Fundsmith Equity portfolio manager Terry Smith is often called ‘Britain’s Warren Buffett’. It’s not hard to see why. Since Smith launched Fundsmith back in late 2010, he has delivered a return of around 18% per year for his investors.
Fundsmith’s latest factsheet reveals that, in October, Smith made two key moves for his portfolio. Here’s a look at a stock he sold, and one he bought.
Terry Smith just sold this FTSE 100 stock
The factsheet reveals that last month, Smith sold his position in FTSE 100 stock InterContinental Hotels Group (LSE: IHG). The hospitality giant owns a range of hotel brands including Holiday Inn, Regent, and Kimpton.
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I’m not particularly surprised by this move. IHG is a great business with a very profitable business model. However, to my mind, the recent share price gains here and valuation don’t really match the fundamentals.
You see, IHG’s share price has had a huge bounce since its Covid-19 lows and, currently, it’s not that far off its all-time highs. That doesn’t really make a lot of sense, to my mind, given that travel is still well below 2019 levels. In 2019, IHG posted revenue of $4.6bn. However, this year and next, analysts forecast revenue of $1.5bn and $1.8bn respectively.
As for the valuation, IHG currently trades at 57 times this year’s estimated earnings and 28 times next year’s forecast earnings. These valuations are quite high, given that the travel industry isn’t likely to be firing on all cylinders for several years.
So it looks as if Smith has simply taken advantage of the recent share price rise here. With the stock not far off it’s all-time highs, I imagine he sees better opportunities.
If I owned IHG stock in my portfolio and was sitting on a decent gains, I’d consider taking some profits off the table right now as well.
Fundsmith just bought Amazon stock
And the stock Smith bought during October? That was Amazon (NASDAQ: AMZN), a stock he’s had his eye on for a while and bought for his own portfolio a few months ago. Now however, he’s purchased a position for his flagship fund.
This is very much a classic Smith move. We know he likes high-quality businesses that have strong competitive advantages. However, he also likes to buy these companies when they’re experiencing short-term difficulties because this allows him to pick them up cheaper. “You rarely get to purchase high-quality businesses at cheap prices unless there is a ‘glitch’ which provides an opportunity to do so,” wrote Smith in his 2020 annual letter to investors.
Amazon is one of the world’s most dominant companies. And in the years ahead, it’s likely to get much bigger as the e-commerce and cloud computing industries grow. However, right now, it’s experiencing a bit of a glitch in that higher costs are hitting profits in its e-commerce division. And this has hit the share price.
Clearly, Smith is looking beyond these short-term challenges and focusing on the long-term growth story. I think that’s the right move as I don’t expect the higher costs to last forever (automation will help ease costs in the long run).
I’ll point out that I’ve actually been buying Amazon stock for my own portfolio in recent months. I believe the growth potential here is significant.
