SIMON BROWN: Chatting now with our Kyle Wales, portfolio manager at Flagship Asset Management. Kyle [I] appreciate the early morning time. A note that you sent out basically [says it’s] time to buy consumer discretionary and tech stocks, looking here at the US rather than local[ly]. And a lot of folks are going to be [saying]: ‘Have you seen those prices? They’re under pressure, results weren’t excellent.’ And you’re saying, hang on, but that’s exactly the time when you step to buy the quality when people are scared and when the bears are roaring,
KYLE WALES: They offer compelling value in our view at the moment. So if one takes a consumer discretionary stock, like a Capri Holdings, basically a fashion company listed in the US, [it] trades on six times earnings currently versus a long run average of 15 times. So there’s a lot priced into those stocks already.
SIMON BROWN: And that’s just it … we are looking at it and where we are today, August 2022 [with] interest rates, inflation, GDP data and everything, but markets are looking forward. And of course we are investors. We are not worried about what today is, we are worried about what they’re going to earn over the next number of quarters and years going forward. And that’s what these sort of sell-offs do: they create great opportunity.
KYLE WALES: Absolutely. It’s always very hard to call the bottom of a bear cycle and people that try to do so normally fail. But when you do find good companies trading on compelling valuations and you have a long-term view, I think that’s more often than not, the time to buy.
SIMON BROWN: You make a great point about this. You’re not sitting here bravely putting your head on the block and saying the bottom is in. I mean prices can go lower. There are still challenges out there. We are not trying to predict prices. We are just looking at valuations in a sense.
KYLE WALES: Absolutely. It’s always very hard to call the bottom of a bear cycle and people who try to do so normally fail. But when you do find good companies trading on compelling valuations and you have a long-term view, I think that’s more often than not the time to buy.
SIMON BROWN: You make a great point about this. You’re not sitting here bravely putting your head on the block and saying ‘the bottom is in’. Prices can go lower. There are still challenges out there. It’s just simply [that] we are not trying to predict prices. We are just looking at valuations in a sense.
KYLE WALES: Absolutely. And we are technically in a recession at the moment. There have been two quarters of negative quarter-on-quarter GDP growth, but it’s worth pointing out that the average length of recession over the last 50 years is only 11 months. So the rebound might come sooner than people expect.
SIMON BROWN: Your one tech stock is Adobe. Of course when people talk tech, it’s the social medias, it’s the Fangs [Meta, Amazon, Netflix, and Alphabet] and the like. But Adobe – I use their product. You make the point that their suite of products, also a service, is essentially the Microsoft Office to those in the creative space.
KYLE WALES: Yes, Simon.
We think tech as a whole has been unfairly blighted because you had the unicorns on one hand, trading at 10 to 20 times sales, and then you’ve got the stalwarts of the tech industry which, even though they’re expensive on a pure multiple basis – stocks like Adobe – are actually are not that expensive relative to their growth prospects.
So if I look at Adobe, for example, it trades on 28 times earnings, which is not cheap by any means, but it has grown at 34% per annum over the last five years. Colgate Palmolive trades on a similar multiple. Its earnings have gone backwards at a rate of 1% per annum over the last five years, but it currently has this halo around it because it’s a consumer staple stock, which investors believe will be more defensive in a market like this.
SIMON BROWN: And Colgate Palmolive on that sort of valuation is frankly mind-boggling. One of the beauties of Adobe is that annuity income. Users sign up for the service and typically they pay. [Adobe] pings my bank account every single month and they have done, I’m thinking, probably for close on eight years, and will do it for many years further. It’s not just the growth, but it’s that base that’s baked in, which is unlikely to erode at any point at any time soon.
KYLE WALES: Yes.
Our belief is actually that some tech stocks like Microsoft, like Adobe, are more defensive than consumer staple stocks.
When you go the supermarket, you have a choice between buying Colgate Palmolive toothpaste and buying an Oral B toothpaste, and sometimes you might change your mind, whereas, as you say, with Adobe that monthly subscription comes off your account like clockwork, and there’s no chance that you’re going to change to an alternate product because Adobe’s a product you use, it’s a product you are used to and it would be very difficult to switch.
SIMON BROWN: You’d have to go and learn everything again. Capri holdings – this was one I did not know. They own Versace, they’ve got Jimmy Choo, two brands I don’t own but two brands I know. That really is aiming at the high end and, more than anything, it’s just its valuation. It’s at a price earnings of below seven which, you make the point, is well below its long-term average of 15.
KYLE WALES: If one looks at Capri historically, over that period [when] it traded on an average multiple or 15 it was just Michael Kors [which] recently bought Versace, but Versace’s punching the lights out. So the whole thing now – including Versace which actually presents a compelling long-term growth story for the company – is trading on six times earnings. We believe that’s completely unfair.
SIMON BROWN: Yes. And mispriced.
We’ll leave that there. Kyle Wales, portfolio manager of Flagship Asset Management, is saying that it’s now time to step into the waters here.
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