[TOP STORY] Finding value beyond the AI trade

Simon Brown (0:02)

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Trading now with Keith McLachlan, Element Investment Managers. Thinking around the AR trade, but thinking around, hang on, what aside from the AR trade? Quickly before I get Keith on, what have the Mag 7 done? So looking year to date, Alphabet almost 10%, Tesla off 17.5, it's the red. NVIDIA almost 26 up, Apple 23 higher, Microsoft almost 8%, Amazon 9% and Meta 10.5. Most of that Meta has happened in the last week or so. So AR stocks are, they're having a year, make no mistake about that. But Keith McLachlan, there's more than AI and there's other stocks out there, sectors in the offshore space, that have actually had a good year. We saw it in the last earning season. Sure, there was lots of numbers from the big tech stocks, the big AI trade, a lot of good numbers elsewhere. Where have you been finding value outside of the AR trade?

Keith McLachlan (1:03)

Good morning, Simon. Well, the first question that has to be asked, obviously in the world with such disruption from AR, is are you looking at value or value trap? And some of these things are beaten down because AR is gonna dislodge them and all sorts of negative narratives around it. But standing back and considering different sectors and different companies in them, because there might be winners and losers within sectors, we think that there's a couple of themes that are either just agnostic to AR, doesn't affect them, or in fact stand to win from them. I mean, there's European luxury that sold hard, there's health care and specifically in it, eye care, merging markets. In fact, Chinese tech is increasingly dislodging from AR by building their own.

Then we have consumer staples that, in fact, I don't think AR is going to stop us cleaning our hair or cleaning our teeth, things like that. And then there's an interesting little pocket, and these are all very different stocks from each other. We colloquially internally refer to them as anti-AR stocks, but it's stocks that have sold off heavily because AR is going to dislodge them. And in fact, we think that they've got deep modes and or stand to benefit from AR, almost a complete polar opposite to the market narrative. But importantly, across all these themes, in all the individual stocks that we express them in, all of them are profitable. They're cash-generated.

The question is only one around valuation and growth, and possibly sustainability where we think in fact, that either they're agnostic or stand to benefit.

Simon Brown (2:46)

Some of those ones you mentioned there, they're agnostic with deep modes. What are some examples in that space? Because when it's a wide space, and to your point, lots of profitability and lots of decent looking valuations as well.

Keith McLachlan (2:57)

Yeah. So there's the London Stock Exchange Group.

There's S&P Global being dislodged. I mean, both of these, data rich, deep reach, immensely embedded in systems that are processes and businesses and markets, and cetera, and cetera. There's another one, Redux Group, where they are deeply embedded on, particularly the legal side of things. Over in France, there's the world's best effectively marketing agency, Publishers Group, that has launched their own AR platform.

There's some very interesting options out there that have either sold off heavily and for the first time in many years of a really good entry points. The important thing is to understand that some of these may indeed be dislodged. The market is very smart, therefore, control your position sizes here, nibble selectively. Not everything that is sold off as an opportunity, there are some value traps. We think that these offer some interesting entry points, but we are controlling our position sizes.

Simon Brown (4:05)

Quick last question. IK, you and I have chatted about this before, but it's a weird little niche, but fairly concentrated. And of course, I wear glasses, and I'm going to be spending on glasses the rest of my life, and there are many others like me.

Keith McLachlan (4:20)

Definitely. I mean, it's not just an aging population that sees the deteriorating R-Site, but in fact, increasing screen time from a digital age, compounds that even foster. And R-Site as human beings' primary sense is really inelastic. It's economic cycle, agnostic. It doesn't matter. You're going to spend it, but there's very few players here. So on the contact lens and surgical side, we like Ocon that's listed on the Swiss market. And then, interestingly enough, sold off heavily because it's got a fashion and European luxury element to it, and then even tied in with tech and meta.