Buy Hold Sell: 3 global giants and 2 due for a pullback

Buy Hold Sell

Livewire Markets

Hello and welcome aboard Livewire Market’s flight A2021. Lean back, ready the snacks and throw on some of your favourite tunes - Buy Hold Sell is back for another week and this time we are going global. 

Why? Because you asked for it, and we listened. When our annual survey went out, requests for more coverage of global equities was high on your wishlist. 

Welcoming you aboard this much-anticipated expedition is Livewire Markets' Ally Selby, who will also be introducing you to high-flying co-pilots Vihari Ross from Magellan and Chris Demasi from Montaka Global Investments. 

Our team will be sharing their insights on global giants Kellogg's, Visa and Spotify and we also asked our fundies to nominate a high-flying stock that they think is over-hyped. 

Stay tuned for a return of our new segment, Questions Without Notice, to catch Vihari and Chris grilling each other on their burning market questions.

Note: You can watch, read or listen to the discussion below. This episode was filmed on 17 February 2021. 

Edited Transcript 

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell, I'm Ally Selby and today we are doing something most of us haven't done in a very long time. That's right, we are packing our bags and going global. And what better way to kick off the long-overdue holiday than a look at some of those household names that we know, and hopefully still love. Today, my co-pilots on this trip are Vihari Ross from Magellan and Chris Demasi from Montaka. Thanks for joining me.

Kellogg's (NYSE:K)

Ally Selby: First up, we are talking Kellogg's. Vihari, I'll start with you. It's down about 15% over the past 12 months, it's trading on a PE multiple of 14, and has a nice dividend yield of 4%. So do you think this cereal producer is a sweet deal? Is it a buy, hold, or sell?

Vihari Ross (SELL): Ally, this is a sell for me. The biggest issue facing Kellogg, there is a number of headwinds here. But the biggest issue is health and wellness. When it comes to our main meals, health and wellness has become a permanent feature. People simply don't want those sugary cereals to the same extent as they used to. And that means this business is going to struggle to grow and in an environment where they're facing increasing costs around e-commerce and competitor brands, that is a very ugly place to be. So it's definitely a sell for me on Kellogg.

Ally Selby: Do you agree Chris? Will you be chowing down on Coco Pops or any of other Kellogg's products anytime soon?

Chris Demasi (SELL): Ally, it's definitely a sell. I think much, much less so than we ever have before. And it's cereals business has done fantastically well over the last year because more people have been forced to stay at home with all of the COVID-19 restrictions. That's going to come to an end at some point, probably this year. And it means that the downward trajectory of sugary cereal sales is going to take up where it left off a year ago. And the stock price is going to follow it all the way down.

Visa (NYSE:V)

Ally Selby: Let's talk about Visa now and we'll stay on you Chris. It's share price is relatively flat year on year. It's recovered around 60% since its COVID low. Do you think this mega cap can still make bank this year? Is it a buy, hold, or sell?

Chris Demasi (BUY): It's a buy. I think they'll make bank this year and next year and 10 years from now. Visa's the leader in a global duopoly for cashless payments along with MasterCard. And it benefits from classic network effects. There are 3.5 billion Visa cardholders, and they have Visa cards because they know it'll be accepted at merchants all around the world. The merchants accept it because they want the business of those 3.5 billion consumers. And as the world moves to cashless payments towards card payments and digital payments, Visa's opportunity is just growing larger and larger. 

So there's an $18 trillion opportunity as payments transition from cash to cashless, that's twice the volume of payments that Visa processes today. And another a $100 trillion in transfer payments and business to business payments. And Visa has earned itself the right to win in that market. And we think it's going to do so for decades to come.

Ally Selby: Vihari, do you agree? Or do you think investors should be saying hasta la Visa?

Vihari Ross (BUY):  Well, for me I'm afraid it's a buy as well, I don't have a different view here. I agree, there are very nice structural growth tailwinds sitting behind this business. I think it's very sort of odd for us sitting here in Australia where so many of our payments are already digitised. We don't realise that people over at Walmart are paying for their groceries with chequebooks still. So that shift is still yet to happen. And of course, Visa also benefits from the e-commerce tailwinds and also particularly cross-border e-commerce. And when we can travel again, travel-based spending around the world as well. So this is a high growth, high return business.

Spotify (NYSE:SPOT)

Ally Selby: Okay, let's stay on you. Next up we have Spotify. It's had a tremendous run in 2020, is it a buy, hold, or sell?

Vihari Ross (SELL): This is a sell for me. Spotify, it's actually remarkably well-positioned today. 44% share of audio subscribers, twice as big as Apple. And ever since the Joe Rogan podcast was announced last year that the share price has doubled. And my hesitation here is there is a very deep-pocketed competitive set here in Amazon, Apple and Google. And that could potentially inhibit not only yes, there's a big TAM here, but the ability of Spotify to monetize this user base, take pricing and ultimately get to a point where it's actually profitable.

