Stocks to watch: Greeting cards and wine could be a better play than Magnificent Seven’s tech bandwagon

If you weren’t invested in the Magnificent Seven technology stocks, investing in stocks in 2023 would be a bit like treading water in treacle. Going hard.

The Magnificent Seven has risen an average of more than 100 percent over the past year, while most other markets have seen only very modest or no returns. Everyone expected a stronger recovery last year after the annus horribilis of 2022.

So what about the future? Should investors jump on the technology bandwagon? Not necessary. In November we got a glimpse of what the future could bring if central banks cut interest rates.

Richard Champion (left), co-chief investment officer, and Simon McGarry (right), head of equity fund research, Canaccord Genuity Wealth Management

Equities rose alongside bonds, with the stocks hardest hit by rate cuts (infrastructure, healthcare and small UK businesses) rising the most. So investors might want to keep in mind the words of the great Wayne Gretsky: “play where the puck is going, not where it has been.”

Every investor has unique financial circumstances and different levels of risk tolerance, so the ideas on our radar won’t apply to everyone. If you are unsure, you should contact a financial professional.

CRH

CRH is a leading diversified manufacturer and distributor of building materials and products. The wide range includes cement, aggregates, asphalt, ready-mixed concrete and other construction-related products.

CRH is well positioned in the US market, where it:

• The leader in aggregates, with more rock in the ground (over 90 years’ supply) than anyone else

• Five times bigger than the number two in road construction

The country is also the most exposed to US infrastructure among its European counterparts (around 30 percent of the group’s revenue), where medium-term growth prospects are strong given Biden’s 2021 infrastructure law, which aims to build 32,000 kilometers of roads and 10,000 bridges across five areas. year through an investment of $110 billion.

Acquisitions have been a key part of growth in recent years, with assets from LaFarge-Holcim acquired for €6.5 billion in 2015.

Since 2008, capital discipline has been at the forefront of decision-making, with CRH divesting assets that do not deliver acceptable long-term growth and margins. These include the European distribution activities (2019, €1.6 billion), Oldcastle (2022, US$3.8 billion) and the European lime activities (2023, US$1.1 billion).

Unlike a number of peers, which have experienced margin pressure post-merger, CRH has achieved ten consecutive years of margin improvements.

Trading at a deep discount to US peers such as Martin Marietta Materials and Vulcan Materials Company, CRH switched to a US primary listing last September. While this discount has since partially narrowed, there is still a lot to do, with CRH trading on a 2024 EV/EBITDA* of 7.6x, versus Martin Marietta (14.1x) and Vulcan (14.4x).

While we don’t know when, or even if, CRH will record a premium to its US peers, we see room for a significant decline in the valuation discount in 2024.

IG Design Group

IG design creates, produces and sources a wide range of party-related goods, and sells internationally to major retailers. It is the world’s third largest manufacturer of greeting products (after Hallmark and American Greetings): a highly fragmented market worth around £15 billion at retail.

Key products include gift wrapping paper (for which IG design is number one worldwide), cards, crackers, ribbons, stationery, boxes and bags. It sells more than 600 million units per year in 80 countries through more than 200,000 points of sale.

The group manufactures about a third of the products it sells, with the rest sourced from third parties, mainly in China.

IG Design has a blue-chip customer base consisting of many of the world’s largest retailers, including Walmart Inc., Costco Wholesale Corporation, Amazon.com, Inc., Tesco PLC, ASDA Stores Limited, Carrefour SA, WH Smith PLC, Primark Stores Limited and TJX Companies, Inc.

In fiscal 2022, margins and revenues were severely reduced by unprecedented increases in supply chain costs. Most of these issues have now been resolved and the company is experiencing an ongoing earnings recovery. In the first half of 2023 (the seasonally stronger half), profits rose 27 percent to $35 million and good year-over-year growth is expected.

The company remains well capitalized. Medium-term capital investments will focus on using technology to support growth.

With challenges being addressed through pricing and a variety of self-help initiatives, a continued recovery in profitability is expected in FY 2024.

Consensus estimates say the shares are currently trading at a price-to-earnings (P/E) ratio of 17.8x as of Mar 24, falling to 7.9x as of Mar 25, with a further recovery in earnings likely in FY26.

