Rupal Bhansali, a veteran global investor, favors innovation and technology, much like other investors. The difference is that she is finding it outside the technology sector, and in companies that sport much lower valuations than today's tech leaders.
Bhansali, a former member of the Barron's Roundtable and a former money manager at Ariel Investments, Mackay Shields, and other firms, launched a new firm, Double Duty Money Management, in 2023. In the past year, she has invested globally for high-net-worth and family-office clients. The firm's name alludes to her focus on both managing risks and maximizing returns.
Barron's spoke with Bhansali in mid-July about her favorite investments in France, Brazil, the U.S., and elsewhere, and the types of companies and stocks she thinks could be most at risk of setbacks. An edited version of the discussion follows.
Barron's: How do you approach this momentum-driven, artificial-intelligence-focused market as a value investor?
Rupal Bhansali: I'm a believer in AI. I use it because it's an amazing technology, but that doesn't mean it's a good investment. Even though we are value managers, we are big believers in owning innovation and technology companies. The challenge is that the obvious winners are overrated and overowned. We look for leading-edge technologies and capabilities but without the bleeding-edge valuations you find in the Nasdaq Composite.
Where do you find them instead?
Geographically, France is a good example. Tech companies in France don't have Nasdaq-like valuations. Edenred operates a digital platform for human-resources services. It isn't well known because it isn't consumer-facing, but it runs some of the biggest employee-benefit programs and payment services globally, such as meal vouchers and reimbursement. It benefits from the network effects of a Visa or Mastercard but doesn't trade at the multiples of those stocks. Instead, it is trading at roughly 11 times next year's estimated earnings and pays a 6% dividend yield.
Edenred is an asset-light business with negative working capital, creating a high return on equity. The company had a setback in late 2024 regarding regulatory changes [around fees], as did Visa and Mastercard about a decade ago. The decline in those stocks became an opportunity for long-term investors. I believe the regulatory changes cement, rather than undermine, the business model.
What is another example?
French engineering company GTT is the Nvidia of the LNG [liquid natural gas] tanker market. LNG has become a popular source of energy because shale fracking created export potential. Because of the pipeline destruction caused by the Ukraine and Iran wars, customers need to diversify their energy sources. The result is that a lot of LNG is being exported over longer distances by tanker -- from Alaska to Japan, for instance -- which has increased tanker demand.
GTT makes a membrane required to prevent LNG from leaking. Gas is volatile, and needs to be compressed to turn it into a liquid. The transformation process creates a lot of complexity. Like Nvidia in GPUs [graphics processing units], GTT has a quasi-monopoly in this membrane technology. Many companies in Japan, China, and Korea have tried to make similar membranes, but there have been more failures than successes. GTT trades for about 16 times free cash flow, has little capex, and has a 5% dividend yield.
Do you typically favor dividend players?
We pay attention to dividends. They are an important attribute, often overlooked. Over 200 years of investing history, dividends were big contributors to total return. But they have lost some shine because capital appreciation has been so big in recent years. We think dividends will overtake capital appreciation because equity valuations currently are rich. Dividends are far more bankable.
What else are you focused on in this market?
Dividends, downside protection, and diversification. Globally, investors used to seek diversification by investing overseas. But with so many people now looking to invest in semiconductors and other "picks and shovels" related to AI, international investments have become highly correlated to the AI trade.
People conflate technology with the tech sector, but it is used in every industry. Canada's MedMira makes specialized diagnostics for infections, generating 80% of its revenue from recurring reagents because of its installed equipment base. Europe has interesting niche companies in critical care, such as Denmark's Coloplast, which makes adhesive ostomy bags and related products. These critical-care stocks used to trade for 40 to 50 times earnings and now have price/earnings ratios in the midteens. There is a DNA of high R&D [research and development] in Denmark.
