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It takes a lot for Questor to recommend a share this column has previously advised readers to sell. Particularly when, as in the case of Samsung, we sold at a loss after the fund manager who prompted the tip had bailed out of the stock.
So what has led Questor to change its tune, barely 12 months after we cut our losses on what had been our 2021 tip of the year?
The answer lies in following the smart money, changing market conditions and the South Korean technology giant’s efforts to improve its business.
When Questor advised readers to sell Samsung in November last year, we were following the actions of the Allianz Technology Trust, which had sold as a result of slowing demand for the products in which Samsung’s memory chips are used.
The trust’s former manager, Walter Price, had first put us on to the company in January 2021.
Now, however, the Allianz Technology Trust has bought back in. In the process, Mike Seidenberg, who replaced Price as manager last year, is joining some of the world’s best-performing investors on Samsung’s shareholder register.
Like last week’s tip, Builders FirstSource, Samsung ranks as one of the 10 most popular stocks in the world with the top-performing 3pc of equity fund managers tracked by the financial publisher Citywire.
Thirty-six of these investors hold shares in the company, resulting in Samsung’s AAA rating from Citywire Elite Companies, which rates companies on the basis of their backing by the best-performing fund managers.
They include Kamil Dimmich, manager of the Pacific North of South Emerging Markets All Cap Equity fund, which has returned 36pc over three years against just 1.7pc from its emerging markets index benchmark. Samsung is the third largest holding in his fund and represents 3.6pc of the portfolio.
He is looking past the slump in demand that has hurt Samsung’s sales this year.
“Earnings can appear volatile, partly due to its cyclical memory business, which has just been through a significant downturn, but this has the potential to generate significant cash flow over time,” he says.
There’s no denying that 2023 is proving to be a grim year for the business, as the fears over the slowdown in demand for Samsung’s memory chips that led Questor to sell have come to pass.
As demand for the devices in which these chips are used – such as smartphones and tablet computers – has slowed, manufacturers have slashed their chip orders. Sales from Samsung’s Device Solutions division, which makes the chips, halved in the first half of this year compared with the same period in 2022.
Samsung’s chip manufacturing plants need to be kept busy in order to make decent profits. The slump in orders has led to this division of the business falling to an 8.9 trillion South Korean won (£5.4bn) loss in the first six months of 2023 after it made an 18.4 trillion won profit in the same period last year.
But investors are now hoping that the chip industry, which is highly sensitive to the fluctuations of the global economy, may be past the worst. While Samsung’s sales and profits this year are still expected to be down heavily, analysts are forecasting a strong recovery to follow, with sales hitting a new high in 2025.
Another significant boost to the chip business could meanwhile come from Samsung’s plans to tap into the artificial intelligence boom. The company has launched its latest high-bandwidth memory chip, Shinebolt, to target AI applications by offering faster, more capable and energy-efficient processing.
The other areas of Samsung’s business continue to perform well. It has retained a strong position in mobile phones, tablets and televisions and is exposed to the current areas of growth in these markets such as foldable smartphones and large-screen premium TVs.
Samsung shares have climbed by 36pc from their lows last year, but even after that recovery they remain cheap for a tech stock, trading on 18 times expected earnings over the next 12 months.
“Looking through the currently depressed earnings, the stock trades at only a modest premium to book value, which seems harsh given the brand’s strength and technological prowess,” says Dimmich.
“It continues to generate significant cash flows and holds a significant net cash position.”
Readers can invest via Samsung’s “global depository receipts” traded in London.
Questor says: buy
Ticker: SMSN
Share price at close: $1,235
Phil Oakley is a contributing journalist for Citywire Elite Companies
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