In the words of Curb Your Enthusiasm and Seinfeld creator Larry David, there is no denying that February's reporting season was Pretty, pretty ... pretty good. 

Nearly half of the company's that reported their half-yearly results beat analyst expectations, while 61 stocks received upgrades. Cyclical sectors like Mining, Resources, Materials, and Financials were top performers during the month, rising 6.4%, 6.0%, 5.8%, and 3.6%, respectively. 

But as Bella Kidman recently reported, it wasn't all rosy, with a handful of not-so-impressive reports resulting in cascading share prices and 43 broker downgrades. As a result, the Technology sector dropped around ~9.3% during the month, while Utilities, Consumer Staples and Healthcare also fell ~8.2%, ~5.3% and ~4.6%, respectively. 

In this episode of Buy Hold Sell, Centennial Asset Management's Matthew Kidman speaks to Aberdeen Standard Investments' Michelle Lopez and Monash Investors' Simon Shields for their take on the winners and losers of reporting season, and what they are still buying despite both the good and bad news. 

Note: You can watch, read or listen to the discussion below. This episode was filmed on 3 March 2021.

Edited Transcript 

Matthew Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Matthew Kidman, and the reporting season is done. There are winners, there are losers, we own a bit of both of them. And to talk about how it all went and a few stocks, we've got Simon Shields from Monash Investors and Michelle Lopez from Aberdeen Standard. 

Michelle, we'll start with you. Pinnacle. It's a new Magellan. It can't do anything wrong. Buy, hold, or sell?

Pinnacle Investment Management (ASX:PNI)

Michelle Lopez (BUY): Oh, it's a buy. It's a buy. They're about to enter a purple patch of fund performance, fund momentum, and operating leverage. And I think the market is starting to wake up to the quality of the affiliates that they own equity stakes in. And with that comes a great conviction to apply an earnings multiple to a portion of the performance fees, the out-performance fees that they earn, which should lead to further upgrades. So it's a buy.

Matthew Kidman: Simon, we all know funds management's a fickle business, we're in it.

Simon Shields: Yes, indeed.

Matthew Kidman: Pinnacle? Is it at the pinnacle? Buy, hold, or sell?

Simon Shields (HOLD): Okay. It's a definite hold for me. Look, it's a great business. And Ian Macoun, who's the CEO, has done a fantastic job. Funds management's all about funds under management and performance. And it's got great flow, and it's got great performance at the moment. As Michelle said, it's going to get a performance fee, as well.

But in the good times, when you're pricing these fund managers, you've got to be careful. It's not always good times, and it's not just the markets falling away, it can be performance, too.

WiseTech Global (ASX:WTC)

Matthew Kidman: Let's get to the sexy end of the market: Software, ships and transport kept going through COVID. WiseTech. Buy, hold, or sell?

Simon Shields (BUY): That's definitely a buy for me. The goods and logistics surprise that we saw out of WiseTech in the last result was just absolutely terrific. It's got itself positioned with the platform for the digitalization of the whole logistics chain. Yes, it's on a high multiple, but it's pulled back a little bit. It's a great opportunity to buy at this price.

Matthew Kidman: It's wise technology. Is it wise to buy, hold, or sell it at the moment?

Michelle Lopez (HOLD): We're holders of WiseTech, and I agree it's got a world-leading product in CargoWise, which will play into the structural theme of the digitalization of the industry. And interesting, the strategy has pivoted somewhat in the last six months to kind of refocus on the core and integration and high-value customers. But it's in the price for us, and that it's back up to where it was trading at pre-COVID. So it's fully reflective of that. So it's a hold.

IDP Education (ASX:IEL)

Matthew Kidman: Okay. Let's get to education. All the students have been locked in their rooms, haven't been allowed to go to uni. But, somehow, IDP knocked out a great result. Buy, hold, or sell?

Michelle Lopez (BUY): Oh, it's a buy for us, still. And there are two parts to this business. You've got your English learning testing business, which has shown a huge recovery, post-COVID. And it's literally snapped right back. But then you've got your student placement, which is still struggling and it's still soft. When you think about the value chain and what IDP is providing to the universities, it's in fact strategically more important today than it was pre-COVID. So when those students come back in and our borders open up, I don't think that's yet reflected in the share price. So it's a buy.

Matthew Kidman: It did very well, Simon, and it could be a reopening stock. Buy, hold, or sell?

Simon Shields (HOLD): It is, to some extent, a reopening stock. Hold, though, because the share price has just driven up so high that we think there's too much in the price now. Certainly going to be continuing to grow its testing. And as Michelle said, in the right place at the right time for the universities, but everything has a price. It's a hold for me.

NextDC (ASX:NXT)

Matthew Kidman: During COVID, everything's data storage. It was already on the train. Now you've got to store all those servers out in the remote block somewhere. NextDC, though, somehow disappointed everyone, down about 15%. Buy, hold, or sell?

Simon Shields (BUY): Buy. I think it's a great buying opportunity on the pullback. I mean, the underlying thematics have not changed. The need for data - it's being generated all the time and it's got to be stored somewhere. And this stock is actually a very solid business, asset-heavy. It's not going to give us too many surprises.

