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 offers her thoughts on what to do with Appen, Redbubble, Cettire and Temple & Webster stocks.
Cut or keep?
The Motley Fool: The Appen S.A. (ASX:APX) the stock price has halved in the past six months. What would you do with that?
Jun Bei Liu: Appen for me is very difficult to hold. We don’t hold Appen.
FM: Have you owned it in the past?
JBL: Long ago – years ago. At the early stage of [COVID-19] pandemic, we took the profit because it was just too expensive.
Remember, all the other technologies were underperforming because the pandemic was hurting their supply chain and such, while this company was doing very well. So we felt it was too expensive, the earnings multiple. So we sold it.
I think this company is very difficult to hold as earnings continue to disappoint. Whether it’s really caused by the COVID disruption or whether it’s just important. These big tech companies are really cutting some expenses.
Many overseas articles have talked about all the tech companies currently downsizing. Even Silicon Valley’s top venture capital firms have told all their portfolio companies to watch their spending. So I think anyone [who] operates in this whole technological supply chain, is going to experience some rather difficult environments. So I think for me it’s hard to hold, you’re going to sell it.
We have had a takeover offer [recently]. It did not last long – put on the table and then removed. So, yes, there are M&A opportunities. He’s the biggest player in this whole space.
But it’s just hard to invest something for mergers and acquisitions to succeed. It just didn’t work, what my kids would call “’sus”. It just looked… not great. So I think investors would need more fundamental evidence to hold this one.
The Motley Fool: Luxury goods retailer Cettire Ltd (ASX:CTT) has lost nearly 90% of its valuation this year. What do you think?
JBL: Unfortunately, this company was listed in the era of e-commerce and the like. I think it’s a great little company. He has great brands.
And I think the demand for luxury goods is very defensive. We always see during tough times with a recession or really tough times, luxury goods sales always go up.
FM: Is it correct? I would have instinctively thought that luxury goods would be the definition of discretionary, but it’s interesting that you say they hold steady in tough times.
JBL: Very strong, very defensive. They are very stable.
But look, if you look across Europe, back then there was a lot of Russian spending. It is therefore clear that the war will complicate things. So there may be differences. And back then, there were a lot of Chinese consumers who always bought things at a discount. [But] luxury spending is still very stable and defensive.
But for this company, the challenge is the covid. Consumers have spent huge amounts of money online. Now we are cycling some of these numbers, every e-commerce business is going through such a struggle, just because we are cycling really big numbers.
Longer term, I think these companies will do very well. It’s just over the next two years earnings will have to rebase and all companies used to make a very meager return on equity.
All of these numbers have increased significantly during COVID, but these margins need to contract as competition will pick up over the next 12 months when things get tough. So my view is that space is really difficult. I would hold it, but I’m not sure I’ll buy more at this point. The competition for online retail is going to be tough. That’s also not to mention, I think, the prospects for Australian consumers. It seems a bit harder too with rising interest rates, rising energy prices, rising cost of living, it’s going to be tough.
FM: The third is RedbubbleLtd (ASX: RBL)who could be in a similar situation?
JBL: Yeah. I think Redbubble is an identical situation.
Redbubble especially since a good part of its activity was the sale [face] masks. I think during the peak of the pandemic it was something like 20% of his income was from masks. And it is clear that it will come out.
Now the management has done a good job, trying to branch out into other things. It’s just that you’re going through very strong comparable times and management just can’t commit to what it looks like. They don’t know what it looks like and the competition will resume. It is therefore much more difficult to have a strong conviction of that one, because [we] don’t know what the future categories might be.
FM: It’s a shame with these marketplace type businesses, the barrier to entry isn’t that high, is it?
JBL: It’s true. So I think what’s important for these companies is that they continue to reinvest in brands, because if you don’t have a brand, you have nothing — because anyone can create a website.
In fact, I think during this whole pandemic period, I really think that Temple & Webster Group Ltd. (ASX:TPW) will pass very strongly. They have managed to rise to number one in their online furniture and homeware category.
Yes, the margin will come back, but that’s the one I’ll really be looking to buy more of when the stock price weakens.
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