Why wouldn’t you?
What portfolio manager wouldn’t like to own a stock that doubles or short/sell a stock that halves? Our analysis suggests that over the cycle ~9% of European stocks double and ~14% halve within a two year period, with a greater prevalence in both mid-caps and around cyclical inflection points. But still frequently found in large caps across the cycle.
We believe these high conviction names make a real difference to portfolio performance, whether that’s through participation or avoiding a tail risk.
How do doubles and halves happen?
Surely the market is too efficient for us to spot doubles and halves? We don’t think so, and if anything, we see evidence that market efficiency is declining with the portion of trading dominated by passives and smart beta thematics.
We have a clear classification system that helps us refine our investment cases, for both longs and shorts. We also focus on our edge and going further than the average in our due diligence.
Big moves suggest a big shift in perception – but the catalyst can be both small and reasonably foreseeable with effort and expertise. The build up of inventory that precedes the big profit warning or cash crunch, the accounting statements that diverge from observable reality, or a discounted TAM that ignores rising competition. On the long side, the “uninvestable” company has been quietly improving, or where the market simply underestimates the potential of a stock to keep growing.
High conviction mindset
We believe that if you are looking for high conviction names, you have to adopt a different mindset. We have to strip the noise out of the investment case and focus on the big picture.
What do we mean by a double or a half?
Our objective is to look for stocks we believe can double or halve within a two year time horizon. However, we recognise that not all stocks sourced would double or halve within this time horizon. For shorts generally we can make a clear case that the intrinsic value today is half of that discounted by the market. Often for longs we can make a scientific argument that the price target today should be double the current share price, but sometimes our confidence goes beyond the price target we can calculate today and looks at management track record to identify accretive deals, new products or the market’s tendency to overshoot cyclicality in both directions.
An underserved need
We see most of the sell-side focused on the next quarter, on the 10% either way, on sector or market relative moves, on the names that dominate indices or are likely to have banking fees, and with a very low bar to justify a rating. Very few have the mindset, vantage point or incentive to take a step back and say “this share price is just wrong”.
For many brokers, there is no incentive to pierce the corporate PR story and find the evidence necessary to drive the short case or the long case beyond the horizon being strategically managed by the company management.
Likewise, we are willing to look at mid-caps, stocks that fall between sector teams as well as liquid large caps as we turn stones to find the strongest ideas.
Doubles and halves often live close together
We often look at situations that we call “battle ground stocks”. We know with almost complete certainty today’s share price is wrong – an uncomfortable truce between bulls and bears. Some analysts put these on the “too hard” pile and put a “hold” on them. We don’t have a hold recommendation, but if we did it would be a deep conviction that the share price is right and will stay in a tight band.
We look to see if we can find edge and through the lens of forming a high conviction view we often find the point of clarity. Our mission to find stocks that we believe can double or halve is a process that adds value for clients, well above and beyond the identifying potential candidates.
Selective pressure drives incremental returns
We have restricted capacity for our coverage universe. Sometimes we drop our recommendations because they worked, sometimes we also drop because we no longer think they will. But the best reason to drop coverage is simply because there is a better one. And aim to identify the best longs we believe could double and the best shorts we believe could halve.
