It’s certainly shaping up to be an interesting earnings season with companies struggling to get an accurate gauge on earnings in the wake of the pandemic.
Investment Director, Small Caps at IFM Investors, Melinda White, says 157 companies withdrew guidance during the peak of the lockdowns, with 123 of them in the small-cap space. She adds that the number would have been higher had more companies had formal guidance out there.
“At the FY20 results, you’d normally expect companies to say something about the outlook. Given the fact that the outlook is so uncertain going into FY21, and probably into FY22 because of COVID circling the world, it’s very unlikely that we’ll get any kind of outlook statements from companies.”
Melinda says that within the small cap space there are still some high quality growth businesses with nascent business models that have moats and have been in a position to benefit from the pandemic.
“Marley Spoon is one that comes to mind in the small cap space. In their most recent quarterly [update], they did almost 50 percent revenue growth.”
“Another example would be Fineos, which is a small-cap tech stock. They haven’t missed a beat. It’s tech development, so all of their people are fine working from home and their customers have a regulatory push that hasn’t gone away because of COVID.
“In terms of the technology they’ve developed; it’s very niche but it’s a very big market – a $10 billion total opportunity for them.”
Stock of the Week #1; Breville Group
What a great Australian brand name… and the naysayers reckon Australian manufacturers are dead! Brokers Morgan Stanley has upgraded Breville to a buy with a target price of $28, saying that it could potentially capture $3 billion of the global $10 billion kitchen appliance market.
I asked the experts on The Call (On Ausbiz), Andrew Page from Strawman and Michael Wayne from Medallion Financial to share their views on BRG.
Andrew says that on paper, Breville isn’t a stock he would normally like, given that the nature of its market is that competitors eventually copy their innovations.
“You have thin margins, it’s very competitive and it comes down to scale and global reach,” he says. “And yet, when you look at the financials of Breville, they have consistently and significantly grown their earnings over time. They generate a 20 per cent return on equity and have done so for a long, long time.”
His only concern is that he stock is currently trading at a PE of around 42. He says he would seriously take a look at it on a pullback though.
Michael says BRG has had some good stewardship over the years, with Solomon Lew one of the biggest shareholders yet he wouldn’t be a buyer at these levels.
Stock of the Week #2; Technology One
Software as a service (SaaS) provider, TechnologyOne, was hammered this week after being accused of, by Hong Kong based GMT Research, bringing forward revenue and profit to disguise a slowing of business activity.
TNE has dismissed the claims and remains committed to the guidance provided at the beginning of this financial year.
As a result I experts, James Rosenberg from EL & C Baillieu and John Milroy from Ord Minnett for their views on TechnologyOne. John says he has never uncovered any governance issues with TNE but the current share price multiples are too high for him to be a buyer.
“It’s been more about what’s happening inside the business and how they go about generating revenue, and they have done a really good job, and have been a great performer in the market” he says.
James says TNE is one of the highest quality businesses on the ASX with “trustworthy management” and doubted the accuracy of the GMT report.
“They’ve got a phenomenally robust history of steady earnings growth, [there’s] never been a hint of scandal about them,” he says.
Like John, James thinks TNE is overpriced. He is currently a shareholder and says he would definitely add to that on a pullback.