An investor crushing 98% of his competitors breaks down a contrarian stock pick built around electric cars and Russian oligarch infighting

Reuters

Richard Sneller, the head of global emerging-market equities at Baillie Gifford, has used a contrarian approach to investing that’s vaulted him into the 98th percentile versus peers over the past three years.
Sneller explains the key components of his investing methodology, and reveals his top against-the-grain pick for the future — one that involves Russian oligarch infighting and electric car production.
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If an investment is safe, Richard Sneller wants nothing to do with it.

As the head of global emerging-market equities at $262 billion investment giant Baillie Gifford, Sneller is a self-admitted risk junky. He sits in charge of a roughly 70-company portfolio filled with castaway companies and out-of-favor stocks — ones he thinks harbor immense rebound potential over the long term.

The strategy has earned him the reputation as a market contrarian. It’s a label he fully embraces.

"In terms of risk, we view it as something you should embrace, not something you should look to minimize," Sneller told Business Insider. "We look for companies that are hated, where we think the hatred has become extreme."

That approach jibes with two words that come out of Sneller’s mouth with great regularity: inflection point. He’s looking to load up on stocks set to see a reversal of trend, which is why he’s so drawn to downtrodden firms unloved by the broader market.

To get straight to Sneller’s favorite contrarian stock pick, scroll to the bolded header below.

One added wrinkle is that Sneller doesn’t see every unpopular investment as a surefire bet. He views some of them as complementary pieces to existing portfolio holdings.

In other situations, he might think a stock has such limited downside that it’s worth taking a flyer. If he loses, so be it. He ultimately constructs his portfolio in such a way that, if a single trade does fail, he can more than make up the difference elsewhere.

Beyond that, any addition to Sneller’s portfolio must be expected to double over the following five years, at a bare minimum. Although that can be a high bar to clear, it’s a firm piece of his overall methodology.

Sneller’s approach has worked out for him. The Baillie Gifford Emerging Markets Growth Fund that he oversees has generated a 20.4% return over the past three years, putting it in the 98th percentile relative to competitors.

One example of Sneller’s approach was his decision to buy shares of Chinese tech conglomerate Baidu back in 2009. Yes, Baidu has since evolved into a market juggernaut — surging as much as 2,000% at its highest level — but it was anything but a sure bet when Sneller made his first purchase.

"More than 20% of its revenues were from illegal healthcare advertising," he recalled. "The question was how is the government going to respond to this? We took a measured position that took into account the possibility of bankruptcy."

An overlooked opportunity in Russia

Sneller is trying to rekindle some of that Baidu magic with what he considers to be his top contrarian pick right now: Russian mining company Norilsk Nickel.

Investing in Russia at all at this point could be considered an against-the-grain decision, given the nation’s constant state of geopolitical turmoil and oligarch-heavy corporate landscape. But even if you look past simple geography, Norilsk is a difficult stock to support right now.

For one, the two oligarchs with key ownership stakes in the company — Vladimir Potanin and Oleg Deripaska — have been locked in a long-standing power struggle. Secondly, nickel prices have been locked in an unremarkable trading range since the start of 2015.

Sneller sees both of these factors as opportunities.

In terms of the oligarch infighting, he says the squabbling has actually made Norilsk’s spending plan more predictable.

"That’s a tremendous opportunity, because the capital allocation process over the next three or four years is somewhat constrained," Sneller said. "Which means we know what they’re likely to be investing in over that period, which is environmental footprint. That’s a fantastic thing."

Sneller also sees nickel prices surging — just not in the near term. He’s looking all the way out through 2024, when he says all the world’s electric vehicle makers will be faced with a "huge bottleneck" around battery production, which will drive prices higher.

Should Tesla CEO Elon Musk’s vision of producing millions of electric vehicles come true, Sneller says the world’s nickel supply will fall multiple times short. That would create a major opportunity for Norilsk, which has the scale and capabilities to quickly address that shortfall.

"Norilsk controls more than 25% of the world’s nickel output," he said. "We know where the rest comes from, and none of the other companies are capable of injecting the $5 billion needed to get a new nickel mine to market, given historic issues."

He continued: "But it’s not coming this year, and it’s not coming next year. We see it coming in 2024. Most people don’t care about that. We do. And that’s the inflection point. It’s way too early, but that’s the point."

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Source: Business Insider – jciolli@businessinsider.com (Joe Ciolli)