8 growth stocks on Frazis’s watchlist

A handful of innovative companies Michael Frazis believes are set for "explosive growth" featured in the latest investor update from the Frazis Capital founder and portfolio manager.

On the macro front, in the context of rising inflation, a relatively weak Australian dollar but persistently low interest rates, he weighed the current economic backdrop against those of the 1970s and 1980s. Specifically, he discussed why this time is so different to other historically high-inflation periods.

“This is different because central banks are resisting the urge to lift rates and are pumping money into an economy that is growing very strongly, with prices rising at around 6%. That’s uncharted territory in the modern era,” Frazis said.

In the 1970s, it was an oil spike that caused inflation, which saw rates lift from around 2% to more than 19%. And in the 1980s, the end of the boom that saw markets crash in 1987 was followed by a strong rally and high-interest rates.

Comparing these with the current period, Frazis noted that “it’s not inflation that causes problems, it’s the reaction to it.”
“Interest rates make the difference – if mortgage rates go from 2% to 4%, that’s a big hit for most families. That cash comes straight out of your wallet, which is one of the core ways that high interest rates cause problems,” he said.

And the higher debt loads across the board now, in both families and businesses, means even a very small rise in rates achieves the effect that central banks want.

“Big contractions in super high-growth stocks”

Shifting to the stock level, Frazis said there are several top-tier software and internet businesses trading on multiples of around 100 times sales. As an example, he singles out Cloudflare (NYSE:NET), a US-based web infrastructure and website security company. With a market cap of $62 billion, the NYSE-listed firm generated around $600 million in revenue for the quarter.

“A lot of these super-high growth companies are seeing big contractions and I think we’ll see more of that. It’ll be interesting to see what happens to Cloudflare,” Frazis said.

“If this starts selling off, it will be interesting to see where it bottoms out in terms of the multiple.”

Another growth stock he singled out is Lightspeed (TSE: LSPD), a Toronto Securities Exchange-listed payments and e-commerce company targeting small businesses. The stock was recently trading at a 30 times sales multiple but within the space of just a few weeks, has dropped back to 15 times. Its share price has climbed to around US$66 from $25 a couple of weeks ago.

On UpStart and other startups

Also from North America, Frazis discussed the NASDAQ-listed AI lending platform UpStart (NASDAQ: UPST). He regards this as another example of how quickly PE multiples can move, having gone from 12 times to 30 times, before then dropping back to 20 times in the space just weeks.

Part of Frazis’ portfolio, he bought the stock for around $125 before it “shot up to $400”. The company recently reported revenue was up 250% year-on-year.

And in the cryptocurrency sphere, Frazis recently invested in Galaxy Digital (TSE: GLXY), a full-service crypto investment bank. Galaxy offers a full suite of financial services to the crypto community: prime broking, custody, asset management, and principal investments.

Just last week, Galaxy reported an “astonishing” $1.6 billion of net income for the calendar year so far.

“This is a US$13 billion company that’s still incredibly cheap,” Frazis said.

“The top tier listed crypto companies remind me of software six years ago, before becoming one of the best performing asset classes. Many trade at single digit EV/Sales with exceptional growth and profitability.”

A few other US-listed stocks he discussed are:

• Real estate “iBuying” company Opendoor (NASDAQ:OPEN), which recently reported third-quarter revenue of US$2.3 billion, up 91% over the quarter.
• Online gaming platform Roblox (NYSE: RBLX), which Frazis described as “what the metaverse should be like,” as opposed to what Facebook has become. “I’m super excited about owning this stock for the long-term. If you really want a metaverse company, this is the type of business you should be looking at.”
• Argentina-based online marketplace firm Mercado Libre (NASDAQ: MELI), which has seen share prices triple in the last 12 months.

And from his home market, he also discussed ASX-listed luxury fashion firm Cettire (ASX: CTT), whose sales have jumped 172% to $57.8 million in the first four months of FY2021.

Click on the image below to watch the full video of Frazis's latest update.

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