Surprise

‘It’s not going to be normal by September’ so the readership of the FT was bluntly informed, many apparently reeling from a market sell-off that left headline indices just a tick or two off all-time highs. The fast spreading ‘delta’ variant, by all accounts, having put paid to the much-vaunted reflation trade and hopes of more traditional autumn activities like bobbing apples. And yet there are reasons to remain positive. The US economy is powering on, and up. Indeed, a broker reports that the comfort level for staying in a hotel went up from 14% to 64% in the past three months. One assumes comfort as in ‘happy to stay’, rather than comfort as in ‘are these Egyptian cotton?’. There are other positives too: business formation has surged, retail sales are sizzling and auto makers are guzzling over how they could build more used cars, so hot are prices right now on the forecourts of many dealers. If, indeed, the cars even make it to the lot. Many are now sold before the valet has even finished with the hoover. And all while the Fed’s balance sheet ticks up, irreversibly bloated in the eyes of some, juicing the growth to others. As investors and brokers hit the hills and the beach, no one appears to have much an idea of what it all means. Which leads some active managers to companies like Altice, the fourth largest cable operator in the US whose pipes keep 5m residential customers in Netflix,  and on ‘Insta’. Money managers make money buying something when it is misunderstood, when consensus has turned stale, and for Altice the accepted wisdom is that it is a low growth player in a low growth industry. Nothing to see here. And yet by 2022, courtesy of the roll out of fibre-to-the-home and subsequent lower cost outlay, free cash flow is likely to be better than market expectations. Potentially a lot better. There are several other bits that could go their way and see some growth come through. Altice is currently not priced to grow. At all. And as cash comes in and debt goes down, those left holding the shares might see double digit returns. Double digit returns that don’t require having to take much of a view on today’s sticky, pandemic hit macro.

 

The securities mentioned in this blog may be held by funds managed by Majedie Asset Management Ltd.