3 stocks Eiger Capital is buying and one it has just sold out of

Then there are companies that just report, "That's the profit and that's it. There's only one number. And by the way, if you want verification, look at the bank balance. It should go up or down roughly according to what the company's profit looks like." 

It's the companies with all the adjustments and the pro-formas where the bank balance has inevitably gone down and they've made a huge amount of money, and we don't like that either. Complexity, and adjusted earnings. 

And another one of our beefs at the moment is excessive stock-based comp, which companies copying Silicon Valley have just decided is free money. 

They'll stick it below the line and not even count it in profits. Those are three red flags at the moment.

LW: Where have input pressures eased and where do they remain? 

They're now right back where they were pre-COVID. 

That's all happened literally this year. That's one where there's been a dramatic cut in inflationary pressures for companies. 

The other one, as much as households right now are not going to believe this, but for large consumers of energy, the heat looks like it's come out of the global oil price, gas prices, and coal, to the extent of using that to generate electricity, the heat looks like it's coming out of that. It doesn't mean it's going to flow through to the consumer, but it should start flowing through to heavy industry, things like diesel, fairly soon.

LW: You are overweight IT Services and underweight Consumer Discretionary right now. Why?

IT SERVICES OVERWEIGHT

The first one is a company that reported its results this week, a company called TechnologyOne (ASX: TNE). It's been a stellar performer in the small-cap space over the last decade. They sell software to councils, universities, and state governments for all manner of organisational software basically. They've always had a great business in Australia over a long period of time with clients virtually in every state, federal government, and council. 

Their business in the UK, which they've been working on for a decade, is now starting to get real traction. We hope it will be one of those overnight successes 10 years in the making. But the UK business looks like it's doing well. It's a well-run business. It has quality management, and management that has come through from internal succession, which we like. Also, given the customers, they're relatively immune to an economic downturn, and they've got some degree of pricing power because they've got a quality product. 

Another one we like is Life360 (ASX: 360). It is more in the consumer space. It's a business that a lot of families use in Australia by osmosis. It's never been sold here. Its real home market is the United States, where its paying circles, its subscription business, has grown extremely rapidly, including through COVID, when in theory you didn't actually have to know where anybody was because guess what? They're in the other room. 

It grew nicely through COVID. They've put through some price rises recently. They seem to have stuck. They've taken advantage of the downturn in Silicon Valley to let a few staff go. They don't have to keep as many people on the bench if you like, because a few years ago you couldn't get them back. Now you can. So that's the second one.

The third tech stock we like, which has a defensive property element to it, is NEXTDC (ASX: NXT). Once again, it is a company that's grown through the small-cap space progressively over the last 15 years. It's a major data centre provider now. I think the thing that we like about it, apart from the recent expansion to New Zealand and Malaysia, is that there's a chance, and we don't know yet, but just as the ever more powerful cameras in your iPhone or your Samsung have loaded up data centres with data and that Google searches have loaded up data centres with data, it's going to be fascinating to see what ChatGPT does. 

Will that actually just throw another exponential level of growth in data use? Because if it does, and I guess there's an expectation it will, then that is just going to be more demand for more servers and more data centres. That's our overweight to IT services. It comes from three pretty different areas, but it obviously bulks up to an overweight exposure to that sector.

CONSUMER DISCRETIONARY UNDERWEIGHT 

On the other side, we're underweight consumer discretionary spending. 

We think that the consumer has overspent on home furnishings and small renovations during COVID. 

There's been a big binge in travel in the last 12 months to make up for something that was taken away for a while. But we are just wary that interest rate pressure, utility prices, rent, and a general concern about the level of economic activity will, in the end, because spending in that space to have to, in the case of home furnishings and home spending, revert to the long-term growth rate. This means that if it rose during COVID, it's got to fall, and we expect that to happen over the next 12 to 18 months. The feedback from retailers, in particular, is that as this year has played out, the environment is slowly but surely getting tougher.

LW: Is there a stock within this sector that you are avoiding for those reasons? 

A stock in the consumer discretionary space that we've recently exited is Viva Energy (ASX: VEA). It's been a great performer, and part of the reason for exiting is that it hit our valuation targets. On that front, tick for management, because the stock price has risen a lot recently. 

However, they've just made a substantial new expansion in their discretionary footprint with a large acquisition. Sometimes, with large acquisitions, it's not a bad thing to sit back and see how the integration goes. See if the synergies come through. Maybe they take a bit longer than expected. We think the price they paid has been relatively full. 

We applaud what management's done long-term. They've got to diversify away from being a purer fuel and petrol retailer, no doubt about that. Probably given the rise in the stock price, the amount they've paid for the acquisition, the concerns about how fast they can integrate it, and of course, if there is a bit of a consumer slowdown, what does it mean if you've just bought a whole lot of extra convenience retailers? For those reasons, that's a stock that we've recently let go of.

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Eiger Capital is an active boutique Australian equities investment manager specialising in small companies. For further information, please visit their website or fund profile below.

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