So Domino's was massively hit by inflation and issued seven profit downgrades in two years. They had never had one before and customers started leaving. It was a variable charge, like the surcharge on Uber during busy times. ![]() They added a Domino's Service Fee, the DSF they called it. Then they tried to push prices up but in a very clunky way. Inflation ravaged Domino's, it was among the most-impacted companies in the ASX200 from inflation. It was a major Covid winner in the lockdowns, but then it became a huge inflation loser. The second stock with some old-world characteristics is Domino’s Pizza (ASX:DMP). We think this is a great time to be buying into the explosive business after 10 years of underperformance. It can’t be covered by imports because explosives do not travel well, and the largest exporter of explosives was Russia with nearly half of global supply. We see a large shortfall in the amount of explosives available in the Australian market. Miners such as BHP have been on a capex holiday and they are now increasing production, which means they are increasing movement of material. ![]() How many explosives plants have been built in Australia since 2016? Zero. This is the type of original research we do. The green bars in the chart below show the market was over supplied with explosives for close to a decade. In 2016, a huge ammonium nitrate plant was built in Western Australia. One of the things miners must do is move material, and they need a lot of ammonium nitrate or explosives. We will be left with a pure play explosives business.Ĭonsider the opportunity. They are looking at demerging or selling the Australian fertiliser business. In fact, they have sold the US business and there will be $1.8 billion cash on the balance sheet. The market probably understands that but underappreciates that this is radically-simplified business. Its US fertiliser business is worth about $1.8 billion and Australian fertiliser business is about $1.4 billion, but the explosives business is what really matters. So it is a company that is out of favour and herein lies the opportunity. This is a company that turns gas into fertiliser or explosives, and when their plants don't work efficiently, they don’t make money. There are reasons for this, such as falling fertiliser prices, poor plant reliability and then the CEO stepped down. Incitec Pivot (ASX:IPL) is not a household name but it's been unpopular in recent years, with the share price down from $4 to $3 in the last year. Two old world companies the market is underestimating Investors often focus on the ‘buy or build’ decision, and our view is that as the barriers go up to building new things, many existing assets become more valuable to buy rather than build. Newcrest Mining and Origin Energy are examples of good assets that have received attractive takeover bids in the past few months, Newcrest at a 30% premium and Origin at a 53% premium. Money was free a few years ago but now there’s a cost. Interest rates are higher and competition among brands for a customer base is intense, and there’s less funding available for new businesses. ![]() There are more political constraints and fewer trades people. Anyone who has attempted an investment development such as residential or commercial property or a major project will know it is taking longer and it is much more expensive. In fact, ‘old world’ assets are becoming more attractive because the barriers to building new things are getting higher. Uncomfortable opportunities in real assets We hear a lot about new world assets, but in reality, it means higher expectations and greater potential to disappoint. To find unpopular opportunities, a different framework for thinking is required. The stockmarket is going through a phase when global investors are attracted to the ‘new world’ of large tech, growth companies. However, this underperformance has historically created an attractive entry point, as smaller companies deliver their strongest absolute and relative performance over larger companies when the economic outlook starts to improve. Small caps are now trading on a material discount to their historical relative valuations versus large caps. When the outlook starts to deteriorate, investors rush out of small caps and into large, liquid defensive stocks. ![]() Small caps are more exposed to the economy, have less diversified businesses, and are less liquid than large caps. This is especially true in smaller companies, which have underperformed their large cap peers in 2022 and into 2023 against a backdrop of rising interest rates and a bleak economic outlook. Investing in unpopular stocks is a great way to make money for investors but a disciplined process is required to find uncomfortable opportunities.
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