Ask A Fund Manager
In part 1 of our interview, Medallion Financial managing director Michael Wayne explained how he narrows down booming sectors then targets companies within them. Now in part 2, he tells us the stock that made his clients 500% but he still regrets exiting.
Overrated and underrated shares
The Motley Fool: What’s your most underrated stock at the moment?
Michael Wayne: Audinate Group Ltd (ASX: AD8) is probably the share that we think’s the most underrated at the moment.
Again, it’s probably one of these businesses that suffered as a result of COVID. But as the situation normalises, we expect Audinate will be one of those companies to benefit from the reopening phase.
A good quality company – basically they are operating in the digital audio space. They allow different pieces of equipment to communicate with each other without the need for all the cabling and the cords, et cetera.
They’re growing very, very quickly. The adoption rate… is about 17 times the nearest competitor. So they’ve got a lot of competitive advantages that put them in a good position to benefit in the years to come. I think about 75% of new audio equipment and digital equipment incorporates the Audinate Dante protocol. And that should mean that they’re embedded into that industry for some time to come.
Got some large customers. I think I’ve mentioned [previously] names like Yamaha, Bose, a number of others as well.
It’s one that we got into about maybe a couple of years ago, that’s tracked sideways ever since, maybe slightly higher than where we got it, but it’s yet to see that huge price increase that many other tech names have seen.
MF: So you must’ve bought it at about $6 or $7?
MW: That’s right. That’s when we first sort of brought it to clients and included it in some of our monthly reports, but we think there’s a lot of value still to be unlocked there.
They had an update the other day and by all accounts, the outlook is improving. Their sales process is picking up again. And I think it bodes well for the future as well as the fact that they’re now also branching out into the digital visual space – so they can bolt that on as well as part of their offering, not just the audio stuff.
MF: What do you think is the most overrated stock at the moment?
MW: Not in terms of the quality of the company, but the banks for us are probably the most overrated stocks in that so many people hold so much of [them].
And that’s probably a symptom of the fact that they’ve done really well over a very long period of time, but there’s a bit of a… what do you call it? A bias towards things that people are familiar with.
What we find with the banks is that people hold them. They are almost emotionally attached to them. But if you look at it on a 5-year horizon, for instance, the banks have really gone nowhere except for dividends. And in the case of National Australia Bank Ltd (ASX: NAB), dividends aside, it’s really gone nowhere for 20 years or so.
So we think that there’s an undue affection for the banks. I think you could also include the buy now, pay later sector, although it’s come back recently, where they’re somewhat overrated in terms of what they can deliver long-term. And how well the companies are going to have to execute in order to deliver on those expectations.
MF: If the market closed tomorrow for 5 years, which stock would you want to hold?
MW: Oh look, it’s a hard question because obviously, you won’t be able to manage different positions. CSL Limited (ASX: CSL) would probably be up there with the number 1 pick in terms of a stock specifically.
Otherwise, we would have to lean towards putting it into an [exchange traded fund] ETF. That way you’re getting broad exposure to the market. You don’t really have to worry about the companies in that market. You can just leave it in the ETF and have faith that over the long run the market should do quite well.
That’s probably how we would prefer to do it. Otherwise, a fund manager of quality would be another way to go about that.
MF: Which stock are you most proud of from a past purchase?
MW: There’s been a few in terms of some good returns… But Pro Medicus Limited (ASX: PME) has probably been the best performer amongst client portfolios over the last 4 years or so since our inception.
That’s the company which is a borderline or hybrid healthcare/tech business, which allows for images to be scanned and stored and transferred with ease amongst different medical practitioners and companies.
MF: Is it still on your buy list or has it gone off?
MW: We hold it for clients. We have scaled back some of the position sizes just because [it’s] done so well. However, it is very expensive and we are conscious of the fact that many of these high [price-to-earnings] P/E, high growth names have run very hard. In this market, there’s a lot of rotation back towards value.
So companies like Pro Medicus could have come under some pressure, but if it fell far enough down to $30, $25, it’s certainly something that we would have a look at again.
MF: Speaking of the rotation, how much longer do you think this could go on? Do you think growth will make a comeback this year or is this more of a medium-term rotation into value?
MW: If inflation rears its head, it will drive more money towards value away from growth. There’s no doubt that the likelihood of inflation occurring, the probabilities have increased. So we are increasing our exposure to those parts of the market that would benefit an inflationary environment.
However, we’re not entirely convinced that inflation’s here to stay. We do think that it would be transitory at this point, just once the economy cycles through some of those weaker numbers. So we are still positioned towards growth companies, but we’ve got what we call a style-neutral approach setting with portfolios in that we’ve increased our exposure to value… [we] probably have 50% exposed to each scenario unfolding.
But I wouldn’t be surprised if inflation is transitory and if that’s the case then growth can do quite well, but it’s impossible to say for sure at the moment.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
MW: Well, in terms of a terrible performer, it would have to be Speedcast International Limited (ASX: SDA).
This is a telecommunications company that was providing telecommunications services to those companies and those interested parties that operate in remote locations. So if you think about the military or you think about the cruising industry, they’re two sectors that use those services heavily. That’s a business that looked very good for a long period of time.
They ended up taking on debt to acquire businesses. Those acquisitions weren’t successfully integrated. And when that occurs and you’ve run up your debt, you get yourself into a lot of trouble. Fortunately, we managed to get the vast majority of clients out before it delisted or went belly up – but it wasn’t our proudest moment, that’s for sure.
In terms of missing out, Afterpay Ltd (ASX: APT)’s probably one that we sold out of too early.
MF: When did you sell?
MW: I got clients in there – believe it or not – the day it listed. I’ve got a handful of clients at about $1.30.
Ended up selling [some] at $4.50 and then at $8 the rest – so that’s obviously got on to a lot bigger and better things, but we did okay out of it. But that’s one that we got a little bit too trigger-happy and sold out too early.
I think that’s par for the course [in] investing, unfortunately. I’m sure there’s numerous names for the people that missed out on over the years, but that’s probably our biggest one that we’ve sold early.
MF: Going back to Speedcast, did that experience make you a little bit more shy about companies with debt?
MW: Absolutely. I mean, we always try to avoid companies with too much debt.
[Speedcast] is one that started off with not that much debt, but over time it did run up a fair amount. It’s probably made us more wary of those roll-up type companies that go on these acquisition sprees, spending up big on these new purchases and run up debt in the course of it. Because as I touched upon, all it takes is one or two of those acquisitions to go poorly.
You’ve borrowed all this money… purchasing a company and then all of a sudden the company that you’ve purchased probably is worth half or worth nothing. And you’ve still got to pay back the debt after that, so it’s a tough situation.
But to answer your question, it’s probably made us more wary of roll-up acquisition models, particularly when they involve accumulating more debt.