Matthew Kidman: 15% is a bit of a surprise.

Simon Shields: But that's the pullback. Get in.

Matthew Kidman: Okay, time to buy. Data storage? It's got to be a growth industry. Buy, hold, or sell?

Michelle Lopez (BUY): Oh, it is. I'm with Simon on this one. It's a buy. I think the pullback that we've seen was not reflective of the result. I think it's reflective of broader macro factors, like the bond yield, that we've seen play out. And when you think about the big, megatrends of data and what that means for DCs, these guys are dominant positions in Australia. They've got a very solid pipeline of developments coming on, as well, to be able to meet that demand. And the returns, once they get utilisation in the DCs up, are mid-teens. And so, for a return on invested capital of mid-teens, I think is quite a decent return. And it's trading well below our DCF range of what it's worth. So it's a buy.

Altium (ASX:ALU)

Matthew Kidman: Circuit boards. Altium short-circuited. It was terrible. Had a series of downgrades. Buy, hold, or sell?

Michelle Lopez (BUY): It has. I'm going to put this one on the buy, again, but this is a three-year view. They are coming off a number of downgrades. So hopefully we're closer to the bottom, but you need to step back and realise, with Altium, they are world leaders. They've got this product that enables the design of printed circuit boards, which basically goes into every industry. And what they've been able to do and what they're on the pathway to do is really open up their addressable market and ensure that their software is embedded even more than it already is. So, we are taking a three-year view with this. And it's interesting, this is a company that's given targets to FY 25. I do not know another management team that have done that.

Matthew Kidman: How do they get away with it?

Michelle Lopez: They're either foolish or incredibly impressive, if they're able to deliver. Time will tell, but it's a buy.

Matthew Kidman: Three-year view, Simon. Gosh, we could be doing anything in three years. Altium. Buy, hold, or sell?

Simon Shields (SELL): Sell for me. Okay. So this is a stock we used to own and we sold out of in October last year. And we sold out because it looked like it was struggling to meet its targets. And it certainly continued to struggle to meet its targets. We're going to need to see a bit of better execution because there are high expectations, as Michelle's saying, for what it can potentially do down the track. And it should be able to do it, but they're struggling to do it. And for us, that's a red flag. So it's a sell.

Matthew Kidman: Whether the companies beat, whether they missed, or bond yields are rising, the two people in the room are very, very bullish about the future.

Questions Without Notice

Matthew Kidman: And here we go with our new segment, and this is where you earn your money, guys, Questions Without Notice. Michelle, you're going to go first. You got something for Simon, so it knocks him off his feet and he doesn't know what to say.

Michelle Lopez: Well, I'm going to carry on with the whole tech and growth thematic that we've just been talking about. And I know, Simon, you're quite a bull, I guess, on Afterpay. And just wanting to ask you one question. What's the one insight that the bears are missing on Afterpay, and where do you see value in Afterpay?

Simon Shields: Okay. The big insight that the bears are missing on Afterpay (ASX:APT) when they do their forecasts, is around the frequency of use by customers, the longer the customer has been a customer. So in the first year, the customer would use it four or five times. And that grows to 12 times in the third year. And now, when you go four-plus years out... and, of course, that's lengthening as well... you're up to 29 times. Now that sounds like a lot. But when you bring that back to how many times a month that is, that's less than three times a month. And we're not talking about big amounts of money for each transaction. So that's what they've missed. 

Now, I have been a big bull on Afterpay. I think the business is a magnificent business. But in fact, we sold out completely of our Afterpay at $150 a share. Right? And that's because we've got a view about what Afterpay is going to do over the next five, seven, eight years. And because of that frequency of use insight, it's actually easier to forecast the forward revenues on Afterpay than what it is for a normal company that's having to go out every year and re-establish new customers and so forth. 

So, essentially, at $150 we felt that we were getting paid for the next seven or eight years of execution by Afterpay. So why wait around and see if they do a good job doing it? We took our money, and we left. And so, if it comes back enough, then it's upside might meet our hurdles again. And we may go back in.

Matthew Kidman: That was pretty kind for you, Simon. I hope you return serve. What's your Question Without Notice?

Simon Shields: Okay. Well, I'm not giving you a stock-specific question, Michelle. It's more about the rising bond yields and whether or not you're concerned about those for the market.

Michelle Lopez: It is a factor that we need to consider, but it's a factor. And I think what it has done is really focused us on a couple of things. So firstly, can it continue and for how long? Are we likely to see another big step up like we saw last week? And the answer to the latter part is no. We don't expect another big, massive spike up. However, we do expect it to sort of maintain this trajectory. 

What does that mean for equity markets? We are not fearing the worst. I think, before anything really tragic happens to equity markets, you will likely see Central Banks step back in and do more QE, as we've seen them do, and very swiftly coordinate it last year, as well. So I'm not too worried at this point in time, given where we are in the recovery cycle.

Matthew Kidman: If you enjoyed that episode, please subscribe to the Livewire YouTube channel.

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