In the previous video, Roger Montgomery of Montgomery Investment Management and Ben Clark from TMS Capital stressed the importance of not overpaying for growth businesses to avoid being caught in the crossfire of high earnings expectations and an underwhelming reality.
In this episode, the duo scour stocks in the domestic and international markets offering the best growth opportunities at a reasonable price.
They include: 1) An Australian payments company at the top of Ben's list and whose share price has recently pulled back, 2) A WAAAX stock receiving unfair media coverage, 3) An ASX healthcare giant trying to find its feet, 4) A FAANG pick trading on 23x earnings; keeping US$60 billion cash and offering tremendous growth nationality, and 5) An iconic European brand riding the digital media boom.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 1 July 2020.
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Vishal Teckchandani: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Vishal Teckchandani, and today, we're talking about growth, both ASX and international stocks. We love growth, but where can we find it at a reasonable price? Joining me on the panel is Roger Montgomery from Montgomery Investment Management and Ben Clark from TMS Capital. Ben, let's start with you. Tyro payments. Its been really transparent with its weekly trading updates, volumes are holding up. Buy Hold Sell?
Tyro Payments (ASX:TYR)
Ben Clark (Buy): Yeah, this is a buy for me. It's actually probably at the top of my list at the moment. Tyro has recently had a decent share price pull back on concerns about what's going on in Victoria, but New South Wales is actually moving on the 1st of July to the next stage of easing. Their largest client is Merivale, and it's actually the big pubs that will benefit from this next stage of easing in this state, which is the biggest state they do business in. They're at about 10% market share, we think they could go significantly higher than that. We've been speaking to merchants who love the platform that they use. The lending side of it, it's the disruption of banks that will come out of this longterm. It looks very good. So, I think this pullback we're seeing in share price is a really good entry.
Vishal Teckchandani: Okay. Is it going to be the next Afterpay that you're going to jump on, Roger? Buy, hold, sell?
Roger Montgomery (Buy): I think they're a buy as well. I think that they've got a longterm... I think what's happened is the structural shift towards non-cash payments has been accelerated, brought forward, and I don't think we're going to go back anytime soon. People start to realise how much more convenient it is just to tap, and so that longterm thematic is there. It's a buy for us. I think the share price up 270% from its lows, there might be some short term sideways action, but I think longterm, you'll do very well out of it.
Vishal Teckchandani: Okay, next stop, Altium. No introduction needed. Buy, hold, sell?
Roger Montgomery (Buy): Yeah, for us, probably a buy as well. What you've got to realise though is that there's probably going to be some customer churn, and the reason for that is they've been using discounting and they've been using deferred payments to actually sign on more customers, but as China locks down more areas and as the U.S. suffers obviously from the accelerating spread of COVID, we might find that there's some churn in their seats. And so there'll be some volatility in the short term, but long term you'll do very well.
Vishal Teckchandani: Okay. Ben, it did say that its revenue is going to fall below consensus. Is it time to hop on or hop off the motherboard? Buy, hold, sell?
Ben Clark (Buy): Yeah, I think it's a buy again, for sure. I think it had a bit of unfair media coverage, I've seen some articles saying it's had four downgrades this year, but what it's actually been doing is just much more regularly keeping the market up to date with actually what's going on, and that's why we haven't seen the volatility in the share price around it, I think. And same with Tyro since they've started doing the same thing, our team have had to discount, they've had to offer more generous terms to their customers, they've spoken about trying to get their customers through it, they've had to close their Beijing office twice in the six months of this year, which is not easy, but think further out, they said they're going to put a price hike through in probably September next year.
I agree with Roger. There's going to be some movement of customers, but I think management has continued to just execute incredibly well, and he's got through a very difficult period I think with little damage, so I think this is a good idea to get into Altium again.
Ramsay Health Care (ASX:RHC)
Vishal Teckchandani: Okay. Up next, Ramsay Health Care. It's been a phenomenal performer over the longterm, but in the last five years, it's struggled to find its feet. Buy, hold, sell?
Ben Clark (Hold): I just have a hold on this one. I think the reason the last five years have been more difficult and I think this is the biggest challenge Ramsay has going forward is the private health insurers I think are much better run these days than when Medibank was owned by the government and that sort of thing.
There's a lot more pushback I think on the private hospital operators about fees, charges, how long are you keeping our patients in the hospital for. They're trying to keep their premium inflation down, Ramsay is trying to push through as much as they can, which pushes it up, so there's an arm wrestle happening there, and I think the health insurers are starting to get the better side of it. But in the short term, the beds that were empty for corona victims are starting to fill up again with elective surgery, and we should see a good rebound in earnings.
Vishal Teckchandani: Okay. It did raise more than one point $5 billion in an SPP, Roger, but the government did commandeer its hospitals to make way for COVID related ICUs. Buy, hold, sell?
Roger Montgomery (Buy): We're a buyer on it. At the moment, we own it, and the reason why is we think the question around the return to elective surgery will be answered in the positive for this business, so it's a buy.
Vishal Teckchandani: Now, we did ask our guests to bring one international stock that they think is going to shoot the lights out. Ben, what have you got for me today?
Ben Clark (Buy): I've got Facebook, which has had a decent pullback. We've seen another difficult period for the businesses. Some of the advertisers on the platform have been unhappy with some of the decisions that management have made, but we look at this business and I realise that online advertising at the moment is tricky, and I think the share price of this business will be much higher if we weren't in the environment that we find ourselves in at the moment.
But the thing that I can't get away from with Facebook is the optionality that you get owning the Instagram platform and the WhatsApp platform, the use of which is absolutely exploding. Instagram, they're starting to tinker around with the monetisation of that platform. WhatsApp, they haven't even pushed their attention to that, and despite what are becoming the most entrenched platforms that we see globally with usage rates going through the roof.
You're only paying 23 times earnings for this business, which is still growing and has about $60 billion U.S. dollars in cash on its balance sheet.
Vishal Teckchandani: I'm sure GARP investors are going to be hitting the like button.
Vivendi SA (EPA:VIV)
Vishal Teckchandani: Roger, what have you got for me?
Roger Montgomery (Buy): Vivendi. It's listed in Europe. Its crown jewel is the Universal Music Group. The move some years ago from the physical delivery of music through CDs, for example to digital delivery, has meant a couple of things.
There's the amount of money spent on digital music absolutely trounces by a multiple the most money ever spent in any year on physical music, and that's the first thing. And with the advent of Spotify and Apple Music and so on, they haven't even penetrated all the markets that could be penetrated.
The other thing that I will say is that the margin on delivering music digitally, rather than going and printing CDs and shipping them all around the world has gone up enormously from about 10% with the physical delivery of music to about 60% now. So, more volume at a higher margin, Universal Music, you want to own that asset, and you get it through Vivendi.
Vishal Teckchandani: If you thought your kids or dogs grow up quickly, wait until you see the returns on these growth stocks. But of course, choose your poison wisely.
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I'm very surprised that Roger, being a devout value investor, would call Altium a buy. I know PE ratios aren't everything, but a PE ratio of 60 is extreme to say the least
Roger, is this the Vivendi you are referring to ... VVU (ETR), I assume the same stock listed on a different market?
Hi Darryl, VIVENDI SE (VIV) French-domicile
Hi Carlos, you might like to read Value.able. PEs don’t define value. A stock on a PE of 5x can be expensive and one on 60x cheap.