If last month’s earnings season felt dramatic, that’s because it was; Goldman Sachs says one out of every eight stocks moved more than 10 per cent after delivering their result, nearly double the long-run average.
The challenge for investors now is to dive back into their portfolios and sort the wheat from the chaff. And with this in mind, Chanticleer asked 12 top fund managers who work with the Future Generation family of philanthropic listed investment companies for their best long-term stock pick.
When inflation subsides, Firetrail Investments hopes that Domino’s Pizza’s history of growth can shine through. Picture: Paul Harris
Aussie Broadband – QVG Capital
Like the rest of the team at Sydney-based manager QVG, portfolio manager Tony Waters likes the NBN reseller’s shift into laying its own fibre infrastructure to target more enterprise and government customers, which will ultimately help boost margins. “Growth in business customers is a slow burn but makes Aussie a better business in time,” Waters says.
The stock is up more than 51 per cent in the last 12 months, which Waters says speaks to its ability to keep growing its returns on capital and the stock’s position as something of a defensive save haven.
Netflix - Yarra Capital Management
While streaming has long been eating into free-to-air TV’s market share, Iain Fulton, portfolio manager for Yarra’s global share fund, says Netflix’s move to stop password sharing and introduce an ad-funded subscription is another inflection point. He says this is less risky than the market thinks, given average revenue per user is actually higher for ad-backed users; assuming just 30 per cent conversion, Netflix’s revenue could rise to $US50 billion compared with $US32 billion in 2022. “This looks like a potential re-acceleration in revenue growth and improving cash flow return on investment underappreciated by the market.” Just be aware this shift could take time. Netflix said this week it will take time for margins to improve under the new ad model, sending the stock down almost 10 per cent this week.
Domino’s Pizza – Firetrail Investments
Blake Henricks of Firetrail. Picture: Eamon Gallagher
Blake Henricks, portfolio manager likes to say that uncomfortable opportunities can be the most rewarding for investors. And Domino’s, down 67 per cent since its pandemic peak in late 2021, certainly fits that bill. In many ways, this is a bet on the retreat of inflation, which whacked earnings in 2023 as the cost of food and labour rose significantly. When inflation subsides, Firetrail ishoping that Domino’s Pizza’s history of growth can shine through.
“Even in the tough 2023 year, 205 new stores were opened, representing 6 per cent growth,” Henricks says. “Over time, we believe stores can grow at a rate of 7 per cent. In addition, each store typically grows sales around 3 per cent. Together, that means Domino’s can grow top line at 10 per cent and earnings even higher.”
GFL Environmental – Ellerston Capital
Where there’s muck, there’s money. And portfolio manager Bill Pridham the operational footprint of Canadian waste group GFL Environmental across North America will give it the power to extract even bigger prices from its customers.
Beyond that, Pridham is excited about a project to produce renewable natural gas from its landfills, plus the introduction of new Canadian regulations forcing large consumer companies to track and trace single use and paper products, adding to the push into recycling via GFL’s plants. Add in an improving balance sheet and lower debt costs thanks to an imminent achievement of an investment grade credit rating and Pridham sees a “very defensible earnings stream growing at a double-digit clip for the foreseeable future”.
Cettire – Regal Funds Management
Regal’s Jessica Farr-Jones. Picture: Louie Douvis
Portfolio manager Jessica Farr-Jones sees a lot to like in Cettire, the online platform for luxury goods. It’s founder led, it’s got great organic revenue growth and good profitability, and it’s capital light because it holds no inventory. And she believes it’s cheap, trading on 30 times 2024 earnings.
But Farr-Jones also believes there’s the potential for Cettire to deliver growth for years as its customer base becomes larger and stickier, and its bigger market share attracts more retailers. Further geographic expansion, including into China, is another sweetener.
Amazon – Magellan Asset Management and Munro Partners
Kieran Moore, partner and portfolio manager at Munro, and Jack McManus, investment analyst at Magellan, have a similar thesis for tech giant Amazon, built around the company’s key attributes: a customer-obsessed culture and a willingness to invest for the long term.
Moore says that more recently, that has been mixed with a sharp focus on costs in the flagship e-commerce business, boosting margins significantly. He believes further cost savings can be found, adding to earnings momentum.
McManus further argues the company’s culture and long-term mindset will help improve profitability over the medium term. The build out of Amazon’s fixed fulfilment and logistics investments, for example, will give it a clear competitive advantage. And over time, higher margin businesses, such as its AWS cloud computing division, will become a larger part of group earnings.
The stock is up almost 70 per cent this year.
Goodman Group – Sage Capital
Industrial property giant Goodman Group is known for leasing its sheds to some of the biggest companies in the world, from Amazon to Samsung. But Sage Capital portfolio manager James Delaney is excited about the group’s plans to move into data centres, which was announced last month with the revelation of a development pipeline with 3 megawatt hours of capacity. “Once completed, this would make the firm multiples larger than the biggest Australian competitor and put it in a league with some of the largest global data centre players. In our view, this growth platform will continue to support the stock for many years to come.”
Alibaba Group – Antipodes Partners
China has become a tough place to invest, and Chinese commerce giant Alibaba typifies this: the stock is down 70 per cent from its 2020 highs. But Antipodes portfolio manager John Stavlioti senses a bargain. First, the stock is trading on 9 times earnings, very cheap for a business growing core earnings between 10 per cent and 15 per cent a year and has substantial share buybacks under way. But second, Stavlioti argues Alibaba’s plan to separate its six business units into independent businesses with their own CEO and board will help lift performance. “We are already seeing improvement in the international commerce business with stronger growth and costs narrowing. This presents an opportunity to extract shareholder value given Alibaba is trading at a meaningful discount to the sum of the parts valuation.”
Midway – Sandon Capital
Sometimes, small can be beautiful: just as Sandon Capital portfolio manager Campbell Morgan, who likes $55 million tiddler Midway, which is one of Australia’s largest wood fibre processors and exporters. Morgan points out the firm has net cash, asset sale proceeds and inventory totalling $70 million (well above its market cap) plus 19 hectares of land at Geelong Port that is in the books at $15 million, but probably worth much more. But Morgan is also excited about Midway’s creation of an asset management business specialising in forests and voluntary carbon offsets. The unit already has a $200 million commitment from insurance giant Munich Re for land purchases and tree plantings which Midway will manage.
Universal Music Group – Lanyon Asset Management
Nick Markiewicz from Lanyon. Picture: Ben Searcy
Portfolio manager Nicholas Markiewicz started looking at Universal in late 2021 when it was spun out of Vivendi, and immediately liked what he saw. The company has 3 million songs in its catalogues – including the likes of Bob Dylan, Taylor Swift and Ed Sheeran – but Lanyon’s thesis is that this could be monetised at a rate five times the current rate, thanks to proliferation of streaming services and the explosion of the use of music in short-form video in other content. Lanyon bought 12 months later after the Ukraine invasion smashed European stocks, and Markiewicz remains convinced the value of Universal’s melodious asset will keep growing.
Tuas – Wilson Asset Management
Portfolio manager Tobias Yao has one big reason for backing fast-growing telecommunications company Tuas, which is based in Singapore: David Teoh. Tuas was spun out of Teoh’s TPG Telecom in 2020 and Teoh still owns 40 per cent of the business. Essentially, WAM is betting this can be another TPG. “We believe there are a lot of similarities between Tuas’ strategy and that of TPG Telecom in the early days, and we are backing the team to replicate the strategy in Singapore over the long term.”
This article was originally posted by The Australian Financial Review here.
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