Why Terry Smith is right about investing in Nike

view original post

Our new Wednesday column on American stocks will aim for a steady stream of investing ideas – we have already tipped Mastercard and Alphabet – but we will also use it to update on earlier recommendations. This week we will revisit six US Questor picks from the past.

© Provided by The Telegraph Nike boots

Updates: Starbucks, Nike

We tipped these American giants two years ago on the strength of the purchase of both stocks by Terry Smith for his Fundsmith Equity fund. Smith has now sold Starbucks, although he is hanging on to Nike. He has not, so far at least, explained his reasoning but Questor is content to follow his lead.

Why? Few fund managers, in this column’s view, adopt a clearer or more intellectually coherent approach to stock selection. He will consider investing only in a small slice of the stock market: those businesses that have already found a winning formula for keeping customers happy, that are able to defend that winning position, that can therefore make high returns on capital and that can be bought at a reasonable price.

Smith also believes in owning a small number of companies and making as few changes as possible to his portfolio. This means he is able to devote a lot of analysis to individual buying or selling decisions and does not make them lightly.

We are inclined therefore to follow him out of Starbucks but remain invested in Nike. Starbucks’ share price in dollars is 4pc down on our tip but the pound’s loss of value over the period allows us to break even in sterling terms. Nike is 9pc higher in dollars but 13.7pc to the good for British savers.

© Provided by The Telegraph Nike key facts

Questor says: sell Starbucks, hold Nike

Tickers: Nasdaq: SBUX, NYSE: NKE

Share prices at close: $72.31, $110.72

Update: Upstart

This AI-enabled lender has proved a disaster for readers who followed our tip in August last year: the shares have lost 85pc. Questor understands the frustration of anyone who took our advice; nevertheless we must try to stay rational and assess the business’s real value and prospects and not simply assume that the market is right.

We went back to the fund manager who put us on to the stock, Chris Ford of the Sanlam Artificial Intelligence fund. He points out that Upstart is just the kind of company to have been punished most severely by the market’s sudden aversion to high‑growth stocks as inflation returned. “Some of the share price fall is down to the broader market and an appreciation that the world is a riskier place,” he says.

But the fact is that Upstart’s expected rate of growth, already high, has increased still further: when we tipped it last year analysts predicted $1bn (£830m) in sales for 2022; they now expect $1.25bn. It has also managed to turn those sales into profits more quickly than expected, to the point that the shares now trade at just 17.8 times forecast earnings. This is cheap for a company that’s growing its sales at about 30pc a year. 

Ford is therefore not selling his shares, he says. But one thing is stopping him buying more.

“The company announced earlier this year that it would start to put its own money at risk when it made loans. Previously it had acted as a ‘platform’ – it put borrowers in touch with lenders but did not take on the credit risk itself. The market took fright at what looked like a big change in its business model, particularly as bad loans are increasing. 

“The key question for me is whether this is a permanent change. If it is, the company is fundamentally different and I will sell. If not, this is a business with a lot of value in it.”

He will keep a close eye out for any sign that Upstart’s previous business model has been “permanently broken” by an abandonment of the platform approach and expects other investors to do the same. Hold for now.

Questor says: hold 

Ticker: Nasdaq: UPST   

Share price at close: $34.27

Updates: Twilio, Crowdstrike, Zscaler

Questor recently had the good fortune to meet for one last time with Walter Price, who is about to retire from the Allianz Technology investment trust.

Of the stocks he had put us on to in the past he said he was holding on to Crowdstrike and Zscaler – “they are at the forefront of a wave of new cybersecurity companies that will gradually displace incumbents such as McAfee” – but had sold Twilio over “doubts about its business model and ability to turn itself into a software company”. We’ll sell Twilio but hold Crowdstrike and Zscaler.

Questor says: sell Twilio, hold Crowdstrike and Zscaler

Tickers: NYSE: TWLO, Nasdaq: CRWD, Nasdaq: ZS

Share price at close: $81.86, $159.26, $142.11

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

© Provided by The Telegraph Get in touch | How to contact Questor

Sign up to the Front Page newsletter for free: Your essential guide to the day’s agenda from The Telegraph – direct to your inbox seven days a week.