It may be a gloomy backdrop for the economy as many companies cancel their earnings guidance due to the coronavirus-driven downturn. But even in this environment, there are a handful of stocks whose earnings refuse to go into lockdown.
In this episode, Michelle Lopez from Aberdeen Standard Investments and Ben Rundle of NAOS Asset Management join Vishal Teckchandani to discuss 5 businesses that can help immunise your portfolio from a cyclical slump: 1) a company benefiting from booming data consumption; 2) a tech stock bucking the guidance-scrapping trend; 3) a business providing essential services to households; 4) a WAAAX stock that keeps on chugging and 5) a small-cap riding higher usage of voice, video and messaging apps.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 22 April 2020.
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 pandemic resistant growth stocks. These are companies whose earnings have been virtually unaffected or even emboldened by the COVID-19 situation.
Joining me on the panel today is Michelle Lopez from Aberdeen Standard Investments and Ben Rundle from NAOS. Ben, let's start with you. NEXTDC, buy, hold, sell?
Ben Rundle (Buy): It's a buy. Despite being very expensive, they reported well in February. The capital they raised just recently is for growth capex, which will drive earnings. The sector has a huge amount of M&A activity in it at the moment. It's proven to have resilient earnings and I think in the environment that we are in at the moment, investors will flock to stocks like this as perceived safe havens. So despite the price, I'm still a buyer of NEXTDC.
Vishal Teckchandani: Michelle, as Ben said, they've had a big capital raising at a 15% discount from their previous day closing record high. Buy, hold, sell?
Michelle Lopez (Buy): It's a buy for us as well. And this is really a stock that's playing into a very strong secular theme at the moment as everyone here is working from home or agile working. So that's certainly accelerated following coronavirus and also the consumption of data. So I think this is a company that plays very much into that space.
As we mentioned, capital raising really shores up their balance sheet and allows them to progress with the growth strategy that they have been very clearly articulating and executing on over the last four to five years. So with that in mind and the response from capital raising, we are comfortable owners of them.
Vishal Teckchandani: Sticking with you, Michelle. Appen, machine learning and AI giant. One of the WAAAX stocks. Buy, hold, sell?
Michelle Lopez (Buy): This is a buy for us as well and really one of the few companies that have reinstated guidance lately. So that's quite rare in the current environment. But when I think about Appen and their largest division, which is the Relevance unit, this is all exposing the key earnings drivers there, I'm sorry, search engine and really very quite defensive end markets. So we like this stock.
The acquisition that they've re recently done, which is Figure Eight. That provides a level of IP to the company but also a larger addressable market as they move away from the very large tech companies and merge with these corporate clients. More importantly in this environment, it's got a very strong balance sheet. Appen is sitting on about $75 million of cash. It holds no debt. It is profitable and it's generating a margin of about 20%. And for 25% earnings growth for the next couple of years, I think it trades on P/E close to 28 times for the next year. And an EV-to-revenue of three and a half. So I think it's fairly priced.
Vishal Teckchandani: Ben it's profitable, it's cashed-up, it's reaffirmed guidance. Appen, buy, hold, sell?
Ben Rundle (Hold): Appen's a hold. Michelle has some great points about the balance sheet and the resiliency of the business. I'll preface this by saying I'm not an expert on Appen, but I think we're starting to see some competitive headwinds emerge in that space and it's my view that the recent acquisition looked a little bit like buying a competitive threat rather than buying for growth. It's been a great company and is a great company. I just don't think the valuation justifies the risk at this point. So I give it a hold.
Cleanaway Waste (ASX:CWY)
Vishal Teckchandani: Speaking of is it a great company, Cleanaway Waste; interestingly, put its earnings guidance in the recycling bin, but it didn't scrap its dividend. Ben, buy, hold, sell?
Ben Rundle (Buy): Cleanaway's a buy. I think it's a very defensive business. I mean the most obvious impact to them from COVID-19 is in the commercial and industrial business, but their exposure to affected SMEs in that space is about 10% of that segment. So it's not actually as bad as I had previously thought. It's very diversified, well-run. I think they'll be a leader in the circular economy. I really like the management team and I think that the defensive nature of the business will hold them in good stead.
Vishal Teckchandani: Michelle, is their treasure in the trash? Cleanaway Waste, buy, hold, sell?
Michelle Lopez (Buy): I'm with Ben on this one. It's a buy for us, but for very different reasons to Appen and NEXTDC. So both of the prior ones have got quite strong secular tailwinds. There's a lot with Cleanaway that they can do internally. So three things in particular. So they're really strategically expanding their moat. We know that there's this very initial IP and competitive dynamic and very competitive within the waste collection space. But this company has done an incredible job in looking at disposal and really that vertically integrated chain, supply chain of the whole waste stream across different industries.
The second part is the margins. We still feel that there's some large expansion from a scale point of view. And then finally, they're coming into a step up in their cash flows as well for FY21. So they had quite a large rehabilitation liability that they were paying through and that halves coming into next year. So again, they can put that towards balance sheet or dividend to your point. And like Ben, we really like the management team there. They've very good operators and they're executing well.
Vishal Teckchandani: It's time for our two surprise stocks. Michelle, sticking with you. What's one stock whose earnings runway got even longer?
Michelle Lopez: For us, it's Xero. Xero, and I know this is one that hasn't really flown under the radar, but we think that there's a very strong runway for growth within Xero and it's been relatively unscathed throughout the whole COVID-19 situation. Why do we like it? There's a very clear sectorial growth thesis with this company. If you think about penetration of cloud, it is quite prominent here in ANZ, in Australia and New Zealand, but it's much lower when you look at the growth industries, growth countries and regions that they are in, so the UK, the US and Asia. So there is a very strong runway for subscriber growth.
When you look at the financials, they are transparent. They're operationally, they're very disciplined around the capital allocation now, so they are self-funding. They have got to get 100 billion of cash on their balance sheet, which they can look to allocate if the returns are there or they can sit on it until that opportunity arises. And then you've got quite a professional management team that's really setting the business up for the next level of growth. So for us, Xero is one that we hold in quite an active position.
MNF Group (ASX:MNF)
Vishal Teckchandani: And Michelle has picked out Xero. Which stock is your hero?
Ben Rundle: I agree with Michelle on Xero by the way. My stock is MNF. We have been a significant shareholder for quite some time. They are a significant beneficiary of people working from home. They own their own voice over IP network and their customers who use that network to provide video calling technology are the likes of Zoom, Google, Skype and Microsoft, and they've all seen an explosion in demand. And MNF are a huge beneficiary of that with massive traffic increases on their networks. The balance sheet is very strong.
They raised capital late last year, which at the time they were criticised for, but now it's proving to be quite an astute move given the strength of their balance sheet. It's very well run. And look, I think that, video technology and going forward will continue to be something that a lot of firms take use of and that'll significantly advantage so a company like MNF.
Vishal Teckchandani: Despite what's happening to the market, there are companies whose earnings just won't go into lockdown.
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Great insights as always. Thank you.