In the realm of investing, there’s a unique allure to what Firetrail portfolio manager Blake Henricks terms “uncomfortable opportunities.” These are the opportunities that arise when one dares to venture where others shy away. Henricks asserts that the key to securing truly valuable shares lies in identifying ASX-listed companies that have been left by the wayside but still possess significant growth potential.
At the Pinnacle Summit in Sydney this week, Henricks expounded on this strategy, emphasizing that investing in unpopular stocks can yield substantial returns, particularly in sectors often overlooked in the frenzy of emerging technologies and trends.
“While innovations like artificial intelligence, cancer treatments, and electric cars capture the imagination of the market, companies providing conventional products and services are being ignored,” Henricks noted. He added that many “old world” businesses continue to experience steady demand for their offerings and increasing earnings, yet their share prices remain discounted, creating a prime entry point for investors.
Henricks pointed to two such underappreciated ASX-listed companies that could offer investors a chance at significant returns:
Domino’s Pizza Enterprises Ltd (ASX: DMP): Despite recent struggles, including a 67% drop in its share price from its September 2021 peak, Henricks sees potential in Domino’s Pizza. The company faced challenges such as rising food and labor costs and a service surcharge that drove away customers. However, Henricks is optimistic about Domino’s volume-based business model, its cost-effective takeaway restaurants, and its ongoing store network expansion, which has seen an increase from 500 stores in 2010 to 3,795 presently. Firetrail’s outlook for Domino’s includes a return to 7% per annum store growth, 3% per annum per-store sales growth, and 10% annual revenue growth.
Incitec Pivot Ltd (ASX: IPL): Despite recent setbacks, including a change in leadership and a nearly 25% drop in its share price since December, Incitec Pivot is now a top-five holding in Firetrail’s High Conviction fund. Henricks believes the market has yet to fully recognize the potential of the business. Incitec Pivot has undertaken a “radical simplification” of its structure, divesting its US fertilizer arm and receiving takeover bids for its Australian fertilizer business. This leaves the company with a pure-play explosives division, which Henricks views as an attractive industry. Despite an oversupply of explosives in the mining sector since 2015, the Firetrail team anticipates a deficit in explosives supply in the Australian market as early as next year, with a 7% shortfall predicted by 2027. Henricks noted that importing explosives is not a practical solution due to their limited shelf life and reliance on foreign suppliers.
In a market often driven by the allure of the new and cutting-edge, Henricks’ perspective highlights the value that can be found in overlooked, “unpopular” stocks with the potential for substantial growth and returns.
Disclaimer: The opinions presented in this article may differ from The Motley Fool’s Premium Investing Services. Readers are encouraged to conduct their research and due diligence before making investment decisions.
