Buy Hold Sell: 5 durable growth stocks for your back pocket
There are a few things in life we all love with reckless abandon. That first sip of a cold drink on a warm summer's day, puppies, travel (minus the flights and/or traffic jams), and growth stocks.
And before you say, "But I love traffic jams" or "I prefer cheap stocks"; surely even value investors love watching their undervalued stocks grow to new heights? (As to traffic jams, really?)
In this episode of Buy Hold Sell, we put three popular growth darlings to the test. These include radiology IT software provider Pro Medicus, Australia's #1 employment marketplace SEEK, and global gambling company Aristocrat Leisure.
It's enough to put a smile on even our traffic jam lover's face.
Note: This episode was filmed using Zoom on the 18th of August 2021. You can watch, listen or read an edited transcript below.
James Marlay: Hello and welcome to Buy Hold Sell. My name's James Marlay and today we're talking about sustainable growth stocks. To help us talk about that topic, I've got Kelli Meagher from Sage Capital and Emma Fisher from Airlie.
Emma, I'm going to start with you. Pro Medicus, it's hard to find someone that doesn't have good things to say about Pro Medicus. Perhaps the valuation is the one thing that catches fundies up. For you, is it a buy, hold or sell?
Pro Medicus (ASX:PME)
Emma Fisher (SELL): I'll say sell on valuation grounds. As you say, good business, clearly getting traction, but I really fall over at that 62 times sales multiple. You can always overpay for a good business. And to put that multiple into perspective, if you'd paid 62 times Cochlear sales 15 years ago, you would've paid $430 and the share price today is $250. So you would have lost 40% of your money, even though you'd picked Cochlear and totally got it right that it was one of the best businesses. So you can always overpay for a good business, and I think, unfortunately, Pro Medicus is in that camp.
James Marlay: Kelli, Pro Medicus is about 15% more expensive than it was this morning before it reported its results. Is it a buy, hold or sell for you?
Kelli Meagher (HOLD): It's a hold. I'd like to buy it but certainly won't after today. If I wanted to buy it, I would wait for a dip. It's a fantastic company. Great growth ahead of it. I would say, though, that looking at the PE is fraught with risk because it's been on this three-digit PE for a very long time and if you had bought it on 100 times two years ago, you still would have made a lot of money. But I agree with Emma that it is very difficult to get your head around the valuation on it, and particularly after today, rising 15% for no apparent reason other than it reported. So for me, it's a hold.
James Marlay: SEEK, one of the traditional great growth stories out of Australia, it's been around a while now. Buy, hold, or sell?
Kelli Meagher (HOLD): It's a hold for me. I do think that SEEK trades like a growth stock. It has had good growth, but I characterise it as a cyclical masquerading as a growth stock. It's in a good part of the cycle at the moment with job ads being very strong. I think the question, though, is will they have enough pricing power to continue to grow through the cycle when the job ads start to soften? They've introduced this new dynamic pricing policy, which could work, but for us, the jury is out a little bit. We want to see more evidence that they can actually push those prices through when the job ad market rolls over. So for us, given its really high multiple, it's a hold.
James Marlay: Emma, SEEK, are you a buy, hold or sell on one of the oldest jobs boards going round?
Emma Fisher (HOLD): I agree with Kelli. I think it's a hold. Great core business. If I was in the market to pay 50-55 times PE for an online business, I'd prefer to own REA. I think it's got better pricing power, as Kelli said. So for that reason alone, I'd say hold.
Aristocrat Leisure (ASX:ALL)
James Marlay: Aristocrat Leisure has been a great performer over the past few years. It's been on a steady march higher. Buy, hold, or sell?
Emma Fisher (BUY): I would say buy for Aristocrat. I think it's a great business. US casino customers just cannot get enough of their high performing games. Ironically, digital, which was the reason no one wanted to own the stock a few years ago, was their saviour last year during lockdown and that part of the business is also going very, very well. So undemanding multiple, great balance sheet, very high returning business, I'd say buy.
James Marlay: Okay, Kelli, the punters can't get enough of Aristocrat Leisure. Can you get enough of it in your portfolio? Is it a buy, hold or sell?
Kelli Meagher (HOLD): I'm going to go a hold again, James. I agree with Emma and yourself. There's a lot to like about Aristocrat. It's got a great track record of 20% growth for the last decade, taking market share in the US and invests in R&D and releases some really cool games that are very popular. Purely versus its peers, looking at the growth it offers and its multiple, it does look cheap. However, I do think that with the increasing focus from investors on ESG and gambling stocks, I do think over time that it should trade at a discount to its peers that have similar growth, and I think that the ESG discount is going to get bigger over time, not smaller. Frankly, if I'm going to own a growth stock, I'd rather pay a little bit more and not own one that is exploiting addictive behaviour. So for us, it's a hold.
Temple and Webster (ASX:TPW)
James Marlay: I want to hear the sustainable growth stock that you're going to tip in today. So what's the one that you've picked to share with us and with our readers?
Kelli Meagher (BUY): So James, one that I think can deliver double-digit earnings growth over many years, but not this next year because it's cycling such a huge growth in its earnings from last year during COVID, is Temple and Webster, which is Australia's largest online furniture and homewares retailer. It's enjoyed a huge amount of growth during COVID-19 and it's really in its early stages of penetration in the online market. Australia is way behind the US in terms of the per cent of the market that is online. We're about at 9%. The US is more than double that at about 25%. So from an industry point of view, the industry will move online and that is going provide a big tailwind of growth, and Temple and Webster, as the largest player in that industry, is going to continue to grow really strongly.
The other reason, though, that their earnings will not grow this next year is because they're choosing to reinvest back into the business to really grow their brand presence and their IT. They're doing some really cool things with artificial intelligence to shore up their growth profile. But longer term, we believe that Temple and Webster can really deliver double-digit revenue growth, earnings growth. It makes a profit, it's debt-free. It generates a lot of cash, can self-fund its growth, and I think that it's one that you can pop in the bottom drawer and wake up in five years and you will have made a lot of money.
PWR Holdings (ASX:PWH)
James Marlay: Emma, have you got a double-digit growth darling that you can pitch to us this afternoon?
Emma Fisher (BUY): Full disclosure, I'm sitting on a Temple and Webster chair, so I'm doing my part for Kelli's stock. So my company is PWR Holdings. It's a bit of an under the radar, smaller market cap business. Its market cap is around $700 million, but I think it's one for the bottom drawer for the next 10 years. So their core business is doing cooling systems for motorsports. They supply every Formula 1 team. That tells you that they make the best cooling systems in the world basically. The really exciting reason to own the stock today is their emerging technologies division. So they are doing cooling systems for electric vehicles, for aerospace applications, for missiles, for defence, for a number of applications, and we think that business will underpin double-digit earnings growth well into the future.
James Marlay: Well, ladies and gentlemen, for those of you out there looking for some really strong growth, you've got the full spectrum from gaming to shopping to Formula 1 cars. There's a couple of growth ideas to put in the bottom drawer. If you enjoyed that episode as much as I did, don't forget to subscribe to the channel. If you've got your own growth ideas, why not leave us a comment? Thanks very much for watching.
Let us know what growth stocks you are backing for the years ahead
Our fundies have named Temple and Webster and PWR Holdings as stocks they believe can deliver double-digit earnings growth over the years ahead. But we would love to know what you are backing. Let us know what Aussie stocks you believe display long-term growth potential in the comments section below.
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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.