Ally Selby: Chris, do you agree? Or will Spotify be making it to the top of your playlist?

Chris Demasi (BUY): I disagree. Spotify is a buy for us. Of course, there is an exceptionally large addressable market. There are three billion smartphones around the world and only 10% of those are activated with a digital music streaming service today. The reason why Spotify is going to be the winner is because they have the largest base of users. There are 350 million Spotify users today. That gives Spotify a treasure trove of data around consumer preferences. And that encourages people to listen to Spotify even more. It improves the data set, brings on new users, existing users continue to engage. And that flywheel starts to spin faster and faster. And we think that that's going to continue, not just in a year or two time, but as we look out, 10 years from now we think Spotify is going to compound value very, very strongly.

Afterpay (ASX:APT)

Ally Selby: Well, this week we asked our fundies to bring along a stock that they think has run too hard. Let's start with Chris. What's your over-hyped pick?

Chris Demasi: Ally, my over-hyped peak is Afterpay. So Afterpay has become the poster child for the buy now pay later space, which has exploded. And it's growing at 30% per annum here in Australia, but also in the US. It's extraordinary that that has made Afterpay one of the most valuable companies in Australia.

Ally Selby: These all sound positive. How come it's your over-hyped pick?

Chris Demasi: Absolutely. Well, the market cap is $44 billion, but it virtually broke even this year. There are new competitive entrants into the market, anything from FinTech startups, all the way to Visa that has launched a competing product. And what I think is really dangerous is PayPal, which has 300 million account holders and millions of merchants all over the world, has launched a competing product, which they're giving away for free. So it's a massive marketplace, but it's not clear to us that Afterpay is going to be the winner in that market. And you've got to pay up for that today to be invested in Afterpay.


Ally Selby: Vihari what's your over-hyped pick and why?

Vihari Ross: Well Ally, mine is Apple. Don't get me wrong, this is a remarkable business. It's incredibly high quality. You've got more than a billion installed base of iPhones out there. The thing with Apple is, the business has actually shifted over the last 10 years. Before, it used to all be about new customer recruitment to the platform. Now it's about the replacement cycle, which actually makes it a higher quality business than it used to be. But I think the current over-hype around this is the fact that there's this 5G rollout coming that's going to bring forward new iPhone purchases. And that's created a lot of exuberance in the share price. And frankly, despite the quality of this business, it's just trading above what we think is fair value.

Ally Selby: Fair enough. Well, it seems our fundies think there are various mega caps with headwinds in their future, but we'd love to know what you think. Let us know what mega cap you think is overvalued in the comments section below.

Questions Without Notice

Ally Selby: Okay. Now it's time for our new segment Questions Without Notice, where our fundies get to grill each other on their burning market question. Neither Vihari nor Chris has any knowledge of the question they're about to be asked. Chris fire away.

Chris Demasi: Okay, Vihari, I've noticed in your portfolio, you have a holding in the Intercontinental Exchange. We love the exchange business models. We're owners of CMA Group ourselves. What's so exciting to you about Intercontinental exchange?

Vihari Ross: Yeah, look, I think Intercontinental Exchange, ICE, has a lot of the nice characteristics that CME has. Derivatives exchanges have essentially a network effect, you know, monopolies around single contracts. That's a nice place to be. They've also got a nice growth pipeline coming through the digitization of now the mortgage origination business, as well as potential other industries like fixed income and things as well. But for us, there's a bit of interest rate risk there around CME, those contracts did use to trade up in anticipation of rate reductions or increases over time. And I think now with our low rate environment, it's just less appealing than ICE on a relative basis.

Ally Selby: Vihari, do you want to return fire?

Vihari Ross: Yeah. My question for you, Chris is around Berkshire Hathaway. How do you guys think about the risk of Warren Buffett or Charlie Munger's death when it comes to investment in that business?

Chris Demasi: Well, I think Berkshire Hathaway is going to last a very long time beyond Warren and beyond Charlie. The most attractive thing about Berkshire Hathaway is actually the structure. So Berkshire Hathaway actually receives in effect free funding to be able to go and invest in an equity portfolio that will compound at extraordinarily high rates over a very long period of time. And the access to that funding comes through the float in the insurance business. And that was one of the most attractive features of the model to us as wonderful as Charlie and Warren are.

Ally Selby: Well, that wraps up Questions Without Notice. We hope you liked the new feature in the episode. If you do, why not give it a like. Remember to subscribe to our YouTube channel so you never miss an update.

What large or mega cap do you think is over-hyped? 

Do you agree with Chris and Vihari's overvalued picks? We would love to get your take! Let us know what companies you think have run too hard in the comments section below. 

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