I didn’t start investing until my late 20s. What followed was a steep learning curve, albeit helped by following the thoughts and dealings of some of the best money managers in the business. One in particular — Fundsmith Equity‘s Terry Smith — has probably served a bigger role in my education than any other.

Terry Smith on quality

Terry Smith looks for winners. In practice, this means surveying the market for companies that already possess a strong/leading share of their market and can be depended on to protect it. This is why many of the stocks that make up the Fundsmith Equity portfolio have been around for many decades. Past performance might not be a guide to future returns but it can help when looking for resilient businesses that have consistently managed to grow revenue and profit.

These days, I’ve a penchant for smaller companies flying under the radar. That said, I’m still applying a quality criterion like Terry Smith. Aside from the characteristics already mentioned, I’m on the hunt for businesses generating high returns on capital and big margins. This means I now steer clear of capital-intensive businesses like airlines (which Smith labels “machines for losing money“). 

Like Smith, it also means I’m very selective about what makes it into my ISA portfolio these days. Only 29 holdings make up Fundsmith Equity right now. So long as I’ve picked well, operating a concentrated portfolio can turbocharge my returns. Of course, the opposite is also possible! 

Price matters…to a point

‘Buy low, sell high’: that’s the rule that every investor tacitly learns on entering the market.

Terry Smith doesn’t go against the grain here. However, the UK fund manager has frequently pointed out that focusing too much on valuation can prove detrimental to returns. For Smith, a stock’s price is of secondary importance to how good a company is (see above). A cheap stock can always stay cheap while a more expensive stock can go on increasing in value. In other words, contrarians/value hunters don’t always prosper. This is why Smith picked up stocks like Nike and Starbucks in the 2020 market crash rather than buying ‘bargain’ travel stocks. 

As an investor, I’ve come around to the idea that simply trying not to overpay is preferable to buying what’s cheap. This is also why I’m wary of unprofitable, flavour-of-the-month companies such as cybersecurity firm Darktrace even when its prospects look undoubtedly solid. So long as I’m paying a not unreasonable price, I know the risk/reward should theoretically be (more) in my favour.

No gimmicks

A final thing I like about Smith is his no-nonsense approach. He picks stocks that he expects to generate a better return for holders than the market. He doesn’t short (bet against) any companies. Nor does he use derivatives or get involved in any creative financial practices like some managers might.

Most importantly, Smith has taught me that investing is as much about what you don’t do as what you do. In practice, this means buying stocks with the intention of holding for years rather than attempting to ‘time the market’.

Not only is predicting the short-term movement of a share price very difficult, it only guarantees fees. As Smith frequently highlights, Fundsmith has very low turnover, meaning that investors ultimately get to keep more of the profits made.

The post No savings at 30? Here’s how I’m using Terry Smith’s strategy to build wealth appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As the manager of what’s become the UK’s most popular fund (Fundsmith Equity), Terry Smith has helped to increase the wealth of many thousands of investors, including himself. As someone who picks my own stocks, I regularly draw on simple but powerful tips from the celebrated money manager. Here’s a small selection. 

Don’t just buy what’s cheap

Terry Smith’s experience tells him that investors obsess over price. Indeed, he frequently mentions wishing he’d kept a diary since he started his career in 1974. This would have two columns — one for whenever someone asked him whether a stock was cheap and one for if it was a good company. Smith believes that he would have “overwhelmingly” more ticks in the first column than the second. 

This is not to say that Smith thinks the price of a stock is irrelevant. No one wants to overpay if they can avoid it. For him, however, “it’s not the most important question“. Instead, he favours looking at the quality of a business first. One way of doing this is to look at its return on capital employed (ROCE).

Taking this on board, I’ve become a little less interested in valuation over the years and more interested in ROCE. I’ve already done well out of stocks like trading platform IG Group, laser-guided equipment manufacturer Somero Enterprises, kettle safety component supplier Strix and food-on-the-go retailer Greggs. All of these consistently generate high returns on capital (outside of a pandemic). 

This is not to say that Terry Smith would buy these stocks. Nor is blindly buying businesses with high ROCE a guaranteed route to riches. Some I’ve owned have performed woefully. Nevertheless, I’m confident that my winners now outnumber my duds. And over an investment career, that’s what matters.

