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How Nike’s digital pivot is powering profits
In a world awash with exchange traded funds and thematic strategies, there is a shrinking group of fund managers willing to be different. In equity markets, being different is best measured against key benchmark indices like the S&P500 or MSCI, using measures like active share or tracking error.
Such has been the strength of these benchmark indices that many managers have been gravitating towards the index in an effort to avoid underperforming. One firm, Claremont Global, sits among a small cohort of truly active and high-conviction managers. Its $1 billion global fund invests in a highly concentrated portfolio of just 10 – 15 global stocks, relying heavily on old-school fundamental research to choose the constituents.
In its latest update the group has flagged a ‘tweaking’ of its portfolio, removing credit bureau and data company Equifax (NYSE: EFX), which has had a stellar 12 months, and replacing it with global sportswear brand Nike (NYSE: NKE).
According to portfolio manager Bob Desmond, the group’s philosophy is to “acquire the world’s best companies at reasonable prices,” with Nike fitting the bill. Its thesis is focused around the company’s dominant position and recent pivot into e-commerce.
Commenting on the recent purchase, Desmond says “Nike has consistently been at the forefront of innovation, creating an extensive product range that separates the company from its competitors.”
Nike currently generates over 70 per cent more revenue than its nearest competitor, Adidas (ETR: ADS), with Desmond suggesting “this scale advantage fuelling the company’s marketing budget and allowing them to collaborate with the world’s top sports teams, athletes, and celebrities ― further building brand desirability and consumer engagement.”
Driving the stock’s addition to the portfolio was “the powerful combination” alongside its “best-in-class digital offering, which has helped underpin Nike’s strong financial performance, delivering ten-year average sales growth of 9 per cent and earnings growth of 13 per cent per annum respectively,” Mr Desmond said.
Joining Nike in the portfolio is Steris (NYSE: STE), which is a world leader in medical services, including sterilisation and infection protection. The addition of Steris has driven by one key factor, being the group’s cost-to-value ratio.
“A low cost-to-value ratio is a key metric we seek in our companies and Steris’ offering typifies this. Their sterilisation service is crucial, but comprises only a small part of the overall end product/services total cost, underpinning an attractive investment proposition. Recurring revenues of around 75 per cent-80 per cent make up the majority of the business, providing good visibility on future profitability.”
The other top holdings in the 14-stock Claremont Global fund are Alphabet (NASDAQ: GOOGL), Automatic Data Processing (NASDAQ: ADP), home-improvement goods retailer Lowe’s (NYSE: LOW) and Microsoft (NASDAQ: MSFT).
