Despite central bank money printing and near to zero interest rates capital remains difficult to access for most companies. This is not, however, true for every company. For a small number of companies – we shall call them uncommon stocks - capital has never been cheaper or more widely available.
This contrast between companies that have access to capital and those who do not is in our view perhaps the single most important theme of this new economic and stock market cycle. Investing in those companies with a competitive advantage in access to capital is in our view likely to be rewarded by superior earnings momentum. After all, in a low growth environment the uncommon stock can still achieve healthy profit growth through eating a competitor’s lunch. In addition, because superior growth is also being achieved precisely as a consequence of a lower risk business model and therefore preferential access to capital, this is a self-perpetuating process which will continually reinforce the advantages of the uncommon stock. The uncommon stock will command an increasing premium relative to the rest of the stock market as superior growth and lower risk are recognised as being complementary rather as in previous cycles often opposing factors.
Let’s introduce some examples of uncommon stocks. Take German car giant Volkswagen1: since 2008 it has increased its European market share from one fifth to one quarter. This is in part owing to VW’s superior product and brand, but VW also has a competitive advantage by virtue of its access to cheap capital in comparison with its European mass market competitors (Fiat, Peugeot, Renault). This means that it can offer much cheaper car loans to its customers (car finance is used in the majority of European car purchases). Through being perceived by the bond market as a safe-haven VW is able to increase revenues and profits for its equity holders. This then reinforces the market view of VW as a “safe haven”.
We have previously commented on Nestle’s average cost of debt falling to 2% today from 4% in 2008 and 12% in 19982. We could also point to Ryanair, Europe’s lowest cost airline which recently raised leasing finance on its planes at a record low 1.7% for 12 years3 at the same time competitors are either going out of business or having to shrink their asset base to stay in business. We should also consider Unibail, Europe’s largest property company, and owner of prime shopping centres. So far in 2012 the company has raised €2bn of debt with an average maturity of six years at an average coupon of less than 2%4. Unibail has consistently managed to fund itself at a lower cost of debt than its quoted peers and operates in an industry where most market participants may find it difficult to access capital at all. This should allow Unibail opportunities to grow its asset base at higher levels of profitability than its peers.
Seadrill is the world’s leading owner of deep-water oil rigs. Fundamentals in its industry are very robust: day-rates for renting out oil rigs are near record highs and the cost of building new rigs at shipyards at decade lows. Yet few companies in the rig industry can access capital like Seadrill. Smaller competitors like Norwegian competitor Songa are unable to get financing for new-builds. Indeed, Songa5 recently was forced to sell its newest ultra-deep water rig this week to Seadrill at a knock down price in order to meet payments to bond-holders. Lack of competitors with access to capital should keep rig-rates higher for longer and reinforce Seadrill’s competitive advantages.
Stocks with a competitive advantage in access to capital find themselves in a virtuous circle of being able to fund business expansion at a time when their competitors are constrained, achieving superior earnings momentum and more highly rated equity. Contrary to the view of some investors, we believe that it is competitive advantage in access to capital, rather exposure to booming industries or economies that is the single most important factor behind the emergence of a new “nifty fifty” stock market leadership.
Many will argue that the rally in lower quality equities witnessed in recent months marks the end of “nifty fifty”6 leadership which began in 2010. We would argue that this new stock-market cycle is still only in its infancy and that it will endure for as long as the low-growth economic environment where interest rates are near zero but capital is scarce persists. We could have many more years of anaemic economic growth, dysfunctional banking systems and Euro crisis ahead of us. To bet against the uncommon stock you are betting on a return to economic “normality”. This is not a bet we feel confident of taking any time soon.
Barry Norris
Founding Partner & Fund Manager
November 23rd 2012
1 Source: Wall Street Journal, VW Bests Rivals in a Europe Of Haves and Have-Nots, 13/11/2012
2 Source: ‘Is Nestle the world’s cheapest “safe haven” asset?’, Argonaut Capital Partners, 9/08/2012
3 Source: Ryanair Holdings, 22/11/2012
4 Source: Deutsche Bank, Datastream. 01/10/2012
5 Source: Songa Offshore SE via Thomson Reuters,
6 Source: http://en.wikipedia.org/wiki/Nifty_Fifty, Wikipedia