I am not a huge believer in overly active portfolio management. For my core portfolio, I invest for the long term, so I don’t carry expectations that I can “buy at the bottom” or “sell at the top”. Time in the market, rather than timing, is the key driver. But re-balancing and re-weighting, throwing out the dogs (or mistakes) and occasionally, taking a bit of profit and trimming exposures, are strategies I do employ.
It is with regard to the latter strategy that I am suggesting a couple of portfolio trimmings. While I still like the companies, I think they have run too hard and it is time to lock in a profit and moderately reduce the exposure. Down the track and at a better price, I will look to re-invest.
I have also nominated two that have “cheapened” (mainly due to the “rotation trade”) and are candidates to develop or increase exposure to.
Here are two to sell and two possible replacements.
1. Seek (SEK) – reduce
Seek closed on Friday at $26.06, just shy of its 52 week high of $26.50. It is 10% higher than its pre Covid-19 high set on 17 February, and 230% higher than its market meltdown low of $11.23 on 23 March. Importantly, it has more than fully recovered the loss it suffered when it came under attack from a foreign short seller in late October – it has risen by 31% from the low on November 2.
Seek (SEK) – last 12 months
Source: nabtrade
Short seller Blue Orca Capital accused Seek’s 61% owned Chinese employment jobsite, Zhaopin, of creating fake job advertisements and fake CVs to boost traffic. It also said that there were accounting irregularities. Seek issued a statement strongly refuting the allegations. It agreed that Zhaopin was an industry leader (not necessarily the leader), saying that “Zhaopin led on many key metrics, but not all”.
Friday’s ASIC data showed that there was still a meaningful short position in Seek, with 4.85% of its ordinary shares sold short.
Seek says it is continuing to invest in Zhaopin and three structural themes – online education, Human Resources as SaaS, and contingent labour .
CEO Andrew Bassat delivered an upbeat assessment of the Group’s prospects at the recent AGM on 19 November, saying that “revenue is well above the assumptions underlying the illustrative assumptions provided in August”. They have now guided for FY21 for revenue to be in the order of $1,600m, EBITDA of $400m and NPAT of $50m.
But to put these numbers in context, the results pre-Covid (for FY19) were revenue of $1,530m, EBITDA of $456m and NPAT of $177m.
Seek is back to trading at stratospheric PE multiples as the company invests for growth. About 137 times forecast FY21 earnings and 62 times forecast FY22 earnings. The major brokers, according to FN Arena, have a consensus target price of $23.67, about 9.2% lower than Friday’s close. Individual targets range from a low of $19.90 from Macquarie to a high of $28.50 from Credit Suisse.
Although target prices have been rising (on the back of upgraded guidance at the AGM and an improved outlook for the Australasian business), Seek looks fully priced.
Reduce.
2. Xero (XRO) – reduce
I am a huge fan of accounting software provider Xero (XRO). I nominated it as recently as 28 September in 4 top tech stocks to buy in a dip (see https://switzersuperreport.com.au/4-top-tech-stocks-to-buy-in-a-dip/ [1]). At the time, it was trading at $97.63. On Friday, it closed at $133.76, up 67% in 2020.
Xero (XRO) – last 12 months
Source: nabtrade
The thing I like most about Xero is that its core product, accounting software, is incredibly sticky – typically accountants (and their clients) do not like change and churn is relatively low. It is cloud based, which makes the business very scalable. Remarkably, there are still huge opportunities for cloud-based accounting software outside Australasia. The company is also very innovative, and in Australasia, is developing an eco-system around the accounting software for its small business customers that allows it to grow ARPU (average revenue per user).
But on a key metric, growth in customers, Xero grew international subscribers in the last 12 months by 20.5% to 1.03m, just marginally faster than the increase in Australasia of 18.3% to 1.43m subscribers. In the USA, where Xero is battling Intuit and others, Xero added a disappointing net 10,000 customers in the half year to 30 September.
Xero cited Covid-19 and the prolonged filing of tax returns as being causes to the underwhelming performance of its US business, where it is still a relative minnow with 251,000 customers. It will need to better in this key market.
