Bryce (00:00):
If you've found a stock where the fundamentals don't match, it's beaten down, do you still wait for a positive momentum to come back into the stock before adding it?
Matt (00:07):
No. Once you see the price move, it's probably a little bit too late. So you want to get in there hopefully before it moves or before it really starts to rip and run. Looking for those beaten down unloved ideas that have strong fundamentals, that's where you're going to make all your money from.
Bryce (00:25):
Welcome to another episode of Equity Mates, a show where we explore what's possible in the world of investing. If you've just joined us for the very first time, a huge welcome to our community. My name is Bryce.
Alec (00:34):
And I'm Ren, and today we're talking about the potential wolf in sheep's clothing hiding in your portfolio. We're talking all things the momentum trade.
Bryce (00:44):
Yes. Joining us in the studio, we have Matt Jones. He's the co-portfolio manager of the Fidelity Research Global Equities Fund. And today, as you said, Ren, we are talking all things momentum. It is a style of investing, a factor. We should probably explain what factor investing is because we do start straight into it.
Alec (01:03):
Well, yeah. So there are a number of factors where you can group stocks in by their characteristics. And probably the most common factor people are familiar with is value, where you group stocks that look cheap, but there's also quality where you group stocks that have really strong profit margins and cash flows, strong balance sheets, high return on equity. There are other factors as well. Size is actually a factor, so small caps. But the one we're talking about today is momentum, and that is grouping stocks that have done well in the recent past. And there's a style of investing where you buy momentum stocks, where stocks that have done well, you believe will continue to do well. And in certain markets like today, that strategy has paid off.
Bryce (01:52):
We're all the beneficiaries of momentum investing at the moment, even if you hold the index.
Alec (01:57):
Yeah. And it can get confusing because the stock market is always driven by the stocks that are doing well. That is what drives the index higher. But I guess what Matt is warning about and what we talk about today is that the number of stocks doing well is getting narrower and narrower. And we kind of know what those stocks are. They're the AI stocks and the data centre supply chain stocks, the big tech giants and the like. And under the surface, there's a number of stocks that aren't doing as well. And so Matt is warning us that when that momentum turns on the AI trade, people might be more exposed than they think.
Bryce (02:33):
Absolutely. A big thank you goes to Fidelity for supporting today's episode and helping us keep all of our content free. To learn more about the Fidelity Research Global Equities Fund and Fidelity's approach to systematic investing, head to fidelity.com. Au.
Alec (02:46):
Before investing, you should consider the PDS and TMD available at fidelity.com. Au and whether this product is suitable for you, FIL responsible entity Australia Limited ABN 33148059009, AFSL 409340. All
Bryce (03:02):
Right. Well, with that said, let's get into our conversation with Matt Jones. Matt, welcome to Equity Mates.
Matt (03:10):
Cheers. Thanks for having me.
Bryce (03:11):
We wanted to start by digging into momentum because it's been an incredibly powerful factor for investors over the past decade. Let's start generally. What do we mean when we talk about momentum as a investment factor and how do we measure it?
Matt (03:25):
Yeah, momentum is an investment factor. You can actually measure it in different ways, but the primary way people look at it is the price movement over the last 12 months. You can get a little bit technical or you can get very technical and say remove the last one month part of that component because that tends to reverse in concept. But generally what we're looking at is a price today compared to what it was 12 months ago. Those stocks that are rising a lot faster than other ones that are falling assuming you have positive momentum. You rank order things on that kind of measurement of last 12 months performance, top end, positive momentum, bottom end negative momentum. It's actually quite simple in that regard.
Alec (04:01):
Nice. And momentum challenges some people's intuitive thoughts around how stocks move. For some people there's this idea of mean reversion. Stocks that are going up will come down. Stocks that are down will come back up. But momentum has been a powerful factor of returns over the past recent history. Just how big a driver has momentum been?
Matt (04:21):
Yeah, it's been quite huge again, depending on how you measure it. And it's quite interesting that you said the mean reversion, that's that one month component. So when you're looking back 12 months, exclude that kind of reversion bit in the last one month, which was equally as powerful. But generally, if you look over the last kind of 10 or so years, I think in say MSCI all country world index, momentum is a kind of more simple pure measure is returning like 16, 17% per annum. Whereas a broader index is only done about, well not only, but done about 13% per annum. So that's a decent 4% spread just looking at in that regard. So it has been quite powerful, but I think that the interesting bit is when it's powerful and what's driving it more than the headline numbers over that 10 year period.
Bryce (05:01):
And so how should we think about exposure to momentum? As investors, should we be wary of being too exposed to it? How should we think about it?
