BROKERS’ NOTES: Buy into semiconductors, sell out of travel

Kyle Wales and James Hayward, fund managers at Flagship Asset Management:

BUY: Ultra Clean Holdings

Since the onset of Covid, supply chain constraints have laid bare our reliance on semiconductors. Large, downstream equipment providers have been in the spotlight, but market participants are missing the smaller, critical, upstream players. Enter Ultra Clean Holdings (UCT), listed on the Nasdaq.

Its forward p:e of only 7 belies the importance of its role in the semiconductor industry as it counts industry giants Applied Materials and Lam Research as its biggest clients. UCT has grown its revenues at a compound annual growth rate of 25%, outpacing the growth in its underlying markets by an average of 10% per year for several years. Secular drivers such as artificial intelligence, the internet of things, 5G and big data are benefiting the entire industry, leading to higher highs and higher lows in a notoriously cyclical market, but the long-term trend remains upwards.

SELL: Booking Holdings

Booking Holdings, listed on the Nasdaq, is the largest online travel agency globally. It is an excellently managed business. From being a third of the size of Expedia in 2003, it has grown to be an industry leader today, with best-in-class operating margins. Booking trades on a forward p:e north of 24, which might not seem inordinately high for a business of this quality, but there is a lot baked into this number. Bloomberg consensus estimates are for it to grow its revenues by 47% in 2022. Due to inflationary pressures on consumers, this may prove to be ambitious. It is also disproportionately exposed to Europe, where these pressures are likely to be greater.

Finally, for those with longer-term investment horizons, Booking may also have become a victim of its own success: with online share of bookings already sitting at more than 50%, and Booking (as industry leader) less likely to benefit from market share gains, Booking’s revenue growth is likely to converge to growth in leisure tourism spending worldwide at mid-single digits.