When a company you’re invested in gets bad press, what do you do? Scandals should be taken seriously, of course, but you also need to determine if the company’s fundamentals have changed.
Take Samsung, which has suffered from bad press this year due to the arrest and sentencing of vice-chairman Jay Y. Lee. In August, a court in South Korean found Lee guilty of bribery, embezzlement and perjury, sentencing him to five years in jail. As of late September, Lee had begun his appeal.
Michael Reynal, chief investment officer and portfolio manager at Sophus Capital in Des Moines, Iowa, was focusing on more than that bad news over the summer. In mid-August, he said, “You asked me if we’re worried about Samsung. The answer is a decisive no.”
Reynal, whose firm sub-advises the Renaissance Emerging Markets Fund, added Lee’s arrest “was a bit of a relief,” and he finds there are “fundamental reasons to be involved in Samsung.”
Looking at the company’s earnings reveals an upside. “Where are these earnings coming from; the [Galaxy] Note 7? No,” he explains. “The earnings are coming from DRAM [Dynamic Random Access Memory, or the main memory used for devices] and [other] memory. Don’t forget that Samsung is first and foremost a memory chip manufacturer, and they are the largest and most profitable DRAM manufacturer and distributor in the world,” says Reynal.
Also, the outlook for DRAM pricing is positive. “Stable prices for DRAM have been a positive for Samsung and the other Korean players,” says Reynal. “We’re starting to see cost of manufacturing for DRAM go up. This is good for the lowest cost producers, namely the Koreans. We’re very encouraged on that side.”
A second area where Samsung has posted strong performance is in smartphones —“notwithstanding the Note 7 issues,” says Reynal. He points out, “Samsung has done a good job of maintaining market share; the Galaxy S8 has been selling well throughout the first half of this year and we expect that to continue in the second half. Samsung remains the number two player behind Apple, and they continue to maintain profitability.”
Further, Samsung has been successful when it comes to smartphone displays. “Samsung is the only main supplier to Apple’s OLED iPhone,” says Reynal. “This quasi-monopoly position leads to significant profits. Samsung is a key beneficiary, ironically, of Apple’s OLED iPhone launch. So we’re positive on mobile, on display, and as I said earlier, on memory.”
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“The consumer space, globally, remains very strong,” says Reynal, due to factors such as globalization, low prices and better access to markets.
Also, “Entertainment is now shift[ing] to the mobile space,” he adds, saying, “My 13-year-old son is glued to his phone – and I’m sure he’s not the only 13-year-old out there who’s doing that.”
In particular, he’s invested heavily in what he calls the Apple Valley chain, “through a lot of the manufacturers who supply Apple […] The emerging market exporters are doing very well by that global trend of mobility communication and technology.”
And the buying power of emerging market consumers is increasing. “Low interest rates around the world have benefited the consumer who, in the past, may have struggled with debt,” Reynal explains. “We’re seeing that the consumer across a broad swath of emerging markets is handling this environment well.”
In particular, he’s looking at Brazil and Russia – both have reduced rates several times in 2017. “Again, this is beneficial for consumption; not just of technology but also of cars, furniture [and] housing.”
Expect political upheavel in emerging markets