Matt (05:09):
Yeah, and that's actually probably the most important part of my job, I think, other than the alpha coming into the portfolio. So the portfolio construction process and portfolio construction is as significantly important as the alpha that's driving the fund. And momentum can come into the fund in many different ways and you need to understand more your exposure to that factor. For example, if you only hold NVIDIA or Microsoft in your fund, you're probably close to 100% exposed to momentum at the moment. So what you want to do is hold your fund in slightly different weights compared to how strong the momentum is from each stock and make sure you have exposures outside of that momentum bucket as well.
Alec (05:49):
Yeah. You said Microsoft and NVIDIA, we're really talking about the US here. The narrowness of the market is pretty stark. Can you just give us a sense of how much those few momentum stocks are really driving the overall performance of the index?
Matt (06:04):
Yeah, I can. And I'm going to cave out all this with, and we'll probably get to this in a second anyway. Momentum is not a bad thing. If you have too much of anything, it's a bad thing. It's like all your eggs in one basket kind of concept. But I get goosebumps when I was doing a bit more heavy research on how strong my momentum is because when you run your fund, I don't have huge exposures to it, but we have exposure to it because there's alpha there. But when you start digging into the detail and you see how other people might be heavily exposed to it, it is actually quite scary, that breadth at the moment. I think at a very scary number I looked at, I looked at the top 20% of the S&P 500. How much has that driven the returns of the S&P 500 over the last 12 months? (06:42) I though maybe 60, 70, 80%, 98% (06:46) Coming from the top 20%. And you've got to think if the index is about biggest names around five or 6%, that probably only four or five names potentially. And that's scary. And you look at breadth from a different measure, say 200 day moving averages is kind of a measure that the market uses, not quite a year, but only 43% of the benchmark is above its 200 moving day average. So you're talking 50, 60% of the benchmark, even though it's up 13% kind of 12 months, 50 to 60% of the benchmark, depending how you measure it, actually hasn't outperformed. Well, excluding last 48 hours, which is we'll leave that aside. And the levels you're seeing here, and again, it's weird being old like myself and working so long in the industry, the levels you haven't seen since pre - 2000 even, S&P 500, I think the top, when they measure it by the top five S&P have said this, the top five, 10 and 20% of the index when you aggregate it are at breadth levels that surpass back to the 70s in the extremes.
Alec (07:45):
Yeah. I was going to ask, we're talking about momentum now, but is this a historical anomaly or is it always just that the top stocks drive the overall index? But the answer is it's an anomaly right now.
Matt (07:56):
Well, the extremes are anomaly right now, but momentum always drives the index and the top stocks will always drive momentum because the index is primarily based on momentum. You think you build an index by price times, shares outstanding to get market cap. Shares outstanding typically don't move a lot, so it's a price that drives it. And if you think about momentum, that is the change in last 12 months price. So it's kind of a self-fulfilling thing if you just own the index that you deliberately start building more and more momentum as it grows itself.
Bryce (08:25):
So really anyone who owns the index at the moment, we are heavily exposed to the momentum.
Matt (08:30):
Incredibly exposed right now. And it's not just momentum because we can get to this. Momentum can be many different things or it can be the same thing. And the problem I think with momentum at the moment is it is that kind of whole AI concept, whether it be semiconductors, whether it even be energy names or utility names are exposed to the energy space or supply and energy or even industrials that are building the data centres. So you might think I've got a diversified portfolio because it's not holding to semiconductors. I've got some utilities and some industrial names. But if they're all on that kind of inverted comms AI bandwagon and that's what's also driving the index not at the top level, but from the belly as well, then you might not see that in your fund and that's quite extreme right now. So owning the index, it'd be hard to argue that it's not heavily exposed to momentum and that one singular kind of momentum theme right now.
Alec (09:18):
Now the reason we're talking about momentum today, I think people could listen to this conversation so far and be like, so what? S&P is up 14% this year. I'm happy. Don't write on my parade. But you've been writing recently about how momentum is, and to use your words, a wolf in shaped clothing. And you've been talking about, I guess the risk of hidden concentration that's showing up in portfolios. So can you just explain why this momentum conversation is important for investors?
Matt (09:45):
Yeah. And starting with what I just said, if you just own the index, then you could be heavily exposed to that. And then depending on what else you hold in your portfolio, and that's all depending on that kind of aggregate portfolio concept, you might want to reassess that. And again, it comes back to assessing what's driving your performance and are you comfortable with that? So if you're comfortable with taking that risk and everything is essentially a risk reward trade off, so you'll get that 13, 14, 15, 20%, but you're not going to get that for free. And whatever exposure's building up, albeit it could be momentum, it could be growth, it could be quality. Are you happy with that? And when you look at your funds, you want to see that in aggregate. And when you look at say adding other funds to your exposure, are they adding to that or are they taking away from that? (10:25) It all just goes back to being a risk reward trade-off because what happens obviously when that momentum rotates is you're going to be on the opposite side of that 13 or 14% up. And there's been years obviously, and I think Lucas in a paper that he's supplied and written for Fidelity as well on momentum kind of highlights those turning points are more critical than the last stretches of momentum.
