The market was a cacophony of noise in the aftermath of Silicon Valley Bank’s (SVB) collapse over the last 10 days. Existing contagion effects are already overanalysed, but noise levels should remain elevated as underappreciated second (and third) order effects continue to surface. The mad rush to move deposits into the “safer hands” of bigger international banks once again put the spotlight on the importance of security.
During periods of elevated uncertainty, Alphinity finds “security” in our investment process that has been used by our founders since 2003. We invest in high quality companies that trade at reasonable valuations in an earnings upgrade cycle. Our portfolios are well diversified and not overly exposed to any one sector or thematic at any point in time.
With security top of mind, we also explore one of our (cyber) security holdings in more detail. Fortinet is a global leader in cyber security benefiting from several secular growth drivers underpinning ongoing earnings upgrades.
Finding security in diversity and quality
There is always some level of uncertainty and volatility in equity markets. The intensity level just varies over time. Rather than trying to call the Fed’s next pivot or which bank will be the next victim, we focus on bottom-up stock picking and company specific fundamentals within broader market fundamentals.
Orienting a whole portfolio around a macro or central bank outcome or overexposing investors to one sector or thematic is very risky. A good antidote is a portfolio of high quality, large cap companies, that is well diversified across a range of sectors.
Our current global portfolios offer investors exposure to the resilient luxury consumer, emerging market e-commerce and online payments, renewable energy, life sciences and animal healthcare as well as more defensive garbage collectors and insurance plays. To name just a few.
Alphinity Global current top 10 holdings diversified across sectors and regions
Source: Alphinity, 28 February 2023
Finding security in cyber: Fortinet – A global leader in cybersecurity solutions with secular growth drivers
Complexity of connectivity continues to increase, and this creates more avenues of potential attack from in IT security perspective. Think about the fundamental changes that have occurred in terms of how we access work files; we have moved from using PC’s located in an office accessing files through a closed network to now using personal devices to connect to disparate Wi-Fi services (airports, cafés, hotels) that then access cloud based file systems. Every element in that connectivity chain is a potential vulnerability at a time when the IT security threat environment is deteriorating.
Given these dynamics, in a more difficult macro environment IT security spending is proving more resilient than most categories. And within the secular shifts within the IT security industry, Fortinet is well placed. Fortinet (FTNT) provides cyber security solutions to a broad range of businesses and operates across 3 main areas:
- Network Security: includes sales of network security appliances;
- Infrastructure Security: enables disparate security devices to work together as an integrated security solution; and
- Cloud Security: provides security through virtual firewall and other software products in public and private cloud environments.
Fortinet is a business that has been consistently taking share from Cisco, Juniper and Checkpoint in the core firewall business and expanding the opportunity set in a more hybrid environment that encapsulates hardware and software technology. Things like software defined wide area networks (SD-WAN), operational technology (OT) security, along with the convergence of security and networking are providing a rich environment for Fortinet’s security architecture to continue to take share.
Wrap this together and you have core secular drivers combined with share gains that should drive growth of >20% in the coming years, and with free cash flow growth even higher. The focus on profitable growth is a key feature of the Fortinet business model.
Fortinet has recently reported a strong set of 4Q22 results with strong revenue growth and an improving business mix with high margin services now representing more than 70% of revenue. Management’s FY23 top line guidance was also well above consensus expectations. Healthy demand and a large backlog should drive meaningful upside to forward consensus earnings expectations.
At mid 20’s for a CY23 FCF multiple, we feel that the current valuation meaningfully discounts what is expected to be >20% free cashflow CAGR, a strong balance sheet, and a business that continues to extend its capabilities to address the ever-changing IT security landscape.
Fortinet – Durable 20%+ Compounder in Uncertain Times
Source: Fortinet, 4Q22 Results Presentation
Fortinet – Enjoying strong earnings upgrades underpinned by secular growth drivers
Source: Alphinity, Bloomberg, March 2023
With noise levels expected to remain a few decibels higher than normal in the near term, it will be important to stick to an investment process that has worked through many different cycles over 20 years. Companies such as Fortinet, with rock solid balance sheets and structural growth drivers offers security through uncertain times such as the present.
As the saying goes: “Block out the noise and the only thing you will hear is success”.
Author: Elfreda Jonker – Client Portfolio Manager
Alphinity Global Equity Fund – Active ETF (ASX: XALG) and Alphinity Global Sustainable Equity Fund – Active ETF (ASX: XASG) are two new actively managed ETFs of existing funds that provide access to global portfolios exposed to powerful trends reshaping the world.
