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 names not one, but two, ASX shares that he'd buy and hold for the long run.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Hamish Tadgell: I'm sure a lot of people say CSL Limited (ASX: CSL) to you when you ask this question.
I think that is, you can say that it's a late cycle recovery play and it's an incredibly good business spending $1 billion a year on R&D, and got so many growth options in it. Yeah, you could definitely say that, but I'll give you another one — NextDC Ltd (ASX: NXT).
It's a stock that is really a long term investment play in our view. It does, from time to time, prove a little bit volatile around half-yearly updates as to whether they're ahead or behind on where the market's trying to forecast in terms of connections and interconnections and the like. But when we look at it, if you look at the thematic backdrop first in terms of continuing growth and consumption of data, which has just exploded, I think [it] is only going to continue to go one way.
There is an increasing need for these types of assets, data centre assets. We also see that the barriers to entry around these increasing, due to privacy data security and particularly data sovereignty legislation. The Australian government has passed certain legislation that unless you've got certain accreditation and a domestic company, the Australian government won't have a contract with you.
So it puts domestic players in an incredibly strong position and they need to meet very high quality standards in terms of the infrastructure and investment they're making.
The data centre is like a property play at the end of the day. You build the centres, have long term contracts with certain providers and then your major shopping centre retailers, your Woolworths Group Ltd (ASX: WOW), your David Jones, and the like. And then you have a whole lot of small and medium enterprise businesses that take out space in your data centre. It's a bit like the specialty retail shops, if you like.
It's the combination of those that provides an attractive yield and growing return on capital over time.
The other thing, there's been a lot of focus recently on rising energy costs and data centres are big users of energy. They are increasingly trying to put in more sustainable sources, solar and alternative sources of renewable energy, but they also have pretty strong pass-through in terms of passing those energy costs onto customers. So that provides a reasonably high level of insurance in a rising inflation environment, which again is what you're looking for — companies with pricing power.
MF: You mentioned the NextDC share price can be a little bit volatile. But in 2022 it hasn't been as volatile as most other tech stocks. It's been more steady, like an infrastructure stock, hasn't it?
HT: Yeah. Well, it is. It's got infrastructure characteristics about it. You got to build the infrastructure first.
A lot of people get a little concerned when companies [like] NextDC announces that it's going to spend more money on new data centres. We actually get excited by that because it highlights that there's growing demand for their product. And historically the company is not built on-spec. It's only really built where it's got effectively offtake agreements or commitments from customers that underpin those developments.
