Veteran fund manager reveals 3 growth stocks with upside potential
Many investors like non-U.S. stocks and many investors like sustainable — environmental/corporate governance — stocks, wherever the companies are headquartered.
Priyanka Agnihotri, manager of Brown Advisory Sustainable International Leaders Fund (BISLX) , likes both. She runs this large-cap growth fund, which began in February 2022 and has $38 million of assets.
Brown Advisory, once a part of Alex. Brown, the nation’s first investment bank, had $154 billion of customer assets as of March 31.
The Sustainable International Leaders Fund generated a return of 5.3% for the past 12 months, compared with 10.7% for the Morningstar index of foreign growth stocks.
Agnihotri looks for thriving businesses with strong management teams and reasonable stock prices. She favors industrial and financial stocks and is cautiously bullish on Japan.
She discussed these and other issues, including some stock picks, in an interview with TheStreet.com.
TheStreet.com: What’s your investment philosophy?
Agnihotri: We like businesses with strong competitive advantages, high return on capital and strong free cash flow, in industries with high barriers to entry. We want companies that can provide at least double-digit returns for five years and more.
Brown Advisory/TheStreet
We seek management teams with a strong track record of capital allocation, incentives aligned with shareholders and strong corporate governance. We also want reasonable prices: discounts on valuations for high-quality stocks.
The fund has 25 to 35 stocks [less than many mutual funds]. That’s enough to get exposure to different investment drivers without lowering the bar on business quality, management or valuation.
Foreign stocks offer diversification
TheStreet.com: What’s the attraction of foreign, sustainable, large-cap growth stocks?
Agnihotri: You get good diversification from foreign stocks. For example, the U.S. is strong in technology, while Europe is strong in industrials, health care and luxury goods. Asia is strong in finance — banking and insurance.
In terms of valuations, international equities have underperformed for a while.
As for sustainability, corporate governance is important for limiting risk. Also companies that aren’t thinking about sustainability could find themselves at a disadvantage, particularly in Europe.
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TheStreet.com: What industries and geographies do you find most attractive now?
Agnihotri: There are good opportunities in industrials and finance, as I mentioned. We are overweight both compared to our benchmark.
Looking at finance, in developed markets, securities exchanges have attractive economics. They are moving away from a transaction model to recurring revenue, expanding to data and analytics.
That gives them high profit margins and good competitive advantages.
In emerging markets, financials are a good way of accessing growing consumer markets. The consumer-goods industry itself is very competitive there.
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We’re cautiously optimistic on Japan. Historically, a stumbling block there was that businesses weren’t managed for good returns on capital.
They might invest in worse businesses just to increase their size rather than their value. We found that management quality wasn’t there.
But there are good businesses in Japan. We’re starting to see an awareness of corporate governance and board structure that creates independence. It will take time. We’re cautious because of some false starts. But more improvement in corporate governance will help.
Agnihotri's stock picks
TheStreet.com: What are three of your favorite stocks?
Agnihotri:
1. Deutsche Boerse (DBOEY) , headquartered in Germany. It’s Europe’s largest derivatives exchange and also does custody and settlements.
There’s a high barrier to entry and low incremental capital costs needed for growth. It’s similar to the CME exchange in the U.S.
Deutsche Boerse has expanded into data and analytics, helped by acquisitions. It can build full solutions for market participants, fulfilling all of their trading and post-trading needs.
It also can grow free cash flow at more than 10% per year and trades at an attractive valuation.
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2. Rentokil (RTOKY) , based in the U.K. It’s the world’s biggest provider of pest control and commercial hygiene services. You need route density in that industry. It has a strong scale in each of its markets, serving retail and commercial customers.
Rentokil has really good operations. It used to have a small share in North America, but now it’s the largest player there. It operates in an oligopoly market, where big companies are disciplined on price.
Business growth in the U.S. has slowed down. So the stock has sold off, making it attractive.
And the slowdown is a temporary concern for the next five years.
3. Safran (SAFRY) , headquartered in France. It’s a leading supplier of engines to the aerospace market. It has a partnership with General Electric to supply engines to narrow-bodied planes.
It has a strong competitive position, operating in a market with just two or three suppliers. Barriers to entry are extremely high, and product cycles are long.
Thus you know orders years in advance. The aftermarket — maintenance and repair — drives a majority of profits. Selling engines has thin margins. Strong sales of their engines will create a huge tailwind.
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