Ask A Fund Manager
In part 1 of our interview, Monash Investors co-founder and director Simon Shields showed us 2 quality ASX stocks with still-low PE ratios. Now in part 2, he reveals the fintech share that he's proud to have bought at $5 then exited at $153.
Overrated and underrated shares
The Motley Fool: What's your most underrated stock at the moment?
Simon Shields: People Infrastructure Ltd (ASX: PPE) is the most underrated stock. [Shields discusses People Infrastructure in part 1 of the interview].
MF: What do you think is the most overrated stock at the moment?
SS: Now the most overrated stock is, sadly, I'm going to say, Flight Centre Travel Group Ltd (ASX: FLT) — because everybody loves Flight Centre as a business. It's been around for a long time. In fact, it was a store rollout story in its day. It's a great Australian business, it's a global company.
But that drag it's got from having those bricks-and-mortar stores, it's just been a huge loser. From COVID it's already had to do a couple of capital risings. With the lag that we're seeing in the recovery, I dare say, it's probably going to have to do another one.
Capable people are giving it the benefit of doubt because, of course, when travel starts back, there'll be a huge boom in travel, no question about that. But it keeps receding and that's the problem.
MF: Did you once hold it then exited, or have you never held it?
SS: We've long and shorted the stock — and we're currently short.
MF: If the market closed tomorrow for 5 years, which stock would you want to hold?
SS: Electro Optic Systems Holdings Ltd (ASX: EOS). It's Australia's probably major defence stock, and fantastic technology in laser targeting for use in space communications, tracking satellites, space junk, and by the military.
And it's just got a very long pipeline of contracts that it's going to be bidding on and almost certainly likely to win a very large percentage of those, given its leadership in those areas.
MF: It's been around for a while, hasn't it?
SS: It has. And so if you think, 'Why might the market be closed for five years?', well, I think a defence stock in that circumstance would go pretty well.
Looking back
MF: Which stock are you most proud of from a past purchase?
SS: Afterpay Ltd (ASX: APT). We didn't buy Afterpay in the IPO because we were concerned about this new product and the bad debts it could have. So we didn't get into it until it got to $5.
Of course, it listed at $1, so at $5 you'd think, 'we've missed it'. But our valuation was much, much higher. And what was driving our valuation was, first of all, how we could see it was such an easy sell for the company. They had the metrics because it was all about online sales. They could increase the [merchant]'s online sales by 10% or 15%, and so it was such an easy thing for a merchant to adopt it.
The second thing, we could see the behaviour by the customers that they would maybe use it once every 3 months in the first year, but in the second year they'd be using twice every 3 months. And by the time it got to the fourth year, they were using it over 20 times a year.
Although we'd been buying and selling all the way through — we actually sold out our last shares at $153.
What was really pleasing about that, we were very clear in what we thought each geographic region was worth. So Australia, we thought was worth $7, the United States we thought was worth $70, for example.
It was putting all those geographic regions together, got us to our price target. And when our price target was met, then we sold out.
Just on the reason for that, it's the great thing about doing that assessed valuation. When we sold at $150, we were getting paid for everything we thought Afterpay was going to do for the next 8 or 9 years. So there's no point hanging around waiting for the next 8 or 9 years to see if it was going to do it because we're getting paid for it.
And that's why we sold. That's the whole theory behind the assessed valuation.
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.
SS: I regret not making a lot of money from Altium Limited (ASX: ALU).
Altium was a stock that I first came across in the tech boom, in the late 1990s and knew the business really, really well then. It sort of drifted, actually, after the tech wreck and didn't do all that well.
They remembered me too. I did a company visit with them and they were asking me what I thought of their business strategy. And I said, 'Well, I think you should go to subscription rather than just sell upfront'. And unbeknownst to me, they did that, and then the next thing I know, the stock's taken off and I felt like I'd missed it.
And of course, I hadn't missed it and it kept going. So that was my big regret.
MF: How do you feel about Altium at the moment? It's discounted from the highs of the past couple of years?
SS: Yeah. So, I mean, look, it was interesting, during COVID they found that the sales fell back, and I just wondered to what extent the issues around China and Australia might be hampering their sales at the moment, it's hard to tell.
Also, they've had to do a fair bit of discounting to try and meet their targets and that's always a real red flag, so we're wary of it at the moment.
MF: Last thoughts?
SS: Look, as investors, we're dealing with uncertainty. And all we can try and do is secure the odds in our favour as much as possible. Even then, sometimes we won't have good periods because it's a question of 'Are the opportunities there?'
Generally, there's always going to be some opportunities out there. [But] the other thing is, can we find them? Sometimes they're easier to find, but other times there are less opportunities and they're harder to find.
All I'd say is that nobody, I don't think, is consistently just finding them all the time — but generally over time, you can see if somebody does a good job or not.