Don’t time the market

Given his stellar investment returns, one would assume that Terry Smith is rather skilled at timing the market: buying at the bottom and selling at the top. However, he’s very much against trying to do so. As he frequently reflects during speeches, there are “only two types of people I’ve ever met in investment: those who can’t do [time the market] and those that don’t know they can’t do it“.

However, this doesn’t stop Smith from buying on short-term weakness. He snapped up US coffee chain Starbucks and sportswear and trainer maker Nike during last year’s market crash. But these are quality stocks that were already on his radar.

This is why I’m continuing to push money into Smithson Investment Trust — a fund run by his colleagues. This adopts an identical strategy to Fundsmith but focuses on companies lower down the market spectrum. Smithson’s performance has been superb and I might be tempted to take profit. However, I’m continuing to buy nearly every month. Why? I simply don’t know when markets will sink.

I also try to keep my costs as low as possible. After all, there’s only one certainty with frequent buying and selling: it costs money. So, like Fundsmith Equity, I try to have a very low turnover of stocks. Unless I spot something I really don’t like (or spot a great opportunity), I don’t deal very often.

As Terry Smith has reflected, “over the long term, it’s what the company does that makes money, not what you do“.

The post These tips from millionaire Terry Smith are boosting my stock market returns appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity, Greggs, Somero Enterprises, Inc, Strix, IG Group and Smithson Investment Trust. The Motley Fool UK owns shares of and has recommended Nike and Starbucks. The Motley Fool UK has recommended Somero Enterprises, Inc. and has recommended the following options: short October 2021 $120 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Since its IPO back in May, Oatly (NASDAQ: OTLY) shares have experienced a decline in price. Having been sat near $30 in June, do the shares, now priced at nearly half of that, present a good opportunity? The latest Q2 and half-year results released by the Swedish firm would certainly suggest so. However, its recent performance on the NASDAQ would seem to differ. Let’s take a closer look.

Positive results

Reading through the half-year results for 2021, there were many positives to take away. Most notably, revenues rose nearly 60%, to over $285m, compared to half-year 2020. Q2 revenues also saw a 53% increase compared to 2020. For Q2 2021, revenues sat at $146m. This rise in revenues shows the continuous growth of the oat milk and non-dairy markets. Oatly earlier this year stated that its total addressable market is worth nearly $600bn. If it conquers more of this market, and revenues continue to grow, I think we could see a rise in the price of Oatly shares.

On top of this, other highlights from the results also provided a strong case for buying Oatly shares. April to June was a busy period for the oat-milk producer, it launching in new geographies such as Switzerland and Ireland. It also expanded its presence in China, growing on an existing partnership with McDonald’s, while also launching a new partnership with KFC. The business also saw its exclusive supply agreement with Starbucks in the US account for over a quarter of sales in Q2. As the market expands, Oatly is following suit, showing why now could be a great time for me to buy some shares before we witness a potential rise in price.

Oatly shares issues

My main issue with Oatly is that it is unprofitable. For Q2, net losses were $59.1m. As much as I understand this is more than likely due to expansion, with Oatly hinting at this through highlighting things such as a rise in R&D spending, it still makes me wary about investing. 

Another major issue that surrounds the firm is competition. Oatly finds itself in an expanding market, yet as such, it will face challenges from other firms attempting to capitalise on this. An example is Nestlé, a firm that is continuously expanding the array of non-dairy products it offers.

My verdict

The Q2 and half-year results provide optimism for Oatly. Despite the loss, it shows the firm is pumping money into its expansion. I think long term this will bear fruit. Within Q2, Oatly managed to create an assortment of partnerships, and the large amounts of revenue generated from its Starbucks agreement showed that this can pay off. What worries me is that as the market expands competition will increase. If Oatly fails to gain a solid market share, this will no doubt have an unflattering impact on the price of Oatly shares. With this said, I believe the firm is creating strong foundations through expansion from which it will eventually thrive as a result. As such, now I deem a good time for me to buy shares before we potentially see a large rise in the price.

