by Dylan Lobo
Fidelity’s Sanjeev Shah believes it is a fertile time for special situations investing with valuations in the financial and drugs sector looking particularly appealing, but commodity prices leave him queasy.
Shah (pictured), who manages the £3.1 billion Citywire Selection Fidelity Special Situations fund, says he has identified a significant number of valuation anomalies in the UK market (see graph below).
Shah said: ‘I am encouraged that a number of sectors are not only cheap when compared with their long-term price history but are also disliked by sell-side analysts, under-owned by mainstream investment institutions and are attracting a high number of short sellers.
‘That combination is a good indicator of future outperformance as long as the true value of a company is not properly reflected in its share price. These cheaper sectors provide fertile ground for a stock picker such as myself, and they are currently where I am finding a lot of my ideas.’
Financials and drugs
Areas which are proving to be a particularly fertile hunting ground for Shah include ‘cheap and under-owned financials and pharmaceuticals, which he points out have few buy recommendations from analysts despite their relatively attractive valuations.
Shah believes the valuations on financials are as attractive as at any point in the last 25 years. 'Comparing share prices to book value, the sector has not been so cheap in the past 25 years. As well as banks such as HSBC, which is cheap compared to its long-term earnings capability,’ he said.
He also says he is finding opportunities in the wider financials universe where there is upside potential for rents in UK commercial property, especially in the City and West End, with the added attraction being that property offers attractive yields in a low yield environment.
Shah also believes the drug sector offers exceptional value on a historical basis. ‘The drugs sector is cheaper relative to the broader market than at any point in the past 15 years and valuations are underpinned by strong cash generation,’ he said.
‘I believe the concerns regarding a lack of new products, generic risk and the regulatory threat are well understood and discounted by the market.
Importantly, management at companies such as GlaxoSmithKline is alert to the need to address these challenges with a radical shift in corporate strategy.’
Commodity values stomach turning
In contrast he is bearish on commodities and industrial cyclicals on the basis these sectors are expensive but still in favour with brokers. ‘I’m extremely underweight in these areas as I really struggle to find any areas of interest to me, except in precious metals.’
He added: ‘One consensus investment that I am very happy to pass up is that of commodities and also some other cyclical sectors such as chemicals. In both cases, valuations are higher than they have been for years, if not decades, and hard for a contrarian to stomach. I’m also concerned about the balance between supply and demand as emerging markets continue their drive towards greater domestic consumption.’
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