US internet stocks are likely to enter bubble territory as the projected growth of some of these companies is not sustainable, according to RAM’s CEO and fund manager Thomas de Saint-Seine.
The equity manager, who co-runs the RAM North American Equities fund with Maxime Botti and Emmanuel Hauptmann, thinks that some names in the internet sector might disappoint as their current implied growth rates - 30% for Amazon, 40% for NetSuite - remain very high.
'Some of these stocks have strong competitors, high capex and relatively low margins. More correction in the sector is possible,' he told Citywire Global.
'There are only one or two Apple or Google per decade. Being selective and realistic on the expected growth is crucial in the internet space,' he added.
The manager believes there are still good opportunities in the North American IT sector, where he has an underweight position (11.6% of the portfolio) relative to the benchmark and owns companies like Arris, Apple and Sanmina-Sci.
Hidden energy stocks
Speaking about the most recent changes in his North American equity fund, said he has upped his exposure to mid-cap energy and materials stocks to capitalize on the sectors' growth and earnings momentum.
He has increased his holdings in some second-tier companies in these areas by 1% over the last three months and is still slightly underweight energy (10.1% of the portfolio) and overweight materials (6.6%).
Among the manager’s top picks in these areas he cited the Canadian company Suncor, which produces synthetic crude from oil sands, and the American ethanol fuel producer Green Plains.
‘These companies offer a strong growth potential and have very different businesses from the major players in the sector,’ he said.
On the US shale gas revolution, he said he doesn’t anticipate it will offer high margin levels and thinks firms like Suncor and Green Plains will suffer less from the competition coming from the fracking business.
Consumer and property trends
Elsewhere in the fund, de Saint-Seine has increased his exposure to the consumer discretionary sector, another overweight in his portfolio, in order to capture the secular themes behind some global businesses.
‘A company like Foot Locker will continue to grow as people are generally doing more sport. It also offers a good growth prospect and valuation is not too demanding,’ he said.
In regards to the recovering US housing market, the manager is underweight real estate investment companies as he thinks they have already anticipated a lot of the recovery in that sector.
‘The property market is expanding rapidly thanks to the low interest rates. We prefer to have some external exposure to it through some solid home builders and home appliances companies,’ he said.
Tapering winners & losers
De Saint-Seine is trimming his overweight position in financials (22.8% of the portfolio) as these stocks are no longer very attractive from a valuation point of view.
He also thinks that financials will be impacted on a short term by QE tightening, a good measure that will make US growth more sustainable in the future.
‘We think tapering will boost companies will less debt and strong visibility, especially in the consumer staples area. Tapering is good for companies with strong balance sheets,’ he said.
Over the past five years, the manager returned 115.31%, 17 percentage points more than the average peer in the North American equities sector.