100 Club: Airlines, oil and banks throw up plays for Norris

The manager’s £119m FP Argonaut Absolute Return fund, which he runs with Greg Bennett, can take ‘long’ positions in stocks that benefit if the share price rises and ‘short’ positions to boost the fund when a share price falls.

Mr Norris said he had recently been focusing on three sectors where he had found a long and short position in each one.

The airline sector is one of these, with Mr Norris bullish on Ryanair but negative on Norwegian Air Shuttle. “A successful budget airline must be able to win a price war,” Mr Norris said.

“There are two elements to this. First, having the lowest unit costs and therefore making a profit from cheap ticket prices when the competition is loss-making.

“Second, a strong enough balance sheet to withstand short-term pain on profitability. This could result in longer-term gains in market share.”

He said Ryanair was the “proven winner in this regard” and had seen “considerable positive momentum behind its profit forecasts”.

“Norwegian’s business model only really works in Scandinavia when it comes up against easy competition in high-cost incumbent SAS,” Mr Norris said.

“Norwegian’s attempt to aggressively expand outside of its core markets – without a profitable business model and with a highly levered balance sheet – is in our opinion the airline industry’s equivalent of bringing a knife to a gunfight.”

Mr Norris has instigated a similar move in the banking sector, after backing Intesa Sanpaolo but shorting Banco Comercial Português (BCP).

He said there were “considerable opportunities to add value” by picking the right European banks as some would see a pick-up in profitability sooner than others.

The manager said Intesa Sanpaolo was “arguably over capitalised”, and had “successfully dealt with the sins of the past and is now able to sustain attractive dividends”.

“Intesa is also enjoying revenue growth from fee income and lower funding costs, while it is ultimately geared to a resumption of asset growth as the Italian economy comes out of a six-year recession,” he said.

Mr Norris said in contrast, BCP had “failed” the European Central Bank stress test last year and thought it had “yet to convince in terms of its balance sheet sustainability”.

“We also believe its exposure to Angola and residual exposure to the Portuguese bailout of BES [Banco Espirito Santo] are potential banana skins,” he added.

In the commodities space, Mr Norris said oil was “likely to be in a bear market for a considerable period of time”, which was “creating opportunities on the long and short side within the energy sector”.

He thought Norwegian oil major Statoil was “only marginally profitable [with the oil price] at $55 [per barrel]” and “cannot sustain its generous dividend payments indefinitely without putting its balance sheet at risk”.

“As such, we are amazed its share price has only fallen by 20 per cent since oil was at $100,” Mr Norris said.

“In the oil space, we prefer Europe’s largest pure-play oil refiner, Finland’s Neste Oil.

“[The firm] is enjoying significantly lower crude input costs at the same time as a healthy demand environment. This is leading to booming margins and the likelihood of a sustained period of earnings surprise.”

Mr Norris said his process involved analysing corporate earnings, which he felt was “the prime determinant of share price movement”, rather than whether a stock was a “quality” or “value” play.

“A concentrated portfolio of stocks with superior earnings momentum has been proven to outperform the market most of the time,” he said.