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, Tribeca Investment Partners portfolio manager Simon Brown reveals the two shares he'd snap up now at a 40% discount.
Cut or keep?
The Motley Fool: Let's examine three ASX shares that have been devastated this year and see if you think each of these fallen stars is now a bargain to pick up or if you'd stay away.
The first one is Life360 Inc (ASX: 360), which has dropped almost 40% in the past 12 months. What do you think?
Simon Brown: Yeah, similar to comments that I made with relation to NextDC Ltd (ASX: NXT), in terms of a high growth business where discount rates went up, cost of money increased, and you've seen a reasonably violent de-rating.
It probably doesn't help that it hadn't been necessarily profitable. It is investing for growth and spending quite a bit of money — and those growth rates are very high. So as an investor, if they can continue to invest money to generate those rates of growth, you've got to be reasonably happy.
But you've seen names within the sector that have held up far better. Some of those larger growth names haven't come off nearly as much as Life360 has, and there's probably a bit of a difference there that those ones have reasonable levels of cash generation and profits.
I guess there was a misstep somewhere. It was with the acquisition of Tile, which probably hasn't performed to expectations that were laid out when they made the acquisition. That's baked into the share price as it is now. But it also puts pressure on the business to look to make that acquisition work.
And they've got a program coming up where they're going to bundle Tiles for new subscribers to incentivise customers to sign up to their membership plans. So that's looking to be rolled out in calendar year 2023. We think that should be an opportunity to continue to monetise their user base and potentially lift the level of profitability.
They just raised money, you might have seen in the press just recently. Given that they've got that trajectory towards cash positive later in calendar year 2023, they thought it was prudent to raise some money just to make sure if economic impacts in the US or the like had an impact on growth.
So that's a name we've been on record as saying we've been quite supportive of throughout its journey since COVID, when they were able to demonstrate they were quite resilient in a downturn. It's a name that we've really, really liked and we are supportive of what that business is doing.
MF: Do you still hold it?
SB: Yes, we do.
MF: Fantastic. Next one is Dusk Group Ltd (ASX: DSK), which has fallen about 40% this year. What do you reckon about that one?
SB: Consumer discretionary has been a challenging area to get a huge amount of confidence, in terms of investment.
I think that the most recent update was strong — ahead of where analyst expectations are. But I guess that there's a couple of things. It is a little bit challenging to get a true read on the rate of growth given that we had the Delta lockdowns last year, in that first quarter of FY22. So the run rate comparisons are hard to get an underlying feeling of the true rate of growth, given that the prior comparable period was very depressed.
Secondly, given the level of inflation that's been coming through, particularly for domestic retailers such as Dusk, who import a lot of their products that they sell, there has been a lot of price inflation. That is clouding the ability to see the true underlying volume of sales. We suspect that's probably weaker than the nominal sales that are being recorded.
If you are coming into a period where that rate of inflation is slowing, the higher rates are pressuring consumers and they're more thoughtful about what they're buying, it potentially puts pressure on some of these retailers. They'll be forced back into some degree of discounting and it could prove problematic for margins.
Expectations aren't particularly lofty for the space, but given how leveraged they are with cost bases very much skewed towards wages and rent, both of which are escalating reasonably strongly, it doesn't take a huge amount of disappointment at that sales level to translate into meaningful movements in profit.
So yeah, we're on the sidelines there, just waiting for the interest rate rises that started in March to flow through into consumers. You tend to start to see the impacts around nine months after the first rate rise. We are watching very closely there as to how much of an impact we see on consumers and how that will relate to future earnings for companies like Dusk.
MF: Fair enough. The last one, which has also plunged about 40% this year is HMC Capital Ltd (ASX: HMC).
SB: That's the old HomeCo. It's a property funds management business. They've got two listed REITs — HomeCo Daily Needs REIT (ASX: HDN) and the Healthco Healthcare and Wellness REIT (ASX: HCW) — so they're an alternative asset manager.
We think David Di Pilla's done a good job there to date. We're a big fan of the funds management model in property. You've obviously got some very successful examples of that model in Charter Hall Group (ASX: CHC) and Centuria Capital Group (ASX: CNI).
[HMC Capital] emanated out of small caps that we've invested in previously, that have done very well for our fund. We identified HomeCo as a name that was coming off a smaller base. They had lower levels of invested assets, meaning that as they looked to grow via acquisition, those acquisitions can have a more meaningful impact on growth.
So that's a name that we quite like. They continue to accumulate properties and start new funds.
Look, there has been a property cycle within REIT to some degree. You've had interest rates going up, which should flow through to lower property values via an increase in cap rates there. There's been a degree of value destruction across that REIT space, where a number of the names are trading at fairly steep discounts to their last reported net tangible assets.
You'd argue there's a degree of devaluation in their properties already imputed in the share price. And we think once rates plateau and start to come back down — as they inevitably will as economic growth slows — there's probably an opportunity for the space, including HMC, to pick up a tailwind there. And do better given the underperformance of the whole space over the last 12 months.
