Despite equity markets enjoying the fourth-biggest rally since the Great Depression, value can still be found in select stocks, notes a research report from PIMCO.
Virginie Maisonneuve and Anne Gudefin of PIMCO in their September 2014 research report titled: “Equities: Finding the Path to Value” point out their generally sanguine view on valuations stems from their new Neutral outlook for the next three to five years.
Equity markets: Pockets of opportunity
The PIMCO analysts point out that despite equity markets rallying over the past five years, there are a number of companies in Europe where market valuations have lagged those in the U.S. and Japan. They note valuations of many European companies have been cheaper than their global counterparts and have provided higher dividend yields.
Amid the turmoil in the public markets and the staggering macroeconomic environment, it should come as no surprise that the private markets are also struggling. In fact, there are some important links between private equity and the current economic environment. A closer look at PE reveals that the industry often serves as a leading indicator Read More
Maisonneuve and Gudefin believe that continuing European Central Bank accommodation and an improving economic outlook in Europe will continue to support rising aggregate demand, enhanced earnings and higher valuations.
The PIMCO analysts note consumer staples companies, in general, tend to exhibit stable and consistent earnings and dividend growth profiles. They highlight that the earnings per share growth of European consumer staples last year was substantially better than their global counterparts or the MSCI World Index, though share prices have appreciated less.
As can be deduced from the following graph, European high quality staples have remained underpriced in general, and a few companies in specific.
Opportunities in aquaculture, special situations
Virginie Maisonneuve and Anne Gudefin of PIMCO point out despite World Bank reports pointing to demand exceeding supply for fish farming industry, this sector hasn’t attracted investors’ attention. They note global protein consumption is set to rise 55% by 2030. Citing a Bloomberg report, the analysts highlight the aquaculture industry trades at single-digit price-to-earnings ratios on 2015 market-cap-weighted earnings with dividend yields in excess of 5%.
Focusing their attention to the opportunities in the special situations segment, the PIMCO analysts highlight that opportunities exist in capital and corporate restructurings such as initial public offerings, mergers and acquisitions, asset sales, spin-offs and split-offs, and share buybacks. They note these unique and special situations may offer not only the opportunity to earn attractive rates of return, but less risk in many cases thanks to either the structure of a merger or acquisition or the discount at which they can be purchased.
The PIMCO report also highlights some of the opportunities in special situations such as a postal operator in Europe whose shares rose recently after better-than-anticipated earnings results due to better volumes and management-led cost reductions. Similarly an Irish-domiciled biotech company offered a special situation where the PIMCO team correctly identified the opportunity for the acquirer to ‘invert’ to a lower-cost tax jurisdiction facilitating better internal rates of return from additional product offerings through tuck-in mergers and acquisitions.
The PIMCO analysts conclude that it is possible to identify hidden future potential by digging deep into company and transaction details.