In the midst of reporting season, it's often easy to forget about the long-term potential of some of the market's great compounders.
Last week, we saw stocks like Megaport (ASX: MP1) and Altium (ASX: ALU) soar 20% in one day on the back of their results, while stocks that disappointed, like Ramsay Health Care (ASX: RHC) and Iluka Resources (ASX: ILU), were punished by the market.
But by looking through quarterlies, half yearlies and full-year results, investors can see the bigger picture.
Companies like REA Group (ASX: REA) have returned 345% over the past 10 years, while Fortescue Metals Group (ASX: FMG) has lifted 378%, Xero (ASX: XRO) has soared 706%, and Pro Medicus (ASX: PME) has skyrocketed 15,054%. Over that same time period, the ASX All Ordinaries has only lifted 43% (and the benchmark tracking Australia's biggest companies, the ASX 200, has risen 39%).
Plus, they also name seven companies for above-market returns over the years ahead.
Note: This episode was filmed on Wednesday 23 August 2023. You can watch the video, listen to the podcast or read an edited transcript below.
Ally Selby: Hello, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today, we're talking hardcore growth. This episode is for younger investors with longer time horizons, all those who have a higher risk tolerance.
Today, we're going to be talking about stocks that can deliver compelling returns above the long-term market average. And to do that, we're joined by Nick Sladen from LSN Capital, and Adrian Ezquerro from Elvest. Okay, let's dive straight in. What's the best advantage that a growth investor can have? Nick, I might start with you.
Nick Sladen: Well, looking long-term enables you to look through half-yearly and quarterly reporting cycles and focus on what the long-term total addressable opportunity is for these businesses. There have been several examples over the last 20 years of some of the best companies like REA (ASX: REA), Seek (ASX: SEK), and Carsales (ASX: CAR), where at certain points in time, they've had hiccups on their cycle, but the long-term total addressable market has remained intact. All of those businesses have disrupted incumbents and done really well.
Ally Selby: Everyone's really focused on reporting season numbers right now, whether they are half-yearly or full-year numbers. Why is it important to look longer term, particularly for growth investors?
Adrian Ezquerro: We think it's particularly important for all investors. If we look at the old saying that time is the friend of a wonderful business, we certainly agree
This is particularly apparent for those companies that have the ability to reinvest and compound at very high rates of return. We tend to think that time will be the best friend of those companies that can self-fund their way into very deep pools of opportunity.
So if you think about the likes of Mineral Resources (ASX: MIN), Nick Scali (ASX: NCK), Technology One (ASX: TNE), and Premier Investment (ASX: PMV), it's quite a long list of good quality founder-led type companies that certainly appreciate the importance of this characteristic. They've all been multi-baggers over the past decade-plus and that illustrates the power of compounding, particularly when executed over long periods of time.
Ally Selby: Okay. I want to know how you would invest if you weren't being judged on monthly performance figures, if you were instead being judged on the longer term.
Adrian Ezquerro: It's a great question. I think there's always a lot of noise in markets, but there are always opportunities too. As bottom-up stock pickers, we spend most of our time really focusing on business quality, and those companies with longer-dated earnings drivers. So for that reason, I really wouldn't change much about our process. It's very much geared towards finding those companies that have a competitive advantage and that can reinvest into long-term opportunities.Ally Selby: Are there any sectors or themes you'd like to call out there?
Adrian Ezquerro: I think there's a whole range of really interesting dynamics and thematic looking ahead. Digitization, the ageing population, healthcare, infrastructure spending, and of course, the green energy transition. They're all immense opportunities for investors looking at over the next decade.
Ally Selby: Okay. Over to you, Nick. How would you invest if you weren't being judged on those monthly performance figures and in what themes or sectors are you seeing the most opportunity for growth right now?
Nick Sladen: Focusing on the fundamentals is absolutely critical and looking at the total addressable market opportunity for each of those particular companies. The areas of focus for us are how these businesses are going to get from where they are today to the opportunity in the future.
Areas like AI and financial disruption like we saw with Afterpay (ASX: SQ2) a few years ago are big examples of those areas. We're also seeing emerging industries such as lithium and EV vehicles, which have grown exponentially over the last few years. You've got best-in-class operators taking share from other businesses like Premier Investments (ASX: PMV) or you've got newer businesses like Netwealth (ASX: NWL) and Hub24 (ASX: HUB) are in really good shape and taking share also from legacy players.
We look at all those as really attractive options, but equally, not discounting that some of the cyclical sectors also can be attractive at certain points in the cycle. You just need to have a really clear understanding of where you are in the cycle and what valuation looks like for some of those businesses because there can be good money to be made on those investments as well. Like Adrian though, return on invested capital is a big focus for us. So a lot of those really quality self-funding businesses are the ones that we think will do really well through the cycle.
Ally Selby: I want to talk about the risks now. Growth investing is often considered more risky than its value counterpart. What risks do you think investors need to be aware of today?
Nick Sladen: Inflated valuations, investment bubbles, the latest fad or trends. Those are some of the things we are particularly cautious of at the moment. There are several examples of businesses in the larger cap space that have done particularly well, Afterpay is one. Some of the lithium-producing and cashflow-positive stocks are other ones, and they've dragged some of the smaller cap stocks along for the ride. Some of those valuations got completely inflated.
