If there is one thing that investors should understand by now, it is that stocks that disappoint the market can be beaten-down in price very badly. But sometimes the market goes too far, and stocks get oversold to what looks like bargain levels. Here are three current candidates that I think deserve to be considered oversold bargains.
1. Hub24 (HUB, $27.26)
Market capitalisation: $1.9bn
One-year total return: 10%
Estimated FY23 yield: 1% fully franked (grossed-up, 1.4%)
Analysts’ consensus target price: $34.47 (Thomson Reuters), $34.31 FN Arena
Shares in the leading wealth management platform are down by 18% since October, and I don’t think that is justified by the way the company is performing. The company just reported an excellent quarterly trading update, with net inflows for the second quarter coming in ahead of estimates; in fact, record second-quarter platform net inflows of $3.6bn brought net inflows for the December 2021 half-year to $6.7bn.
Total funds under administration (FUA) as at 31 December 2021 increased to $68.3bn, while platform FUA was confirmed to be $50bn, up 128% on December 2020. That made three consecutive record quarters for net inflows for the company, and record FY21 net inflows. In a very competitive market, HUB 24 lifted market share from 4.3% to 4.6%, placing it seventh in the marketplace – but on a very solid growth trajectory. HUB24 now ranks second for annual inflows, behind only listed competitor Netwealth Group (ASX: NWL).
HUB24 expects to complete soon its acquisition of cloud accounting software provider (and self-managed super fund, or SMSF, specialist) Class Limited, which the company says will accelerate its “platform of the future” strategy, bringing together integrated platforms, technology and data solutions for financial advisers and their clients. The combined business is expected to provide a competitive advantage and diversification of revenue for both companies.
Analysts are quite upbeat about HUB24, which seems to have been caught up in “tech”-related selling – when in fact it is a high-quality business showing strong growth.
2. Magellan Financial Group (MFG, $18.568)
Market capitalisation: $3.4bn
One-year total return: –59.1% a year
Estimated FY23 dividend yield: 9.5%, 75% franked (grossed-up, 12.6%)
Analysts’ consensus price target: $20.50 (Thomson Reuters/Stock Doctor), $25.04 (FN Arena)
Still in financial services, funds management house Magellan Financial Group has been hammered lately, with a long share-price slide accelerating last month when British wealth management group St James’s Place terminated its investment mandate with Magellan. The St James’s Place mandate had been in place for eight years; it was Magellan’s biggest institutional mandate, worth $23bn – it represented about 12% of the group’s annual revenue and about 15% of the profit. The share price promptly plunged 33%.
The pulled St James’s Place mandate came on top of a horror period of 12 months of investment underperformance of the flagship global equity fund that had many more investors than St James Place undergoing a crisis of confidence in the team led by Magellan’s chairman, chief investment officer, co-founder and second-largest shareholder, Hamish Douglass. The house style came in for a lot of criticism: Magellan typically has half of its global fund in trusted defensive exposures and the rest in companies that are exposed to changes in structural growth, for example, exposure to companies riding the wave of China’s middle-class growth. A cyclical rally and a Chinese government crackdown on companies offering what Beijing sees as non-essential and more frivolous services caught Magellan out badly.
In December, Magellan Financial Group chief executive Brett Cairns left the company unexpectedly, with the departure not explained. Shortly after, Douglass made public that he and his wife had separated – a development that should not be relevant, but was to the extent that it represented a potential change of control in about 6% of the company’s shares.
The group’s funds have been leaching money – September-quarter outflows of funds were a net $1.5bn, then the largest quarterly outflows in the company’s history, and then in the December quarter, excluding the termination of the St James’s Place mandate, Magellan experienced net outflows of a further $1.55bn.
The flagship global equity fund managed to beat the market by 1.4 percentage points in December, helped by a stellar quarter from its largest holding, Microsoft, which was up 22%, but the fund still lags the benchmark over the three-month, one-year, three-year, five-year and ten-year time periods. That underperformance has simply tested many investors’ patience too far.
Put simply, the market has pilloried Magellan, shareholders are furious and there could well be class actions arising from the very disappointing share price performance. Analysts are very cool on the stock – with “hold” the most positive rating in the marketplace – but the point there is that, even with the tepid views of the analysts, most of their price targets are quite a bit higher than the current share price. Magellan Financial Group looks to be a classic over-sold situation – but it will need a sustained recovery in investment performance to justify that view.
3. Zip Co (Z1P, $3.03)
Market capitalisation: $1.7bn
One-year total return: –59.7%
Estimated FY23 yield: no dividend expected
Analysts’ consensus target price: $7.00 (Thomson Reuter, ten analysts), $5.16 (FN Arena, five analysts)
With Afterpay gone from the stock market – or at least, morphed into the CHESS Depositary Interests (CDIs) of Block, Inc. (ASX: SQ2), Zip Co becomes the biggest pure-play buy-now, pay-later (BNPL) provider on the market. The travails of the once market-darling sector are evident in the Z1P share price, which has tumbled from the heights of $14.53 last February to a far more prosaic $3.07.
The company’s second-quarter (December 2021) update, released earlier this month, was pretty good. In the quarter, the company recognised a record $2.6bn in transaction volume and grew revenue 58% to a record of $167.4 million. Revenue and transaction volumes surged in Australia/New Zealand, the US, the UK and what Zip Co calls its “expansion markets” – Canada, Mexico, Poland and Czech Republic (through Twisto) and the United Arab Emirates and Saudi Arabia (through Spotii).
Zip’s global strategy is slightly different to Afterpay’s – Zip is targeting emerging markets, where the demographics of younger consumers dominate and there is a demonstrable predilection to use technology to bypass more traditional channels into the financial services market. In September last year, Zip struck a deal to enter the Indian market by spending $US50 million ($69 million) to buy a minority stake in BNPL company ZestMoney. At the time, ZestMoney was quoted as saying that it believed India would emerge as the largest BNPL market in the world over the next five years.
Earlier this month, Zip Co confirmed media speculation that it was holding discussions with fellow BNPL Sezzle (ASX: SZL), and was considering a takeover offer for the company. Sezzle operates in the biggest retail battleground in the world – the US – which is increasingly becoming a focus for Australian fintechs, and certainly for Zip Co.
Zip Co faces a very important first-half result. Brokers feel that it will show mounting pressures, but also strong revenue growth – broker Morgans is even prepared to predict a maiden net profit (after tax) for the first half.
But the situation is similar to Magellan Financial, in that while some analysts are becoming a bit more cautious on Zip Co and have cut their price targets, they have brought them down to levels still well above the prevailing share price. Zip Co also appears to be heavily over-sold.
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