Attractive stocks for troubled times

A professional investor tells us where he’d put his money. This week: Alec Cutler, Orbis Global Balanced Fund, picks two well-placed stocks and a key theme

Russia’s invasion of Ukraine has shocked and appalled us and the rest of the world. It has also left investors with a whole Pandora’s box of unanswered questions to unpack in the weeks and months to come. In times like this, you can still build a portfolio of attractive individual stocks even if you don’t have all the big picture answers. When markets are as rattled by extreme events as they have been recently, there are always gaps between price and fundamentals that can present opportunities for stock selection.

Pioneering a profitable niche

In uncertain times, owning shares of idiosyncratic businesses can provide valuable diversification away from geopolitical and macroeconomic turbulence. Burford Capital (LSE: BUR) is a great example. It pioneered the niche of litigation finance. Just like a stockpicker, it excels at picking litigation opportunities to bankroll. If you are involved in a major lawsuit and need money to keep the fight going, Burford will provide it. In exchange, it is entitled to a share of the winnings if you prevail in court.

While Burford doesn’t always back the winning party, it has an extremely good record when it comes to assessing the merits of cases and the risk-reward proposition. As a result of this unique expertise, it is one of the very few companies that is good at litigation finance and its return on invested capital is astronomical. We expect the share price to reward us over our long-term investment horizon.

A natural-gas toll collector

The world was already facing an energy crisis well before Russia’s invasion of Ukraine. Since then, the need for energy security has only become more urgent. This bodes particularly well for natural gas, which investors are starting to realise is critical to the energy transition.

As the operator of the largest natural-gas pipeline network in the US, Kinder Morgan (NYSE: KMI) is basically a toll-collector. About 90% of its business is in long-term take-or-pay contracts with investmentgrade customers such as electric utilities.

Co-founder Richard Kinder, who set up the business in 1997, continues to serve as chairman. He is also the largest shareholder with an 11% stake in the company. As further evidence of his shareholder orientation, Kinder is paid just $1 in annual salary and forbids the use of corporate jets. At the current share price, the company offers a generous and sustainable 6.5% dividend yield.

Investing in defence

It’s impossible to know how current events in Ukraine will play out. We would all love to live in a world that did not require defence spending. However, Russia’s recent actions have proved one thing: defence spending is essential to protect our societies.

In recent years, the lack of attention that this sector has received from analysts and fund managers has been remarkable. At a recent virtual presentation we were one of only two attendees. This may now change.

Defence companies such as BAE Systems (LSE: BA) in the UK, Saab (Stockholm: SAABB) in Sweden, and Rheinmetall (Frankfurt: RHM) in Germany should be clear beneficiaries of greater defence spending. At the same time, investors may come to realise that these companies perform an incredibly valuable social role in protecting Europe.

“When markets are rattled, there are gaps between price and fundamentals”