Buy Hold Sell: 5 discounted growth stocks
Growth stocks have been punished, especially at the smaller and less liquid end of the market. Think of sectors like healthcare, discretionary retail and tech (Covid winners anyone?).
But what does that look like in terms of numbers? Glad you asked, as our friends at Deep Data Analytics have recently crunched the numbers and it isn’t pretty.
The worst 10 performers in the small cap healthcare sector are down ~32% on average, in discretionary retail the fall is ~49% and things get ugly in tech where the worst 10 are down ~54% on average.
No doubt many Livewire readers will have had some high-growth names on the wishlist, but couldn’t stomach the valuations. So, we invited small-cap specialists Josh Clark from QVG Capital and Gary Rollo from Montgomery Investment Management to see if a selection of market darlings are cheap enough to get them interested.
The stocks covered are IDP Education, Pro Medicus and City Chic Collective. Our guests also share a growth stock that they think has been oversold and now looks attractive.
Note: This episode of Buy Hold Sell was shot on Wednesday 25th May 2022. You can watch the video, read an edited transcript or listen to the podcast below.
James Marlay: Hello, and welcome to Buy Hold Sell brought to you by Livewire Markets and things are about to get interesting. Yes, we're talking about those growth darlings that have been punished in the selling of late. It could be a bit uncomfortable, but you never know - We might uncover a few opportunities. Here to help me talk about whether there are opportunities or not, I've got Josh Clark from QVG Capital and Gary Rollo from Montgomery Investment Management. Brace yourself, gentlemen. It's going to be a bit of a rough ride here. We're talking about discounted growth stocks and we've all had that watch list. Always told those stocks are too expensive to buy. Now could be your opportunity. Josh, IDP Education down 35%, PEs still pretty big, but the borders are opening up. Buy, hold, or sell?
IDP Education (ASX: IEL)
Josh Clark (BUY): IDP Education's a buy. You're right. The PE is huge. If you look at it on this year's earnings, you'll freak yourself out, so don't do that. But that's ignoring the fact that earnings over a two-year basis have the potential to double or thereabouts. Then beyond there, you've still got a durable growth business that is globally dominant in what they do, with a long runway ahead. They're picking up market share in every market that they're in. There's the potential for future deals - similar to the British Council deal that they've done - that could add value over and above what I've described. So I think that multiple comes down quickly enough, such that you don't need to worry too much about this year's multiple. I think you've got a bit of visibility into those earnings so that one's a buy for me.
James Marlay: Okay, Gary, can you get over the multiple? Look to year two and year three - Buy, hold, or a sell on IDP?
Gary Rollo (BUY): We're a Buy. I think IDP is one of those stocks that you can look at and say, "Look, there's enough there to forgive the valuation." If you're going to get involved in a high valuation growth stock now, it's got to have a big market, a competitive advantage and market or industry conditions that allow market share to seed their way.
With the reopening, we'd expect English language testing and international student placement to really start kicking off again. And those universities around the world, well, they've not had the world's best time of it. They're going to want students at scale to arrive at their universities for courses. IEL are the best to help them with that. So for us, we think there will be fantastic growth in the short run on reopening and then longer run, you've got the market share winner here. If you're going to commit a valuation sin, commit it with this one.
Pro Medicus (ASX: PME)
James Marlay: Well, we might be onto another sinner Pro Medicus. I've never had anyone tell me they think this stock looks cheap. It's down 40% year to date. Is it cheap enough now? Buy, hold, or a sell?
Gary Rollo (SELL): Not cheap enough. It's a sell. Look Pro Medicus is the inverse of what we just talked about with IDP. Great business, but the opportunity they are prosecuting just isn't big enough to give you a long enough runway to amortise that valuation envelope you're taking on. Don't take that opportunity. Buy IDP instead. It's a sell.
James Marlay: It's PE gone from three digits to two digits, Josh. Can you break my run of no-one telling me Pro Medicus is cheap enough? Buy, hold or sell?
Josh Clark (SELL): Pro Medicus is on something like a 78 times pre-tax earnings multiple from here, and it's just too hard to wrap your head around how you can get enough growth out of that business to justify that multiple. I mean, there's other businesses - notably technology businesses - out there that trade on those kinds of eye-watering multiples, but then I don't think they're necessarily a fair comparison because there's a lot of businesses that have been reinvesting through the profit and loss statement and earning 0% margin. Pro Medicus is already I think it's around 65% margin. So their world-class margin is already a very profitable business. It's going to be quite hard for them to grow their earnings much faster than revenue from here. I don't think you can get there on the valuation, so a sell.
