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Why boring can be beautiful for long-term investors

The lure of exciting ‘blue-sky’ stocks is understandable. Visionary companies like Tesla have the potential to generate enormous returns, if they can harness and monetise innovative ideas. Unfortunately, these types of stocks also carry considerable risks. Value is often intangible and unsupported by near-term earnings, while P/E multiples can be dizzying. Furthermore, investors may face stock dilution in the event of further rounds of fundraising, says Chi Chan, European Equities Portfolio Manager at Hermes Investment Management.

On the other hand, dull stocks have the potential to shine over the long term. The perception of being in “boring” industries means they garner less attention but their exposure to structural change means they can benefit disproportionately over time.

Outlined below are three European stocks in the areas of road building, airports and warehousing. While they may not set investors’ pulses racing, they do represent compelling long-term value due to significant thematic drivers and structural market change.

A lot has been made of President-elect Donald Trump’s plans to reflate the US economy through a massive fiscal splurge. However, the reality is that an upgrade to the US’s crumbling infrastructure is long overdue; successive administrations have systemically underinvested in infrastructure for the last 30-40 years. The American Society of Civil Engineers (ASCE) estimates the investment needed to restore the highways, bridges and tunnels is estimated at $3.4-trillion by 2020. Trump is now providing the catalyst. One potential beneficiary of this is CRH.

Dublin-listed CRH is a leading global building materials group employing over 89,000 people at around 3,900 locations worldwide, supplying across the whole spectrum of the construction industry. CRH makes about 60% of its profits in the US and is geared towards regional monopolies where quarries exist. Its shares have already received a moderate boost from Trump’s victory but we see strong upgrades to analyst forecasts in the coming years that will lead to further re-rating.

We first invested in November 2015. The shares are trading on 16.9x P/E and 6% free cashflow yield for 2017.

While airlines such as Ryanair and Easyjet regularly enjoy the spotlight of analyst and media attention, airport operators tend to be rather more in the shade. This industry has huge barriers to entry – it is neither easy nor cheap to build a competing airport – and has potential to deliver strong returns.

The Spanish government invested heavily in the country’s airport infrastructure, anticipating a continuation of passenger growth. Unfortunately, this was just before the financial crisis which hit tourism badly and led to a major decline in air travel to the region.

A rapidly improving Spanish economy is now driving domestic and international travel growth, and the network can easily cope with this growth due to the previous over-investment. In addition, nervous holiday makers are choosing Spain over Turkey and the Middle East due to safety concerns. More broadly, falling oil prices have also reduced costs for airlines, which should filter through to consumers and boost the appeal of air travel.

We invested at IPO in February 2015. The shares are currently trading on 17.9x P/E multiple with a free cashflow yield of 8%.

KION Group
Forklifts and warehousing may not sound like exciting investment areas but innovations behind the scenes will dramatically change the logistics industry. Kion Group, the second largest manufacturer of forklift trucks in the world, is revolutionising the industry by bringing fully automated tools. The firm’s advancement in robotic forklifting will allow 24-hour warehousing to vastly enhance the standard two (eight hour) shift system.

The company has already enhanced its automated systems capabilities by acquiring Egemin Automation and Retrotech. It will further bolster its market position now with the addition of Dematic, and establish itself as the leading innovator in e-commerce and intralogistics, managing the flow of materials through customers’ warehouses. We believe Kion’s ability to tap into the structural shifts and innovate will fuel future earnings growth.

We first invested in October 2015. The shares are trading on 15.1x P/E and 5.9% free cashflow yield for 2017.

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