The company is particularly liquid following a US$700m convertible note issue, which will potentially be used to drive business abroad and further acquisitions/investments. But it is expensive. According to FN Arena, the consensus target price of the major brokers is $104.16, 22.1% below Friday’s close of $133.76. UBS is the most bearish of the brokers with a “sell” recommendation and a target of $77.00, Citi the most bullish with a “neutral” and a target of $125.00.
Reduce.
3. NEXTDC (NXT) – add
I also nominated data centre provider NEXTDC (NXT) in 4 top tech stocks to buy in a dip.
NXTDC is involved in the development and operation of independent tier III and tier IV data centres in Australia. It focuses on providing scalable, on-demand services to support outsourced data centre infrastructure and cloud connectivity for enterprises of all sizes.
It grew data centre services revenue by 18% in FY20 to $200.8m, and over the last 6 years, revenue has grown at a CAGR (compound annual growth rate) of 28%. Underlying EBITDA grew by 23% in FY20 to $104.6m.
NEXTDC has been improving operating metrics (revenue per square metre and revenue per unit of power consumed). It is well capitalised for growth, with additional data centres in Sydney, Melbourne and Perth under development. For FY21, it has guided to revenue of $242m to 250m (growth of 21% to 25% on FY20), and underlying EBITDA of $125m to $130m (up 20% to 24% on FY20).
When I nominated NEXTDC on 28 September, It was $12.46. It traded upwards reaching a high of $14.10 on 9 November, but by Friday, had fallen 20% to $11.28.
NEXTDC (NXT) – last 12 months
Source: Nabtrade
I can’t see any reason for the fall apart from the “rotation trade” and profit taking after a very strong share price performance in 2020. The CEO said that the company had “experienced a strong start towards meeting FY21 guidance” at its AGM on 13 November.
The major brokers are positive on the stock with 6 “buy” recommendations and 1 “neutral” recommendation (no “sells”). According to FN Arena, the current consensus target price is $14.00, approximately 24.1% above Friday’s close. UBS is the high with a target of $15.25, while Credit Suisse brings up the rear with a target price of $11.70.
Add.
4. Carsales.Com – add
Last Thursday, Tony Featherstone outlined a positive scenario for car sales (new and second hand) in https://switzersuperreport.com.au/gearing-up-with-2-auto-related-small-caps/ [2] ”Record low interest rates driving a house price recovery and with that, higher spending on home related goods and cars “.
New car sales are still falling, but the rate of fall has slowed and last month, sales were only down 1.5% on the same month in 2019. While tax incentives on instant asset write-off have helped, momentum is building as consumers feel flush with cash and confidence is high.
One company that is set to benefit from the tailwind of higher spending by consumers is carsales.com (CAR). Carsales is one of the largest digital automotive advertising businesses in the world. It has consolidated its leading position in Australia (its audience is more than double its nearest competitor), and international businesses (South Korea and Brazil) are growing. In FY 20, the latter contributed 24% of look through revenue and 19% of EBITDA. Data services is also an important contributor to revenue.
The company has a strong record of with revenue, EBITDA and NPAT growing consistently.
For shareholders, carsales has also been a strong outperformer.
After hitting a Covid-19 market meltdown low of $9.64, carsales more than doubled to $22.99 on 23 October. It has since pulled back closing on Friday at $20.31.
Carsales.Com (CAR) – last 12 months
Source: nabtrade
Carsales has not provided specific guidance for FY21. However, CEO Cameron McIntyre said at the AGM that the company expected to benefit from the resilience of the used car market and that excluding metropolitan Melbourne, “overall lead volumes grew strongly on the corresponding quarter in FY20”. South Korea was also experiencing “good growth in revenue and EBITDA”. The company was ‘well-funded with low gearing, strong liquidity and cashflow that will continue to fund growth and dividends”.
The major brokers are positive on carsales but see it as appropriately priced. There is 1 “buy” recommendation and 6 “neutral” recommendations (no “sell” recommendations). The consensus target price is $19.34, 4.8% lower than Friday’s close of $20.31. In a tight range, Credit Suisse is the low at $18.80, Ord Minnett is the high at $20.26.
On broker forecast, carsales is trading on a multiple of 34.7 times FY21 earnings and 30.2 times forecast FY22 earnings with an expected dividend yield of around 2.4%.
These numbers are not out of line for a company that has demonstrated consistent earnings growth rate of 10% pa and should be a beneficiary of favourable tailwinds.
Add.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.