Buy Hold Sell: 5 long-term compounders

Ah, growth stocks. The darlings turned duds of the market. Would these long-term compounders have fallen out of favour with investors if it had not been for dreaded market kryptonite, or as the experts call it, inflation? Likely not. 

That said. Inflation is very much real. And rates are very much rising. Subsequently, over the past six months, local high-PE indices like the S&P/ASX All Technology Index and the S&P/ASX 200 Health Care Index have fallen approximately 27% and 15%. Yikes. 

But on a stock by stock level, particularly among investor favourites, losses have been far, far worse. Look as far as buy-now-pay-later darlings, like Zip Co and Afterpay (now Square), which have seen their share prices plummet. Or healthcare staples Resmed and CSL, also deeply in the red. 

So as a wise Justin Timberlake once said, in this episode, we are "bringing sexy back" to growth stocks. 

Livewire's James Marlay was joined by Monash Investors' Shane Fitzgerald and WILSONS' John Lockton for their analysis of three sustainable growers. 

Plus, they also each name one stock with long-term compounding potential that looks attractively priced today. 

Note: This episode of Buy Hold Sell was shot on Wednesday 16th February 2022. You can watch the video, listen to the podcast or read an edited transcript below.

Edited Transcript

James Marlay: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay. It's great to see you today. And we're going to be talking about what used to be a really hot topic, and that is sustainable growth. But for some reason in 2022, some of the favourite growth sectors like healthcare and IT have been carted out. What we're going to do is find out if there are some sustainable opportunities that could provide some good ideas to pick over for your portfolio. We're joined by Shane Fitzgerald from Monash Investors and John Lockton from WILSONS. 

Shane, I'm going to start it with you. Aussie Broadband, about a billion dollars market cap, good revenue growth, not so much on the profit side. Buy, hold, or sell?

Aussie Broadband (ASX: ABB)

Shane Fitzgerald (HOLD): I'm going to put a hold on it, but it was tipping over into the sell range, I've got to say. Look, it's had a fantastic run in terms of subscriber growth, but when I look at it's all about customer satisfaction as its point of differentiation and I question the sustainability of that. There are big expectations for growth in the market consensus forecast already, multiple's pretty be high. So at best it's a hold for us.

James Marlay: John, in the small-cap space, these broadband and telcos have been a sensational story for ages. Is it a buy, hold or sell on Aussie Broadband?

John Lockton (BUY): For us, it's a buy. I think some of this momentum can continue over the next 12 to 18 months. It's growing its top line, as Shane said, at a pretty decent clip and we think it can take greater market share than where it is at the moment.

NEXTDC (ASX: NXT) 

James Marlay: Well, we're all on our phones, all in the cloud, zooming around and the rails for that is NEXTDC. Buy, hold or sell?

John Lockton (HOLD): This is a trickier one. I think this is a hold. Our issue there with NEXTDC is that it just doesn't earn any return on capital. So, huge momentum in terms of its top line and the sector trend and the thematic all ticks the box, but it just doesn't generate a return on capital and I think there's better ways ultimately, to make money than owning a DC. 

James Marlay: Shane, it's issued a lot of shares, raised a lot of money. And as John says, the profit line's not moving. Buy, hold or sell?

Shane Fitzgerald (HOLD): It's a hold for us as well, for similar reasons. It doesn't make money at the moment because data centres don't start making money until they have 70% occupancy or higher. And they're putting on extra capacity, a lot of extra capacity, in the next couple of years. We've done our detailed dive on this and DCF on this and we get the current share price more or less. So it's a hold.

CSL (ASX: CSL)

James Marlay: CSL, one of the big darlings of the Australian market. It did just report, people seemed to like the outlook statements. Buy, hold or sell?

Shane Fitzgerald (BUY): It's a buy for us, CSL. If you look at CSL today, it was up six or so per cent and put through a quasi earnings upgrade of that level as well, because they're now including some costs from the acquisition into the guidance. But fundamentally, it's a great franchise. I haven't seen anything that rocks my confidence in the franchise of CSL. It's been oversold. We think it's a buy.

James Marlay: It's a buy for Shane. It is one of the most sustainable growth stocks in the Australian market. Just got a bit expensive for a lot of people. Buy, hold, or sell?

John Lockton (BUY): It's a buy. I agree with Shane in terms of the view that it's been oversold. It's been caught up a little bit in this high growth sell-off because of the multiple, but ultimately this has a very powerful thematic behind it with a multiyear runway and the acquisition, which they made not so long ago, ultimately really adds a new layer of growth into the CSL business. So we are a buy at current prices.

2 attractively priced sustainable growth stocks

James Marlay: Folks, I asked both of our guests to bring along a sustainable growth stock that they think looks attractively priced today. John, first cab off the rank, what have you got to pitch us today?

James Hardie (ASX: JHX)

John Lockton: Ironically, I'm going to pitch James Hardie in the building space, which some people think isn't sustainable because ultimately housing is a cyclical part of the market, but this is really a US story and an underpenetrated part of the market for its core fibre cement products, which sit on the exterior of houses across the U.S. Somewhat differently to Australian, is that they destroy themselves really quickly because of the weather. It's ridiculously cold and they're taking market share off traditional products. 

So we think that this stock has at least a couple more years of really good, well above market growth. And for that, you're paying a multiple, which is broadly in line with the industrials here in Australia. So the stock's been a little bit disappointing recently with an unexpected management change. Ultimately the business is more than one person and we think that the cycle combined with their own internal ability to generate new products and innovate, will lead you in good stead.

PeopleIN (ASX: PPE)

James Marlay: Okay. Shane, what's the idea that you want to bring along and share with us about a sustainable growth opportunity? 

Shane Fitzgerald: I dove down into the small-cap space because it's happy hunting ground down there. PeopleIN or People Infrastructure as they used to be known, PPE. It's a labour-hire business, but it's the country's leading labour hire player in the health, allied healthcare and nurses, as well as in a technology space. So these are two high growth industries which it is leveraged too. And clearly at the moment with the labour shortages we're seeing around the place, it's a pretty good operating environment for it the moment. It trades on about 12 times multiple next year, falling into a single-digit year after. So this is a company with very solid, high teens to 20% growth rates and it's not priced for that.

James Marlay: Okay. Well, folks, growth is not the sexiest term going around the market at the moment. But as our two guests have shown us today, there are still some ideas out there worth looking over and it could be time to find a bargain. I hope you enjoyed that episode of Buy Hold Sell as much as I did. Remember, we're putting up new videos on the Livewire YouTube channel each week, so make sure you subscribe and give it a like.

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