The post Is now a good time to buy Oatly shares? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Starbucks. The Motley Fool UK has recommended Nestle and has recommended the following options: short October 2021 $120 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After a promising start, the Oatly (LSE: OTLY) share price is now sinking back to its IPO price of $17 a pop. What’s going on? And is this an opportunity for UK investors like me to get involved?

Oatly share price: what gives?

It all started so well. The Oatly share price shot out of the gates on 20 May as its stock began trading in the US market. The involvement of celebrities such as Oprah and Hollywood actress Natalie Portman as investors only raised the Swedish company’s profile even higher. Even Starbucks Chairman Howard Schhultz was a backer. 

And who can blame them for wanting to get involved? Last year, Oatly managed to double revenue to $421m as its plant-based milk and other products continued to be adopted in coffee shops all around the world. The nutritional benefits coupled with a ‘right-on’ environmental message proved an intoxicating mix for market participants.

Unfortunately, reality now appears to be biting down on the Oatly share price.

Reality bites

Of course, a drop in the value of a newly-listed stock isn’t all that unusual. It is to be expected that traders would look to profit from the hype surrounding the initial flotation before moving on to the next shiny new thing.

This makes even more sense when it’s remembered that this company doesn’t make a profit. Oatly reported a net loss of $60.4m last year as it invested in marketing its brand and expanding its range.

Now, all this is fine when things are going swimmingly and traders are whistling on their way to work. It’s not quite so comforting when there’s talk of Covid-19 infection rates rising. Big growth stocks also tend to fall out of favour when inflation rears its head.

So, what happens next?

While I’m in danger of comparing apples with oranges here (maybe oat-based milk substitute with meat substitute burgers), I wonder if we can learn anything from the performance of Beyond Meat. 

Tellingly, Beyond Meat’s share price has been all over the place in the last two years. Those buying the stock at the end of July 2019 will still be heavily under water. Those who bought during the March 2020 market crash will be close to trebling their money. With volatility like this, it’s no wonder the company continues to attract the attention of short-sellers.

Problematically, those doubters seem to now be setting their sights on Oatly. One short-seller — Spruce Point Capital — has now broken cover to question the investment case. This includes asking how a company that makes a similar amount of revenue to Beyond Meat can have a market value that is almost 40% higher. It’s a fair point. 

Of course, the presence of a short-seller or two isn’t a reason for me not to buy this company’s stock. However, it may be the beginning of a sustained attack on the company that could send the Oatly share price even lower. 

I’ll pass…for now

As I mentioned when recently commenting on a promising UK small-cap, I’m bullish on the alternative food sector. Even so, the recent performance of Oatly stock and some ‘interesting’ headlines makes me think it might be wise to hold off buying for now. I don’t see an end to the weakness just yet. 

The post What’s going on with the Oatly share price? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Beyond Meat, Inc. and Starbucks. The Motley Fool UK has recommended the following options: short July 2021 $120 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Has Fundsmith performed?

So, how well has Fundsmith done? The short answer is, ‘very well indeed’. 

Since it launched at the beginning of November 2010, Smith has achieved a return of 427% (based on Fundsmith’s most recent factsheet). By comparison, the MSCI World Index which the fund uses as its benchmark has returned ‘just’ 192%.

Had investors shunned equities completely and stayed in cash, they’d have grown their wealth by a frankly awful 6.3%. This, in my opinion, is yet more evidence that the Cash ISA is the last thing one should be using to build a nest egg for retirement. 

Gains to date clearly give credence to Smith’s strategy of buying shares in established, quality businesses, trying not to pay too much for them, then doing as little as possible.

At around £21bn, Fundsmith is already one of the largest funds in the UK. Nevertheless, there are a few reasons why it should continue to make good money for patient investors. 

Just getting started

For one, Smith rarely does much buying or selling. This helps keep transaction costs extremely low, meaning the fund holds on to more of its gains. 

That said, he’s not afraid to adapt. Fundsmith’s exposure to technology stocks, for example, has vastly increased over the years. Think tech titan Microsoft and social networking giant Facebook. This willingness of Smith to move with the times should be reassuring for those prepared to stay invested until 2030.   

Like Warren Buffett, Smith has also been true to his word and bought great shares when others are selling in a panic. Coffee chain Starbucks and sportswear label Nike have been two new additions this year, captured during March’s market meltdown. 

