Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Redpoint Investment Management senior portfolio manager Max Cappetta explains how a pair of growth stocks helped his income-focused clientele.
Hottest ASX shares
The Motley Fool: What are the 2 best stock buys right now?
Max Cappetta: We don't necessarily field our strategy around a small number of big bets. We actually like to have diversification and have a large number of maybe smaller bets.
However, at the moment we do like two particular stocks — Domino's Pizza Enterprises Ltd (ASX: DMP) and logistics software group WiseTech Global Ltd (ASX: WTC).
Domino's, whether you love or hate their actual product, they do remain a reliable and affordable provider of pizza with a very large and growing global footprint. They've been a beneficiary of the COVID lockdown. There's no doubt about that. And we've actually seen their revenues reach $2 billion for the very first time in 2021.
From an income perspective, we've seen that management [is] now guiding that they're going to increase their profit payout to investors, to up to 80% going forward. And we can see that their annual dividend payments are on track in this fiscal year to be more than double their 2019 or pre-COVID levels. And quite frankly, that's a feat that has been really unmatched in the marketplace.
In terms of WiseTech, they've performed very well after posting a strong result in August. The company definitely exceeded expectations, both on revenue and their profitability. I think what we liked most was that they were able to increase their profit margins by lowering their costs on the incremental growth in revenue.
We still see the company's really an industry leader. They've still got a lot of strong growth expected from their CargoWise solution. However, we will say, at its current price of $53, a 6 cent dividend in 2021 makes it a very low dividend yield stock versus even its earnings of 34 cents a share.
However, I think the good news here in this instance is that our fund investors have actually been rewarded with a 60% share price rise rather than a larger dividend. Given our focus on zero tax rate payers, retirees and charities, what this means is we can actually redeploy some of those gains to other income opportunities as they then present themselves in the months ahead.
MF: So just because your fund's outcome is income-driven, doesn't necessarily mean your portfolio is wholly dividend-focused?
MC: Yeah, absolutely. One of the things that we've seen and understand is that the share price will rise before the earnings are delivered. And the earnings will be delivered before the dividend gets paid.
So you just can't sit there and wait and look backwards at what dividends have been paid to then build your portfolio. If anything, that actually probably leads to bad outcomes because the companies that are paying the largest dividends relative to their price may, in fact, be currently under stress. That's why their share price is down.
They might, in fact, may be in a period of low growth. And not have other meaningful investments to be able to deploy that capital — so they pay it out.
The ASX share for a comfortable night's sleep
MF: If the market closed tomorrow for 4 years, which stock would you want to hold?
MC: Probably the key trend over the next 5 years is going to be looking at the path to net zero emissions for the global economy.
Now, Australia, we think is really well placed to provide both the raw materials plus the engineering expertise that is going to be required to ramp up on renewable energy sources to support this sort of low carbon electrification of the economy.
We do have the COP26 summit, which is just a few weeks away, and that's going to be focused on how we achieve net zero by 2050 with an estimated investment of over $100 billion in each and every year, to get there.
This is a massive task and the transition is going to take some time. But I think we can look at how around the world we've come together to actually develop and roll out an effective COVID vaccine. And I think this is a standout trend for the decade ahead.
So looking at stocks that, in the mining sector, that are going to be beneficiaries — looking at copper, lithium, even iron ore, and also cobalt that goes into batteries, that's going to be a key area where I think there's going to be a lasting trend and demand that will be beneficial for those companies involved in that space.
Beyond that, we do have very successful engineering firms in Australia. I think one key that is supporting the building of wind farms is a company like Worley Ltd (ASX: WOR), and they should be very well placed to essentially be some of the leaders in this transition to a low carbon economy.
MF: It's a bit of an irony, isn't it? To get to net zero, we still need to dig up all these minerals out of the ground, which are non-renewable.
MC: Yeah, exactly right.
But I think there are other opportunities, potentially, with carbon capture and even with hydrogen that could lead us [to] other places. So companies like Fortescue Metals Group Limited (ASX: FMG) are investing in that space.
What we need now is that unified effort that we've seen with COVID… if we can have more of that aimed at climate change and decarbonisation, I think the next 10 years are going to be very exciting in this space.
Looking back
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.
MC: More recently, the fallback in the iron ore price, and the impact on the share price of iron ore miners, was probably faster than we would've expected or preferred. But I actually think it's a great example of the fact that share prices always have more volatility relative to the company's underlying profits and dividends paid.
I think regret in equities investment is mostly associated with price moves. And there's no doubt that we definitely would've benefited by reducing that exposure sooner. But we also did have some winners through WiseTech and Domino's.
So I really think that the most important thing for people to think about in [terms of] regrets from income investing, is to really look beyond the volatility of the share prices, and actually focus on the fact that what they actually own is a share in the underlying profits earned by the companies that they're invested in.
For people who are retirees, they're hopefully looking at a 20-plus year retirement phase and charities are looking at an even longer time horizon. If you look over those long time frames, there's some really attractive characteristics for earning income and getting a reasonably solid total return over the long term by looking at the Australian equity market as a source of capturing income.
