Four mispriced Australian and international stocks you should know about

Arguably the time is ripe to be hunting for undervalued stocks. Markets are choppy. Interest rates are rising. Inflation is high. Investors are nervy. Striking gold is not always a simple task though, and in some cases, it can take years to generate returns. Just ask Steve Johnson, Founder and Chief Investment Officer at Forager Funds, who points out that some of his high conviction picks won’t pay off for a few years yet.

He's played the long game for many years now and taken calculated risks, some of which he says have paid off more than others.

One of his most successful has been Celsius (NASDAQ: CELH), a carbonated water company that grew from 1% US market share to 4% in the couple of years that Forager held it. Another is Jumbo Interactive (ASX: JIN), a seller of online lottery tickets, which Forager identified as an opportunity at a point where German losses masked the value in the Australian part of the business.

Forager view themselves as seeking differentiation, rather than simply hunting value. They typically exit positions when the stock has reached their desired outcome, or market consensus has made it less appealing from a growth perspective. The Forager team recently discussed their approach and some of the stocks they've identified in a webinar on Tuesday 11 October. You can watch the webinar here.

The Forager approach to finding mispriced stocks

According to Johnson, there are two ways of finding undervalued stocks.

1. A differentiated view of a company where you have a contrarian opinion compared to market consensus.
2. Dysfunctional market activity (aka like current markets) where there might be panic behaviour or forced selling.

In either case, investors need to have a rich understanding of the company they are looking to buy – there’s no other way to determine if it's undervalued or not.

Forager run concentrated Australian and international portfolios of between 20-40 stocks. High conviction on the potential outcomes for the stocks they invest in is crucial.

Two Australian opportunities

Taking a contrarian approach to identifying stocks can mean choosing companies that fill niche service or product needs.

Take RPMGlobal (ASX: RUL) for example, which is the largest position in the Australian portfolio at present. RPMGlobal provides software to mining companies, with its products recognised as the industry standard.

Forager identified RPMGlobal as an opportunity at the point it started to move its service model from a single upfront fee to a subscription model. According to Alex Shevelev, Senior Analyst for the Forager Australian Shares Fund,

“The move to a subscription model meant a short-term profitability hit as they lost the large upfront payments. This made it look less likely to grow and hit share prices but RPMGlobal has added $11m in new annual subscription sales in the last year.”

While costs have also been trending higher, latest reports have indicated growth in costs are expected to slow in FY23 and EBITDA to triple.

The team see continued upside in maintaining the holding. Two competitors to RPMGlobal were recently sold at valuations that were 2-3x RPMGlobal, so they expect offers may come this way too.

The travel industry may not be one where investors have expected to see mispriced opportunities at the moment but Forager believes that Apollo (ASX: ATL) and Tourism Holdings (NZ: THL) combined are an excellent opportunity. Both companies rent recreational vehicles like caravans and then sell them at the end of rental life. The COVID-19 pandemic and lockdowns created an opportunity for them to sell off capacity into what was a highly receptive market. This buffered it from needing to raise capital in a challenging time (a contrast to a company like Flight Centre (ASX: FLT)).

Both companies are merging in the coming year and they have around $17m in synergies to capitalise. They can also further leverage and combine growing European businesses and merge the US and Canada businesses. The dual listing next year should create a combined market capitalisation of $500m and future years should start to see tourism return to normal. Shevelev anticipates this business could generate 6-7x in earnings from 2025.

Two international opportunities

Now is not the time to ignore global opportunities, regardless of geopolitical concerns.

It may come as a surprise to many to realise sports betting is a relatively new market to much of the US. Laws enabling the states to make their own decision around legalisation only started around 4 years ago. This has made the US a highly attractive and lucrative space for gambling companies to enter.

One such company is Flutter (LON: FLTR), a global giant with a range of sub-brands. It has launched its brand FanDuel which offers sports betting and daily fantasy sports across the US. FanDuel is the market leader with around 40% marketshare. Ohio and Massachusetts are expected to open later this year, offering tremendous opportunity and growth for FanDuel.

Gareth Brown, Co-Portfolio Manager of the Forager International Shares Fund, says, 

“FanDuel is already profitable in 10 states and we expect 30% margins in coming years. The gap is likely to widen between FanDuel and its competitors. We’ve owned the business for around 10 months and expect it to become a cashflow machine as it establishes itself across the US.”

Another company that sounds less familiar – but hosts a lot of household brand names – is Techtronic Industries (HK: 0669). Think Ryobi, Milwaukee and Hoover. The business is largely US-based but is Hong Kong-listed and has offered good returns for a decade.

Harvey Migotti, Co-Portfolio Manager of the Forager International Shares Fund, says, 

“Valuations have been a good entry point for a company we expect will continue to gain market share.”

Techtronic has been a first mover on battery-powered tools, which has created new markets for the company and expanded its share. It plays to many thematics across the market – such as continuing renovation and construction. There’s a lot of pent-up demand in the US for this activity. Migotti believes the market has underestimated Techtronic’s exposure to non-residential construction which will support the company in coming years.

Where next?

Though pricing and value come to play in the Forager strategy, Johnson says it is more about balance. That is balance of pricing and future opportunities against risks. Forager looks for good businesses that will grow over time rather than short-term mispricing opportunities. Less ASX top 50, more likely to be unique businesses that have the strength but perhaps not the household brand.

Do you hold any of these stocks?

For more information about the Forager portfolios, visit the fund profile below:

Managed Fund

Forager International Shares Fund

Global Shares

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