Buy Hold Sell: 5 bulletproof growth stocks
After a tumultuous year in which growth stocks dominated, the announcement of a successful vaccine has investors questioning whether these trends will continue. With low returns on offer elsewhere, investors are turning to equities, looking for bulletproof returns that continue to run long into the future.
In this episode of Buy Hold Sell, Bob and Joe discuss three growth stocks that ran hard in 2020 and whether they still see value in them. The pair also reveal their top pick for a resilient stock that's primed for growth.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 5 November 2020
Eddie Orchard: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's Eddie Orchard, and today we're looking at five bulletproof growth stocks. They've had a stellar year in 2020. The question is, can they continue the run? To help me discuss that, I'm joined by Bob Desmond from Evans and Partners and Joe Magyer from Lakehouse Capital.
Joe, I'll start with you. Netflix, it's the world's biggest online streaming service, 200 million users, and I heard they've just got the new Beckham documentary. Buy, hold, or sell?
Joe Magyer (Hold): It's a hold. Look, I love Netflix's content, their competitive position, management team, willingness to reinvest, but I don't love the balance sheet, and it's expensive against where it's been historically.
Eddie Orchard: Bob, everyone was supposed to be working from home in the first half of 2020. Netflix added 26 million subscribers. Buy, hold, or sell?
Bob Desmond (Hold): I'm going to totally agree with Joe on this one. I think a terrific business model, love the network effects, the scale, but on valuation and cashflow grounds, I'm probably going to go hold on this one.
Eddie Orchard: Alibaba. It's Ant IPO was going to be the IPO to break all records, but it just got pulled by the Chinese government. Buy, hold, or sell?
Bob Desmond (Hold): I'm going to go hold on this one. I think it's an incredible business. Again, I love the network effects, there’s huge scaling still to come, unmonetised business, and a really long-term thinking management. I'm just going to go hold on this one. I don't really like the governance structure around the VIE. Also, they don't expense stock options. When you adjust for that, it's probably not as cheap as it initially looks. I'll go hold.
Eddie Orchard: There's a lot of superlatives for Alibaba, 750 million active users. Is it a case of too big to fail? Buy, hold, sell?
Joe Magyer (Sell): I'm going to say sell, appreciating what Bob said, I'd say the governance of Alibaba is particularly poor. I think when you look at historically how things went with Alipay and the way it felt like they more or less stole – or there was some confusion – with Yahoo about their stake in that. Additionally, I think the way that the Ant IPO got pulled, whether or not it's a governance issue, it doesn't bode well for the company being a third owned by Alibaba.
Eddie Orchard: We all love listening to music. Spotify debuted as an IPO in April 2018. Took a few years to get going, but in the last 12 months is up around 100%. Buy, hold, or sell?
Joe Magyer (Hold): A hold for me. Great platform, growing market, and I think in the long run, they're going to capture a lot more value and within the profit pool than people appreciate, but it's hard to place for me where the business is going to be in 5 to 10 years, and that gives me pause.
Eddie Orchard: Bob, Spotify, you dancing to a different beat to Joe or buy, hold, or sell?
Bob Desmond (Sell): I'm dancing to a different beat on this one. I do love the platform myself personally, but 43 billion market cap, probably only going to get to profitability in about three years. The valuation is very rich, and I do think there's competition there as well. A lot of other platforms will be vying for that content, so I'm a sell on Spotify.
Eddie Orchard: We've asked you to both bring along a global stock that you think is resilient and prime for growth. Bob, what's your option?
Aon PLC (NYSE:AON)
Bob Desmond (Buy): I think the most resilient stock we have in the portfolio is Aon, which is kind of a mixture of insurance broking and consulting. I really like that. On the downside in recessions, you get flat organic growth, it’s very resistant. It has 80% recurring revenue, 95% retention rates, allowing for really sticky high margins at 29%. But obviously, as the economy recovers, you're going to see better employment, better fixed asset coverage, so that'll get better organic growth. They've got a merger coming with Willis. We probably can take out 5 to 10% of costs. So that's probably the most resilient business we've got in the portfolio now.
Eddie Orchard: It's been a pretty rough year for most investors, Joe. We've had pandemics, we've had recessions and the recent US election. What's one company –
Joe Magyer: Other than that, it's been pretty smooth.
Eddie Orchard: – What's one company you've got that's going to ride through that?
Joe Magyer (Buy): So, Amazon. We love the cyclical and structural side of the Amazon thesis and the different parts of its business. So in the short run, there's been a huge boost for the e-commerce business, but we think that's a structural pull-forward of demand, not just a cyclical bump. If you look at AWS, Amazon Web Services is the highest margin part of their business. While that's taken a short-term hit because customers are spending a bit less, the reality is that it's pulled forward cloud adoption, and we think all companies are going to be thinking more seriously about distributed computing than before and over the span of two, three, five years. That's going to treat them very well.
Eddie Orchard: They've had a cracking 2020, but what lies ahead is anybody's guess.
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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.