Global Share Fund Portfolio Manager Garry Laurence returned from the US feeling upbeat. Here’s why he’s positive about Oracle and News Corp, two key US holdings in the Perpetual Global Share Fund. 

Equity markets volatility has increased significantly this year. The fears around China’s slowdown and about falling energy prices and their impact on the banks peaked in February 2016 with global equities falling 11.3% in those first six weeks of the year. Since then, global companies have reported their quarterly results for the end of the last quarter of 2015. I am pleased to say the earnings reported for the companies we own, on average, were solid.

Global markets acted like a roller coaster and actually ended the quarter pretty flat. The US equity market gained 1% while Europe and the UK were down 2.4%, Japan was down 6.4% and emerging markets were up 6%. Unfortunately for Australian investors, our returns were affected by the recent rise in the Australian dollar (AUD) relative to other currencies. While the falling AUD has been a tailwind for Australian investors in global equities, over the past five years, it has been a headwind this quarter with the AUD bouncing 10% against the US dollar.

We continue to be optimistic about the US

Despite the fears about the US economy and a global recession, the US is bustling along.

1. Nonfarm payroll employment in March rose by a solid 215,000 jobs, which puts the annual monthly gains for the first quarter at 209,000, up from an average of 190,000 in first quarter 2015.

2. The supply management index of manufacturing activity for March jumped to 51.8 from its February reading of 49.5 – a decent expansion.

3. Wages growth is gathering pace with average hourly earnings for all private sector jobs up 2.25%.

With this backdrop our team has been busy delving into the dynamics of a range of companies across a range of sectors. Some we own and want to own more of when the price is right. Some we have decided to sell. Some we are thinking about buying.

We travelled to San Francisco, Chicago and New York to visit our investments in Oracle, 21st Century Fox (Fox) and NASDAQ, among others. Thomas Rice, our technology expert, spent a week in California and is optimistic about our positions in Google and IBM and their leading positions in artificial intelligence. Abbey Cook, our consumer expert, is upbeat on Whirlpool’s growth prospects and on our media positions. Vince Pezzullo also travelled to the US, visiting a host of companies across the country.

Dick’s Sporting Goods facing ecommerce pressure

We sold out of our position in Dick’s Sporting Goods this quarter due to the increasing ecommerce threat to traditional retailers. This has hurt Dick’s growth trajectory over the past few years and its net income has been flat since 2014 with earnings expected to be flat again this year.

Ecommerce is taking market share from bricks and mortar retailers. One of Dick’s largest competitors on the West coast, Sports Authority, recently went bankrupt. The market has taken the view that this is good news for Dick’s. Our view is that the ecommerce threat outweighs the loss of a big competitor.

We see value in 21st Century Fox

Media companies are enjoying a strong advertising market. Fox told us their cable advertising revenue is growing well and the federal election and “Trumpmania” are helping Fox News ratings. Yet this is not the sole driver of an improvement in the television and cable ad market. Advertisers are switching money from digital back to TV due to low returns on investments. This is consistent with feedback we’ve heard from advertising agencies and media buyers such as WPP, Omnicom and Publicis.

21st Century Fox has high-quality assets in businesses that have been around for a long time, have high barriers to entry and a strong growth profile. Their cable assets like Fox News, Fox Sports, National Geographic and their regional sports networks continue to drive the company’s growth. We believe its Star India sports and entertainment channels aren’t yet properly valued by the market. Star India is currently breakeven, but is expected to generate $500m in EBITDA by 2018.

Meanwhile Fox News has grown over the past 10 years into a business that currently generates over $1 billion in earnings. We expect a number of their other cable operations, such as Star India, to follow this growth trajectory.

Fox has also captured value from their film studio, 20th Century Fox. Deadpool has done exceptionally well recently, and we expect their upcoming film slate to generate growth for this division with the releases of the next instalments of their Ice Age and X-Men franchises. Fox has a strong balance sheet and trades at an attractive valuation. Perpetual sold out of Fox a few years ago when the valuation got to a price to earnings ratio (PE) of around 20x. Now we are buying the stock again on a PE below 14x next year’s earnings. We are value investors and I see good value here.

Oracle’s transition towards cloud-based software

Oracle has an exceptional (and sailing-mad) founding shareholder, Larry Ellison, who continues to drive the company forward. It has a strong balance sheet and we forecast a period of improved earnings growth as it transitions towards cloud-based software sales.

I visited Oracle’s headquarters and was impressed with the company’s strong sales growth in cloud-based enterprise resource planning and human capital management applications.

Right now, Oracle is going through the same transition as Microsoft – from selling licenced on-premise software to cloud-based subscriptions. They receive less money upfront in the first year of the cloud software sale but the ongoing value of this annuity stream is greater. The stock will re-rate once the market realises this, just as Microsoft’s and Adobe’s did.

This transition and a stronger US dollar have hit earnings growth over the past few years. However, we believe Oracle will return to decent earnings growth next year. The company is trading on a 7.5% free cash yield, which we believe to be cheap for a company that has grown consistently, through many decades of technology cycles.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter

Originally published by Perpetual