And when expectations are low, things don’t need to turn out great for shares to do well. Just a little better than anticipated is often enough.
For example, let’s compare Microsoft and FLEETCOR*. Microsoft needs no introduction, but chances are you’ve never heard of FLEETCOR, the US payments company that’s currently a top 10 position in the Orbis Global Equity Strategy.
Looking at the basic facts of the two, FLEETCOR has stronger historical earnings per share growth and a comparable return on invested capital. So, on growth and quality dimensions, the lesser-known FLEETCOR compares pretty well to the mighty Microsoft.
Valuation is where things differ, however. Investors have high expectations of Microsoft, resulting in a rich valuation. FLEETCOR, however, embeds low expectations, and is available at less than half the price-to-earnings ratio.
Another difference is in size. Microsoft earned almost $100bn in operating profit in 2023, and the market expects that to grow at around 10-15% a year—so it needs to grow profits by about $10-15bn a year, compounded over time2. That’s like growing a brand new Coca-Cola in 2024, and then adding another one in 2025, and so on. That becomes hard to sustain, even for the best companies in the world.
On the flip side, FLEETCOR has operating profit of just below $2bn, and it operates in a payments industry worth trillions, so it’s got lots of room to grow organically and through acquisitions.
FLEETCOR represents the kind of opportunity that’s not the biggest or most eye-catching prize, but one offering real value to investors willing to dig deeper: a good company available at a reasonable price that embeds low expectations.
Therefore, strategy can be the difference between a win or a miss, where skilled active managers meticulously choose their targets, while passive funds grab indiscriminately due to their market-cap weighted approach, often latching onto the markets’ most enticing but potentially overhyped toys.
This means traditional index funds are naturally overexposed to the most overvalued parts of the market, and could struggle in an environment like 2022 where the most overvalued or momentum-driven shares sell off the hardest and overlooked shares recover.
It’s clear the last two years have not really followed the traditional bust of a deflating bubble. The reality has been more awkward and muddled than that. But whether we’re entering a new cycle or still stuck in the old one—what we do know is that it’s an important time for investors to be adaptive and open-minded to avoid the allure of the seemingly-obvious winners that come with potentially unrealistic expectations.
