One of my favourite investment ideas over the years has been to buy the large-cap online marketplace stocks during share market corrections.
REA Group (REA), Seek (SEK) and Carsales.com (CAR)always look expensive for good reason: they are exceptional companies with a long runway of growth in Australia and overseas.
Real-estate portal REA Group has a 10-year annualised average return of 30.2%, Morningstar data shows. Carsales.com and Seek have returned about 22% annually over that period. Buying these stocks when they offer better value during corrections has paid off.
However, I wouldn’t buy any of these stocks now. They’re pricey at the current valuation. Of the three, I’m least interested in Seek. Yes, it’s a terrific company, but I wonder if business-focused platforms, such as LinkedIn, are becoming the main jobs channel for many.
My interest has turned to online sites that lost favour and are starting to recover. Or have strong growth prospects in Asia, but valuations that do not adequately reflect the outlook. Or are exposed to strong growth segments, such as home renovations.
Several online marketplaces have been affected by Covid-related issues that have weighed on consumer demand. When lockdowns end, particularly in countries badly affected by Covid, classified advertising on car, real-estate and job-ad sites should bounce back.
I’ve outlined three ideas below for online marketplace stocks. Readers who favour small-cap stocks could also consider Frontier Digital Ventures (FDV), which is focused on building online marketplaces in developing countries.
1. Hipages Group Holdings (HPG)
I first outlined a bullish view on the tradies website in this report in December 2020 (“Three IPOs to watch”) at $2.20 a share. Hipages rallied to $3.50 and is now $3.04.
I confess to having doubts a few months ago after using Hipages to source tradies to fix my fence (when there were no lockdowns in Melbourne, for a fleeting period!). None showed any interest in the job but that could have been partly because of timber shortages.
Hipages’ latest quarterly result exceeded the company’s guidance, sparking a rally in its shares. It’s always a good sign when IPOs beat their prospectus forecast.
There’s no doubt Hipages solves a problem for consumers who want to source tradie quotes efficiently, and for tradies who need more work and smart tools to schedule, quote and invoice for jobs. Or that Hipages is the dominant marketplace for tradies jobs.
More will be known when Hipages reports on August 26. Lockdowns in Sydney and Melbourne will affect the result, but any significant price weakness on the news could be a buying opportunity for long-term investors.
Chart 1: Hipages
Source: ASX
2. iSelect (ISU)
I wrote favourably about the health-insurance platform for this report in mid-July (“2 health insurance stocks to watch”). iSelect rallied from 43 cents then to 55 cents and is now 47 cents.
To recap, iSelect, has been belted in recent years. Once a market darling, iShares was fined for misleading advertising, lost its CEO, had falling website traffic and terrible marketing. Its share price hit a 52-week low of 24 cents – a far cry from its $1.80 offer price in the 2013 IPO.
Fund managers dumped the stock and analysts stopped covering it. Just the conditions for smart investors to increase their position in iSelect. Its rival, Compare The Market, has lifted its stake to 35%, sparking recurring talk of an iSelect takeover.
iSelect this week reported a 10% fall in revenue to $111 million in FY21, largely because of Covid-related impacts on consumer demand for health insurance. But underlying earnings (EBITDA) rose 52% to $20.8 million as iSelect evolved its business model and cut costs.
In its guidance, iSelect says it expects cash flows to remain strong, underpinned by trail asset collections, which it expects to perform in line with expectations. iSelect’s trail commissions (fees it receives from previous policy sales) at one point were worth more than the company.
About 70% of iSelect’s trail book is payable by health-insurance companies. That means two things: iSelect should have consistent future cash flow; and investors are not paying much for the company’s operations at the current market capitalisation (most of the value comes from the trail book).
The market’s reaction to iSelect’s profit result looked a little overdone, although that was no surprise given the strength of the price rally in the second quarter. iSelect still looks reasonable value for experienced investors who understand the risks of contrarian micro-cap investing.
Chart 2: iSelect
Source: ASX
3. OFX (OFX)
Like iSelect, OFX (then known as OZ Forex Group) was a market darling for a time after it listed in October 2013. OFX’s $2 offer price capitalised it at $480 million.
Today, OFX is valued at $388 million – eight years after its float. Its stock trades at $1.60. For a company that had so much promise at listing, returns for its early investors disappointed. Earnings downgrades, rising competition and slowing demand hurt OFX.
The Sydney-based platform enables international money transfers. OFX’s business-to-consumer market has been affected by Covid, but its model has moved much more to a business-to-business offering. The B2B model is a lot less volatile and has a lot more repeat business.
To be sure, international money transfers are a highly competitive market. Financial technology (fintech) companies with their snazzy Apps add to the competitive threat.
But international money transfer is a giant market, giving OFX plenty of long-term growth in its addressable market. OFX should grow at double-digit rates when Covid lockdowns finally ease – but is not priced for that type of growth at the current valuation.
Longer term, regulatory focus on anti-money laundering provisions will provide more incentive for companies to use trusted providers and quality counterparties like OFX rather than new entrants. Regulatory reform might provide a small barrier to entry for new players.
OFX had net cash of $60.6 million at its FY21 result in May and a strong balance sheet with little debt. OFX launched a share buyback for the first time, which suggests it believes its shares are undervalued – a view I share.
OFX has rallied from a 52-week low of $1.01 and $1.60 as the market pays more attention to its recovery prospects. Price gains might be slower from here, and a pullback or pause would not surprise after the recent rally. But there’s a lot to like about OFX’s medium-term prospects.
Chart 3: OFX
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at August 25, 2021.