Samper Vic: “Nestlé (NSRGY) Shares are Well-Positioned in Our Portfolios Based on its Global Growth Potential”

Semper Vic Partners LP, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A return of 11.0% was recorded by the fund for the second quarter of 2021, outperforming its Dow Jones Industrial and S&P 500 benchmark that delivered a 5.1% and 8.6% return respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Semper Vic Partners, the fund mentioned Nestlé S.A. (NYSE: NSRGY) and discussed its stance on the firm. Nestlé S.A. is an Omaha, Nebraska-based multinational conglomerate company with a $344.3 billion market capitalization. NSRGY delivered a 5.90% return since the beginning of the year, while its 12-month returns are up by 3.39%. The stock closed at $124.60 per share on September 13, 2021.

Here is what Semper Vic Partners has to say about Nestlé S.A. in its Q2 2021 investor letter:

“I believe that Nestlé shares are well-positioned in our portfolios based on its global growth potential. Nestlé’s global growth potential is a dividend from their trusted consumer brands’ 100-year command presence in over 100 countries. Over these years, Nestlé has developed trusted and cherished iconic brands. For instance, Nestlé has over 30 brands that have over $1 billion of annual turnover. Nestlé benefits from a vast Total Addressable Market (TAM)
available through developing and emerging market consumers shifting from subsistence economies to the introduction of market-based economies. Nestlé benefits from its market leadership in two key categories that evidence extremely high brand loyalty – global pet food/care and global premium coffee (led by Nestlé’s globally leading Nespresso).

More importantly, Nestlé has a culture of long-term investing. Nestlé has long excelled at securing new markets and rolling out new products, often adjacent to long-standing brands. They also have a history of internal innovation (e.g., behind launch of new brand’s single-service coffee platform, as a result of external acquisition of companies whose brands, technology, patent, manufacturing, route-to-market, adjacent category presence, etc., offer powerful longterm returns on incremental investments deployed to meet demands of growing consumers and growing affordability for those consumers of Western-style goods and services).

Like Berkshire Hathaway, Nestlé management is driven to find ways to reinvest Nestlé’s massive annual free cash flow into new products, new geographies, and adjacent categories. They are aided in this search by their extensive global network of an extraordinary management team. Nestlé’s senior most management are an extraordinary team of multi-national, multilingual (most of top 100 executives speak at least three languages), and multi-cultural. Quite simply, they know their way around the globe through global experience in ways that ought to empower Nestlé shareholder’s management teams to obtain for Nestlé shareholders “their unfair share” of future growth amongst categories serviced by Nestlé’s leading, trusted consumer brands.

Nestlé’s management added enormous value over the past decade. First and foremost, they were disciplined enough to retain their long-standing and sizeable holding in shares of L’Oréal (whose market value over the past eight years has moved from $22 billion to over $59 billion). While many investors believe that Nestlé should have divested L’Oréal shares, Nestlé instead has held firm, allowing their support of management to allow L’Oréal to reach
further with investments intended for long-term results even if investment spending to do so burdened near-term reported profits. (Over these years, where activists suggested divestiture, the dollar value of Nestlé’s stake in L’Oréal has advanced by over $37 billion in value.) Second, Nestlé’s management strategically restructured their Galderma subsidiary, prior to selling the business for what I believe to be billions of dollars more than what they would have received had they not embarked upon such restructuring under the leadership of Nestlé’s recently appointed new Chief Executive Officer, Ulf Mark Schneider. Third, Nestlé has partnered with countless private equity pools to which they have sold legacy businesses in ice cream, confectionary frozen foods, etc. These partnerships are run separately but provide Nestlé with extraordinary ability to participate through equity holdings alongside of buyers of Nestlé divisions that had been rightfully deemed non-strategic.

One area of redeployment of cash raised from above-described restructuring, involved investments in younger food and beverage industry participants involving venture capital investments in digitally enabled and disruptive food and health start-up ventures. During the Pandemic, Nestlé’s willingness to have made such venture investments provided reward when several of their venture portfolio companies sought to sell themselves. Nestlé’s willingness to
invest early on in such ventures gave Nestlé the only seat at the auction table that could possibly have been filled as their potential competitors were unable to act due to the inability to due diligence businesses offered for sale during the disruption in the world caused by COVID.

Nestlé’s sole ability to due diligence these venture capital funded investments, which they knew well as a result of their long-standing investment presence, allowed Nestlé to acquire a handful of strategic investments with foreknowledge that other potentially interested parties could not have had. More importantly, potential competitive bidders could not due diligence such investments as they were unable to travel and visit due to COVID restraints. Nestlé’s familiarity left them as sole contender when it acquired, for over $2 billion, Aimmune, the world’s leading peanut allergy vaccine. Ironically, just at the same time that the FDA awarded Aimmune with the sole rights to advertise and market their product’s ability to protect against
this often fatal allergy, Nestlé was given the opportunity to purchase this important new line of business.

Nestlé similarly was able to acquire Freshly, a leading e-commerce-based food solutions company. Nestlé knew of the business dynamic as a result of their time spent as board members of Freshly during its venture capital funding era. Nestlé was familiar with management, with kitchens, etc., which they believe created the competitive advantage which made it an attractive investment. Others, without prior knowledge, were at a substantial disadvantage when it came to obtaining assurances required of traditional due diligence prior to substantial investments such as Nestlé made in Freshly. All totaled, since the Pandemic, Nestlé has sold businesses for proceeds of over $5 billion while acquiring interesting venture phase investments for several billion dollars and while investing in greenfield and expansionary projects in support of Nestlé’s traditional businesses in excess of $5 billion.

Nestlé’s ability to weather and, indeed, take advantage of disruptions caused by the Pandemic supports my long-held belief that Nestlé is, indeed, a combination enterprise – equal parts fixed income and equal parts venture capital. Nestlé’s characteristic as a fixed-income investment reflects the extraordinary generation of free cash flow that its long-standing trusted brands generate. Such free cash flow from existing and often mature Western markets resembles fixed income, bond-like returns from previously established regions of the world. The free cash flow has been invested heavily back into Nestlé’s business…” (Click here to see the full text)

Based on our calculations, Nestlé S.A. (NYSE: NSRGY) was not able to clinch a spot on our list of the 30 Most Popular Stocks Among Hedge Funds. NSRGY was in 4 hedge fund portfolios at the end of the first half of 2021. Nestlé S.A. (NYSE: NSRGY) delivered a -2.37% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.