Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Tribeca Investment Partners portfolio manager Jun Bei Liu picks three stocks that are discount buys right now and why she suspects growth could come back into vogue pretty soon.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Jun Bei Liu: I run the Tribeca Alpha Plus Fund. It's probably one of the longest-running long-short funds here in Australia and probably one of the largest, just over $1 billion.
We specialise in Australian equities. We're a very active investor. Long-short means we take advantage of rising and falling share prices. And we're finding the current market environment providing lots of opportunities.
Myself, Jun Bei, I've been an investor, a fundamental investor for almost 20 years. And my career spanned across Australian equities and also had some exposure to international equities.
Hottest ASX shares
MF: What are the three best stock buys right now?
JBL: I think on a risk-adjusted basis, we actually think things like CSL Limited (ASX: CSL) is an amazing buy at current levels. Share price has been depressed as investors [have been] selling that whole growth basket. And unfortunately, CSL got bundled into it.
This is a company that's going to deliver double-digit earnings growth for the next few years, regardless of economic outlook. And this company will also be a beneficiary of [the] reopening economy as well because the blood collection used for plasma production has been very weak because of the COVID disruption and now has really picked up.
So, the earnings growth, it's very, very defensive. It's not dependent on economic outlook. And the share price is a very reasonable level. So I think that's a really strong buy.
The next one in my mind is Xero Limited (ASX: XRO). We love this company because, for many years, it's demonstrated its execution in dislodging incumbents and growing its share and became a dominant player across the New Zealand, Australian markets. And now it's gone to the UK. It's demonstrated it's gaining [market] share really well.
Share price, again, [is] being punished because of people rotating out of growth stocks into others. And I think the current share price is [at] very reasonable levels. It's not something you buy for next month's earnings. It is something you buy for the bottom drawer, for the longer term, for the next five years.
So we love Xero.
MF: Earlier this year Xero shares were punished because the company decided to reinvest money back into the business rather than try to make it more profitable in this environment. What do you think about that dilemma they have?
JBL: Yeah. Look, to be honest, I always believe for businesses that have such huge addressable markets, it is actually important for them to continue to invest.
If you look at some of the market leaders, things like TechnologyOne Ltd (ASX: TNE) — that's another one of our picks as well — they're just continually executing on growth and continually to expand on the existing product suite, but they're constantly expanding on the R&D so that they will stay ahead of the competition. That's why they're so dominant in a category.
So I think that for tech companies, they do need to do that, particularly if you can demonstrate that your return on capital is significantly higher than what can be otherwise generated. To me, that's the right thing to do.
I don't buy this company for near-term earnings. To be quite frank, I didn't think the disappointment was all that large. It was just investors still very skittish with growth companies, just because they're unsure of the growth premium, what they want to pay for the growth premium. That's why the opportunity exists.
MF: Speaking of how the market's turned against growth shares, how fast do you think that sentiment can turn around again?
JBL: I think as long as, which we saw last week, you start seeing the stabilisation in bond yields, essentially the expectations of interest rate, then you will begin to see interest moving back into those growth or long-duration stocks.
Also you need the market sentiment to improve, not a "risk-off" kind of environment.
Essentially, three or four components to be in place. One is that peak in inflation expectations. So, last two weeks you probably heard… all the inflation stats are looking horrendous at the moment. But there are some indications that some of those supply chain disruption things are improving and the inflation may be peaking.
Secondly, the interest rate expectation peaking. So, the market was expecting an enormous interest rate increase just before the slightly mixed message out of the [US Federal Reserve] last week. Now that you see interest rate expectations started coming back because now you started getting mixed messages out of the Fed. Some actually started saying, "Oh, maybe in September, they may pause to see how they go."
And then the next one is the valuation de-rate. So we see certainly across the growth sector, some of the names that really come off. Then, we need the outcome of the Ukraine-Russia war, [which] is still a little bit uncertain.
So I think, with all these core components, certainly seems like hard to call market bottom [yet], but it does feel like it's looking a lot better from here on.
That bodes pretty well for some of those growth names.
MF: And the third stock that you like?
JBL: Given my thesis on growth, I would pick Seek Limited (ASX: SEK). The company's very leveraged to the employment market. The company's done well over the years in terms of growing from a small classifieds business into a dominant player. And then went to other markets, managed to replicate some of its business.
Now it's well on its path to capitalise on its base. Essentially like what REA Group Limited (ASX: REA) did many years ago, to start increasing output on every spend, every account. Seek just started doing so, and it's very early stage with that monetisation process.
So we see this company will have a multi-year double-digit earnings profile, and share price being sold off because, again, it's growth. Also, people suddenly worry about the economic outlook, even though our employment market is incredibly strong. Our inflation is nowhere near the way it's expected in the US.
That to me is a good buy. I think you'll do well in the [next] 12 months.
MF: It has a very dominant position in Australia, doesn't it? It doesn't really have a close competitor these days.
JBL: Yeah, it's very dominant.
Over the years we have had a lot of new [competitors] that threatened to dislodge that position, but they come and go, right? They're never really proven, and [don't] really gain a meaningful market share.
You've got the likes of Indeed. Remember when they come in? Back then there was My Career and then so many different businesses. They were going to be the next big thing. But none of them did.
In any tech space, first-mover advantage is huge. Secondly, the company's management never really stopped investing, and they've constantly reinvested and then essentially provide value to their customers. So that's why they've got a very sticky base. They've done well.
