Argonaut’s top long & short plays within industries
Specialist European equity boutique Argonaut Capital believes corporate earnings – not quality or value – are the prime determinant of share price movement. The group says a concentrated portfolio of stocks with superior earn-ings momentum has been proven to outperform the market most of the time. Conversely, stocks with negative earnings momentum tend to underperform.
 Barry Norris |
The FP Argonaut Absolute Return Fund looks to take advantage of inefficiencies in earnings expectations, by taking long and short positions at stock level. The FP Argonaut Absolute Return Fund has a strong track record delivering alpha by taking positions on both sides of the trade, with the long and short books both adding value during 2013 and also 2014. In every year since inception in 2009, the strategy has delivered a positive return for investors.
Argonaut founding partner Barry Norris currently sees a number of compelling long and short opportunities, with many contrasting plays in the same industry:
Ryanair (long) v Norwegian Air Shuttle (short)
“A successful budget airline must be able to win a price war. There are two elements to this. Firstly, having the lowest unit costs and therefore making a profit from cheap ticket prices when the competition is loss making. Secondly, a strong enough balance sheet to withstand short-term pain on profitability. This could result in longer term gains in market share. While Ryanair is the proven winner in this regard and as such has seen considerable positive momentum behind its profit forecasts – Norwegian’s business model only really works in Scandinavia, when it comes up against easy competition in high-cost incumbent SAS.
Norwe-gian’s attempt to aggressively expand outside of its core markets – without a profitable business model and with a highly levered balance sheet – is in our opinion the airline industry equivalent of bringing a knife to a gun fight.”
Intesa Sanpaolo (long) v Banco Comercial Português (short)
“There are considerable opportunities to add value through stock-picking in the eurozone banking sector, but some banks are seeing a pick-up in profitability sooner than others. Intesa Sanpaolo is a great example of the positive characteristics we look for in a stock. It is a well-capitalised (arguably over-capitalised) bank, with a prudent provisioning policy that has successfully dealt with the sins of the past and as is now able to sustain attractive dividends. Intesa is also enjoying revenue growth from fee in-come and lower funding costs, while it is ultimately geared to a resumption of asset growth as the Italian economy comes out of a six year recession. In contrast, BCP ‘failed’ the ECB stress test last year and in our opinion has yet to convince in terms of its balance sheet sustainability. Its exposure to Angola and residual exposure to the bailout of BES are also potential banana skins.”
Neste Oil (long) & Statoil (short)
“We believe oil will likely be in a bear market for a considerable period of time; until at least the Saudis achieve some or all of their strategic aims and OPEC recovers its political and economic cohesion. This is creating opportunities on the long and short side within the energy sector. For example, we believe Norwegian oil major Statoil is only marginally profitable at $55 oil and cannot sustain its generous dividend payments indefinitely without putting its balance sheet at risk. As such, we are amazed its share price has only fallen by some 20% since oil was $100. In the oil space, we prefer Europe’s largest pure-play oil refiner, Fin-land’s Neste Oil. It is enjoying significantly lower crude input costs at the same time as a healthy demand environment. This is leading to booming margins and the likelihood of a sustained period of earnings surprise.”
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