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Why I think WiseTech Global Ltd (ASX:WTC) will lag in any upcoming share market rally

Acquisition news from tech darling WiseTech Global Ltd (ASX: WTC) wasn’t enough to keep investors onside today as many rotated out of high-flying growth stocks for value plays.

The share price of the logistics software provider jumped nearly 4% at the opening bell today but soon slipped into the red with the stock trading down 1.4% at $17.36 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index lifted 0.4%.

Management announced this morning that it was buying UK-based LSI Sigma Software for around $5 million, which includes a circa $3.6 million upfront payment and the balance as performance bonuses.

The deal will provide WiseTech with UK customs capabilities ahead of the UK’s exit from the European Union (or Brexit).

WiseTech is confident that LSI’s trade and cross-border compliance software will be useful regardless of a soft or hard Brexit with the UK still locked in negotiations with the EU on exit terms.

The takeover has more strategic than financial value given that LSI generated revenue of around $1.8 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $400,00 in the last financial year. This compares with WiseTech’s $222 million in sales and $78 million in EBITDA in FY18.

LSI is another feather in WiseTech’s cap as the ASX entity has made a string of recent acquisitions from around the world and it’s nicely within its strategy of making targeted buyouts.

However, I don’t think this will stop investors from selling outperforming stocks trading at a significant premium to the market and buying underperforming value stocks.

Even with the 20% pullback in WiseTech’s share price over the past month, it is still sitting on an FY19 P/E of over 80 times as the stock rallied 73% over the past year compared with a flat performance by the ASX 200.

It’s not only WiseTech that’s on the nose. Other market darlings like Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), RESMED/IDR UNRESTR (ASX: RMD) and CSL Limited (ASX: CSL) are under pressure.

These high-growth companies have outperformed strongly in a low-interest rate and bond yield environment, but the cycle is turning.

As rates rise, stocks trading at a premium will suffer the most as their valuation is more sensitive to any change in the risk-free rate, which is typically benchmarked to the 10-year government bond.

Investors looking for stocks with the best prospects of outperforming into 2019 will need to look at shares trading at a discount to the market instead.

There will be exceptions to this, but I believe the growth stocks have passed their collective prime and discount stocks will be leading the Santa Rally this year.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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