Bryce (10:49):
Now as investors, we can own several funds and strategies that still really depend on the same small set of stocks that are driving returns. If active managers own the same stocks that really dominate the index as retail investors, why would we not just go passive?
Matt (11:06):
No. Well, if I was investing in an active manager that looked exactly like the benchmark or very close to it, but was charging you active fees, I'd challenge why I would be doing that and not owning the index. And it's not that we're saying myself or even Fidelity or Alice is saying that these bigger stocks in the market aren't justifying their prices or aren't great stocks from here into the future. It's more the fact that you can own many different names and look like the benchmark without being the benchmark as well. So you don't have to hold all of your exposed portfolio, 20, 30, 40, 50% of your portfolio to those top four or five names. You could diversify that across the space and own some other quality names that might've been beaten down recently, but still have that future earnings ability, future marginability, future kind of competition and barriers to entry type process to return the share price in the future.
Alec (11:56):
I appreciate you're an active manager working for one of the biggest active managers in the world, but you're coming on here and saying scrutinise your active managers and look at their holdings and make sure they're not just hugging the index.
Matt (12:07):
100%. And I say this to everyone in all the funds that I manage. I go, I'd be scared if an active manager wasn't willing to show me what's the underlying driving themes in the portfolio. They might have delivered 15, 20% last year and the benchmark did 14. So where did that come from? Did it come from a lucky guess in four or five names? Was it a concentrated bet in AI infrastructure names? Was it diversified? And not only did it come from that, but look back six or 12 months ago, did you actively make that decision? So some of these things can creep into your portfolio and you can somewhat be lucky to get that exposure and it drives your alpha. Obviously you need to really open the bonnet, so to speak, and look under the hood and dig into the detail of what is the engine driving that top line number. (12:52) I think if a manager to me wasn't able to come back and articulate that, even in a top level way or a more detailed kind of risk assessment or stress testing of say when momentum rolls or you have these big exposures, how are you positioned if they move against you, they're kind of little flags that keep popping up where I'd be challenging how much should I own in this fund and should I diversify away?
Bryce (13:14):
Well, Matt, you have a case study on the risk of momentum, so can you just take us through it?
Matt (13:19):
Yeah. And I think that there was a case study that Fidelity has done, not myself personally on momentum, but the general gist of the case study is those rotation points. And the example used is, we all know the markets fell in 2022. Defensives were the top end of the momentum, more positive momentum than the other names that fell during that year. Momentum is backward looking. So if you just bought the better momentum names, you would've piled into more defensive names on that backward looking behaviour of price momentum. And then the market ripped in 23, 24 and momentum really fell compared to owning the broader market. And that's the point of this article is to highlight not that momentum is good or bad, but how are you positioned for when it moves against you? And I think more importantly too, not position where it moves against you from a low to a high point, but what we're currently seeing is the opposite of that. (14:08) That concentration from a high point and the rotation to a lower point of momentum, if the market rolls over, how is your aggregate exposure? Are you happy with driving those returns? And are you positioned for the rotation? Which is I think the gist of that article. How is your fund positioned? How is it exposed to these things? And are you happy with those exposures?
Alec (14:28):
Yeah. Now we'll include a link to that case study in the show notes and YouTube description if people want to read it. But I think what you said there is just, it's a good clarification because we've been speaking about momentum as it exists in 2026 and momentum now is in the AI and the tech names and the data centre supply chain names. And so people may think that momentum is just a synonym for growth investing, but there are times when the momentum names are like the value names or as you said, the oil companies in 2022, they were the momentum trade of the day.
Matt (15:00):
Exactly. And this is why I like referring to it as the wolf in sheep's clothing because it's all happy and fluffy and nice when it's delivering alpha and you're positioned in that alpha.You might own the quality names, you might own the energy names, but where it becomes a wolf is when that rotates and it goes, "Oh, hang on a second. There's some pain to come and I am a bit scary." So it's just being aware of those exposures and what's driving them. And momentum is quite tricky, like you said in that regard. It changes weekly, monthly and over the long term as well. So it's just keeping an underlying understanding of what is momentum and what's in your portfolio.
Bryce (15:36):
How do you then determine or know when it will rotate? What are the signs that you're looking for? That's the million dollar question.
