There’s a Japanese proverb that says: “Fall seven times, but stand up eight”; in other words, perseverance is what wins. And with emerging companies, it is almost standard to see major setbacks on the route to victory.
However, these temporary setbacks can cause a collapse in the share price. Herein lies the opportunity: to invest in the resilient and adaptable ones making their comeback, while the share price is yet to fully catch up. So, for this week’s Buy Hold Sell, we look at some stocks fresh from the sin-bin and find out if they're ready to go back on the pitch.
James Marlay: Welcome to buy, hold, sell. Today we're talking about the comeback stories. Everyone loves an underdog. The stocks we're talking about today have had a period of underperformance but are starting to turn good. Here to talk about comeback stories. I've got Rob Miller from NAOS and Arden Jennings from Ausbil. Arden, let's kick it off with you and Enero Group. Buy, hold or sell?
Arden Jennings: Yeah, I think it's a buy, James. Management have done a great job turning around the business. We've got 60% of their earnings offshore now. They had been acquisitive and they've acquired quite well. They also have a PR business called Hotwire that is really servicing the U.S. tech firms primarily, but also other firms around the globe, and that's really exposed to a high growth segment of the market. It's trading on a reasonable valuation sort of 14 times, but offering 26% EPS growth. So from that perspective it's a buy.
James Marlay: 26% EPS growth sounds pretty attractive. Buy, hold or sell, Rob?
Rob Miller: Yeah, it does James. And I think it's a buy as well. It's one we hold in the portfolio. It's been a key turnaround over many years, but it's starting to really bear some fruit. I think the key thing at the FY '19 team result was the double-digit organic growth figure, which the market clearly liked. For us, Hotwire is the jewel in the crown. Plenty of growth there in terms of upside in the U.S. market. They are clearly under penetrated there and that is the biggest market for them to operate within. Net cash balance sheet, they've got the ability to acquire more businesses and it's a growing market and in terms of their multiple, they trade at a significant discount to global public and unlisted peers as well. So we think it's a buy.
James Marlay: Okay. Next stock is MNF Group. Actually had a moment in the sun a few years ago and fell on some pretty tough times. Buy, hold or sell on MNF?
Rob Miller: Yeah, James, for us it's a buy. Again, it's one we hold within the portfolio, it's a software business in our opinion that is kind of working the telecom market, I should say, rather than the other way around. The key thing for us there is they've got a digital infrastructure in terms of the network they built. The competitive advantage is real, and it's growing. It's a network effect with what they do. What we really like about the business is their key customers are the likes of Google, Facebook, Amazon and Microsoft. And when these key customers grow by virtue, MNF grows as well. As I said, it's valued like a telco, but it should be a software business in our opinion. So for us it's a buy.
James Marlay: Okay. Google, Facebook, Network Effects, sounds pretty good to me. Buy, hold or sell?
Arden Jennings: Yeah, look the NAOS team know this one pretty well, think probably the best in the market, but look for us it's a hold. It's amazing what happens when you repackage the presentation and communicate clearly. Talk about recurring revenue and the market seemed to like it after a period in the wilderness, if you could say that. You know, the exit runway for the second half '19 it looks like they're on track to get the upper end of their guidance range, for FY '20, but don't really have a really strong view here. So, leave it on hold for now.
James Marlay: Okay. Now retailing and traditional retailing has not been the best place to have your money over the past few years. Baby Bunting had a whole bunch of issues after a great debut. It's popped recently. Buy, hold or sell?
Arden Jennings: Yeah, we really liked this. It's a buy. We do own it in the fund and we were buying it aggressively prior to the results. I think got hit by a lot of transition money in the market. But look, these guys really delivered on the result. Prior to the result it was trading on 16 times PE, offering 30% EPS growth, which is quite attractive. But I suppose the market didn't believe that they were going to hit that guidance, but they did, and some more. So markets re-rated that. Coming up, we've got the AGM, which should provide a positive trading update. They're revisiting their store format across Australia, and we think there could be some upside from that at the first half results. So strong online growth. They're really watching the website, strong same store sales growth, expanded footprint from the store rollout, management are executing on what they said they would do. Stock is up, sort of 60% since June, but we think that there could be more to come in the next 12 months.
James Marlay: Okay. Rob, do you believe the turnaround story is more to go at a Baby Bunting? Buy, hold or sell?
Arden Jennings: Yeah, look I agree that the management's done a great job with what cars they've had in terms of in front of them at the moment. For us it's a hold. I think they've been almost a survival of the fittest in terms of the industry. We've seen a lot of competitors fall by the wayside and clearly Baby Bunting had benefited from that. Their gross margin profile in terms of retailers is on the low side, so that's a concern for us. That's probably the main reason why I think it's a hold, based on that. And also the valuation is as quite a run in the last little while. So for us it's a hold.
James Marlay: Okay. Now I've asked each of you to have a dig around for something. It's a bit beaten up, a bit bruised, but you think he's ready for a comeback? Rob, let's start with you. What have you got?
Rob Miller: Yeah, sure James. I've got Moelis, which is obviously the asset management business we all know. Where I think the market's possibly misunderstood that is the volatility around their revenue profile. It's actually morphed itself from being a corporate advisory type business into more of a funds management business. Now they've got circa 70% of their revenue coming from funds management. Principally in real estate. We think it's an excellent management team who are very well aligned, trades on a single digit AV to EBITDA multiple. So for us it's a buy.
James Marlay: Okay. Arden, have you got something that's a bit unloved, that's ready for a turnaround?
Arden Jennings: Yeah, one we think is a buy is Countplus, CUP is the ticker. It's one that we've recently added to the portfolio. It's a very small company, only about 110 mil in market cap. Post the acquisition of Count Financial from CBA. These guys actually sold the business originally for over $300 and ... $300 million and now they are buying it back for for $2 million as CBA wanted to get it off their books. But we think that FY '20 is going to be a really transformational year for the business and looking into '21 it's sort of trading on 10 times PE, ex cash. Yeah, taking the cash off as well. So yeah, really attractive earnings profile. There is going to be a lot of change obviously in the financial advice and accounting space. But they are well equipped to really dominate the space and become the next, perhaps Steadfast and Oz brokers of that sector. And another key signal for us is that management insiders have been buying substantial amount of stocks on market.
James Marlay: Okay. Well, don't give up in value. Even the beaten and bruised can make a comeback.
Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 )and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.