Buying The Unknown

The Financial Times published a nice piece on the UK the other day. Its cheeky headline was memorable:

It’s no secret that the UK has suffered of late as measured by multiple traditional measures. In part, it lacks the growth names that dominate the US headlines and aid in elevating US indices ever higher.

One of the interesting things I’ve found the be at least partially true about investing is: puzzles that have no answer often result in little investor interest. We as humans like to know the road came from, are on now, and the ultimate destination.

As an example, a UK listed and UK based company has the following past with respect to earnings per share:

Over the past 10 years, it has roughly increased earnings by 12% annually with little fanfare with exception of Covid. A fine performance.

In 2021 it guided to a continuation, or rather an acceleration, of its performance by the end of 2024 and has largely met its promise to date.

But today it trades a roughly 6x annual earnings and pays roughly an 8% dividend, nominally cheap metrics. An astute investor (not I) could probably guess the industry and perhaps the company, but that’s not the point. If a company has a strong past and reasonable odds of a good near term future, shouldn’t it have reasonable appetite for its shares?

Alas, the long term future is unknown, as the company undergoes a CEO transition, has no strong comparables, resides within the flows or lack thereof of UK stocks, and is in an industry that is generally unloved at present. Said simply, there is good reason for statistical cheapness. Or more tangibly, there’s no clear catalyst today, for a turn in the narrative to reverse its cheapness. And thus the lack of investor interest.

Perhaps therein lies opportunity. Certain investors have success investing behind defined catalysts. Event driven investors make their hay doing exactly that. But what of companies that get priced in a manner that you do “alright” for an individual investor (not a performance fee gathering investor) if nothing happens? I tend to like such situations and believe certain businesses, including one or more that reside in the UK, offer modest returns with unknown odds that for some reason, the buyer pool changes.

Alas, key to such an approach is diversification: an acknowledgement that accumulating such upside options do not offer certainty in upside. Just odds that the narrative may change at some undefined point.