Monday 22 January 2018

Glamour and fun rarely pay in the stock market - blue-chip firms do

Elon Musk’s Tesla is is now the largest vehicle maker in the US in terms of market capitalisation Picture: Bloomberg
Elon Musk’s Tesla is is now the largest vehicle maker in the US in terms of market capitalisation Picture: Bloomberg

Diarmuid Broderick

As technological advances continue to open new possibilities for humanity, it also leads to floods of exciting new business ventures which were never before possible. Invention, sophistication or adaptation of existing products and services is not just serving to transform industries - but is spawning entirely new ones.

For example, renewable energy is finally becoming a significant source of power; drone technology is moving beyond military operations to maintenance, transport and retail applications; and 3D printing is touted as the next industrial revolution.

Intriguing? Absolutely. Profitable? Potentially. On paper, the most disruptive emerging industries have massive growth curves, lasting relevance to the world, and expanding possibilities - making them lucrative investment propositions.

For investors interested in gaining exposure, there are no shortage of publicly traded companies to invest in. Buying their shares however involves a considerable leap of faith. To commit capital to an obscure company in its formative years, one must be willing to invest based on projections of cash flows - rather than on proven track records of wealth creation.

Take Tesla - the electric car manufacturer founded by Elon Musk. As difficult as it is becoming to deny the legitimacy of the electric vehicle revolution - of which Tesla is a pioneering force, the level of enthusiasm that investors have for the stock appears reminiscent of the "irrational exuberance" that then Federal Reserve Chairperson Alan Greenspan lamented during the dotcom bubble of the 1990's.

Tesla's growth plans have captivated audiences to such a degree that it is now the largest vehicle maker in the US in terms of market capitalisation - having surpassed General Motors to claim the number one spot earlier this month. This is despite General Motors selling 10 million vehicles in 2016 for a net profit of $9.4bn, compared to the 76,000 vehicles sold by Tesla for an operating loss of $773m!

Clearly, shareholders are betting on the growth potential of the company rather than its performance to date - but the $50bn stock market valuation placed on Tesla looks stretched nonetheless.

Instead, consider Unilever - the Anglo/Dutch conglomerate which has operated within the altogether less inspiring space of consumer goods for more than 80 years. It's responsible for billion-euro brands such as Dove, Lipton, Hellmans and Lynx.

Unilever has had a good recent run, with its shares returning 47pc over the last two years (including dividends). Its shares have also chalked up a very satisfactory long-term performance.

Unilever's product portfolio consists of everyday essential items which gives an element of defensiveness to its earnings stream. Its brands are well-recognised and established, giving it a degree of pricing power. Its balance sheet is strong and the shares are quite reasonably priced with a price-to-earnings ratio of 21.7.

Therefore, under the basic tenets of business risk, financial risk and valuation risk, Unilever ticks all the boxes and its track record shows that we don't have to invest like venture capitalists to enjoy the considerable fruits which the stock markets can offer.

Constructing a portfolio of well-known blue-chips may not be as stimulating as rooting out the next 'big thing', but as George Soros said about investing: "If you're having fun, you're probably not making any money."

Diarmuid Broderick is an investment adviser with GillenMarkets (gillenmarkets.com), an investment training and wealth management business..

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