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Miton's Hugh Grieves: my five stocks for US strength

Miton's top performing manager Hugh Grieves highlights five of his favourite US stocks.

The American economy had been expanding at an unusually slow pace in the years since emerging from the wreckage of the global financial crisis as the scars of that period have remained.

For all of that time, economic growth has been disappointing, with companies lacking confidence to invest in productivity boosting plant and equipment and banks slow to extend credit, whilst consumers have been under pressure from wages barely rising in line with inflation.

In the last 12 months, however, corporate America has rediscovered its mojo and animal spirits are starting to return.

In part, this has been helped by corporate profits, growing at double-digit rates last year, the fastest rate since the post-recessionary bounce of 2011.

In addition, the passing of the tax cuts and jobs act at the end of 2017, which cut the headline corporate tax rate from 35% to 21% as well as adding incentives to accelerate capital expenditures and bring back to the US historic profits stranded overseas, provides a further, recurring windfall for US corporations.

Here are five stocks which I believe should all benefit from a strengthening US economy:

Over the last three years to the end of January, Hugh Grieves has returned 62.9% on the Miton US Opportunities fund versus a peer group average of 47.7% 

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The American economy had been expanding at an unusually slow pace in the years since emerging from the wreckage of the global financial crisis as the scars of that period have remained.

For all of that time, economic growth has been disappointing, with companies lacking confidence to invest in productivity boosting plant and equipment and banks slow to extend credit, whilst consumers have been under pressure from wages barely rising in line with inflation.

In the last 12 months, however, corporate America has rediscovered its mojo and animal spirits are starting to return.

In part, this has been helped by corporate profits, growing at double-digit rates last year, the fastest rate since the post-recessionary bounce of 2011.

In addition, the passing of the tax cuts and jobs act at the end of 2017, which cut the headline corporate tax rate from 35% to 21% as well as adding incentives to accelerate capital expenditures and bring back to the US historic profits stranded overseas, provides a further, recurring windfall for US corporations.

Here are five stocks which I believe should all benefit from a strengthening US economy:

Over the last three years to the end of January, Hugh Grieves has returned 62.9% on the Miton US Opportunities fund versus a peer group average of 47.7% 

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Lowe’s

Lowe’s is the number two home improvement retailer in the US, selling a broad range of products for home decorating, repair and remodelling through its nationwide network of 2,370 stores to more than 17 million weekly customers. Rising wages and lower taxes, together with rising house prices, are providing a strong tailwind to home improvement sector sales as consumers look to spend more liberally on where they live.

Importantly, unlike other retailers, the home improvement segment has suffered only very limited competition from Amazon and other online competition given the bulky nature and immediate needs of the majority of what it sells.

Whilst demand from DIY customers is improving, historically Lowe’s has lacked focus on the professional customer, unlike the industry leader, The Home Depot. However the recent involvement of an activist shareholder has shaken up the board and reinvigorated the management who are now increasingly focused on making up lost ground.

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Royal Caribbean

Royal is the second of the three industry dominant cruise lines companies (behind Carnival Corp. and ahead of Norwegian Cruise Line), operating 49 ships around the world, with over 120,000 berths overall. Together the top three companies have now consolidated to make up almost 80% of the industry combined, making for a more stable, and profitable, industry than in the past.

In the past, despite the steady increase in the popularity of cruising, the cruise lines have suffered from almost permanent excess capacity, putting margins under pressure. Now for the first time in years, we have entered a period of synchronised global growth in which there are no large pockets of weakness and instead we have greater demand from holidaymakers than there is available berths. With new ships taking many years to build, cruise lines have been able to take advantage of the newly found scarcity by raising prices and improving returns.

Longer term, the industry appears to have entered a new phase of rationality, with ship supply growth of only about 4% per year for the next several years, or about half the rate of the previous 35 years. This should allow them to capitalise on cruising’s low consumer penetration without overbuilding and remove some of the boom and bust that has bedevilled shareholders in recent years.

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Worldpay

Worldpay is one of the largest processors of debit and credit card transactions in the world.

Every time you swipe your card to pay for something, a whole series of companies stand in the background to make the transaction possible and receive a few pennies each time. Worldpay is one of these. Every extra card transaction is potentially more revenue for Worldpay, providing a predictable long-term tailwind to growth.

Being a key part of the global financial plumbing system, makes for very high barriers to entry and high returns to shareholders. It would be almost impossible today for a new company to enter the market and reach any viable scale given the complexity, security demands and transaction volume hurdles that would need to be overcome. This security allows Worldpay to achieve the high margins and strong cash flow that it consistently delivers for its shareholders.

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Union Pacific

The Union Pacific railroad has been in operation since the 19th century, operating primarily in the western two-thirds of the United States. The railroad carries almost exclusively freight traffic, including agricultural, automotive and chemical products, across its network which connects all the west coast ports with the eastern gateway, such as Chicago and St Louis, as well as joining with railroads in Canada and Mexico.

The consolidation of the railroad industry in the 1990s has brought improved operating efficiencies, greater traffic as well as higher margins and improved shareholder returns.

Today Union Pacific’s financial performance is strongly correlated to the health of the US economy. Increased economic activity results in more carloads to be transported around the country. And with limited extra cost for each additional shipment carried by rail, profits should benefit.

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Eagle Materials

Eagle Materials is a leading producer of cement and plasterboard manufacturer for the US construction industry. As the US economy has been gathering momentum in recent years, construction of new commercial and residential buildings has grown, requiring increasing volumes of raw materials.

However the production of new cement is limited by the lack of domestic capacity which currently stands at around 100m tons per year. Environmental and planning regulations effectively prevent the construction of any new greenfield plants whilst imported cement cannot be economically transported far from the marine shipping terminals. This leaves incumbent domestic producers like Eagle in a powerful economic position, able to deliver to the growing, supply constrained market whilst raising prices, and margins, over time.

The company also has a large plasterboard business. Although the margins on this business are lower, the housing sector, which is the primary consumer of plasterboard, is once more growing strongly as it recovers from the excesses that helped create the global financial crisis. New housing starts, having fallen below 500,000 per year in the last recession, are now up to almost 1.2 million per year. This, however, is still well below the 1.5 to 2.0 million starts we consistently saw in the years before the financial crisis so we believe there is significantly more headroom for wallboard demand ahead in the coming years.

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Hugh Grieves
Hugh Grieves
38/199 in Equity - US (Performance over 3 years) Average Total Return: 57.30%
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