Matt (15:44):
Well, that's not my job fortunately, but that's the job of my 120 analysts that I use globally to assess each individual stock. And that's what we do, I think, best at Fidelity. So it's not that momentum's bad. The job of the analyst is to look at where the stock is sitting and a price or a valuation perspective and then look at the fundamentals and go, "Do the fundamentals match that price or where the stock is in valuations at the moment?" I think the best thing to look for is just assume you've got a stock that's really cheap, it's been beaten down over the last six or 12 months. What you would hope to see if you want to own that stock is that the fundamentals aren't reflected in the current price movement. And what the fundamentals are saying, whether it be margins, sales growth, quality of the balance sheet, interest rates are going up, how's that going to affect cash flows, interest rate cover? (16:34) Maybe it is beaten down because it's extremely geared and it can't cover cash flows and dividend payments next year. So fine, that stock's going to buy. And the negative momentum is justified, but then you might find a stock that's beaten down for an anomaly that the market feels is there, but we've got better eyes on it and we feel that margins will improve, that customer base will grow, that sales are coming through, expansion's going to be fine. So it's hard to do at a top level. You need to really do it from a bottom up sense in that regard. Coming that with at a top level, if I was looking at the fund, it's easy to see your momentum exposure and it's easy to see how many stocks you've owned at a very basic level that have gone up ridiculously high in the past 12 months. (17:14) If I was looking at a fund at a top level, I'd go, "Well, what are my top 10 names? How hard have they run? Do I own those names across multiple funds I might own?" And you gauge a very rough view at a top level from a portfolio exposure level. From a bottom level, it's a little bit more difficult.
Bryce (17:31):
Just from a practical point of view, if you've found a stock where the fundamentals don't match, it's been beaten down, you think the fundamentals are there, but the market's kind of not seeing it. Do you still wait for a positive momentum to come back into the stock before adding it?
Matt (17:44):
No, especially at Fidelity. I think that is the job of the analyst is to, again, it's like most things in life, once you see the price move, it's probably a little bit too late. So you want to get in there hopefully before it moves or before it really starts to rip and run. And that's what I try to do best and what we try to do best at Fidelity is on my early kind of training days in London, Europe on the likes of someone called Anthony Bolton, it was like looking for those beaten down, unloved ideas that have strong fundamentals. That's where you're going to make all your money from. You're still going to make some from owning the momentum names that still have stronger fundamentals and can continue into the future, but the big bucks are from looking from those beaten down ones. What we hope and what we see at Fidelity is where hopefully be ahead of that curve in researching those fundamentals and finding those turning points. (18:30) And then the momentum comes and that's where you get the greater upside. Makes
Bryce (18:34):
Sense.
Alec (18:36):
But at the same time, you don't want to be stuck in a stock that has good fundamentals, but the market just doesn't like it for whatever reason. How do you avoid catching a falling knife or just being in a stock that isn't going anywhere?
Matt (18:47):
It comes down to that constant reassessment of the fundamentals. And then when you've got some expectations of what the stock should be delivering and if it doesn't meet those say margins targets or earnings targets or sales targets or subscription targets or tack numbers, you got to keep reassessing that. And then if the market doesn't move or the stock keeps falling, well, that's when ALS would typically downgrade the name or essentially indicate that it's not going to move from here in either their ratings or other metrics. But it's that constant reassessment. So you can't just make the call and wait for the price to move. You need to keep reassessing the fundamentals and judge that versus the price.
Alec (19:27):
So Matt, we want to take this conversation around momentum and put it into practise for people watching and listening how they can sort of do a self-assessment of their portfolios and think about their exposure to momentum. But we want to actually start with your portfolio because when we looked under the hood of the Fidelity Research Global Equities Fund, we saw that there are a number of momentum names at the top of the fund. The top five holdings are Nvidia, Alphabet, Microsoft, TSMC and Samsung. So I think the advice for people is more nuanced than just avoid momentum. So how do you reconcile this conversation around the risks of momentum with the top names in the fund?
Matt (20:06):
Yeah, and that's a fair statement. So it's like I tried to say earlier is just because a stock has positive momentum doesn't mean it's a bad stock. And it comes back to that justification of the share price versus the underlying fundamentals. So obviously if those names are at the top of my fund, our analyst team feels that where they are now and the share price and that positive momentum will continue based on what we're forecasting the fundamentals to be, whether that be earnings, margins, subscribers, ad revenues, balance sheet quality, the standard things that you'd expect a research team to look at. And more importantly too, I think in the current market, also heavily looking at off balance sheet liabilities, cash flows, cash interest covered because of some of the debt burdens growing in these things. So they're constantly reassessing those. We're comfortable with those names. (20:53) There are some strongest names and most powerful names in the sector. Even if it did rotation happen, we're okay to have them in that fund. But what I'm not going to have in my fund is those names representing 50, 60, 70% of my portfolio. And we'll make sure that those sector and industry bets are relatively contained and we allocate the rest of the portfolio, not to the complete opposite end of that spectrum, but outside of that scope. So it comes back down to momentum in your fund is the momentum in the stock times the weight in the fund or the relative bet in the fund. And that's probably more of the most important bit in a portfolio context than the underlying individual stock momentum.
Bryce (21:28):
Just digging into that, where do you think we are in the overall sort of AI trade at the moment, given that you think prices for those five are reasonable based on the fundamentals?
