Selling skills are vital. Academic research (Tosin, Jin et al 2022) has found that fund managers with superior selling skills are significantly better at buying stocks, and deliver higher returns over time. However, market commentary has a bias towards stocks to buy and how to do so. The market is awash with ‘buy ideas’, often for attention-grabbing stocks. For some investors, selling skills are an afterthought.
With that in mind, PM Capital has outlined five attributes of its investment process when selling stocks.
1. Start with the end in mind
Before initiating a stock position, PM Capital develops an exit thesis. We understand the market’s view on the stock, the catalysts that could re-rate it, the likely timing of those catalysts, and how the stock’s recovery could unfold. This exit thesis is not just about maximising profits; our theses on stocks help determine if unexpected news changes our view on a company, warranting a sooner-than-expected exit to minimise losses.
Our initial investment in July 2023 in Grupo Mexico, one of Mexico’s largest companies, is an example of how we build an exit thesis. Group Mexico has two main assets: an 89.9% stake in Southern Copper, a US copper producer, and a 70% stake in GMexico Transportes, Mexico’s largest rail-freight operator. We believe the market has misunderstood the true value of Grupo Mexico, its leverage to a rising copper price and its improving position in rail.
PM Capital expects copper demand to rise this decade due to growth in electric vehicles that require the metal. Production supply constraints in copper could also support a higher copper price. In rail, central America could benefit from the global manufacturing trend towards on-shoring and near-shoring, which could support logistics demand. As such, we believe Grupo Mexico could be re-rated by the market and, over time, move towards a top-quartile valuation. Should that occur, our exit thesis would be confirmed.
2. Valuation focus
PM Capital’s investment process is built on buying stocks that trade on bottom-quartile valuations and selling when they achieve top-quartile valuations, based on their historical valuation ranges. Often, this means buying deeply unpopular stocks and selling after the investment ‘in-crowd’ arrives.
Our position in European banks highlights this approach. In 2020 and 2021, we increased our position in European bank stocks when they traded at bottom-quartile valuations due to market concerns about the risk of European recession and the Russia/Ukraine war. European banks have rallied this year but can still be a long way from top-quartile valuations. By sector, European banks remain the largest position in the PM Capital Global Companies Fund1.
3. Patience
PM Capital’s investment process is built on long-term investing. Often, it can take years for an out-of-favour company to regain market confidence, then years more to consolidate those gains and for a bullish consensus view on the stock to form. That’s why we think about companies over a full industry cycle.
Not all stocks follow this pattern. Some recoveries happen quickly. In late 2023, PM Capital initiated a position in Newmont Corporation, the world’s largest gold producer, as gold equities lagged gains in the gold price.
Newmont rallied during the June 2024 quarter, outpacing the quarterly gain for the underlying gold price and reversing some of the recent disconnect between the all-time high gold price and the discounted valuations across the gold sector. We expect a further positive re-rating across the gold sector as the strong free cash flow generation of the higher-quality assets becomes evident. PM Capital still owns Newmont stock.
4. Resist selling winners too early
In our experience, investors often exit profitable stock positions too early, in pursuit of quick gains and a short-term boost to fund performance. Through 26 years of investing, PM Capital has seen stocks fall further than the market realises, and rise further than investors expect. Markets move much faster than company fundamentals. It takes time for companies to conceive and implement recovery strategies that yield results.
PM Capital’s investment in Airbus is an example of letting recoveries play out. We initiated a position in Airbus, the world’s largest aircraft producer, in late 2021 after its valuation slumped amid COVID-19 travel restrictions.
Airbus shares rallied in 2023 and early 2024, before retreating in the June 2024 quarter due to supply-chain challenges. We have increased our position in Airbus, believing its recovery potentially has further to run due to the production ramp-up of its A320 family of aircraft, growth in Asian air-travel demand and a valuation that is too low given its leading market position.
5. Capitalise on volatility
After selling profitable stocks, some investors quickly move to the next position. They overlook opportunities that can re-emerge in previous winning positions during volatile periods. In our experience, some of the best opportunities re-emerge in stocks we have owned and sold, and know well.
PM Capital’s position in Wynn Resorts, a leading owner and operator of casinos in the US and Macau, is an example. Like other large casino stocks, Wynn Resorts’ valuation has been volatile. Three times over the past 10 years, Wynn’s share price has fallen 50-80%, peak to trough. This volatility has created opportunities to lighten or exit our position after price gains, and rebuild or add to it during price weakness.
Share-price volatility is also evident in Sands China, which owns five casino properties in Macau. PM Capital acquired an initial position in Sands China in the June 2024 quarter after a large fall in its price. As with Wynn Resorts, the market continues to underestimate Sands China’s leverage to the recovery underway in Macau casinos and the sector’s long-term growth prospects.
Conclusion
Capitalising on market volatility, when equities are irrationally oversold or overbought, is key to delivering attractive real returns (after inflation) this decade. That is, having an active approach to selling and buying shares, in the context of a disciplined long-term investment framework.
References
Tosun, O. Jin, L., Taffler, R and Eshraghi, A. (2022) ‘Fund Manager Skill: Selling Matters More! Review of Quantitative Finance and Accounting, forthcoming. Available at SSRN: https://ssrn.com/abstract=4087534
Wulfmeyer, S. (2016). ‘Irrational Mutual Fund Managers: Explaining the Differences in Their Behaviour.’ Journal of Behavioural Finance. 17(2) pp 99-123.
1 At end-June 2024
This insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Global Companies Fund (ARSN 092 434 618), the PM Capital Australian Companies Fund (ARSN 092 434 467) and the Enhanced Yield Fund (ARSN 099 581 558), the "Funds". It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider the Target Market Determinations and the current Product Disclosure Statement (which are available from the PM Capital website), and obtain their own financial advice, prior to making an investment. The PDS explains how the Funds' Net Asset Value are calculated. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.