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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Leithner & Co joint managing director Chris Leithner tells how a pair of unpopular companies passes his team's own ethical testing.
Hottest ASX shares
The Motley Fool: What are the 2 best stock buys right now?
Chris Leithner: Again, they fall into the category of well-established industry leaders [and] track record.
APA Group (ASX: APA) is the country's biggest natural gas infrastructure business. It is, in a sense, not often talked about, but it's sort of the successor to Australian gas and lights when they put together the Moomba to Sydney pipeline. That's the origins of APA from that.
Its pipeline networks resemble natural monopolies, and long-term contracts secure its revenues. Moreover, because APA's relatively lightly regulated, its profit margins are very high.
On 8 November 2018, in his rejection of a foreign entity's offer to buy APA, the treasurer noted "the size and significance of APA Group". He added that it's a "unique company supplying gas for part of all mainland capital cities".
Call it cautious contrarianism, conservative contrarianism. We've done a lot of research on [fossil fuels] and basically it's tough to envisage a world that uses considerably less gas than it does at the moment.
Aurizon Holdings Ltd (AXX: AZJ) traces its origins to Queensland's first railways in the mid-19th century. Today it's Australia's largest rail-based transport business. It owns and operates as a government-regulated monopoly one of Australia's most critical bulk-haulage, multi-user rail networks.
Both of those are unpopular from a coal, gas, and fossil fuel point of view. But it seems to me in the past, they have been very resilient cash-generating businesses, and it seems to us that's going to continue.
Aurizon and APA are also complex beasts, and APA's effort to buy AusNet further complicates its valuation.
The ASX share for a comfortable night's sleep
MF: If the market closed tomorrow for 4 years, which stock would you want to hold?
CL: We invest for the indefinite long term, and over our 22 years of operation our average holding period has been more than 5 years. So everything we currently own – as well as what we've contracted to buy and hope to acquire in the future – we're prepared to retain for at least 4 years.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
CL: We want to avoid what we call 'sins of commission', as in 'My God, why did we do that?' because it's turned out to be a stinker.
We've also committed a fair few 'sins of omission' that, in effect, we had the right company [but] we're waiting for a price which never eventuated.
One that comes to mind, this would have been early on in the global financial crisis, Flight Centre Travel Group Ltd (ASX: FLT) fell to something like $4 or thereabouts. And we had colossal orders in, whatever the price was, it didn't quite reach it — a matter of just 50 cents or some such. And in post-GFC at some stage, it certainly was about $40, into the $50s. So that would be a good example of a sin of omission.
There's a trade-off that you really can't avoid. If you want to avoid the sins of commission to minimise the number of stinkers… you're going to increase the number of sins of omission.