Matt (21:39):
I always follow the analyst view. So this would be more of a personal opinion than the analyst view. So my job is to take that analyst view and deliver it in a really risk aware portfolio to my clients. The general feeling I think is we should be good for the next two or so years. But obviously this is as we sit here in point in time now, two to three years. I think the biggest driver of things will be interest rates, interest expenses coming onto balance sheets, that CapEx spend delivering, ultimately delivering returns. We all know that. And again, the joy of my job is I don't have to worry about that. I have like 120 analysts watching that on a daily basis. So if they see that start to move against the stock and the valuations aren't there into the future, then we'll adjust those weights. (22:22) But I think what we're seeing currently, there is some rotations going on in the last 48 hours. I think that's cleaning out a few of the smaller, more speculative names. But I think that the stronger ones, the ones that we own will continue to deliver indefinitely.
Alec (22:37):
Yeah. The balance sheet strength of alphabet versus CoreWeave is our chock and chase.
Matt (22:42):
Yeah, exactly. But the market's doing the right thing and the market's trying to price things differently and be as efficient as it can to clear out the junk at times, so to speak, and make sure that everything that is going up is quality and investible at a basic point.
Alec (22:57):
Our theory is the firmest IPO was the first domino in the data centre trade to fall.
Matt (23:03):
Yeah, it was quite fun. I was on stage this week talking about private credit of all things. So just brushing up on my old accounting degree knowledge and how we look at things from that point of view and data centres. And when you look at some of these names, this is what our analysts are doing. So we hold a lot of these names. We still think they're great value, but I was reading up, it was in the FT and on Bloomberg News recently, things like Meta's got, I think it was about 85 billion of off balance sheet liabilities. I'm guessing most of them are tied to data centres and AI growth. That 85 will grow to I think 385 or 400, just a ridiculous number, a magnitude of five times. And then I was reading to discount that back to under $100 billion requires double digit discount rates. (23:43) And these are the things that we're assessing on a daily basis. And the analyst is to see can earnings deliver? Can they do with it on their balance sheet and cash flow statements? So the numbers are getting large and that's fine again, as long as they can deliver into the future. Now, price momentum won't predict that. Price moment's always backward looking to a large extent. Alphabet, a classic example too, I think is net interest expenses a magnitude of five or six times what they were last year? Fine, but does it has the cash flow earnings margins to deliver? I think whereas you look at Firmus and other listed private or private credit type vehicles, this is where they start to come a bit unstuck.
Alec (24:25):
It's interesting. Yeah, it is interesting. Well, let's move from that conversation which we could spend a whole episode on and move to how individual investors can do that same assessment of their portfolio. I guess if Bryce and I were going to do an audit of our holdings for hidden concentration, what are the questions or what's the checklist we should go through?
Matt (24:48):
Yeah. And I always go back to basics. We always go back to the basics of finance, basics of everything. Quite simply, you would just, if I had five different funds, five different equity funds, I'd just take my top 10 or 20 holdings, rank order them and see what the overlap is quite simply by name. Then what you could do if you want to take another further step, you could not rank by name, but look at the top 10 or 20 performing holdings in each fund and see what the overlap is there because it might not necessarily be by name, but if you're wanting to look at momentum, if what's driving my five different funds, they might not be in the same sector. They might be the same stocks that have gone up the most in the last 12 months, whether it be energy, utilities, AIs or semiconductors and see what the overlap is there in aggregate. (25:32) You can get more technical and quantity on this kind of thing, but that might then mean reaching out to your financial advisor who will reach out to the end fund manager and go, "What is my risk adjusted momentum exposure to my fund?" And not only the exposure, but how much of that exposure delivered my last 12, 18 months returns? Because it's exposure times your weight to that exposure in aggregate. And then look at that across all of the funds. I think they're the kind of basic key things you could do. And then if you can't get those answers back, that's when I'd start to get a little bit more worried about is there something hiding there that I'm not aware of? And two, I guess I work for an active manager, but don't trust the label of the fund sometimes. And like you were saying earlier, momentum could be quality, it could be growth. (26:17) So I've got a fund that's full of quality names, but is it real quality or is it just momentum into those quality names that's driving it? That's where it gets a little bit harder to differentiate and discern as an individual retail or wholesale investor. And that's where you hope that your financial advisor or the end fund manager can step in and help with those answers.
Alec (26:36):
Yeah. But I think, as you said, going back to the very basics, going back to one of the first principles that everyone learns as an investor, it's diversification. And diversification can be on the sectors you're exposed to, the names you're exposed to, but it's also in this case, what's driving your portfolio. Yeah. Well,
Matt (26:52):
They're the underlying factors that are driving your portfolio and that's the most important thing. Again, don't put all your eggs in one basket. It's pretty simple. And I think more importantly too, if I had a fund that was doing 20% alpha over the last one year, I'd want to know what's driving that. And if it's only delivered 5% alpha, typically over time it's doing 20 now, I'm guessing there's some momentum of some sort in there, whether it be an industry momentum exposure or quality exposure or there's something there that you might want to... When it's too good to be true, it's time to reassess.
