Venture: UK Large Cap

Issue 1;

Venture begins, and I am delighted as it will give me the opportunity to share some of the higher risk, less liquid, and controversial ideas that I come across in markets. Currently, I see them, and they go straight to the bin, which seems such a waste.

I say that because The Multi-Asset Investor letter, and indeed everything we do at ByteTree, strives to be excellent but is targeted at mainstream investors. There is little point in me recommending things like Saudi Arabia, uranium, or even a midcap which would be unsuitable to someone. Yet, I come across many interesting ideas, and now that Venture is live, they will be presented here. In no way am I lowering standards from an investment perspective, but it’s gloves off, and anything goes… Provided it’s a good idea.

Venture will take the structure of a tip sheet rather than a portfolio and will simply highlight and discuss the investment ideas. I do not know how frequently these recommendations will come, but the market will be the primary driver. Sometimes, opportunities are plentiful, whereas at other times, there’s a drought.

If I was a ByteTree client following the Multi-Asset Investor, I would keep that as my core portfolio, and pick and choose the ideas in Venture that I liked and keep the holdings no larger than something found in Whisky, i.e. 1% for 80/20 and 2% for 60/40. At least something like that.

Today, my maiden recommendation is BATS. I would gladly hold it in Whisky, but the last time I did, a surprising amount of emails came in, and I realised I had to be more sensitive as the world had changed. Smoking kills, so don’t smoke, but we aren’t smoking; we are buying the shares.

Buy BATS

Researching tobacco companies is bizarre because they write things like this:

“BAT is a leading, multi-category consumer goods business with a purpose to build A Better Tomorrow™ by reducing the health impact of its business through offering a greater choice of enjoyable and less risky products for adult consumers.”

These days, the tobacco companies acknowledge the risk of smoking, and aim to grow “non-combustible” revenues. But that’s not enough for ethical investors, which is no longer a small group but the mainstream. As a result, the shares offer excellent value.

The company grows, but slowly. Yet the cashflow yield is nearly 15% while the dividend is 8.7%. If tobacco stocks were in decline, by which I mean sales were falling, there would be much more risk. But they aren’t, and the new vapes are growing quickly and are 15% of sales, up from 10% just two years ago.

Strong Dividends and Cashflow

I should also mention they have agreed to separate from their Russian operations, which was announced today. This removes a cloud.

You’ll recall I wrote about Vodafone (VOD) on Tuesday and highly indebted companies. BATS has £38 billion of net debt, but with £8.5 billion of free cash flow, it really isn’t very much. It also has much higher margins than VOD.

This is a very simple idea to get Venture started. I promise you the ideas will get more interesting, but I think it’s ideal for the present and may benefit should rates turn down.

Risk

BATS is medium risk on normal financial grounds because it is a high-quality equity. But it has political risk, and that makes it medium to high risk. I am no fan of automatic stops, but if BATS settles below £25, I will reconsider.

BATS Support at £25

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture