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Edelsten: Stocks that can survive a nuclear war – and why Unilever isn’t one of them

17 December 2018

The manager of the Mid Wynd International trust says that Unilever’s valuation now looks toppy for a stock that is struggling to keep its top line growing.

By Anthony Luzio,

Editor, FE Trustnet Magazine

If you asked any UK-based investor to provide an example of a defensive stock, Unilever is likely to come close to the top of the list. The dependable consumer demand for brands such as Persil, Ben & Jerry’s and Marmite allowed it to sail through the dotcom bubble and financial crisis relatively unscathed.

FE Alpha Manager Nick Train has long sung its praises, with the company the top holding in his Lindsell Train Global Equity fund.

Performance of stock vs index over 20yrs

Source: FE Analytics

However, Simon Edelsten (pictured), manager of the Mid Wynd International Investment Trust, has warned that the surge in Unilever’s valuation over the past decade completely negates any defensive characteristics the stock once had, adding, “there is nothing more dangerous in life than thinking you are doing something safe which turns out to be dangerous” .

“Going into 2000, Unilever was one of the lowest-rated stocks on the market,” the manager explained.

“It had a decade of not growing and had failed to put up the price of its branded products even when it had inflation in input costs.

“It used to trade on a P/E [price-to-earnings ratio] if I remember rightly of 12x or 13x, but it no longer does.

“Today it trades on 22x earnings and on the implied growth rate on the calculation we do to value stocks, the market believes it is going to grow its cashflow in perpetuity to around 3.8 per cent per annum and yet the stock markets at the moment believe it is growing its revenues at 0 per cent.”

Edelsten added that there is not much of a “kicker” left from emerging markets, which have been responsible for much of Unilever’s expansion over the past 20 years and the company is now struggling to keep its top line growing; it has even guided down revenue growth for the last couple of years.

“And yet it sits there, really quite an expensive stock, with a P/E of 22x, a P/B [price-to-book ratio] of 11x and a high multiple of EBITDA [earnings before interest, tax, depreciation and amortisation],” he added. “Is that really going to prove to be defensive?”


The manager said the reason investors think of Unilever as a defensive stock is that people carry on eating ice cream and Marmite through a recession, meaning the revenue line won’t go down.

However, he said there are many other stocks whose revenues are unlikely to fall but which are on much more compelling valuations than Unilever. He named two he thinks are better placed to provide capital protection – the first of which is likely to raise some eyebrows.

“You may have noticed that Apple has been thrown out recently as being a complete pile of rubbish that nobody is ever going to love,” Edelsten continued.

“American analysts have downgraded it so much they think the revenue growth is only going to be about 4.5 per cent. And for that, American fund managers are only prepared to pay 15x earnings.”

Edelsten pointed out that Apple is also “miles more profitable than Unilever will ever be” due to the higher margins that come from “putting a load of chips in a phone” and selling them at a much higher price than the value of the components. He added that while the price of these components keeps going down, the price of inputs for Unilever – for example milk and sugar in ice cream – have a habit of going up.

“So, Apple is much more cash-generative and much more profitable,” he added. “It also has, by the way, the odd $250bn in cash on its balance sheet which you could use to buy back shares – and it does buy back a lot of shares.

“The implied growth on our model is only 1 per cent. So my contention – my suspicion – is that Apple will prove to be much better value, much more defensive, amazingly, than Unilever, despite the fact that at the moment it is hated and Unilever is loved.”

However, Edelsten said his favourite “cockroach stock” – by which he means a stock than can survive a nuclear war – is Nippon Telegraph and Telephone, or NTT.

The manager said that following the extended global bull run, most companies are trading on their cashflow valuations and are on significant premiums to their asset flow with the only exceptions being a few stocks in Japan. Even in Japan though, Edelsten said that NTT stands out.

“The company trades on about a quarter of what it would cost to rebuild it,” he explained. “And the likelihood that anyone would try to dig up the roads of Japan and put in a new fibreoptic network, which is what this company does, is low.”

“That is a proper deep-value investment. There are almost no stocks which trade on such an enormous discount.”

The manager pointed out the stock also trades on a P/E of 9.5x and has a running yield of 3.6 per cent, which is particularly attractive given that local Japanese bond yields are 0.1 per cent.

In addition, it has bought back and cancelled 6 per cent of its shares in most years over the past decade.

“So, while the revenue growth of this company has been zero for a decade – Japan has a shrinking population, there is no opportunity to put up the phone prices, so it is a deflationary environment – it has actually managed to double its earnings and cashflow in that period, just by cancelling shares,” said Edelsten. “Just by doing shareholder value better than other people.”


Data from FE Analytics shows that Mid Wynd International has made 86.66 per cent since Edelsten joined in May 2014, compared with 69.52 per cent from the IT Global sector and 66.56 per cent from the MSCI AC World index.

Performance of trust vs sector and index under manager tenure

Source: FE Analytics

The trust is trading at a discount of 0.62 per cent to net asset value [NAV] compared with premiums of 1.94 per cent and 1.10 per cent from its one- and three-year averages.

It has ongoing charges of 0.65 per cent and is not currently geared, according to data from the Association of Investment Companies (AIC).

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.