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The Motley Fool: What are the 2 best stock buys right now?
Elfreda Jonker: I can share 2 examples of stocks that we've recently bought into our fund. So the first one is Lifestyle Communities Limited (ASX: LIC). It's quite an interesting little company. Well, it's not that little, it's got a $2 billion market cap. But effectively what they do is they're a Melbourne-based provider of affordable housing for people over 50 — retired or pre-retired.
They offer a community-style shared facility. They use the land lease model. You pay for the home, but you lease the land from them. So it's not aged care or retirement homes. It's all houses that self-care, but it's built on shared facilities for the community.
For us, this is a very interesting concept. It's quite well-known internationally, but not necessarily here.
At this point in time, Lifestyle is based in Melbourne and the outskirts of Melbourne. They have around 24 communities, but they are really growing with plans to grow across Victoria. If you look at the current sales and their pipeline, we think it's quite exciting that, even through all 6 of the recent lockdowns, they've been consistently able to continue to sell. Now after the lockdowns in November… it's really accelerated once again.
As soon as they find the land, they will get developers in. They develop the land and they pretty much pre-sell at least 50% of those properties beforehand.
So the risk of the model is relatively low. The cost of the model is relatively low to them. And particularly for, I think, those kinds of retirees or pre-retirees at that age, given that the property market has been so strong, they have not had any issues to sell their [old] houses for really good prices and then, I guess, downscale to a bit of a lower-cost house within these communities.
From Lifestyle's perspective, their revenue streams would be the development fee when they sell the units. And then the ongoing land rental and house selling value, obviously. So they've got an internal rate of return of around 20% on those units that they sell — the development fees.
The key really is that we think they can certainly expand faster than what the market's currently anticipating.
At the end of the day, the biggest risk for a company like this is probably a house price decline if you see a huge fall in the market. But given that they are quite a bit lower than the overall housing market price, there's certainly already a buffer built into that price of theirs.
Obviously, you can see competition, and you can see construction costs increasing. So you always need to look at this and say, are you aware of all the risks? What is priced in for us?
We have the expectation here that you can see consistent earnings growth coming through from this company, and a valuation that we don't think is particularly expensive, and also with a very strong balance sheet. So there's not a lot of risk that they can't raise enough cash or continue to expand at the current strength of the balance sheet. So it's really about winning market share, growing faster than the market [is] expecting, and just a really well-run business with a very good management team. We really like that opportunity.
MF: I see the share price has almost doubled this year.
EJ: Yes… it's up around 70% over the last year. We've had [the stock] in our sustainable fund for quite a bit. We've also recently added it to our Australian share fund. But yeah, it's definitely outperformed the market very well.
It's trading on a 23-times PE [ratio], so it's not really seen a massive re-rating in this period, but it's really been an earnings growth story. And I think that's the crux of what we look at, to try and identify those companies where we believe the market's underestimating the potential earnings growth of a company. So it is definitely a nice little niche company.
The other one that we've recently added back into our funds — we used to have it a while ago — is Treasury Wine Estates Ltd (ASX: TWE).
It's one of the largest premium wine producers in the world. And one of the largest listed wine players and possibly even the largest listed pure wine producer in the world.
What happened with this company is that they had a very big setback last year when China slapped the 200% tariffs on Australian wines. That really caused the share price to tank. Subsequently what's happened is that you have actually seen them really back-fill that book that they used to have in China, into other parts of the world.
Also, over that time, they have seen a huge amount of earnings downgrades, and obviously, China was very disappointing and very disruptive for the business. But what's happened of late is that they actually also have a very, very good, strong management team and they're realigning their business. They're busy transforming, particularly their US business. They recently bought a business called Frank Family Vineyards in California, which I would love to go and visit one day.
It's a luxury wine business. They've got a very strong margin, 35% to 40%. And I think that's really what Treasury is trying to do, to focus more on that premium side of the business. They have got a range of very strong brands now, and all areas of the business in Australia, as well as abroad, are now actually growing again.
If you think about how much you do pay for a glass of wine in a restaurant or so forth, it's really a high-margin business in general. And given the pullback that the [share price]'s had of late, and now the new acquisitions, relatively strong balance sheet, as well as the ability to now just continue to grow into other areas and particularly into the US, we're very excited about their potential scope for growth there.
We've put that company back into our portfolio. So definitely one to watch for the next year.
MF: I remember when the China tariff came in last year people feared the worst about Treasury Wines, but they've done really well to get around that, haven't they?
EJ: Yeah. And it's all in the last year that they've really been able to find other clients in Asia and US and pretty much across the board. And I think that's a nice thing. It's actually a stronger business now because they're more diversified. They are focusing more on the premium brands, so yeah, I think it's exciting.
And on a 25x PE, we don't think it's incredibly expensive for the sort of earnings growth and margins that this business can generate.
