Stockholm (NordSIP) – There is more than one way to invest sustainably. In the spirit of illustrating the hard work of portfolio managers that integrate sustainable investing into their process on an ongoing basis, NordSIP will be presenting investment stories to its readers. How do managers come across new ideas, what do they look for and how do they go about implementing them?
In a first in this series of stories, we have recently listened to Ryan Smith, Head of ESG Research at Kames Capital, who presented alpha opportunities at a recent seminar in Stockholm and highlighted one of his firms exciting stock pics. UK-based asset manager Kames capital has shown a commitment to investing responsibly for 27 years already and currently has €2.8 billion of assets in specialist ethical/sustainable funds.
Mohawk would usually not be considered a typical sustainable investment, as they have nothing to do with green energy, waste management, or any other sustainable industry. Also, Mohawk is based in the US, which is not so often haloed as the poster child of environmentally friendly behaviour. Mohawk certainly offers a long experience in devising flooring solutions, as it has been doing so since 1878. More remarkably, however, it has made a strong commitment to investments in environmentally responsible practices. To secure a steady supply of high-quality and low-cost raw materials for its polyester carpets, the company has invested in recycling facilities that allow for the transformation of plastic bottles into textile fibres. As a result, margins the company achieves are higher which allows it to price below its competitors, should it need to.
Kames has designed its investment process in a way that easily allows for the identification of these types of opportunities. After an analyst comes with an idea, the stock goes through a standard ranking process based on financial metrics. Immediately after that, the investment idea is scrutinised under a sustainability lens. In the case of Mohawk, the company was identified as a leader in its area of sustainability. It is the largest recycler of plastic bottles in the US. As recycling there is not yet mainstream, it may seem trivial to reach the highest step on the podium in this domain, but given the size of the country, it still represents 2 billion bottles annually.
After this critical step, Kames’s process goes back to fundamentals. Mohawk was found to have a high-quality management and to be a cost leader. At the same time, the end-market of US residential housing was solid, and the investment could present an M&A arbitrage. Finally, the process takes valuation and technicals into account. The stock looked relatively cheap in comparison with historical and peer figures. The balance sheet looked strong, and from a discounted cash flows perspective, the stock price implied a recession within five years. After the stock price traded down on poor competitor results, a good entry point could be identified. Kames’s team initiated a position in April 2016.
Picture © Kames Capital