By Anthony Doyle, Head of Investment Strategy, Firetrail
21 March 2023
We conduct over 200 hours of research on every company we invest in. The focus of this research is on the true drivers of a company’s earnings and its share price.
We describe this as “What Matters”. It’s an opportunity to filter out the noise of day-to-day markets.
Every company we invest in is also assessed to determine whether it meets one of Firetrail’s sustainable investment themes of:
- Health and Wellbeing
- Innovation and Equality
- Climate Impact
- Sustainable World
Here are four of our favourite global stocks right now, each aligning with one of the above positive change themes.
Health and Wellbeing: Ryan Specialty (NYSE: RYAN)
What Matters
- Excess & Surplus Market Growth
The E&S (Excess and Surplus) insurance market is a portion of the US insurance market for specialised risks. As an example, numerous mainstream insurers have stepped away from insuring Florida property due to physical risks from climate change. Ryan Specialty’s brokers use their specialised knowledge to find underwriters that can insure these risks. Ryan is the fastest growing player in this industry (>20% organic growth p.a.) which is growing at about twice the rate of the regular general insurance industry.
- Binding Authority Opportunity
Ryan Specialty is a business that was founded by Patrick Ryan, the former CEO of Aon. It has managed to attract the best brokers in the industry due to the opportunity for growth. Its track record is such that underwriters (the capital providers) are increasingly giving authority for Ryan to write business on their behalf. This is highly profitable business for Ryan Speciality.
Innovation and Equality: KPN (AMS: KPN)
What Matters
- Industry pricing
Netherland’s telco industry consists of three players – KPN, Vodafone Ziggo and T-Mobile. The industry is acting rationally and KPN can achieve profit expansion as it implements price increases close to consumer price inflation. With a fixed cost base this translates to operating leverage in the business. This is true across both KPN’s mobile and broadband businesses.
- Fibre Roll Out profile
KPN is in the early stages of rolling out the largest fibre network to homes in the Netherlands. This will replace the copper network for broadband use and enable faster internet access for many consumers. Right now, this is a highly capex intensive process in the midst of its construction phase, however by 2026 the network will be largely complete, and we see significant free cash flow generation. Our investment timeframe of 5 years enables us to capture this value. KPN realises this value and has begun the buyback its own shares in anticipation of the cashflow uplift.
Climate Impact: Weyerhaeuser (NYSE: WY)
What Matters
- Carbon removal opportunity
Weyerhaeuser’s forests currently absorb 35mt of CO2 each year as they grow – we believe this is one of the largest listed natural carbon sinks in the world. Weyerhaeuser has begun the opportunity to start monetising this in the form of growing trees for carbon offsets, rather than harvesting. As carbon offset prices reach ~USD25 per ton, it starts to become more economical for Weyerhaeuser to keep a lot of their trees in the ground and grow for carbon rather than harvesting them for use as lumber. In addition to this opportunity Weyerhaeuser has begun to lease out its below ground geological caverns for CO2 storage, as well as portions of above ground land for wind turbine locations.
- Timber and Lumber price
The market for processed timber (lumber) is driven by US construction markets and has been a volatile commodity. There is a significant backlog of construction yet to be done, and the cost structure for lumber has risen across the industry. Compared to an average lumber price of ~USD300-400 prior to COVID-19, we know see the costs for the industry being closer to USD600 for the industry. In addition, the market for timber (unprocessed wood) is improving as a decade long glut is coming to an end in the US South.
Sustainable World: Darling Ingredients (NYSE: DAR)
What Matters
- Feedstock Supply
Darling is the largest collector of feedstocks such as used cooking oil and animal fats in the US. It has the majority marketing share in the processing of animal fats, as well as relationships with over 200,000 customers for the collection of their used cooking oil. These feedstocks are used in the production of renewable diesel, which is a 100% replacement for fossil fuel derived diesel. The feedstocks have the benefit of being very low carbon intensity (up to 90% lower than fossil fuel) and are not disrupting the food chain. Darling’s position in the collection of feedstocks would be difficult to replicate.
- Renewable Diesel, Biodiesel and Sustainable Aviation Fuel Demand
The demand for feedstocks is increasing due to the significant volume of bio-refineries being built to produce renewable fuels. Between now and 2025 the volume of renewable diesel being produced in North America will triple based on our analysis of permits and builds underway. These will increase the demand for, and the price of renewable fuel feedstocks. Recent government incentives (from the Inflation Reduction Act) have also increased the incentives to produce Sustainable Aviation Fuel in the US, which will place further demand on feedstocks. There are few, if any, alternatives for decarbonisation of airlines apart from switching towards these fuels.
The Firetrail S3 Global Opportunities Fund (Managed Fund) is a concentrated portfolio of approximately 30 stocks from both developed and emerging markets. The strategy is built on fundamental, deep dive research with a focus on finding unappreciated positive change attributes. S3 refers to the three attributes of the ideal stocks for the portfolio – Sustainable business models, Sustainable earnings, and Sustainable positive change. We assess a company against these attributes not today, but on our forecasting 5 years into the future.
For further insights, including key holdings in the Firetrail S3 Global Opportunities Fund (Managed Fund) (ASX: S3GO), please visit https://firetrail.com/funds/firetrail-s3-global-opportunities-fund-managed-fund/
These examples are illustrative only and not a recommendation to buy or sell any security. This communication was prepared by Firetrail Investments Pty Limited (ABN 98 622 377 913, AFSL 516821) (Firetrail). It is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Any persons relying on this information should obtain professional advice before doing so.
