With interest rates (currently) on pause, investors are once again looking for growth opportunities that can bolster their wallets and compound their cash faster than if they were to leave it in the bank.
One way investors can gauge the probability of picking a winning stock is the growth rate in earnings per share (or EPS).
For those not in the know, EPS is calculated by dividing a company's net profits by the number of shares a company has on issue. The growth in this number demonstrates how quickly a company can boost its profits per share. Typically, a growth rate of 20-25% or more is the sweet spot.
So in this episode, Livewire's Ally Selby was joined by Elvest's Adrian Ezquerro and LSN Capital Partners' Nick Sladen for their analysis of three stocks with high EPS compound growth rates over the next two years.
Plus, they also name two stocks that could be in the dog house from here.
Note: This episode was filmed on Wednesday 23 August 2023 and originally published for Livewire Markets. You can watch the video, listen to the podcast or read an edited transcript below.
Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we'll be taking a look at three stocks with some of the best growth rates in the biz. Plus our guests will also be naming two stocks that could be facing some headwinds from here. To do that, we're joined by Adrian Ezquerro from Elvest and Nick Sladen from LSN Capital.
Okay, first up, we have lithium darling, Pilbara Minerals, which is forecasted to grow its earnings per share by 48% per annum over the next two years. Adrian, let's start with you. Is it a buy, hold, or sell?
Adrian Ezquerro (HOLD): Pilbara's a hold for us. We're not big investors in the commodity space, but having said that, there is a lot to like about the business. It's a low-cost producer, has a long mine life, operates in a tier-one jurisdiction, and it's also sitting on a pretty handy $3 billion cash pile. That said, we tend to look at commodity businesses when the market is overly pessimistic about the underlying commodity. You're more likely to get a larger margin of safety in what is inherently a more volatile sector. So, whilst it's getting close, there are some nice attributes about the business. For us, it's a hold at this stage.
Ally Selby: Even despite lithium stocks being quite volatile this year, the stock is up 39%. Nick, over to you. Is it a buy, hold, or sell?
Nick Sladen (BUY): It's a buy from our perspective. We think it's the best way to play lithium on the ASX. As Adrian said, it has a tier-one location. Its free cash flow yield is greater than 15%. It's a low-cost producer. There's a structural deficit coming in with the lithium supply-demand market, so it's a buy from our perspective.
Ally Selby: Okay. Next up we have Helloworld Travel. This stock has had an exceptional 2023. The share price is already up 125%. Nick, staying with you, is it a buy, hold, or sell?
Nick Sladen (SELL): It's a sell from our perspective. We've actually just recently exited the position. It's done very, very well. It's had multiple earnings upgrades. It's not expensive. We're just a bit cautious on the outlook for the consumer and think at the margin, that might weigh on their earnings. After their last upgrade, the stock actually didn't go up, so we're comfortable selling it at this point in the cycle.
Ally Selby: Its earnings per share are expected to grow at a compound rate of 30% per annum over the next two years. Adrian, over to you. Is it a buy, hold, or sell?
Adrian Ezquerro (BUY): Helloworld is a buy for us. They're certainly benefiting from surging demand for travel, particularly from the over-55 age bracket. And at the same time, we've seen a transition in household expenditure from goods to services and experiences. Helloworld's typical client really doesn't sit within the mortgage belt, so we think some of the macro concerns might be overstated. And then looking ahead, you see a business that's exiting COVID as a better business. EBITDA margins are forecast to be greater than 30%. It has a strong net cash balance sheet. And on our numbers, it's trading on an EV/EBITDA of about five times for FY25. We do think that earnings growth sustains for a little while yet, and so it's a buy for us.
Ally Selby: Okay. Last up today we have wealth management platform HUB24. Its share price is up around 16% since the beginning of the year. Adrian, last one for you, is it a buy, hold, or sell?
Adrian Ezquerro (BUY): HUB is also a buy for us. It's quickly becoming the platform of choice for advisers. It is rapidly taking market share from legacy incumbents. They've just delivered a wonderful result. One of the highlights was operating leverage. We think that will continue as a theme for HUB for quite a few years to come. And that's for a business that's already generated 58% compound earnings growth over the past five years. So, it's done an exceptional job. We acknowledge that it's trading on an elevated multiple, but in this instance, we think it's justified because the compound rate of earnings growth that's forecast is quite attractive. So, it's a buy for us.
Ally Selby: HUB's EPS growth is forecast to grow at 28% per annum over the next two years. Over to you, Nick. Is it a buy, hold, or sell?
Nick Sladen (BUY): It's a buy from our perspective - for all the reasons that Adrian alluded to. We think HUB is a really high return on invested capital business, so that makes it extremely attractive because it obviously can self-fund its growth and development, which it's done over many years. It can then return capital to shareholders in the form of dividends and share buybacks. So, it's a buy from us and we think it's got a terrific outlook for the next 12 to 18 months.
Ally Selby: Okay. I'm really excited for this. We asked our guests to bring along a stock that they think could be facing headwinds over the year ahead. Nick, what stock is in your burn book?
Nick Sladen: We're a seller of Steadfast. We think the business has had a tremendous run over multiple years, but ultimately, insurance and insurance broking is a cycle, and we think that cycle will turn at some point. They're on 22 times earnings. We think that valuation is probably broadly full for that business and the upside opportunity that exists. The CEO and founder, Robert Kelly, has done a great job building that business and growing it. He's probably closer to the end, and we see succession as a risk going forward. So, we're probably comfortable exiting that and allocating our capital elsewhere where we see more upside.
Ally Selby: Over to you Adrian. What stock do you have in the doghouse?
Adrian Ezquerro: Our sell today is Temple & Webster. It's an online-only retailer of furniture and homewares. They operate a drop-ship model, which is both low-margin and quite competitive. For this reason, management is investing aggressively to build brand value with a focus on top-line growth. And as a result, we don't see material profits being delivered in the years to come. I think for context, Temple & Webster have just delivered a profit of $8 million, $3 million of which was from interest income, and that speaks to a really strong balance sheet. So, there's no solvency risk, but it trades on about 100 times forecast earnings. For context, Nick Scali's got a slightly larger market cap. It just delivered a profit of $100 million. So Temple & Webster is just too expensive for us. We think it's a sell.
Ally Selby: Well, that's all we have time for today. 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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