Matthieu Kidman: Justin, we thought we got rid of the buy now, pay for the shares later, but guess what? Afterpay bounced back. Buy, hold or sell?
Justin Braitling: I think it’s a sale, Matthew. I’m going to put Afterpay in there along with all the other disruptive tech. You have Bitcoin or Tesla, and Afterpay is the same. We probably saw the peak six months ago, and it’s questionable if they reach a new peak. Afterpay is 20 percent off its previous high, and I think it’s probably as good as it gets. There is more competition now; PayPal and Square will soon launch their own versions.
And as the competition intensifies, the frequency of use, which drives this flywheel for Afterpay, reuse rates will be under pressure. And I think the company is going to disappoint in the medium term as some of these competitive pressures kick in.
Wineries of the Trésor (ASX: TWE)
Matthieu Kidman: Let’s move on to Treasury Wine. The Chinese basically said that you are not allowed to sell Penfolds in China. And guess what? It is finding its way in any way, and the stock has risen a lot lately. Buy, hold or sell?
Justin Braitling: I think it’s a buy. Treasury is a unique portfolio of branded assets. And Penfolds, as we’ve discovered, is the price within that Treasury wallet. It accounts for the vast majority of profits. Much of this product is still exported to China at much higher prices and it sells. They will try to pivot into other growth markets outside of China.
We’re still in the early stages, but we’re getting some really good feedback there indicating that they’re going to be successful with this. The new management team, I think, is a breath of fresh air. I think they are doing a great job, and I think this is a great buying opportunity for the treasury. Again, five years from now, we’ll look back and see this as a great buying opportunity for a single asset.
Matthieu Kidman: Well, not even the power of the Chinese government has derailed this fine red wine. Buy, hold or sell?
Ben Clark: The wine must be good. I’ll hang on to this one. I agree with all of Justin’s points there. I think the management has done an incredible job considering all the hurdles that have been thrown at the company recently. The other thing is that he has an incredible asset, which is a lot of this wine that rests in vats and ages, and he’s probably a little underestimated by the market. But it trades 26 times in the short term, earnings are expected to drop in the coming year, although I think it’s a bit of a dark shoot. So I’m going to have a wait.
Education of internally displaced persons (ASX: IEL)
Matthieu Kidman: There aren’t many students venturing to Australia these days, but IDP Education is a global business and students are on the move again. Buy, hold or sell?
Ben Clark: I would go on this one as well. It’s a big business. This is one of the companies that will absolutely play the reopening trade. Many international students, even if they cannot travel to Australia, intend to go to the United States or elsewhere and they have to take the IELTS test. But at 60 times the payouts, it doesn’t look cheap. This is one of the ones that I think you want to put on your list, where if you get a massive sale in the market, this is a good deal to consider buying. The profit recovery is going to be superb, but I think it’s in the price.
Matthieu Kidman: Justin, everyone needs to be educated. IDP is in the middle of this. Buy, hold or sell?
Justin Braitling: I think it’s a buy. It’s a great business. I think there is a huge pent-up demand out there. We have lost a lot of students because of this health crisis that they will be enrolling this current season as Europe and North America open up. Then we have this great pent-up demand for new students. So I think the registrations next year will really surprise on the rise. And there was a real washout of the competition. Many smaller competitors closed their doors during the health crisis and it is a classic case of the strong getting stronger during a crisis.
Matthieu Kidman: Well, some of the growth options have become darlings in racing time. Do you have one for us that we could earn money in the future?
Ben Clark: I am going to choose Appen, Matthew, who has certainly had a very difficult year 2021, mainly due to his top five customers who represent around 93% of his turnover. These customers are delaying projects for which they plan to use Appen data or modifying projects that move resources, which has affected the demand for data.
There have also been big regulatory changes with big tech over the past year or so and the complete shutdown of Silicon Valley and everyone sent home to work hasn’t helped the company. The market is really concerned about competition. He’s worried about the arrival of new competitors who actually use AI to create AI solutions.
The CEO is adamant that there has been no change in the competitive landscape. We have followed him for many years and we think he is a straight shooter and say it the way he sees it. So I really think that’s one way to see a good ramp-up and a pick-up in profits. And you pay 22 times for a business, I think, is still in an area of very long term structural growth. So Appen is my choice to buy.
Matthieu Kidman: Justin, I feel like you have something similar that has been turning a bit sour lately. What do you have for us that is a good growth story?
Justin Braitling: I love A2 Milk, Matthew. It’s a strong buy. The shares are only a fraction of what they were 18 months ago. It’s pretty clear what happened. Through the health crisis, there has been a great resupply of the pantry in China as stores for mothers and babies, and the civic chain has lit on infant formula. And then they had to face the consequences of that in the following neighborhoods. The canal was full, the cross quickly passed through China, and all of a sudden there was a buyer’s strike, the prices started to drop. And because infant formula is so dependent on the channel, these marketers rely heavily on a high price. While the daigou were faced with falling prices, they were content to sell their product.
And so a new direction came in, they basically cleaned up the canal, wrote off all that stock. Daigou now have a release card. The daigou are reorganizing now, prices are going up and the brand is trading well, they are actually gaining a bit of market share. So we think we are all very good signs for the brand.
And the street destroyed the income in the outer years. Profit estimates for 2023 are a third of what they were 18 months ago. So we believe that as the company recovers, these earnings expectations will really surprise on the upside and the stock will recover. I think that’s the stock for 2022.
Matthieu Kidman: The valuations of some of these high priced stocks can be a little hard to swallow, but a good glass of red wine, or even a glass of milk, can be the trick to help us.
Buy Keep Sell is a weekly video series produced by Livewire Markets.
Disclaimer: The information in this presentation is general in nature and should not be relied upon. Before making any financial planning investment decisions, you should consult a licensed professional who can advise you if the decision is right for you. Contributors to this show may have commercial or financial interests in the companies mentioned.