IG Design creates, produces and sources a wide range of party-related goods, selling internationally to major retailers

Pernod Ricard SA

Pernod Ricard is a leading wine and spirits company, with a diverse portfolio of whisky, cognac, cognac, vodka and gin brands, including The Glenlivet, Jameson, Martell, Absolut and Beefeater.

The company’s growth is driven by two major changes in consumer drinking habits. First, the general preference has shifted from beer to spirits.

Spirits made up 35% of total global alcohol expenditure in 2015, rising to 41 percent in 2022, while beer consumption simultaneously fell from 40 to 38 percent. This trend has had a positive impact on Pernod Ricard’s spirits brands.

Secondly, there has been a preference for premium spirits brands, which have outpaced the growth of the broader spirits market.

This has significantly benefited Pernod Ricard’s portfolio, with premium spirits contributing to around 80 percent of the company’s sales growth during its 2023 financial year (July 2022 to June 2023).

Pernod Ricard is also benefiting from a strong demographic tailwind. According to United Nations estimates, the number of people of legal drinking age worldwide will increase by 1.3 percent between 2020 and 2025. This increase is expected to bring approximately 100 million additional consumers to Pernod Ricard’s target market, which should further support revenue growth.

Pernod Ricard also has an attractive emerging markets bias, generating around 40 percent of its revenue from emerging markets, with leading positions in India and China.

Pernod Ricard has strengthened its leading position in spirits through complementary acquisitions. For example, gin brand Malfy was acquired in 2019 and has since tripled in turnover.

Jameson whiskey belongs to the Pernod Ricard brand

Walmart

Walmart is one of the largest retailers in the world, operating more than 10,000 stores worldwide. The company is split into three main segments:

• · Walmart US – the largest retailer in the United States, selling groceries and general merchandise through Walmart stores and Walmart.com

• Walmart International – operates a variety of stores and e-commerce platforms in 19 countries, including Canada, China, India and Mexico

• · Sam’s Club – a membership-based retailer similar to Costco Wholesale Corporation, known for its bulk sales.

Despite its dominant retail position, Walmart has several initiatives to improve sales and operating margins in its U.S. operations. A key driver is the strong growth of Walmart.com, which is estimated to have nearly doubled its market share in US e-commerce sales since 2020.

Walmart is also investing in robots and automation within its distribution network and aims to have more than 50 percent of its stores served by automated facilities by 2026.

Walmart International is strategically positioned in key developing markets such as China, India and Mexico. Its international footprint covers 40 percent of the world’s population, which Walmart estimates should contribute to 50 percent of global growth outside the US.

Walmart is the largest retailer in the United States, selling groceries and general merchandise through Walmart stores and Walmart.com

Smith & Neef

Smith & Neef is a medical device company that develops, manufactures and markets medical devices for use in orthopedic reconstruction, trauma and clinical therapies, sports medicine and advanced wound management.

Before the COVID-19 outbreak, S&N consistently achieved operating margins of more than 20 percent. Recent years have been less impressive, with margins shrinking to 11 percent in 2020 and only recovering to 16.8 percent in 2022 – the result of global supply chain challenges and inflation.

Growth also deteriorated, with sales growing at an average annual rate of just 3 percent between 2019 and 2023 – about half the pace between 2012 and 2019.

This deterioration in performance led to the hiring of a new CEO, Dr. Deepak Nath, from Siemens Healthineers AG in April 2022.

After just 18 months in charge, much changed under his leadership, with a medium-term target of around 5 percent underlying sales growth, coupled with a recovery in margins to above 20 percent by 2025. In July 2022, Nath detailed a twelve-point plan to achieve these objectives.

In the second quarter of 2023 we saw some green signs of recovery: orthopedics grew by 5.8 percent; In particular, the largest and most challenging specialties, hips and knees, grew by 3.4 percent and 7.8 percent respectively.

With the shares 44 percent below January 2020 highs, we think there is significant upside if Nath can achieve his targets, as S&N trades at just 15x expected 2024 earnings, versus Stryker Corporation, a US rival, at 26x .

Richard Champion and Simon McGarry are co-chief investment officer and head of equity fund research, respectively, at Canaccord Genuity Wealth Management.

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