Ask a fund manager
The Motley Fool talks to the best in the industry so you can get a taste of how the pros think. In this edition, Tribeca Investment Partners portfolio manager Jun Bei Liu picks out three stocks that are currently discount buys and why she suspects growth may be back in fashion very soon.
The Motley Fool: How would you describe your fund to a potential client?
Jun Bei Liu:
We specialize in Australian equities. We are a very active investor. Long-short means we profit from rising and falling stock prices. And we see that the current market environment offers many opportunities.
Myself, Jun Bei, I have been an investor, a fundamental investor for almost 20 years. And my career spanned Australian equities and I also had some exposure to international equities.
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FM: What are the three best stock buys right now?
JBL: I think on a risk-adjusted basis, we actually think things like CSL Limited (ASX:CSL) is an incredible buy at current levels. The stock price was depressed as investors [have been] sell that whole basket of growth. And unfortunately, CSL ended up there.
This is a company that will post double-digit earnings growth over the next few years, regardless of the economic outlook. And this company will also benefit from [the] reopen the economy also because blood collection used for plasma production has been very low due to the covid disruption and now has really picked up.
So earnings growth is very, very defensive. It does not depend on the economic outlook. And the share price is at a very reasonable level. So I think it’s a very solid buy.
The next in my mind is Xero Limited (ASX:XRO). We like this company because for many years it has demonstrated its execution by dislodging incumbents and increasing its market share and has become a dominant player in the New Zealand and Australian markets. And now he’s gone to the UK. It’s proven that it wins [market] share really well.
Share price, again, [is] to be punished because of people coming out of growth stocks in others. And I think the current share price is [at] very reasonable levels. It’s not something you buy for next month’s income. It’s something you buy for the bottom drawer, longer term, for the next five years.
So we love Xero.
FM: Earlier this year, Xero shares were punished because the company decided to reinvest money in the business rather than trying to make it more profitable in this environment. What do you think of this dilemma they have?
JBL: Yeah. Look, to be honest, I still believe that for companies that have such large addressable markets, it’s actually important for them to keep investing.
If you look at some of the market leaders, things like TechnologyOne Ltd (ASX: TNE) – this is also another one of our picks – they just continue to grow and continually expand the existing product suite, but they are constantly developing R&D in order to stay ahead of the competition. This is why they are so dominant in a category.
So I think for tech companies, they have to, especially if you can demonstrate that your return on capital is significantly higher than what can be generated otherwise. For me, it’s the right thing to do.
I am not buying this business for short term profit. To be completely honest, I didn’t think the disappointment was that big. It was just investors who are still very nervous with growth companies, just because they’re not sure about the growth premium, what they want to pay for the growth premium. This is why the opportunity exists.
FM: Speaking of how the market has turned against growth stocks, how quickly do you think sentiment can turn?
JBL: I think as long as, as we saw last week, you start to see stabilization in obligation yields, essentially interest rate expectations, you will start to see interest return to these growth or long duration stocks.
Also, you need market sentiment to improve, not an “anti-risk” type environment.
Essentially, three or four components should be in place. One is this peak in inflation expectations. So the last two weeks, you’ve probably heard… all the inflation stats are looking horrible right now. But there are indications that some of these supply chain disruptions are improving and that inflation could peak.
Second, interest rate expectations are peaking. Thus, the market expected a huge rise in interest rates just before the slightly mixed message from the [US Federal Reserve] Last week. Now that you see that interest rate expectations have started to come back, it’s because you’ve started to get mixed messages from the Fed. Some actually started saying, “Oh, maybe in September they could stop by to see how they’re doing.”
And then the next is the valuation downgrade. So we’re certainly seeing in the growing sector, some of the names that are really coming out. Then we need the outcome of the Ukraine-Russia war, [which] is still a bit uncertain.
So I think with all these base components it certainly seems hard to call the bottom of the market [yet]but I feel like it’s much better from now on.
This bodes pretty well for some of these growth names.
FM: And the third title you like?
JBL: Given my thesis on growth, I would choose Limited search (ASX:SEK). The company is closely linked to the labor market. Over the years, the company has done well to grow from a small classifieds company to a dominant player. And then went to other markets, managed to replicate some of his business.
He is now well on his way to capitalizing on his base. In short like what REA Group Limited (ASX: REA) made many years ago, to begin to increase the production of each expense, of each account. Seek has just started doing this, and it’s only a very early stage in this monetization process.
So we see that this company will have a multi-year double-digit earnings profile and the stock price will be sold because, again, it’s growth. Also, people are suddenly worried about the economic outlook, even though our job market is incredibly strong. Our inflation is far from the way we expect it in the United States.
It’s a good buy for me. I think you’ll do well in the [next] 12 months.
FM: It has a very dominant position in Australia, doesn’t it? It doesn’t really have a close competitor these days.
JBL: Yes, it is very dominating.
Over the years we have had many new [competitors] who threatened to dislodge this position, but they come and go, don’t they? They are never really proven, and [don’t] really gain a significant market share.
You have the tastes of Indeed. Do you remember when they arrived? At the time there was My career and then so many different companies. They were going to be next big thing. But none of them did.
In any technology space, the first-mover advantage is enormous. Second, the management of the company never really stopped investing, and they constantly reinvested, and then they basically delivered value to their customers. That’s why they have a very sticky base. They did well.
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