The fact Smith holds a concentrated portfolio with just 29 holdings also means Fundsmith should do far better than a passive fund tracking, say, the FTSE 100. As he’s remarked many times over the years, good investing is as much about avoiding the rubbish as it is with finding the winners. Sadly, the market’s top tier contains some absolute stinkers.

As an aside, it’s notable that Smith has always advised avoiding the airline sector completely. Those invested in Fundsmith over 2020 will be glad he did. 

So, nothing can go wrong?

I wouldn’t go that far. As investors, we must accept past performance is no guide to the future. This applies as much to celebrated fund managers as it does to any shares we buy.

Fundsmith could certainly become a victim of its own success. As we know, expecting too much from any fund or individual share normally leads to disappointment. With over two-thirds of its portfolio exposed to the arguably-still-overpriced US market, Fundsmith is hardly devoid of downside risk.

Should performance slide, investors may become more vocal over the management fees. Some already believe these are too high, considering the fund’s size.

At 67 years of age, there’s the possibility Smith may decide to retire (or take a backseat) at some point in the next decade. That said, I take huge comfort from his no-nonsense approach and track record to date. I have no hesitation in committing my cash for the next 10 years.

The post Terry Smith’s Fundsmith Equity is 10 years old. Here’s why I’d hold for the NEXT decade appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK owns shares of and has recommended Facebook, Microsoft, Nike, and Starbucks and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short November 2020 $85 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The London firm has thrown the kitchen sink at building its presence across Europe, a move that not only reduces its reliance on the strength of one or two markets but bolsters its relationship with the continent’s largest fast moving consumer goods (FMCG) manufacturers.

And this leaves DS Smith is in great shape to enjoy growing custom as FCMG clients select fewer, but bigger, suppliers for their packaging needs.

A rich history of earnings growth

This growth model allowed chief executive Miles Roberts to reassure the market last month by advising that “the business continues to demonstrate good momentum with growth in line with our expectations, despite the considerable political and economic uncertainty.”

DS Smith has a rich history of earnings growth, and the City expects this to continue with expansion of 13% and 8% in the years to April 2017 and 2018 respectively. This results in an ultra-low P/E ratio of 12.5 times for this year and 11.7 times for 2018.

This solid earnings outlook, allied with the boxbuilder’s ability to throw up shedloads of cash, is expected to keep driving dividends higher, too. Indeed, a dividend of 12.8p per share last year is anticipated to rise to 14.1p this year and to 15p in fiscal 2018. These figures yield 3.7% and 3.9% correspondingly.

Whilst consumer spending patterns could deteriorate in the months ahead as inflation picks up, I believe coffee and cake play Greggs (LSE: GRG) has what it takes to keep the bottom line ticking higher.

Pastry powerhouse

Hot drinks and fancy pastries are a mainstay of British life regardless of broader economic pressures. Besides, Greggs has long positioned itself at the cheaper end of the market, protecting itself from the pressures that may affect the likes of Starbucks and Costa Coffee looking ahead.

Investors should also be encouraged by the success of Greggs’ product innovation strategy in driving like-for-like sales of its tasty treats higher.

Underlying sales at the baker rose 2.8% during the 13 weeks to October 1^st, the firm’s expanded ‘Balanced Choice’ salad range helping to propel demand for its summer menus. And Greggs has a stream of new sandwiches and healthy treats scheduled for rollout in quarter four and beyond.

While cost pressures are expected to mount looking ahead, the City expects the allure of Greggs’ delicious foodstuffs to offset these problems, turbocharged by the firm’s store refit and expansion programme.

Earnings growth of 7% is forecast for 2017 alone, resulting in a decent P/E ratio of 14.7 times. And Greggs is also a great pick for income chasers, in my opinion, with strong bottom-line growth anticipated to push the dividend from a predicted 30.1p per share in 2016 to 33p next year. This creates a robust 3.6% yield.

I reckon investors should capitalise on recent share price weakness and pile into the tarts titan.A

The post Check out these FTSE 250 stars for growth AND income! appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Starbucks. The Motley Fool UK has recommended DS Smith. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.