Buy Hold Sell: 5 beaten up growth stocks
High P/E stocks’ blistering run appeared to have come to a screeching halt in April and May, when the Aussie tech sector got sliced by over 15%. But June showed us that growth stocks only took a bullet to the vest, and their share prices are climbing back again with zest.
In this episode, we invited Ben Clark of TMS Capital and Justin Braitling of Watermark to discuss three stocks rebounding, but below all-time highs:
1) Afterpay – Which nearly halved during the recent mini-tech wreck and then soared 61%. But one of our guests thinks this company will never peak again
2) Treasury Wine – After being smashed by Chinese tariffs, this stock has managed to recover ~20% since its May low
3) IDP Education – A key player in the business of immigration; its share price has risen 25% since bottoming.
The daring duo also pitched two growth stocks - one a tech company, the other an exporter - that were off 75% at one stage, but could be once-in-a-lifetime opportunities for gutsy investors.
Note: You can watch, listen or read an edited transcript below. This episode was filmed on 23 June 2021.
Matthew Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. It was supposed to be the year of the cyclicals, but guess what? Since April, growth stocks are back in vogue, interest rates are down even though inflation is around, and so it's a great time to talk about what to buy. And to join me today I've got Ben Clark, TMS, and Justin Braitling from Watermark.
Matthew Kidman: We'll start with you Ben, the Australian darling that everyone loves to talk about Afterpay. Buy, hold, or sell?
Ben Clark (HOLD): I'd have it as a hold now Matthew. I think under $100 it was a buy. So you know what we're seeing is this aggressive rollout into the US and now into Europe, and that flywheel that they talk about where the cohorts are transacting more and more and more frequently, it's the exact same pattern that happened in Australia and New Zealand is flowing through over there. Short-term catalyst, it looks like they will look to float in the US and a higher multiple might be applied by American investors.
Matthew Kidman: Justin, we thought we got rid of the buy now, pay later stocks, but guess what? Afterpay has bounced back. Buy, hold or sell?
Justin Braitling (SELL): I think it's a sell Matthew. I'll put Afterpay in there with all the other disruptive technologies. You have Bitcoin or Tesla, and Afterpay's the same. We probably saw the high six months ago, and it's questionable whether they make a new high. Afterpay's 20% off its prior high, and I think that's probably as good as it gets. There's more competition coming through now; PayPal and Square are soon to launch their own versions.
And as more competition comes in, the frequency of use, which drives that flywheel for Afterpay, the reuse rates will come under pressure. And I think that the business will disappoint in the medium term as some of those competitive pressures play out.
Treasury Wine Estates (ASX:TWE)
Matthew Kidman: Let's move on to the Treasury Wine. The Chinese basically said you're not allowed to sell Penfolds into China. And guess what? It's finding its way in any way, and the stock's been up a lot recently. Buy, hold or sell?
Justin Braitling (BUY): I think it's a buy. Treasury is a unique portfolio of branded assets. And Penfolds, as we've discovered, is the prize within that Treasury portfolio. It counts for the vast majority of profits. A lot of that product is still going into China at much higher prices, and it's selling. They're going to try and pivot into the other growth markets outside of China.
It's early days but we're getting some very good feedback there that they're going to be successful with that. The new management team, I think, is a breath of fresh air. I think they're doing a great job, and I think this is a really good buying opportunity for Treasury. Once again, in five years' time, we'll look back and we'll see this as a great buying opportunity for a unique asset.
Matthew Kidman: Ben, not even the might of the Chinese government has derailed this good red wine. Buy, hold, or sell?
Ben Clark (HOLD): The wine must be good. I'm going to go hold on this one. I agree with all of Justin's points there. I think management has done an amazing job given all the obstacles that have been thrown at the company recently. That the other thing is it owns an incredible asset, which is a lot of this wine that is sitting in vats and aging, and it's probably somewhat underappreciated by the market. But it's trading on 26 times in the short term, earnings are projected to fall in the coming year, although I think that is a bit of a dark shoot. So I'll go a hold.
IDP Education (ASX:IEL)
Matthew Kidman: There are not many students been venturing into Australia these days, but IDP Education is a global business, and students are moving around again. Buy, hold or sell?
Ben Clark (HOLD): I'd go hold as well on this one. This is a great business. It's one of the companies that is absolutely going to play the reopening trade. A lot of international students, even if they can't get to Australia, have plans to go to the US or wherever and they need to do the IELTS test. But at 60 times earnings, it doesn't look cheap. This is one of the ones I think you want to put on your list, where if you get a broad-based market sell-off, it's a good business to look at buying. The earnings recovery is going to be superb, but I think it's in the price.
Matthew Kidman: Justin, everyone needs to be educated. IDP's in the middle of that. Buy, hold or sell?
Justin Braitling (BUY): I think it's a buy. It's a superb business. I think there's enormous pent-up demand out there. We've lost a lot of students through this health crisis that they're going to sign up in this current season as Europe and North America opens up. Then we've got this big pent-up demand for new students. So I think the enrolments next year will really surprise on the upside. And there's been a real wash out of the competition. Many of the smaller competitors have closed through the health crisis and it's a classic case of the strong get stronger through a crisis.
Matthew Kidman: Ben, some of the growth options have become falling darlings in racing times. Have you got one for us that we might make some money out of going forward?
Ben Clark (BUY): I'm going to pick Appen Matthew, which has certainly had a very difficult 2021 year mainly driven by its five major customers which make up about 93% of its revenue - those customers are either delaying projects that they were planning on using Appen's data for or changing projects that are moving resources around, which has affected the demand for the data.
There have also been some big regulatory changes with big tech over the last year and the complete shutdown of Silicon Valley and everyone being sent home to work didn't help the business. The market's really concerned about competition. It's concerned that there are some new competitors coming in who are actually using AI to create AI solutions.
The CEO is adamant that there hasn't been a change in the competitive landscape. We followed him for many years and we think he's a straight shooter and says it how he sees it. So I really think this is one way you could see a good ramp up and recovery in earnings. And you're paying 22 times for a business, I think, is still in a very long-term structural growth area. So Appen's my pick for buy.
A2 Milk (ASX:A2M)
Matthew Kidman: Justin, I get the feeling that you've got something similar that's turned a bit sour in recent times. What have you got for us that's a good growth story?
Justin Braitling (BUY): I like A2 Milk Matthew, it's a strong buy. The shares are a fraction of where they were 18 months ago. It's pretty clear what happened. Through the health crisis, there was a big pantry restock in China as mother and baby stores, and the civic channel lighted up on formula. And then they had to deal with the aftermath of that in the ensuing quarters. The channel was full, the cross passed quickly in China, and all of a sudden there was a buyer strike, prices started falling. And because infant formula is so dependent on the channel these traders rely very much on a high price. So as the daigou were faced with falling prices they just dumped their product.
And so new management's come in, they've basically cleared the channel, have written off all that stock. The daigou now have got a get out of jail card basically. The daigou now are reordering, prices are coming back up, and the brand is trading well, they're actually picking up a bit of share. So we think that we're all really good signs for the brand.
And the street has destroyed earnings in the outer years. The 2023 estimates for a profit are a third of where they were 18 months ago. So we think as the business recovers, those profit expectations will really surprise on the upside, and the stock will recover its rating. I think it's the stock for 2022.
Matthew Kidman: Valuations on some of these high priced stocks might be a bit hard to swallow, but a good glass of red wine, or even a glass of milk, may be just the trick to get us through. I really enjoyed that show. I hope you did too. If you want to see more of Buy, Hold, Sell, why don't you subscribe to the Livewire YouTube channel.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.