Buy Hold Sell: 5 undervalued growth stocks
Everyone loves a bargain. It's what sees us stampede shopping malls on Boxing Day, walk the extra block for a cheaper coffee and celebrate with abandon when we uncover a stock that's been undervalued by the market. Yes - we are united in our worship at the altar of a good discount.
But finding growth at a discount? Well, that can be a challenge - particularly given historically low-interest rates and all.
In this episode of Buy Hold Sell, Livewire Markets' Ally Selby is joined by small and micro-cap aficionados James Dougherty from Lennox Capital Partners and Nick Guidera from Eley Griffiths Group, who together put five growth contenders to the test. And you better grab a notepad, because - spoiler alert - there's one particular call (can you guess?) our fundies don't utter once in this entire episode.
Note: You can watch, read or listen to the discussion below. This episode was filmed on 17 March 2021.
Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell, I'm Ally Selby. They say pretty fortunes can be made in the small end of the market. So in this episode, we're putting small and micro-caps to the test. Joining me to talk all things growth stocks is James Dougherty from Lennox Capital Partners and Nick Guidera from Eley Griffiths Group.
First up, we have oOh!media. It's an outdoor advertising and media company based in Sydney. They obviously had a tough year last year. James, is it all about to turn around? Is it a buy, hold, or sell?
James Dougherty (BUY): It's a buy. We believe it is about to turn around. Out-of-home as an advertising medium hasn't come back as quickly as some other mediums, but this is a business with a new management team. Their focus on costs should mean that the operating leverage in this business - which can be quite extreme - comes out and you see profitability grow a lot quicker as that revenue reverts back to pre-COVID levels. If that happens, it's very cheap on a medium-term view.
Ally Selby: Nick, do you agree? Are you buying up OML?
Nick Guidera (HOLD): It's a hold for us. It has a new CEO who is clearly very capable, but it'll be great to see what her strategy ultimately looks like. Clearly agree with James, OML will be a beneficiary of the ad market recovery, but outdoors has been slower, so I'd like to see more evidence of that.
Ally Selby: Next up we have Megaport and Nick, our stay on you. It's got a $1.8 billion market cap. Is it a buy, hold or sell?
Nick Guidera (HOLD): Look, I think its a hold. Right at this juncture, valuations are still stretched, given you're seeing a rotation out of tech into cyclicals. I think for that stock, you've seen solid growth in ports and services, but you're yet to see an acceleration post-COVID, and I think that's what the market's waiting to see to buy this stock.
Ally Selby: James, its share price is down about 16% since the beginning of the year. Should people be buying the dip? Is it a buy, hold or sell?
James Dougherty (BUY): It's a buy. Adding to what Nick said, I think they're in for a period of acceleratingd growth over the next few years, they've gone through a period of consolidation and investment; they've invested in R&D, and you've seen a new product in SD-WAN (software-defined networking in a wide area network) that opens up a new market for them. They've hired a Head of Revenue globally, and they also have cash on the balance sheet for acquisition. So all of those three factors, I think means you're going to see an acceleration in growth.
Infomedia (ASX: IFM)
Ally Selby: James, I'll stay on you. Next up we have Infomedia. I'm seeing it on a lot of small-cap managers' lists. Is it a buy, hold or sell for you?
James Dougherty (HOLD): It's a hold for us. So look, we acknowledge that the new management team of Jonathan and Leon have done a really good job. There was probably under-investment for a number of years before they arrived, they've got the tech back to be a competitive advantage, and you've seen them win some new deals. But what we're really waiting for is some real sales or revenue momentum. When we see that, then I think we'd move to a buy.
Ally Selby: Nick, it provides SaaS solutions to the automotive industry; is it a buy, hold or sell for you?
Nick Guidera (BUY): It's a buy for us. We're substantial shareholders and have backed management for a number of years now, certainly the COVID-19 disruption prevented them from getting out to dealerships and rolling out this new software that they've spent years investing in. I think as the vaccine rollout continues, those guys should be clearly a big beneficiary as they can continue to drive rollouts and new contract wins across service and parts. And I think there's a really exciting opportunity around data in the vehicles, and these guys are well-placed to capitalise on that.
AP Eagers Automotive (ASX: APE)
Ally Selby: Nick will stay with you and also on cars, we've got AP Eagers.
Nick Guidera (BUY): Yeah, I think AP Eagers is a really interesting one. It's certainly benefited from the recovery in the new car market, also used car margins, but they've also just completed a significant acquisition of AHG (Automotive Holdings Group), and there's a whole lot of synergies that they can get from bringing those two businesses together. We ultimately think the new car market strength will probably continue for a significant period of time, longer than the market anticipates, so there'll be opportunity for these businesses to make money on new cars, rather than just in the service and parts of it.
Ally Selby: But is it a buy, hold or sell?
Nick Guidera: It's a buy.
Ally Selby: A buy. James, it's got a market cap of $3.9 billion, it's share price is currently trading at an all-time high; is it a buy for you as well, or a hold, or a sell?
James Dougherty (HOLD): It's a hold for us. So share price appreciation, the fact that the CEO of 16 years, Martin Ward, is leaving and caution over a reversion in margins, if inventory in new cars come back, means it's a hold for us.
Corporate Travel Management (ASX: CTD)
Ally Selby: Next up, we have Corporate Travel Management. You may have seen that it's CEO, Jamie Pherous sold out I think $31.5 million worth of shares. Should shareholders be selling as well? Is it a buy, hold or sell?
James Dougherty (BUY): Despite that fact, it's still a buy for us. Acknowledging Jamie sold effectively 1% of the company, he still owns another 14%. This was a business that has always had a lot of questions around sustainability of growth; it performed extremely well in easily the largest downturn you've ever seen in activity in that industry. We don't believe business travel is dead, we believe it will come back and they're in a great position to participate in that when it comes back, but also to take advantage through acquisitions of some of the competitors that are probably struggling.
Ally Selby: Nick, it's been a pretty turbulent ride for investors over the last few years, but is now the time to buy? Do you agree with James?
Nick Guidera (BUY): I think it's a buy. Yeah. I mean, personally, I've been on four flights in two weeks. There were queues at Sydney Airport, and corporate travel is back. The planes are relatively full, it feels as if COVID-19 may not be behind us, but certainly there's more comfort in getting out and about in the corporate market. Jamie's business is very well placed to capitalise on that, so it's a buy for us.
Ally Selby: Well, there was a few buys in there tonight, I hope you were taking notes. If you've enjoyed this episode of Buy Hold Sell, why not give it a like? Remember to subscribe to our YouTube channel, so you never miss an episode.
What stock do you think is undervalued?
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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.