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Some of the UK’s highest-quality shares have been falling sharply. And while this has been a huge problem for some fund managers, it could also be a massive opportunity.
Warren Buffett says that the time to be greedy in the stock market is when others are fearful. So while investors need to think carefully about the risks, this could be a great time to think about buying.
Nick Train
Nick Train, who manages the Finsbury Growth & Income Trust has a portfolio that’s dominated by UK stocks. And it’s fared badly in recent years as the FTSE 100 has underperformed the S&P 500.
The usual complaint about the UK stock market is a lack of tech companies. But the fund’s top 10 holdings include Experian, RELX, The London Stock Exchange Group, and Rightmove (LSE:RMV).
All of those are tech or tech-adjacent companies that have traditionally been thought of as quality businesses. And rightly so – they have assets that are virtually impossible to replicate.
Recently though, sentiment has shifted against them. Investors are starting to see the emergence of artificial intelligence (AI) as a source of disruption, rather than growth.
The concern is that competitors might easily be able to create similar products at a fraction of the price. They won’t be as good, but they could be a close approximation while being a lot cheaper.
If this happens, these companies will find it hard to maintain their pricing and margins. That would mean their stocks are almost certainly overvalued, but are investors writing them off too quickly?
How big is the threat?
The likes of Rightmove are clearly facing a threat that they haven’t seen before. But the falling share price means investors need to ask themselves two questions.
The first is how big is the threat really and the second is do current share prices reflect that risk? If there’s a mismatch between the two, there’s a potential opportunity.
With Rightmove, the threat is reasonably clear. It’s the UK’s leading online property platform, but the rise of the likes of ChatGPT means that there’s a risk of such intermediaries become redundant.
If a significant number of potential buyers start their property searches elsewhere and bypass the firm entirely, this could be a big problem. But is this really a likely outcome?
Rightmove has a two-sided network effect – buyers use it because it has the most listings, and agents list there because it’s where buyers look. Generating one without the other is difficult.
It might be possible if ChatGPT (or whatever) can create a much better search experience. But Rightmove is looking to fend that off with its own AI investments to improve its site functionality.
A rare opportunity?
Rightmove’s share price is currently at a five-year low. And in terms of valuation multiples, it’s trading at levels that investors haven’t seen in the last decade.
Many have tried to disrupt this business over the last 10 years and all of them have failed. So I think this is a good time to consider buying the stock.
Rightmove is one example. But while no two companies are exactly alike, something similar might be true of the other quality UK shares that have been falling recently.