Bryce (27:23):
Well, Matt, we want to turn to a couple of stocks in your portfolio and do a bit of a deep dive. So we've asked you to bring two today. The first is Amer Sports. So let's just start at the top. What does the business do?
Matt (27:34):
Yeah. So I'm going to caveat all of this with my analyst as the expert on these names. So I do invest them so I know them quite well, but I will not be the absolute expert on luxury goods in the world. Amer Sports is quite interesting. If you know Salomon skis, that's essentially the premise of what Amas Sports came from in Finland. But it's looking at expanding through or has expanded through China, North America, and more broadly to continue that growth in Europe. And it's not just about skis. So if you split it down, I think you split into three different types of business, you've got a luxury outdoor wear brand called Arc'teryx. I'm not a skier, so I'm guessing some of our listeners would be -
Alec (28:11):
Oh, you don't do that as part of your due diligence? Fidelity, you have to pay for a ski trip for me.
Bryce (28:16):
Surely.
Matt (28:17):
I've tried. I tried. Yeah. No, I wish. If it was that easy, I'd never be here. Yeah. So Arc'teryx is that kind of luxury kind of ski outdoor wear brand. It's high margins, high end. It's got great customer base that will stick with it, very sticky. So that's kind of the one bit which is driving some of the margin growth they expect. Then you've got Wilson, tennis rackets, tennis balls, that kind of thing. So it's a bit diversified compared to that. And then you've got Salomon are expanding out into not only... They're traditionally known for trail running type footwear, but expanding out more of that Salomon sporty kind of footwear brand. Everyone's into running these days. I'm a bit of a fake runner. We can get into that a bit later, but it's got a lot of momentum behind that. So the strength is coming from those three different types, diversified types of the business, diversified kind of consumer luxury brands to some extent. (29:09) And they're also kind of opening up more stores, doing direct to consumer to help build that brand and build support those sales and earnings growth, I guess. So that's the kind of three core parts of the business that we're looking at that are going to drive that earnings growth, margin growth. And more importantly, from this concept of this discussion we're having now, I think the stock price was down about around 12-ish to 20% in the last kind of year today, 12 months. I think down close to 30% over one year. So this is the job of the analyst is to go, "Actually, you know what, this stock is so beaten down. The fundamentals are actually quite strong. Don't necessarily agree with what the market's pricing it, why it's priced it down. And these are the names that we look for and I love the most when I see them in the fund."
Alec (29:53):
Yeah. And we specifically asked for you to bring two stocks that aren't riding strong momentum as kind of the, what is it, the counter Ballast or whatever in the fund. And so as you said, this is a stock that's not riding momentum, but your analysts like it. Why do you think the market isn't liking it at the moment?
Matt (30:11):
Yeah. And again, the bit I love when I see a stock that the market hates and analysts love, because I drink the Kool-Aid at Fidelity for 21 years. We're much better than the market. So to be different to the market, I'm already winning. But basically the market just pummled it because there's a little bit of slowdown in China growth and they don't think that the support from the core European growth or expansion in North America will help that. And possibly that the direct consumer is a bit capital expensive. Whether they're spending on those stores and build out of that will also offset a little bit of the China slowdown. And will it actually add to margins and be margin accreditive or destructive to some extent? And our view is from what we're seeing from the fundamentals, basically all of those fundamentals like earnings growth, sales growth and margin growth is counter to what the market's seen in the last 12 months.
Alec (31:06):
Yeah. The China slowdown is interesting. This company seems to be in the intersection of two China slowdowns, which is one, luxury is facing a China slowdown. And then the sportswear companies like the Nikes and the Lululemons are facing increased competition from domestic Chinese brands. And this luxury sportswear sits at the intersection of those two.
Matt (31:25):
Yeah. And that's why I went back to the original point I see is a bit more diversified than just being lumped into a luxury Chinese brand. I won't use it as a perfect example, like say Louis Vuitton or something more kind of high in aggregate like this. It's actually quite diversified in what it's trying to do. And the geographic exposure isn't 100% tied to China. So what we're seeing is the offsetting numbers coming through for that direct consumer North America and even Europe growth expanding outside of just Salomon trail wear and skis into the more high end luxury high end quality outdoor wear as well as the more sport style shoes. If that continues, then everything's fine.
Bryce (32:06):
Yeah. What do you think the market wants to see though if it is just to invert?
Matt (32:11):
Oh, okay. Yeah. So the classic is just the numbers to come through in an earnings. And it's interesting too to see this because what I typically see and what we see is it will take two or three quarters. It always takes two or three quarters for the market to start to digest that information and go, "Actually, you know what? We can see that coming through." But then at the same time, it's not that our analyst lies there asleep, makes a call and does nothing. So analysts will be reassessing some of these numbers themselves and looking at a divergence between us and what the market's pricing and what the street's pricing. And if any of these things change, then the analyst will change their view. It's not set in stone. I think the market is overly concerned with the China luxury goods slowdown and not taking into account all the other areas of growth in the high end margin business and their direct to consumers working.
