When a professional investor has 54 ASX shares in his portfolio but singles out one as his pick of the February reporting season, investors need to pay attention.
According to Katana Asset Management portfolio manager Romano Sala Tenna, his team categorises investment opportunities into one of three categories: growth, quality, or (deep) value.
Occasionally he runs into a gem that fits two of those buckets.
However, Pepper Money Ltd (ASX: PPM) is the triple threat that somehow fits all three categories.
"Pepper Money is trading on a PE ratio of five times earnings, has averaged 21% growth per annum for the past decade, and has a high calibre management team and business model," Sala Tenna posted on Livewire.
Second time unlucky?
Pepper Money has had two lives on the ASX. The first incarnation, called Pepper Global, lasted from 2015 until 2017 when it was bought privately.
The current version listed in May last year and has had "a troubled return" since.
"From an IPO price of $2.89 per share, the stock has steadily declined to around the $1.70 mark."
But this just makes it a golden buying opportunity, as far as Sala Tenna is concerned.
"There is a lot to like about this company, and it wasn't a straightforward decision," he said.
"We have been tracking Pepper Money since listing, and finally began building a position around the $1.90 level."
Pepper Money is 'the holy grail'
As a loans provider, one very obvious tailwind for Pepper is rising interest rates, which is expected to come multiple times later this year.
"In the 21+ years that PPM has been operating, it has demonstrated that it is increasingly adept at passing on rate increases to preserve net interest margin."
A structural growth stock, according to Sala Tenna, is "the holy grail of investing".
"It is easy to see why. If we consider a stock growing at 5% per annum, then after 10 years it has grown profits by 1.6 and presumably its share price by about the same amount," he said.
"However, if a company is able to grow its profit by 20% per annum consistently, then through the effect of compounding its profit will grow 6.2x, and so too will its share price (all things being equal)."
He added that true structural growth narratives are extremely rare, and they often trade at a PE ratio that's 10 or 15 times higher than the market.
"A basket of structural growth stocks that we track is currently trading on an average PE ratio of 34 versus the S&P/ASX 200 Index (ASX: XJO) 's PE ratio of 16.3."
This makes Pepper, with a PE ratio of 5, outstanding value at the moment.
The Pepper Money share price has plunged more than 22% this year so far, closing Monday at $1.69.
