Ian Cowie: how I’m attempting to ‘buy low’

Not many people know this but in the marvellous cowboy movie The Magnificent Seven, only three of its heroes are still standing in the last reel. I am grateful to Kirsty Gibson, co-manager of Baillie Gifford US Growth (LSE:USA) for pointing out this pertinent fact.

Gibson explains its relevance to investors today, now that the crowd are piling into the so-called Magnificent Seven technology shares: Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), Facebook-owner Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA) and Tesla Inc (NASDAQ:TSLA).

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This Magnificent Seven certainly shot the lights out last year, providing an eye-stretching two-thirds of the total return from the Standard & Poor’s 500 index, a broad measure of the American market.

But that outperformance eased during the first quarter of this year, when these seven shares delivered only 37% of the S&P 500’s returns, according to independent statisticians Morningstar.

Now Gibson cautions: “There are pockets of exceptional opportunity in the US inside and outside the Magnificent Seven, which is a catchy but not very meaningful name for a group of large businesses.

“Investors might do well to recall that in long-term investing, it pays to be selective. We own some large businesses for the shift to accelerated computing and we also own lesser-known companies that could provide the infrastructure for the next computing age.”

Buying yesterday’s winners is essentially what tracker funds do when passively following size-weighted stock market indices. That works well enough while momentum is maintained but it can leave buyers at the top of the market looking rather silly if share prices fall.

By contrast, an alternative first step towards making a profit is to attempt to buy low in the hope of being able to subsequently sell high. So, it is worth considering medium-sized and smaller businesses in the world’s biggest economy for growth opportunities outside the Magnificent Seven.

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Step forward JPMorgan US Smaller Companies (LSE:JUSC), the self-descriptive investment trust where I have been a shareholder for more than a decade. I transferred my stock from a paper-based broker in March 2014, when the shares were trading at £1.50 each. They cost £3.91 this week.

Looking forward, I think they might have further to go - especially in a presidential election year, when incumbents often favour fiscal stimulus to increase their chances of getting re-elected. While big, blue-chip US stocks are already flying at nosebleed altitudes, there is plenty of scope for medium and smaller companies to benefit from increased government spending before Americans vote on 5 November.

For example, JUSC has delivered total returns over the last decade, five years and one-year periods of 184%, 34% and 12%, according to Morningstar. With a negligible dividend yield of 0.75%, rising by an annual average of 3.7% over the last five years, that’s OK but still leaves plenty of room for improvement.

This “glass half-full” assessment is reflected in JUSC shares being priced -10% below their net asset value (NAV) and a modest yearly ongoing charge of 0.93%. As you might expect in a smaller companies overseas trust, the underlying holdings are not household names in the UK.

JUSC’s highly diversified top 10 include Encompass Health Corp (NYSE:EHC), which specialises in helping heart attack and stroke survivors recover; MSA Safety Inc (NYSE:MSA), which makes respirators or breathing masks for firemen and other first responders; and WillScot Mobile Mini Holdings Corp (NASDAQ:WSC), which supplies temporary accommodation and offices. There is also the childcare and nursery provider Bright Horizons Family Solutions Inc (NYSE:BFAM).

By contrast, USA lacks a 10-year track record, having been launched in 2018, but delivered total returns over five years and one year of 51% and 34% respectively. Its annual charges are even more reasonable, at 0.69% a year, and the shares trade at a -12% discount to their NAV.

Being focused on bigger businesses, USA’s top 10 holdings are more familiar and are led by Shopify Inc Registered Shs -A- Subord Vtg (NYSE:SHOP), the Canadian e-commerce platform; Nvidia and Amazon. As this is a Baillie Gifford fund, it is no surprise to find Elon Musk’s Space Exploration Technologies, or SpaceX, for investors with exorbitant ambitions willing to aim for the stars.

Coming back down to earth, while JUSC is the leader of its two-fund sector over all three standard periods, it is only fair to point out that honour is held in the much larger North America sector over the last five and one-year periods by Pershing Square Holdings Ord GBP (LSE:PSH) with total returns of 232% and 55% respectively. Yeehah!

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Having been founded in October 2014, it still lacks a 10-year track record. But it delivered stellar returns from a street level portfolio led by the fast-food chain Chipotle Mexican Grill Inc (NYSE:CMG); Hilton Worldwide Holdings Inc (NYSE:HLT) and the Burger King owner, Restaurant Brands International Inc (NYSE:QSR).

PSH yields 1.1% dividend income that has risen by an annual average of 7.8% over the last five years. These shares trade -25% below their NAV, but its hedge fund manager Bill Ackman does not underprice his skills with yearly ongoing charges of 1.61%.

That’s even more than the 1.42% a year I pay Canadian General Investments Ord GBP (LSE:CGI) for more modest returns of 181%, 74% and 13% over the usual three periods. Don’t mention 2.6% dividend income, rising by 4.8%, because Canadian withholding tax is not as easy to avoid as the US Internal Revenue, as this small shareholder has discovered from painful personal experience. No wonder CGI trades -40% below its NAV.

Returning to where we began, readers with long memories may recall that the three survivors from the original Magnificent Seven in 1960 were Chico, Chris and Vin; played by Horst Buchholz, Yul Brynner and Steve McQueen. They don’t make them like that anymore - but we can still learn from them.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Canadian General Investments (CGI), JPMorgan US Smaller Companies (JUSC) and Microsoft (MSFT) as part of a globally diversified portfolio of investment trusts and other shares.