Alec (32:56):
I'm just getting real deja vu. We've had another Fidelity portfolio manager in here before, James Abella, and he has also spoken about a Moncler. The European luxury sports skiing brand Moncler, which he loves. So maybe that's like a
Matt (33:14):
Fidelity momentum trade.
Alec (33:16):
So yeah, as Price was asking, the catalyst is that the strategy delivers, the numbers turn around.
Matt (33:22):
Always in those underlying P&L balance sheet cashflow numbers ultimately. And then I see what our competitive advantage would be, not just that analyst eyes on the ground in that region, but multiple analysts looking at the luxury goods sector in China, are China analysts coming in and helping with that exposure. So I think that the breadth of our research basis is much more powerful than just having say one individual analyst covering that stock. The analyst will be speaking to the China consumer team and getting feedback through there.
Alec (33:53):
Yeah. Trying to get the information before it comes out in the quarterly results.
Matt (33:56):
Yeah.
Alec (33:57):
So what's the flip side of that? What would be the thesis breaker? What would cause you to sell this stock?
Matt (34:03):
The reverse of everything I just said essentially. So that China slowdown expands, becomes quite dominant and it's not being able to offset that direct consumer that they're doing. And especially that growth in the sports style shoes from Salomon Sports Style, the numbers don't flow through from that to help bolster the earnings and growth in the business there. I think they're probably the two major key numbers that came through if they started slowing down, didn't offset the China, margins start shrinking, earnings slow down, that standard. I
Alec (34:35):
Don't know how big a percentage of the business Wilson Tennis is, but that feels like just a dominant franchise. No,
Matt (34:42):
It's actually not. And again, I don't have the exact numbers at hand, but when I was looking, I think they're rough, this is relatively broad range, but it's about 30 to 40% across each of those three segments.
Alec (34:52):
Their
Matt (34:52):
Market share? I was talking about business earnings. So thinking of exposure is not just... It's quite evenly distributed across the
Alec (35:01):
Three. Across the business. Yeah. But in the tennis world, it feels like Wilson is a dominant franchise.
Matt (35:07):
And these are kind of the underlying... So if the China thing does slow down, you've still got these underlying core businesses that are going to deliver. And the price is so beaten down, and this goes back to that price momentum versus forecast earnings and forecasting predictability of the company. Even if it does slow down, it's so beaten down right now the share price doesn't even justify that basic kind of valuations.
Alec (35:30):
What I was going to ask about Wilson though is we see all these stories, particularly in America of fights between pickleball and tennis and a lot of tennis courts being turned into pickleball courts. How worried are you about that?
Matt (35:42):
No, I did think about that and this is why I would have to call the analyst in because I was actually going to do a bit more deep diving myself on the stock going, how exposed are they to pickleball? But I'm guessing if they're making tennis rackets, then they can make pickleball. There's got to be some ability to diversify quite quickly into that space.
Alec (35:57):
It hasn't really come to Australia yet.
Matt (35:59):
No. I
Alec (36:00):
Haven't seen it.
Matt (36:02):
I know a few people getting on board that whole kind of bandwagon. I guess it's a bit more fun, a bit easier than running as well.
Bryce (36:10):
Well, Matt, let's turn to your second stock, which is Scout 24. Again, starting at the top, what does the business do?
Matt (36:16):
If you think of REA Group, it's exactly... Well, it's largely like that, but based in Germany. So they're the biggest online provider of interactions on real estate for agents, people looking to buy, sell, lease, that kind of thing. They're huge in Germany. And I guess it's one of those subscription type companies where their revenues come from that subscription from the real estate agents and building up that presence. So it comes from interactions, subscribers, subscription growth, and generally the broader German real estate market. And I'll pause there for a second because I thought quite interesting on this stock too and relating it somewhat to Australia, is you'd think when the real estate market gets hammered and there's a lack of supply that these businesses would ultimately shrink, but it's actually quite the opposite because there's so few properties out there to find in Germany and the market has shrunk so much, you're very reliant on these to actually find somewhere to live or rent or buy. (37:09) So I think it goes a bit counterintuitive to thought sometimes.
Bryce (37:12):
Interesting. I mean, a lot of people would be using the platform, but less agents on the other side have, I guess, inventory to actually list.
