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, SG Hiscock portfolio manager Hamish Tadgell gives his thoughts on a trio of stocks that have fallen off a cliff this year.
Cut or keep?
The Motley Fool: Now let's take a look at what you might do with three ASX shares that have plunged in recent times.
First is Seek Limited (ASX: SEK), which has lost almost 40% year to date.
Hamish Tadgell: I'd say this is a keeper.
We think it's a quality business with some very strong longer-term growth prospects and optionality on Asian markets in particular.
I think, though, that the market's clearly been debating how much this company could be priced or impacted for a recession. And when we look at it, the market's actually pricing a recession in or about a 25% drop in volumes in this business. Seek did very well coming out of COVID, really tight labour markets. Everyone's looking to put people on and jobs.
There's this concern that [if] we get a recession, then people will stop employing and job advertising will fall in a hole. We certainly think that consumer spending will slow over the next sort of 12, 18 months with higher rates, as household cash flow starts to come under a little bit more pressure. But we don't see the same drop off at this point in labour market activity.
This week, [there was] a two-day conference up in Canberra, which is all about trying to create more jobs in a very tight labour market, which has been COVID impacted, but I think there's other structural issues going on, changing it at the moment. And we think that Seek should continue to benefit from a reasonably resilient labour market over the next sort of 12, 18 months.
Therefore, I see it as being mispriced at the moment.
MF: At least in Australia, it's got quite a dominant market position. It's seen off many challengers over the years, hasn't it?
HT: Yeah, it does. Look, I mean LinkedIn and Facebook and others over the years have become competitors, but it's certainly still the preeminent site, the leading site.
What we look for in these online businesses is you want to be the market leader because it's the virtuous circle that you look for in these businesses where the market leader creates more opportunities, that then feeds into more eyeballs. More eyeballs feed into that being the preeminent site where people want to advertise and you get that virtuous circle and we still think that Seek certainly has that.
MF: How do you feel about Aristocrat Leisure Limited (ASX: ALL), which has lost about a quarter of its stock price this year?
HT: Yeah, this stock was clearly impacted during COVID. It had a very strong recovery due to the [post-]COVID recovery, but also due to the announcement that it made that it was looking to get into iGaming and buy one of the leading competitors overseas and that transaction fell over, and with it, the stock has come back quite a bit.
But we still see this as a quality business generating $1 billion in free cash flow per annum with little debt. It is the leading global player in electronic gaming machines and it's really got a strong opportunity to continue to grow in the gaming and digital online space.
I'd say, in particular, it's very well positioned to still develop and grow in that iGaming, or real money gambling as they call it, market in the US. So, this is an opportunity, which Aristocrat looked to buy and enter the market through buying a competitor. That didn't play out, but it's now going the organic route of developing the business itself. But we certainly think that they've got the people and the opportunity and the capital to be able to do that.
The iGaming market in the US is estimated to be about $20 billion. It's emerging as a result [of] the deregulation by the US states at the moment… So we see it again as a keeper and one that we think there's certainly value opened up as a result of the pullback in price.
MF: Great, so two buys there.
What are your thoughts on the third one, GPT Group (ASX: GPT), which has dropped about 24% so far this year?
HT: It's an REIT that has derated a lot over the last 12 months. General Property Trust is the biggest diversified REIT probably in the market — office, industrial, retail, and some funds management.
This is one we probably cut. We just think that we're increasingly cautious around the office and the industrial market. And in particular, office really, we think is probably the asset, the property asset class that is most at risk post-COVID from changing behaviour.
MF: There's been a cultural change in where people work, hasn't there?
HT: Well, I think it is. There's been a lot [of debate], over the last 12 months… but it remains pretty uncertain how it's going to play out.
We're seeing it in our business and our observation talking to a lot of companies is that staff are seeking more flexibility. People are spending less time in the office. And I think companies are getting to that realisation and up until now probably have been debating about how much space they need, what they need.
But I think over the next year or so, in a couple of years, you're going to start to see more decisions made. And I think that is going to have a big impact upon rents and cap rates in the office space. We're seeing already at the moment — the incentives in the office have gone up dramatically.
Industrial assets have been very big — had done incredibly well — through the deflationary cycle and lower rates, but also globalisation. And my comments at the outset about higher rates, de-globalisation, I think, puts some pressure around those cap rates.
The area we probably prefer the most is probably retail at the moment, in terms of property, but also social infrastructure assets like I spoke about before in terms of, Qube Holdings Ltd (ASX: QUB).
So for those reasons, I think it's one that we would probably cut.
