As investors, we often consider this factor when assessing the attractiveness of a consumer discretionary name. This is especially important today, amidst challenging economic conditions and concerns about declining disposable incomes.
To that end, we look for companies offering a special product or service that consumers will buy, irrespective of the economic backdrop.
Two stocks in our Global Smaller Companies strategy that fit this category are CTS Eventim and SharkNinja.
CTS Eventim – the Taylor Swift effect
CTS is a German-listed ticketing and events business, with a market-leading position in continental Europe. The company is benefiting from the ‘Taylor Swift effect’ – a surge in musical artists keen to go on tour to replicate Taylor Swift’s huge success. In the world of streaming and diminishing royalties, touring has become an important part of an artist’s revenue mix. CTS charges a small percentage fee for each ticket bought on its platform. More tours and more tickets mean greater earnings.
Consumers, at the same time, appear willing to pay the (sometimes) high costs to see and enjoy their favourite artists. In 2023, 70 million music tour tickets were sold worldwide. This marked an 18.4% increase from 2022.
CTS is also profiting from the long-term trend of ticketing moving online. Its latest results confirmed stronger-than-expected trading in its core ticketing business.
We purchased the stock in December 2021. Since then, the share price is up 72%, outperforming the benchmark by 65%.
SharkNinja – Air Fryer innovation
SharkNinja specialises in designing and marketing small appliances, such as blenders, vacuum cleaners and air fryers (we’ll get to them). It operates under two brands – Shark and Ninja – with each delivering $2 billion (bn) in annual sales. This is a highly competitive market and not particularly high growth. However, since its inception in 2008, SharkNinja has continually innovated and fostered an entrepreneurial culture. As a result, it has achieved a 20% compound annual growth rate in organic sales.
The business has over 900 engineers across a range of disciplines, allowing it to quickly develop products to meet changing consumer trends. To inform this process, SharkNinja collects huge amounts of data from multiple sources, both online and in-person.
For instance, by analysing consumer trends on Instagram, the company learnt that, despite the popularity of its Ninja AirFryer, the machine’s size was an issue. In response, the company launched the Double Stack Air Fryer in April this year. This model saves space while still delivering the same functionality as the previous iteration. It is proving to be popular as a result.
We added the stock in May. Since then, it’s up 39%, outperforming the benchmark by 32%. (Note: the shares did pare back some earlier gains following recent results, but we view this as an overreaction combined with some profit-taking after a strong run. Our long-term view of the company remains unchanged.)
Election-fever over
It’s been a busy year for elections. Voters went to the polls in over 100 countries, including India, Brazil, and the US. Looking ahead, a quieter political calendar in 2025 removes a layer of uncertainty and allows investors to refocus on company fundamentals. This includes further down the market-cap scale, where compelling investment opportunities abound.
In the US, it’s too early to tell what a Donald Trump presidency will mean for the economy, tariffs, and interest rates. However, the potential benefits of tax reform, regulatory relief, and trade policy changes could potentially create a favourable environment for select small-cap companies. Watch this space.
To a larger point, it’s easy to get caught up in the political maelstrom that surrounds major elections. However, a BoA Fund Managers survey shows that other factors, like profits, matter more than which party is in power. As interest rates continue to fall, investors are best positioned in companies that are growing profits. This plays well into our strategy, which seeks to invest in profitable companies showing strong earnings momentum.
Valuation premium
Historically, smaller companies have traded at a premium valuation to their larger peers, thanks to their superior growth potential. The average 12-month forward price/earnings (P/E) premium for the ACWI Small versus ACWI is 25%. However, the asset class is cheaper in absolute terms and well below the long-term average P/E.
Direction of interest rates
In recent years, rising interest rates have been a major factor in the underperformance of small caps. However, inflation is now on a downward path in most major developed economies. Central banks have started cutting interest rates, with further reductions likely in 2025. Historical data shows that small caps have materially outperformed large caps following the first rate cut, as illustrated below. We see no reason why this time will be different.
Final thoughts…
Equities have struggled in the world of high interest rates. Over the past two years, we saw around £140bn in cross-border outflows from the asset class. One area that has bucked the trend is global small- and mid-caps, with received net inflows of £4.1bn over the same period.
The forward-looking data also looks supportive. According to the latest BofA Fund Manager survey, small caps are expected to outperform large caps over the next 12 months.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.