Investors should watch stocks exposed to the low volatility in equity markets as they could present big opportunities in the future, Syz Asset Management’s Claire Shaw said.
In the latest market commentary, the European mid- and small-cap equities expert and portfolio manager revealed where she is finding hidden gems by going against the current.
The contrarian manager described how she invests when sentiment is at its worst and fear at its highest for the OYSTER European Mid & Small Cap fund.
She used the example of exchange-traded products provider Flow Traders, which is currently suffering from earnings downgrades and weak sentiment as a result of multi-decade lows in volatility.
The low volatility has impacted trading velocity and reduced the company’s revenue capture and margin.
Even so, Flow Traders offers a strong investment case, she said.
‘They are the market leader in Europe with a c.20% share, and the company is essentially a geared play on the huge secular growth in the ETP industry (global ETP assets under management have grown at 28% CAGR in the last 15 years).
‘Supporting the investment case further is a 4.7% dividend yield and double digit FCF yields.’
Shaw also sees big potential in new disruptive technology group Ion Beam Applications – the market leader with a 50% global share in proton therapy.
In the short term, the group has been out of favour, having delivered three profit warnings in the past nine months – mainly due to delays in the construction process – which have halved the share price.
Even so, proton therapy, which is an advanced type of cancer radiotherapy that minimises exposure to healthy tissues and reduces the risk of secondary cancers, is expected to post a 15% CAGR to 2035.
‘Our long-term investment horizon allows us to see past these temporary, cyclical factors and invest in a company that benefits from high barriers to entry in a structurally attractive oligopoly, a strong backlog equating to over €1 billion in sales and a rock-solid balance sheet which can support future growth.’
Uncovering a hidden gem
A tough year for diamond companies in an area that has oversold, and a sluggish diamond market with mining setbacks have presented opportunities, Shaw said.
Lucara Diamond Corp is one company that has had a difficult year as a change in its mine operator temporarily hampered volumes and the company suffered from a lack of news flow around new discoveries. This has created an attractive entry point, she said.
‘Uncovering this hidden gem in the small- and mid-cap universe highlights our research edge – buying unknown and unloved stocks and taking advantage of short-term pessimism.
‘Investor antipathy and hostility towards certain stocks, sectors and countries is what gets me excited.’
The company is a pure-play diamond miner at the Karowe mine in Botswana.
‘In November 2015, Lucara made history when it recovered the 1,109 carat Lesedi La Rona (meaning 'our light' in Botswana's Tswana language),' Shaw explained.
‘It's the largest gem-quality diamond to be recovered in the last 100 years and the second largest to ever be recovered, and was recently sold to Graff for $53 million.'