were closed; and
iii) KFC provides a cheap luxury, something people will always want – perhaps even more so when in isolation.
Collins Foods provided an earnings update in June, recording an incredible 11.5 percent growth in same store sales in Australia over the seven weeks of trading from April 30.
More cars on the road – Bapcor (BAP.ASX)
Bapcor is one of the largest providers of second-hand vehicle parts to auto-mechanics across Australia and New Zealand. During February and March, Bapcor’s share price dropped by more than 50 percent. We considered Bapcor’s $A210 million capital raise (at $A4.40 per share) an excellent opportunity to increase our holdings in the company, given:
i) The shift towards driving to work over using public transport;
ii) Older cars requiring more servicing and battery replacements, having been parked for six weeks or more; and
iii) Collapsing new vehicle sales, meaning older cars staying on the road longer.
Bapcor provided an earnings update in June, recording 10 percent growth in same store sales across its Trade division and 45 percent growth in same store sales across its Autobarn retail stores during May and June. At the beginning of this week (Monday June 29), Bapcor’s share price was at $A5.85.
Tools that enable people to effectively work from home – MNF Group (MNF.ASX)
MNF Group is Australia’s largest provider of Voice over IP telephony. The company generates revenue from virtual phone numbers it creates, which help enable collaboration software like Skype, Microsoft Teams and Zoom: the more these numbers are used, the higher the revenue. During February and March, MNF’s share price dropped by more than 40 percent. The Milford Dynamic Fund (NZ) has held MNF Group shares since August 2014, and we identified MNF as a company very likely to benefit from the increased number of people working from home. During March we took advantage of the weaker share price and significantly increased our MNF position within the Milford Dynamic Fund.
The above stocks are just a few of the companies which have stood out in light of the COVID-19 market volatility. Active investors need to identify the winners through every economic cycle. Irrespective of what is happening in the broader economy, some businesses will benefit and investors in those businesses will reap the rewards.