City Chic (ASX: CCX)
James Marlay: Slightly different tack now, we're going for City Chic Collective. It must have been one of the most popular and well-earned retailers in the market. Buy, hold, or sell? It's down 60% in 2022.
Josh Clark (HOLD): That's brutal. It's painful just to think about. It's a hold for me, City Chic. It looks way too cheap. If they can continue their previous growth trajectory, then you would buy it. But naturally, it's down for a reason. They've got a lot of inventory coming into the balance sheet, so that's going to weaken the balance sheet. I think the jury is still out in terms of what gross profit margin they're going to be able to clear that inventory at, how long it's going to take them and what the balance sheet's going to look like on the other side of that. So I think those question marks mean that you need to hold off for the moment. You probably need to see a result or two for some evidence. There are a lot of other things to like, but for the moment, I think it's just a hold.
James Marlay: Hold on City Chic. Buy, hold or sell for you, Gary?
Gary Rollo (SELL): I can make a case for all three, but if I had to pick one, I'd say it's a sell now. Now, this is a quality small-cap and I think you mentioned the point that most small cappers look at that business and say they want to own it, and we are no different. But we're not in normal markets right now. We're in an area, the consumer discretionary area, that's an area where you're going to have significant uncertainty on demand to play out. You have to ask yourself if you want to take that on, even in a stock that you'd like to get invested in. Our view at the moment is no, we won't take that on. We'll wait and come back another day to buy that business so that's what we've decided. It's a sell.
James Marlay: To finish up, I've asked our guests to bring along a high growth stock that looks oversold. Gary, it's an area you love. You love the growth stocks. What's one that's been punished too hard?
Gary Rollo (BUY): Well, I've tried to go with a stock where I really don't see any change in the fundamentals so the underlying growth velocity in the business is still the same. The stock I'm picking is Symbio (ASX: SYM) . It's the old MyNetFone business. Let's just start off with a couple of valuation frameworks for you. It's a $350 million market cap. It's got $50 million of cash on the balance sheet, so we don't have a capital structure question. It's on 8.5 to 9 times EBITDA, depending on whose EBITDA forecast you use so it doesn't have a valuation question.
Why has it been sold off so hard? It's been sold off so hard because the comparators, the overseas players that do what it does, they're at a different stage in their life cycle than the Symbio is. So this business has had its valuation regime adjusted, I think unjustly without reflecting on the fundamentals. So for us, Symbio, great Asian growth story, but you're not paying for it and so we like the look of that and that's our tip for now.
James Marlay: Can I call on you for a sold off high growth name something to match Gary with his Symbio?
Johns Lyng Group (ASX:JLG)
Josh Clark (BUY): We're a bit spoilt for choice, aren't we? So I think Johns Lyng Group (ASX: JLG) is probably one that's worth the mention, maybe a little bit of a small-cap market darling, but yeah, absolutely it's been sold off. So I think some are in the $9 range into the mid-$5s or thereabouts, so the valuation's actually starting to look much more compelling.
I would concede that it was expensive pre the sell-off and all stocks need to be less expensive in this environment, but they haven't seen a change to their earnings. They're still going to hit their earnings guidance. They reiterated just the other day. I think part of the selloff is the market's having a bit of a hissy fit that there's no upgrade near term. They're just going to hit their guidance and then also management has sold some stock. I think there are maybe some short term technicals at play in that one.
I think if you focus too much on that, you're missing the forest for the trees. It's still a really capital-light, high growth services business. I've said this a lot, but owner, founder-led, which is really important and these guys have just got more irons in the fire than you can count. This strata opportunity, whether that's cross-sell or inorganic purchase of strata businesses, the US opportunity, just more market share on their existing insurance panel - the list really goes on and on and on. So earnings are fine. The growth trajectory is fine and it's now much cheaper. So I think that's a buy.
James Marlay: Okay, well with these high growth companies come a lot of moving parts and the outlook's a bit uncertain, tread carefully, a few ideas there for you from our guests today. I hope you enjoyed that episode of Buy Hold Sell and remember to check-in and subscribe on our YouTube channel. We're adding fresh content every week.
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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.