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, Eley Griffiths portfolio manager Nick Guidera reveals the 2 ASX shares that currently dominate his fund.
Biggest convictions
The Motley Fool: What are your two biggest holdings?
Nick Guidera: Well, since we last spoke, Aussie Broadband Ltd (ASX: ABB) is actually still one of our largest holdings, 6 or 7 months later.
There's a number of reasons for that. One has been the stock has performed well during that time on the investment thesis that we had, which is this is a small, or probably a medium size telco now, that is taking a significant amount of share from other participants in the NBN world.
It's now the 5th largest retailer, having grown substantially and holding around 5% market share. Given this run rate and the ability that it is attracting customers due to its superior customer service offering, that market share will probably continue to grow.
Probably more interesting for your readers is the recent announcement of an acquisition of Over The Wire Holdings (ASX: OTW), which was another listed company. That allows Aussie Broadband to move out of the retail space, into the business space.
They've had a business broadband offering, but this allows them to offer far more comprehensive [services] to businesses seeking voice and data and other technologies that Aussie has historically steered away from.
The market is interested in this acquisition because there are significant synergies that will come out over time. It's been flagged somewhere in the vicinity of $8 to $12 million, and they are going to come from things like network costs, improved margins, obviously not having two ASX boards and the costs that come with being a listed company.
A lot of these synergies look particularly achievable and putting the two businesses together, you are close to a $70 to $80 million EBITDA business heading north of that. Growing at a really impressive rate — 20% to 30% — means that the runway for this business has probably got some way to go.
MF: It's dropped a little bit this month. Do you feel like this is a buying opportunity?
NG: I think so. I think it's actually dropped pretty much in line with a lot of the higher-growth, more expensive stocks in the emerging end of the market, just on this correction that we've seen in the last 2 to 3 weeks where investors, having made [a] significant amount of money in this, and many others are taking some profits and reallocating some of that capital into other stocks.
Since the actual confirmation of the [Over The Wire] deal, the stock has de-rated — so yeah, I would be comfortable buying on the pullback.
MF: Great. And the other largest holding?
NG: The other one is a mining stock. And it's a stock that we have been on for a very long time. The stock is Capricorn Metals Ltd (ASX: CMM). It is a gold stock. The 3 reasons why it's in our top 2 holdings is it has the best management track record in the industry, probably for the last 20 years. They have an increasingly large production profile. And we are confident they can double production from here.
They've been very good stewards of capital, and in both the development of this mine and further expansionary opportunities, we believe that should there be limited options for them to do with the capital that they have, or the cash that they're generating, that capital will be returned to shareholders.
Their gold price is starting to move. More recently I suppose some concerns over both inflation, a higher rate cycle [has led to] the correction we've seen in markets in the last 2 or 3 weeks.
This stock's been in the portfolio for a long time. It's not a gold price proxy, but I think that that could draw attention to the name as people look for gold exposure if they're rotating out of other resource names.
MF: Do you ever worry about the cyclical nature of mining companies?
NG: I think gold typically bucks the cyclical trend. Gold can be out of fashion if the cyclical rotation is ongoing. And I think that's what you've seen in the last probably 18 months… It's often flocked to for its defensive characteristics. It's often used as an inflation hedge.
In the past, in 2018, it was seen as the barbell portfolio that you needed. You needed gold stocks, and you needed tech stocks because growth was hard to come by and people were questioning whether… the market was going to roll over at that point.
I think mining stocks, as a whole, certainly have a cyclical bend to them. There are some question marks right now as to how elongated this cycle will be.
As a rule, you do need to be careful about investing in mining stocks… You need the expertise from people like Tim Sergeant, who I work with, who spends days looking at mining stocks to make sure you pick the right ones.
Because at the end of the day, mining stocks are just like an industrial. You need to understand management, you need to understand their strategic plan, how they allocate capital. They just happen to be digging things out of the ground or processing material. Those things are just as important, but the overarching thing you need to consider obviously is the outlet for the commodity.