Matt (37:25):
Yeah. But when that becomes more finite, there's much more demand to actually find the property quicker and get it on the site and get it out there. What we're seeing in that company specifically is that huge growth in subscribers and need for that. The penalties from the market lately have been AI. I could go to ChatGPT or Claude and use it to help me find somewhere to live or somewhere to rent, which is in theory -
Alec (37:51):
I mean in theory, but ChatGPT and Claude are then going to the listings portal to be AI. And
Matt (37:56):
That was where I was going to get into. I could frame it similarly to Fidelity and Alpha and generating alpha from fundamental research. The most important thing in AI is data, full stop. I'm a quant by trade. So everything, data and clean data and data that no one else has access to and that's what they have. So they have the superior data set and then they can do what everyone is doing in this space. And I think the initial AI trade smashed a lot of these companies to perform. Like this company, I think it was down 12 months, 40 odd percent or more. But what they don't realise is if they adopt AI and then they can upscale their offering to the agents and integrate it into their process and integrate to the process of all of the real estate agents locally, I guess to the extent a real estate agent needs to list a property, they just throw in a couple of photos where it is and it writes a whole spiel for them. (38:43) They don't have to go close to cafes and restaurants. Renovator's
Bryce (38:47):
Dream.
Matt (38:47):
Yeah, exactly. Literally, I could do this. So that means then the agent can spend their value add time on trying to sell the property and get a better price for it. So it works for everybody. And that's where a lot of leverage and a lot of the upside we see in this. They want to be the agentic operating system for real estate in Germany and not only that, their expansion into Spain. I think the market has punished them a little bit because they feel that maybe that Spanish integration might not pay off. Are they going to get the synergies, the standard things when you see an integration? Obviously we're feeling and seeing the opposite of that. I mean, different company to Amer Sports, but it's like 60, 63% margins.
Alec (39:27):
Yeah. When I was going to ask how the market's fallen out of love with it, so just for context for people, Scout 24 is down 23% in the past 12 months. It's actually ripped in the past week or so. It's up like 10%, so that's good for you.
Matt (39:39):
No, no. We can talk about mean reversion. Compared to September, I'm breathing a sigh of relief in this last 48 hours.
Alec (39:49):
But if you look around the world, REA Group here in Australia down 28% in the past 12 months. CoStar, which is a listings portal in the US but now owns Domain, down 57% in the past 12 months, Zillow down 57. This as a global industry, these listings businesses were some of the best businesses, two-sided marketplace, low cost, but they've all been punished. I think part of the reason was people were worried about ChatGPT listing, but I think it was also they were worried about Bryce and I sitting in our garage vibe coding our own version of realestate.com. Au and eating away their margins. That for me feels overblown, but the market still seems to be quite worried about that.
Matt (40:29):
Yeah. And I completely agree with you. And a lot of these companies, even REA group, I haven't looked at that directly and we don't own it, but I can see we're relatively positive on that as a stock ultimately. But if I go back to Scout 24 and look at things like that, that is one of the biggest risks. Someone comes in, writes some code, but that's easy to do. But it's like if you think about Salesforce as a classic example too where it's got hammered, but once it's integrated into your massive organisation globally, do you really want to unwind that quickly? And that's very costly to unwind it. And then you've got to trust that the incumbent exists tomorrow or into the future. And even these incumbents, say with Scout 24, you can write the code to build the front end, but you don't have the data and you don't have the experience in the underlying data and structure of the data and the unique data set.
Alec (41:11):
And you don't have the customers. Yeah. And that's the big thing. The web traffic's the hard thing.
Matt (41:15):
And the trust too. I mean, real estate and finance is a big game of trust. Are you going to, a new real estate agent or even existing massive real estate agent go to someone who's written their code in the garage? It's not a bad thing. We've seen some big companies come from that, but it's a big risk involved in switching some of these things. I think that incumbent that's been around, that's got a great reputation, that has access to the data that you know already works internally, that's a big move to switch to someone who's got some fang dangled new website.
Alec (41:46):
Then the natural follow-up to that is this business model is out of favour in the market. What's the catalyst for it to turn around?
Matt (41:53):
The catalyst for it to turn around, I guess, is to see that monetization more of that, I think more of that AI spend into the higher margin offerings ultimately. And then the continued subscription growth from Germany, generally, that's your kind of floor and provides the foundations to continue with the business and the expansion into and see the numbers come through from that expansion into Spain. I think the expansion to Spain plus the integration of AI and that relatively robust balance sheet and margins continue will support and grow the share price. Again, classic question I guess you're going to ask me again is what would make that not happen? I go, and this is probably what you're seeing Australia at the moment compared to Germany, another massive monumental slowdown in real estate and housing market more than anything. And where that spend doesn't come through, subscriptions taper off, you can't use that to help grow the business. (42:45) Which again, when you talk about Australia, I think it's going through that bit now. I won't comment on REA Group, good to buy now because I don't own it and my personal opinion might differ. Okay.
Bryce (43:00):
Well, Matt, you did front run the last question, which was around reasons to sell. So I think we'll leave it there, but thank you so much for coming in today and sharing your thoughts around momentum and what's going on in the AI trade as well. We really appreciate your time. Thank you so much. Yeah,
Matt (43:14):
It's been awesome. My pleasure. Thank you very much. Thanks, mate