In autos, China's Fuyao Glass Industry Group manufactures a super-complex type of glass used for panoramic roofs. It is used in just about every new electric vehicle. The company drives innovation and creates new product categories. Yet the stock trades for 10 to 11 times earnings and yields 5%. Fuyao has a strong balance sheet.
Where else are you finding opportunities in emerging markets?
Investors' attention to emerging markets is now focused almost completely on Asia -- really, Korea and Taiwan. Latin America doesn't get a fair shake because of the political overhang. Also, the cost of capital is structurally higher, so lower valuations are relatively deserved.
But you can find strong franchises that trade at huge discounts. In the U.S., CME Group, which runs the world's largest financial derivatives exchanges, has done well. Brazil's leading exchange, B3, is a similar business. The advantage: Brazil is earlier in the journey of financialization. B3 has double-digit growth prospects as far as the eye can see, and is trading at only 10 or 11 times earnings. It has a strong balance sheet and yields 6% to 7%.
What do you own in the U.S.?
United Parcel Service. Management is astutely losing the battle to win the war, by shifting away from lower-quality volume and lower-paying customers to focus on returns rather than market share. The market is unduly focused on the journey, or near-term volume and cost pressures, while ignoring the destination -- the structural improvement to margins from an improved mix, pricing discipline, and network redesign.
UPS trades for about 15 times next year's earnings and yields 5.8%. The valuation reflects a lot of skepticism on execution and offers asymmetric risk/reward.
Virtu Financial is a leading market maker in the U.S. To invest in the so-called retailization of markets, many investors have turned to fintechs such as Robinhood Markets. Virtu operates behind the scenes. When trading volume is high, companies like Virtu make a lot of money, and when it isn't, they don't, so the business can be volatile. Virtu's earnings have almost tripled in the past three years, while its price/earnings multiple remains low at around eight times this year's expected earnings of $7.50 a share. Investors are forecasting benign trading conditions, but the reality is the opposite.
You mentioned downside protection. How do you manage risk?
Historically, what you know that isn't so has gotten you into trouble in the markets. AI could be the poster child for that. We think we understand AI, but what we don't know about it could get us into trouble.
For example, people believe in growth and technology investments because these themes have worked so well, especially in recent years. Many investors have grown up in this environment. They believe in the Fed put, a Goldilocks economy, and that bad news is good news about the economy because it will prompt the Fed to lower interest rates. These developments have been self-reinforcing. But everything that has become market wisdom eventually is tested.
The global financial crisis didn't come about because investors bought junk. They thought that they were buying triple-A-rated securities that turned out not to be triple-A. Right now, I would be concerned about owning companies with high operating leverage and financial leverage. These attributes are concentrated in technology.
Software companies have extremely high operating leverage because of fixed costs. That is why investors liked them. Because of their operating leverage, companies layered on financial leverage, borrowing against a stream of earnings that was thought to be utility-like. But it turns out that may not be the case for many business models, as AI may intermediate them.
Which parts of the market are most vulnerable?
Investors need to be vigilant about falling for the "hype" trap -- pricing cyclical earnings as though they were structural, and inflating the earnings and multiples. When the boom turns into a bust, an outsize crash occurs as both earnings expectations and multiples deflate.
SK Hynix raised capital through an equity issuance, and other technology companies are issuing debt. When a business needs increasing amounts of capital to sustain revenue growth and internal free cash flows can't support it, debt is used to bridge the gap. This exposes borrowers to both operating and financial leverage, a dangerous combination in any downturn.
Stress-test your portfolio holdings, whether held in the private or public equity bucket, and ask yourself if the fixed debt is being supported by fleeting earnings. If so, there is a risk the value of the whole company needs to be written down, not just the earnings.
Do you see other warning signs?
Markets have grown increasingly narrow, depending on fewer stocks for gains. This is a global phenomenon and a flashing danger signal.
The market seems to have disregarded developments such as war, tariffs, and supply-chain disruptions. What does that say about the risks that are building?
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