A handful of stocks outside the ASX 20 have proved especially popular during the COVID-19 induced stock market rout and (contentious) recovery, according to data provided by Sharesight.
In this episode, Ben Rundle of NAOS Asset Management and Michelle Lopez from Aberdeen Standard Investments debate whether the stocks investors have been stockpiling are truly essential items for your portfolio. They are: 1) Altium - which recently withdrew its earnings guidance; 2) EML Payments - down ~60% from its peak as lockdowns smash discretionary and business spending; 3) Sonic Healthcare - a key player in coronavirus testing but off 25% from its all-time high.
Michelle and Ben also present their two favourite ex-20 growth stocks being materially underappreciated by the market.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. Altium, EML and Sonic Healthcare were among Sharesight customers' most-traded stocks from the period 1 April to 15 April 2020. This video was filmed on 22 April 2020.
Listen to the podcast
Vishal Teckchandani: Welcome to "Buy, Hold, Sell" brought to you by Livewire Markets. My name is Vishal Teckchandani, and today we're going to talk about the three most traded companies in the last fortnight, and two stocks flying under the radar. Joining me on the panel today is Michelle Lopez, from Aberdeen Standard Investments, and Ben Rundle, from NAOS. Michelle, let's kick off with you. Altium: Buy, hold, sell?
Michelle Lopez (Buy): Altium is a buy. For us, this is a company with a very clear strategy and tangible drivers for long-term growth. So when you think about the product that they're selling, and that's software designing printed circuit boards, they virtually go into every electronic device. So there's clear demand, structural demand, coming through for that. They're the first to market with their cloud product, so what they call 360, and we're really going to see market share growth come from that. So they're currently at about 16% global market share, and the expectation is that will grow out.
And the other thing that we like about Altium, and it's quite impressive in this part of the market, which is tech, and high-growth tech; they are highly profitable, so they generate margins and returns in 30's. They've also got a very clean balance sheet and sitting on a lot of cash that they can use to grow organically, or through some strategic acquisitions. And importantly, they've been very profitable and have paid a dividend, which again, is quite rare in this part of the market. So for us, we like this company, it's run by a management team that've got a very strong vision for what they're trying to do, and are very aligned.
Vishal Teckchandani: And Altium does look like it's in a strong position. It did withdraw its guidance, but it did say it has cash to ride out the storm. Buy, hold, sell.
Ben Rundle (Hold): I think Altium is a hold. Look, it's a great business, just near-term. If you look at the guidance, back at the result, pre-coronavirus issues, was a little bit soft for this business. And the year started a little bit poorly for their Octopart business. So ex-coronavirus issues, I think there are a couple of very minor near-term headwinds, which I don't think the share price is currently discounting. It is a very high-quality business; I think it's one you want to own. I just think you'll get a better opportunity, so for the time being, I'll call it a hold.
EML Payments (ASX:EML)
Vishal Teckchandani: Okay. Ben, let's stay with you. EML Payments. It lopped off nearly $200 million from its acquisition costs for a European financial services company. Buy, hold, sell?
Ben Rundle (Buy): I think it's a buy. Large acquisitions like that make me a little bit nervous, but I think in the case of EML, they're really in the eye of the storm a bit with their shopping centre exposure. But longer-term, I don't think we'll see a structural change in demand from prepaid gift cards. The balance sheet is strong; they obviously got the acquisition for a much lower price than what they'd previously expected. So I think the normalised earnings scenario doesn't look screaming expensive, and I'm using the sell-off as an opportunity to call it a buy.
Vishal Teckchandani: Michelle, are you buying EML Payments? Buy, hold, sell?
Michelle Lopez: We're not buying, and we haven't been shareholders in EML. For me, it's a hold, given the significant share price fall that we've seen to date. It's no longer a sell. But this is really a company in flux, and remarkably complex, for me, for what is a relatively small business and company. And when you think about the end-users of their product, there are two sectors, so it's the retail, and it's gaming. And I really don't have a firm view around how long this situation will play out for, and then what the end earnings look like. And then you throw in the mix, as you said, a very large acquisition, which for me also I get quite nervous with, particularly in a market like the UK, where they had quite limited exposure. So for me, the balance sheet should see them through the next period; I just don't know what this company looks like in two to three years' time. So it's a hold.
Sonic Healthcare (ASX:SHL)
Vishal Teckchandani: Michelle, moving onto a fairly defensive company, Sonic Healthcare. It's actually winning a lot of federal and state government contracts to do the COVID-19 tests. Buy, hold, sell on Sonic?
Michelle Lopez (Hold): Sonic is a hold for us, as well. So we do like the business, and it is quite a defensive business, as well. And management has certainly done a great job in running the organisation over time. So whilst we see quite a material uplift, a potential uplift, as volumes return, and, as you mentioned, the contracts. And they're also doing some interesting things around antibody testing. So there is that potential for their uplift to come through.
What we've seen, and how they've been able to generate growth in the past, has been through new contract wins and acquisitions. So for both of those, or particularly acquisitions, it's very much off the table at the moment. And then from a valuation perspective, the share price is really almost back where it was pre-COVID-19. So, in an environment that we're not really sure what the government coffers are going to look like after all of this, it's a hold.
Vishal Teckchandani: Ben, Sonic Healthcare; can its share price go supersonic? Buy, hold, sell.
Ben Rundle (Buy): I think it's a buy. I think that it's a good time to tilt portfolios towards health care, and in the case of Sonic, I think we'll see pent up demand for each of their business units. In the meantime, they're running tests for COVID-19; the balance sheet has capacity, so happy to own Sonic.
Objective Corporation (ASX:OCL)
Vishal Teckchandani: Okay. Time for our surprise stocks; what's one ex-20 growth stock that's flying under the radar? Ben, can you name yours?
Ben Rundle: Yes, mine's Objective Corp. I think it's a fantastic business. It's a software company that's mainly facing the public sector, and a lot of what they do is service mission-critical processes. So it's not the sort of software that can easily be removed once it's been implemented. The track record of management is among the best I've ever seen; it's absolutely fantastic. The balance sheet is strong, the accounting is very conservative, the cash flows are clean, and we think the business is in great shape.
Vishal Teckchandani: And Michelle, what's your high-flying stock that's flying under the radar?
Michelle Lopez: Mine's going to be a lot more boring, I suspect, than Ben's suggestion, but I'm going to go with Cochlear. I don't mind boring when we can see long-term potential for compounding returns, which we can for Cochlear. So post the capital raising that they did a couple of weeks ago, they've got close to a billion dollars of liquidity, and this really ensures that the balance sheet risk is completely off the table and allows them to invest through the next period of material dislocation. What that means is that this company is actually going to come out at the other end in a much stronger position, and it's going to come out when competitors are in a position that they're still defending product recalls, and could potentially be in possible financial distress.
So this is a company that's got a very clear strategy. They've delivered into that strategy, and the runway for growth, both within the developed market for the seniors, but also the developing, or emerging, markets for paediatrics and children; it's still quite a long runway there. And then you think about the innovation in the product. So when you look at the R&D that this company spends, it's actually more than all their peers put together. So we've really seen product leadership from them, and what that means, in our opinion, is that 60% global market share is sustainable. So for us, I think this is a company that, taking a long-term view, taking three to five years, they're going to come out of this in a much stronger position, and one that we're backing.
Vishal Teckchandani: Things may seem a bit boring at home, but our experts have given you some killer stock ideas to do your research on while you're stuck in self-isolation.
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really like all of Michelle's videos since she gives a lot of reasoning for her views rather than 1 line answers like some others..
Yeah, Michelle is great with the analysis