UBS Wealth Management published its picks for next year last month, earlier than most. At the hedge funds, I would not have given such a report the briefest of looks. But for a private investor, sometimes such picks are more interesting.
The reason I decided to put pen to paper was that Meta Platforms was one of their top stocks, which I think is interesting. Before discussing some of the individual names, here is the list by currency:
UBS 23 for ‘23
There are 11 US names about half the total; 4 from Europe, 2 from the UK and 6 from Asia or a quarter EMEA and a quarter Asia – quite a broad portfolio. The spreadsheet for paying subscribers gives the Factset valuations and the 52-week highs and lows. The average stock was 15% off the high and 35% off the low.
So not a bad spread geographically and also by sector – I spotted 4 energy plays, one miner, 4 industrials, 2 tech stocks and 4 drugs companies. My problem with this portfolio if used by a private investor is that
- it’s very diverse geographically
- it covers a wide range of sectors
- it has too many stocks in it.
This would be extremely difficult for a private investor to monitor, although obviously UBS clients get that done for them. I don’t know all the stocks of course, and there are certainly names that I like, including Lockheed, Meta, Exxon, and Glencore. I just wonder if this portfolio will deliver much performance.
The first reason for my scepticism is the geographic spread. The US market is over-represented in global indices because the market has performed so well and the dollar has been extremely strong. It looks a clear underweight for global portfolios from here.
Second, I wonder why they have included both Exxon and Total. I should make it clear that I am no expert on the integrated oil majors. Total is on 4.9x 2023 P/E while Exxon is on 10x, with Total offering a 2% yield advantage at 5.2%. I understand that having two stocks gives you twice as much weighting to the oil price and affords some protection against an individual esoteric blowup.
But it’s twice as much work to monitor.
If you believe Total is good enough to be included, I am not clear why you would need Exxon as well. I know many private investors believe they need more stocks to let them sleep at night. But I think private investors often under-estimate the importance of time. That’s equally true of many professionals. And only holding Total would free up additional time to research that position more deeply or to look at another stock.
This trade-off between portfolio concentration and time to do the research is one which I rarely see discussed. But in my view, it’s fundamental to investing success – you need to know what you own. Of course this is a personal choice but one which should be made consciously and constructively. Too often it’s a passive outcome.
Palo Alto Networks/Meta Platforms
The two tech stocks I spotted were Palo Alto Networks and Meta Platforms on 2023 P/Es of 50x and 14x respectively. I am not familiar with the former which is a global cybersecurity provider, hence the rating. It’s hard to argue with this as a theme, but it’s not going to be a value investor’s favourite with this setup:
Palo Alto Networks Valuation
Palo Alto is growing revenues at 20-25%. and making c.30% EBITDA margins which are projected to FALL to 24%. There may be some reason for the fall in the margin which is then projected to stabilise. There is certainly growth in their market, but teh stock is on 9x this year’s projected sales. Of course, you could make money by buying this stock or something similar, but a lot needs to go right. It’s not the sort of thing which attracts me – too dear, no operational gearing, already high forecast revenue growth and on 22x EBITDA in 2025.
In contrast, Meta Platforms, is trading like a value stock. Bear in mind that the data below are AFTER Zuck’s $10bn pa foray into the Metaverse, the billionaire’s plaything for those who missed out on space travel. Here is the equivalent analysis for Meta Platforms:
Meta Platforms Valuation
A valuation of 6x EBITDA next year after burning $10bn ish on the new toy seems undemanding to me. It’s certainly lower than over 30x next year for Palo Alto. Instead of playing in the metaverse and getting excited about legs on his avatar, imagine if Zuck decided to spend that $10bn on cyber security research. Palo Alto Networks’ total cash expenditure is $4bn pa. That’s not the R&D, that’s everything – probably what Meta spends on free lunches, stationery and incidentals.
The inclusion of Mercedes surprised me at first, although I think a number of value investors are becoming interested in the automotive OEM sector on the basis that Tesla, even after the drop, is still valued at more than the rest of the industry put together.
That certainly seems illogical, but the winners of the transition to electric vehicles is far from clear to me. Currently, I would say certainly Tesla and probably some of the South Korean manufacturers. Five years ago, I would have assumed the Japanese players, although they don’t seem to be grabbing the limelight with new EV products.
Here is the Mercedes valuation:
Mercedes Valuation Summary
I assume the EV is inflated by the inclusion of debt relating to the lease book. As a result, the EV:sales and EV:EBITDA numbers are probably overstated. I am not surprised at the P/E multiple of 5.0-5.5x. Historically, I recall that the OEMs never attracted much of a rating. On the other hand, a double digit forward FCF yield surprised me and the historical 24% and 27% look extremely high – I would need to do some further work on this.
1 car companies have never traded at high valuations, partly because of the excess capacity in the industry
2 the move to electrification creates massive uncertainties as to a) who will be the winners; b) what will be the cost of success; and c) what will be the steady state run rate of profitability?
3 the question of mobility Is not as pressing as seemed possible when I last looked in detail at the industry five years ago, but it remains a potential sinkhole for the industry cash. So too is the move to automated vehicles which is likely to absorb a huge R&D investment and will likely only have one or two winners. This is a major risk.
4 short term profitability has been affected by the Covid-affected supply chain interruptions which have helped demand and boosted used car prices with a corresponding impact on leasing profits; to what extent has normalisation been factored in to consensus estimates?
In my last review of the industry (linked below for paid subscribers), I felt that there were huge risks facing the automotive industry and that it was an easy long term short. Valuations are cheaper today but the risks haven’t gone away. I like the free cash flow yield at Mercedes and to some extent the dividend pays you to wait, but I am not sure that such stocks warrant inclusion in a private client portfolio. Quite risky.
Alexandria Real Estate
Alexandria Real Estate caught my eye as it’s trading at 2.2x historical book and 1.2x prospective book. It’s an unusual real estate investment trust (REIT), focusing on “collaborative life science, agtech, and technology campuses in various cluster locations”. With properties in Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, and elsewhere, it is presumably being valued on the basis of redevelopment potential.
But the 2024 consensus price:book is still high at 1.2x, so it’s far from the cheapest property play – lots of high end assets on offer in global markets at significant discounts to historical book. I understand why investors might be worried that interest rate increases will drive valuation yields up, but some of the discounts look attractive. In an inflationary environment, I imagine that property won’t do badly, although it might be a case of survival of the fittest, as it was in the 1970s. Paying a premium for a fashionable property sub-sector isn’t an obvious one to me, but I don’t know the details.
So that was a short cruise through part of a wealth manager’s global portfolio for 2023. Obviously I haven’t covered all the names and I would be happy to return to any that people were interested in.