Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Marcus Today portfolio manager Ben O'Leary picks two ASX shares in pole position to take advantage of how the world is changing.
Hottest ASX shares
The Motley Fool: What are the two best stock buys right now?
Ben O'Leary: I've got a couple of genuine growth stocks here with some structural long-term tailwinds.
The first one is WiseTech Global Ltd (ASX: WTC). They had results in February — their revenue operating earnings were up 18% and 54%, their EBITDA [earnings before interest, tax, depreciation, and amortisation] underlying profit blew consensus expectations out of the water, and they upgraded their growth items as well. They showed that their numbers are going really well.
They are a genuine growth company with wins that are about benefiting from the longer term structural changes in the shipping industry. And they are really revolutionising that.
The big thing with their numbers is they've got recurring revenues. Last year, 90% of their revenue was recurring, which is very impressive. We know customers are a really important thing in the long-term success of any business. That's why things like Amazon.com Inc (NASDAQ: AMZN) and Netflix Inc (NASDAQ: NFLX) and whatnot have done so well, because of their customer retention, and [WiseTech's] customer loss was below 1% for nine years in a row last year. So they really do get people on board and keep them on board.
Obviously they are a high-growth tech company, so they are going to be pushed on the valuation grounds when the market gets worried about that, which they have recently. It's a little bit at the whims of what the central banks decide to do, but we've recently got a little bit more clarity there and the market is factoring in something like seven [US Federal Reserve] raises by the end of the year. So even though that will be a factor on pressure and valuations, I think from our perspective, it's mostly priced in and the tailwinds behind it will hopefully outweigh that. It's culled 15% from the top with that little pressure, so seeing a bit of an opportunity for a good long-term investment that'll push years into the future.
MF: It hasn't discounted quite as much as many other ASX tech shares, has it?
BO: No, it's held up probably because of those numbers they reported. Because it reported so well, it did show that there is a reason you're buying it. It's not just a story, there's numbers behind it that are serious.
The second one there I'll jump to is Johns Lyng Group Ltd (ASX: JLG). It's one we've liked here for quite a while. It's done really well for us. It's a building services company that specialises in emergency construction work. So they have a lot of contracts with insurers. Its core business is centred around the restoration of properties that have been damaged in external events like floods and fires. And we know that there's the trend, which is a really unfortunate trend, of climate change, extreme weather events. We've seen some really unfortunate ones recently, but the numbers show that growing year to year.
That means that Johns Lyng Group is going to be in demand, and companies like that are going to be in demand. There's going to be a lot of restoration work needing to be done and continuing to be done.
They've shown an ability to get those contracts and get the work and grow with that demand. So they've performed really well. We see there's a lot of scope for them to continue to perform well. And they're what we call here a bottom left to top right stock. So when you look at [the share price] chart, it goes pretty much bottom left to top right, so it's a really nice trend there.
They're a similar story as WiseTech, where it is on a high P/E [price-to-earnings ratio]. So when the whole market tips on valuation grounds, it does come under a bit of pressure. But again, we think there are a lot of tailwinds going into the future that could see it still form an opportunity to lock in a long-term position.
MF: You've already touched on this a bit, but you're not too worried about the fact that it has gone up quite a bit in the last couple of years — that the valuation isn't too high?
BO: Obviously it's a factor, but we are talking about a genuine growth company here. I think it's definitely one, you won't find it being one of our biggest holdings. We're taking a tactical risk here, but we see the upside is there.
They had quite a bit of consolidation within the industry. They've been quite aggressive in their own expansion. So I think they're there. They're ready to take their slice of the pie and keep getting those contracts and sending vests out to grow with that increased demand in years to come.
MF: As you say, we saw from the floods in eastern Australia a couple of weeks ago, demand for its services is not going to fall, is it?
BO: Yeah, exactly. Every year the things we're seeing tell us there have been more extreme weather events, which is really unfortunate. But … people are going to need their homes rebuilt. Also, the infrastructure needs to be maintained and rebuilt after these disasters, so someone's got to do it.
