Buy Hold Sell: 5 undervalued global growth stocks
Growth and the word "undervalued" don't usually appear in the same sentence. After all, much-loved growth stock Tesla still trades on a P/E of 136.37 times, while the trailing P/E of the NASDAQ 100 is currently more than 31 times.
But with an estimated forward P/E of 24.75 times, and some stocks cascading 50-70% off their highs in the recent sell-off, growth stocks may just be the perfect hunting ground for value investors.
So in this episode, Livewire's James Marlay was joined by two of the country's most respected global stockpickers - Jacob Mitchell from Antipodes and Andrew Clifford from Platinum, for their thoughts on three long-term compounders trading at stomachable valuations.
Plus, they also each name one stock with double-digit growth potential that is still trading at a compelling price.
Note: This episode of Buy Hold Sell was shot on Wednesday 27th April 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. My name is James Marlay, and I'm going hunting for value in global markets. And two investors that are going to help me find the best value out there in the global markets, got Jacob Mitchell from Antipodes and Andrew Clifford from Platinum.
Microsoft Corporation (NASDAQ: MSFT)
James Marlay: Let's talk big to start off with. Microsoft on the NASDAQ, $2 trillion market cap. Jacob, buy, hold, or sell?
Jacob Mitchell (BUY): Buy. If you think about what Microsoft is, it's the world's best software company and it's on an average software multiple. The two aspects of the business that we think underwrite the growth outlook are the adoption in the Azure business, which we think is only probably 25% through the adoption curve, and the ongoing, let's call it conversion of users to Office 365, which is a very competitive bundle. And it really is a stock made for this current environment, loads of pricing power and in a slowing economic environment.
James Marlay: Andrew, sounds like a good pitch from Jacob. Is it a buy, hold, or sell on Microsoft?
Andrew Clifford (SELL): Absolutely a sell, James, and I can't disagree with anything that Jacob said. This is one of the finest companies the world has known, it is a great story, and I can't think of anything that is wrong with it. And to me, that just makes for a risky investment, and we've seen this. A year ago, we could've talked glowingly about all the other FAANGs, and one by one, they're dropping. I don't expect this one to, but if they disappoint at any time, we know we're going to get hit a bit of a readjustment. So, not for us.
EQT Corporation (NYSE: EQT)
James Marlay: Okay. Let's go out of tech into gas. EQT Corporation, $14 billion market cap, makes it a minnow over in the US. Buy, hold, or a sell?
Andrew Clifford (HOLD): Yeah, look, energy markets have been great, and everything that's happened in Russia makes that outlook even better. We're going to have tight energy markets, whether it's gas or others, for some time to come, and that's going to underwrite earnings here for a while. But longer-term, it's not that clear to me where we go from here. They've had a good run. They're okay. It's a hold.
James Marlay: Okay. It's nearly doubled over the past 12 months, Jacob, EQT. Buy, hold, or sell?
Jacob Mitchell (BUY): We still see it as a buy - It's in our top 10. It's a company which we bought prior to the Ukraine crisis. We're very constructive on the outlook for natural gas as a transition fuel. It has half the emissions intensity of coal. We're still going to have lots of demand for energy, and the US is just in a very unique position of supplying it at a very cheap price.
Microchip Technology (NASDAQ: MCHP)
James Marlay: Yep, great. Next up, Microchip Technology, listed on the NASDAQ, $36 billion market cap. Buy, hold, or sell?
Jacob Mitchell (SELL): We are generally a seller, of semiconductor stocks, which are very reliant on the foundries, which Microchip is too. In terms of the semiconductor value chain, we think TSMC and the capital equipment providers take most of the profit pool over time, and investors have forgotten, I think, how economically sensitive semiconductor demand is. And also, semiconductors are very much exposed to this pull forward of consumer spending that's happened across the Western world, and also we have China that's slowed aggressively. So we just think the demand environment is much worse than many investors are currently discounting.
James Marlay: Okay. Andrew, can you give us a quick pitch on what it does? I did try to work it out from their website.
Andrew Clifford: Microchip makes microcontroller units (MCU), which are a semiconductor. It's like a very simple mini-computer, and so if you think about every electronic product you can touch, your microwave, the thing that controls that when you put in the time, press the start button, that's an MCU. Same for your car, turn the window up or down, a robot, everything. It's about the electrification of our world. Everywhere you look, there are microcontroller units.
James Marlay: Okay. Microcomputers don't sound very simple to me, but that was a good explanation. Now, the stock. Buy, hold, or sell?
Andrew Clifford: It's a buy, and this is very different to its semiconductor brethren. This is a company that it makes 20,000-odd off-the-shelf products. Its customers are tied in because they get used to working with them. Once it's in a design, you're not going to change it out. It's an incredible spread of end markets. One of their big end markets, autos, are in short supply, and that's because we can't make enough MCUs which really are not particularly reliant on the foundry system.
So we have, yes, there's a bit of cyclicality in this business, but this thing has been organically growing at high single digits. You're buying it on around 12-13 times earnings. Yes, there's a little bit of variability there, but not significant. They have historically been a big M&A story, that's coming to an end, so the cash is just going to flow out of this thing like you won't believe.
James Marlay: Sounds like a party. Andrew. The title of this show is undervalued global growth stocks. So I've asked you to bring along a recent portfolio addition, or something that you think meets that headline, undervalued global growth.
Minebea Mitsumi Inc (TYO: 6479)
Andrew Clifford: Sorry, I'm going to go with the one I've been in a little while, but it's had a good pull back, and it's a very similar story to Microchip. The stock is Japan-based Minibea. Their first market was being globally dominant in making miniature ball bearings, but they've turned their expertise in manufacturing highly automated or very small components into a large offering of componentry for all sorts of things. It's just a very nice growth industrial, and the big story here is M&A in Japan. No one's really doing it well. These guys are M&A champions. We think this is a sort of a 10% grower again, on a low teens multiple.
Merck & Co. (NYSE: MCK)
James Marlay: Okay, Minebea. Jacob, same question to you. Have you got a stock that meets the headline of undervalued global growth that you can pitch to our viewers today?
Jacob Mitchell: One of our largest holdings is Merck. Investors haven't associated large-cap pharma with growth for quite some time. You've always got to think about the growth relative to the multiple - in this case you pay a PE of 12 times for Merck. We think it's one of the few pharma stocks that actually still has a functioning internal R&D engine, so less reliance on large acquisitions to manage pipeline risk. A third of the business is animal health and vaccines, which standalone would be on a very high multiple; pure-play animal health exposures trade on 30 times PE. The vaccine businesses have a lot of pricing power. It's a relatively simple, high margin business with clearly a lot of repeat purchases.
So we think that offsets the risk that is in Keytruda, which is their large oncology drug. Let's face it. You don't have to grow that fast when you're on 12 times, but we think it can grow in, let's call it low double-digit type levels at the EPS level,
James Marlay: Well, investors love growth. There's also a camp that loves value. Our two guests have given you a bit of both today. I hope you enjoyed that episode of Buy Hold Sell as much as I did, and remember to check in regularly. We've got new content coming to you 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.