There are also a bunch of businesses that are still trading on the ASX today that are probably working through their existing residual capital and there's limited prospect of self-funding going forward. So that's an area we're pretty cautious on and that's where we'd encourage others to be cautious as well.
Ally Selby: Okay. What are the risks that you're seeing today for growth-focused investors?
Adrian Ezquerro: I think the risks are twofold. Like Nick, we would urge investors to focus on fundamentals and really avoid investing in speculative companies that are burning cash and at the mercy of capital providers. Often, these are the companies that have exciting stories and narratives, but in many cases lack genuine substance.
At Elvest, we focus on those companies that are still early in their life cycle but they still have established cash flows. They're well-established businesses, and we find that's our sweet spot. I think the second risk really is just overpaying. You can go buy a great cohort of good quality businesses, but if you're buying them on 1 or 2% earnings yields, we're not convinced that will generate a good long-term return, so it's crucial just to maintain your discipline.
Ally Selby: We asked our fund managers to bring not one but three stocks that they believe can deliver exceptional above-market returns over the next decade. Nick, what have you brought for us today?
Nick Sladen: We're speaking about Lifestyle Communities, Hansen Technologies, and the platform businesses, Hub and Netwealth.
So Lifestyle Communities is an affordable land lease business operating out of Victoria. There's obviously a significant housing shortage across Australia at the moment, so they're very attractively positioned from that perspective. This means they've got really good structural tailwinds.
Lifestyle communities currently have seven new projects under development, which is quite a significant undertaking for them. And that is expected to deliver 50% earnings growth over the next two years, and we think you're only paying around 20 times earnings for that opportunity. So we see that as quite an attractive compelling opportunity.
Hansen Technologies is a backend software billing service focused on the telco and utility sectors and communications. It's founder-led, that founder owns 17%, it has a really excellent return on capital, and has really positive and strong cashflow generations. Over the last three years, its valuations have been inflated. They've been able to pay down their debt. They're basically net cash now.
They've provided a good solid update today in terms of their outlook for FY24. Their second half of FY23 was very good. So we're expecting at least, or they're expecting 5 to 7% organic revenue growth. We would expect more than that in terms of earnings per share growth, and given the strength of their balance sheet, we would be looking for them to make an acquisition and multiples of comeback, which will be complementary. So we think they can comfortably deliver 10%-plus EPS growth for the next few years.
Ally Selby: Wow. And the platforms?
Nick Sladen: The platform businesses, obviously, Netwealth and Hub24 have grown significantly. Over $20 billion across those two businesses in premium in terms of flows per annum. They've grown at about 40% CAGR over the last 10 years. They've gone from 1 - 1.5% in terms of market share of the platform business to over 6% in the last five years. They're both structurally growing, taking shares from some of the legacy incumbent players.
The cost management that was shown in the FY23 results will position them well for FY24. There's been a big theme of money going off-platform into term deposits over the last 12 months, but we would expect that headwind to become a tailwind and drive flow over the next 12 months for those two businesses.
Ally Selby: Four stocks, not three. That's a little bit of a kicker. How about you, Adrian, what are your three stocks?
Adrian Ezquerro: We actually tend to agree with Nick's comments there, particularly around the platforms and Hansen where we've been a long-term supporter and investor there as well. Looking at our three stocks, the common thread, each operates in industries with supportive market structures, there are long-dated growth opportunities, and all are founder-led or have owner-manager teams in place as well.
So our first stock is RPMGlobal. It's a leading provider of mining software and principally, it's servicing major global resource companies. We think they benefit from the mining digitization theme, and many miners are still relatively early in terms of mining software adoption. We think that represents a significant tailwind for RPM. Looking at recent results, albeit coming off a low base, FY23 EBITDA is forecast to triple and we think that they continue to deliver really strong earnings growth from this point.
Our second stock is Seven Group. Obviously, it's a conglomerate, but most of its capital these days is deployed in industrial services. So business units like WesTrac, Boral (ASX: BLD), and Coates. WesTrac, we view as the jewel in their crown. It's wonderfully well positioned within its key markets, and benefits from increasing mining volumes and its high-margin services business is leveraged to an ageing mining fleet here in Australia.
Looking at Boral and Coates. They're leveraged to a $1.2 trillion pipeline over the next five years for work in infrastructure and construction. In aggregate Seven Group has got a good portfolio of assets, they've got long-dated tailwinds, and a really high-quality aligned management team. So we think they continue to deliver from this point.
Ally Selby: And your third stock, what is it?
Adrian Ezquerro: The third stock is a little divisive, but nonetheless, we like it for good reasons. We think it's Corporate Travel Management. As the name suggests, it is involved in the management of corporate travel right across the world. I've mentioned it's divisive because people tend to have strong views on the company, but looking at the numbers, by the end of FY24, it will have delivered compound annual growth in earnings of 19% over the past decade, which is a great track record.
Looking at it today, it's a top five global player in what is a $1.5 trillion industry, and yet it still commands less than 1% global share. So we think Corporate Travel just has an immense opportunity to grow both organically and by acquisition. For those investors that can stomach some volatility, they'll be well rewarded over the next five or 10 years.
Ally Selby: Okay. Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.
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