In this ‘Essentials’ video, Nick Sheridan outlines his value-focused European equities strategy, designed to identify larger European companies listed in, or operating in, core European markets. His differentiated process focuses on businesses with stable margins and high barriers to entry, and which he believes have been fundamentally mis-priced by the market.

Summary

Investment process

Value investing has its roots in the 1930s and is reliant on the compounding effect, where successful businesses reinvest their earnings to generate higher returns in future.

Investment universe

Nick’s strategy covers both the Euroland and Pan European areas. With the former, Nick takes more of a capital growth approach, while with the latter his focus is on identifying those companies able to offer a consistent or increasing dividend. He tends to avoid the more peripheral markets in Europe, reflecting the quality of publically available information on companies.

Favoured stocks

Nick likes to buy businesses that can compound their earnings and compound their cash flows, with very stable margins, big barriers to entry, but where the market is inappropriately pricing the company – either through the misperception of a particular issue, or a risk of uncertainty.

Sell discipline

Nick maintains a strong sell discipline, triggered by a number of relevant factors. For example, he will usually sell on a profits warning, because that tells him the company is probably being run with an inappropriate capital structure. He will sell when stocks reach a point where they are no longer discounted, given their potential for future growth (effectively the reverse of his investment process). He also tends to be more active (in terms of both buying and selling) when markets are volatile.

Investment style

In aggregate, Nick will tend to have portfolios with a price/earnings ratio below the market average and a return on investor capital that is much higher. He will also tend to have an operating margin that is higher than the market. What he is looking for with any particular company is the ability of that company to reinvest substantial cash flows back into the business, and grow its earnings profile over the long term. He tends to find that the compounding effect of money being reinvested by companies increases the likelihood of capital appreciation in future.

Benefits of Europe

In Nick’s view, Europe continues to offer investors’ opportunities that are not available elsewhere, due to the nature of the companies and the quality of regulation. Furthermore, considering Europe as a universe, the region remains one of the most attractively priced developed markets in the world.