The next generation of Aussie tech titans

The next generation of Australia’s technology unicorns are galloping into sight, says Regal Funds Management CIO Philip King, and he’s betting at least a few of them crack the ASX300 in 2021.

Buoyed by vaccine breakthroughs and the US election result, global markets have been shifting in favour of value stocks. Investors have been rotating out of cyclicals like technology and resources and back toward COVID laggards such as financials, industrial and resource stocks. But this hasn't bothered the style-agnostic folks at Regal.

“It’s important to have a balance; we’ve tried to have exposure to both value and growth, on both long and short positions,” says King.

“Sometimes it’s better to look at some of these stock moves in terms of the reversal of momentum and the reopening trade.”

As an example he points to Qantas (ASX: QAN), which he believes will rank among the biggest beneficiaries of the re-opening trade in Australia. “It’s making losses at the moment so looks expensive, but it’s probably better to think about the reopening trade."

Aussie technology has grabbed the attention of King and his team, but not prominent local players Wisetech (ASX: WTC), Altium (ASX: ALU), Afterpay (ASX: APT), Appen (ASX: APX) and Xero (ASX: XRO).

“The WAAAX stocks look expensive, so we’re very focused on the next generation that are doing very well for us,” says King. He refers to the following small-caps:

• Location-sharing app Life360 (ASX: 360)
• Document-handling company Nitro Software (ASX: NTO)
• Cloud-based call recording software firm Dubber (ASX: DUB)
• Wagering software developer Betmakers (ASX: BET)

YTD performance of emerging Aussie tech firms vs small ords

Source: ASX

Regal first bought into these firms – which range in size from Betmakers’ $378 million market cap to Life360’s $604 million – when they were at pre-IPO stage, via its Emerging Companies strategy. The team then added the names to its Small Companies fund once the companies listed and scaled up.

“And we expect those four stocks will have great profit growth over the next few years,” King says.

“We expect their share prices will increase as more investors become aware of them, and that they’ll all go into the ASX300 at some stage next year.

“It’s always great to have exposure to growth stocks, if you can get that exposure at the right price.”

Gold: "A lot more upside than downside"

Back on the value side, he also likes mining junior Nickel Mines (ASX: NIC). Just last week, the fledgling low-cost producer of nickel pig iron – a key ingredient in stainless steel – tapped investors for $350 million to fund a major Indonesian mine acquisition.

“On a single digit PE and making a very accretive acquisition, that’s been a multi-bagger for Regal and we think it could go up even a few more times from here as well,” King says.

He also likes some gold miners, seeing “a lot more upside than downside in the gold price.” With bullion prices bid up during the pandemic downturn as investors rushed for safe haven assets, the sell-offs of gold exposures as the recovery gathers pace is also creating some good opportunities, says King.

The manager holds names like Saracen Mineral Holdings (ASX: SAR) and De Grey Mining (ASX: DEG). The first is a $5.2 billion gold miner in the throes of being acquired by Northern Star Resources (ASX: NST), while De Grey, whose shares are up 24-fold since March, may soon be Australia’s fifth-largest gold producer.

And at the smaller end, Regal likes Red 5 (ASX: RED) and Westgold Resources (ASX: WGX) – West Australian gold miners with market caps of $522 million and $1.08 billion.

On a broad basis, Regal’s outlook for 2021 is upbeat, looking ahead to “a goldilocks scenario” where very low interest rates continue and corporates have “some of the best profit growth that we’ve had for a long-time” as they bounce-back post-pandemic.

The hedge fund widowmaker

But King is also watching long-term bond yields very closely, mindful that when yields start to go up, markets will face a big headwind. This is where the manager’s shorting strategies come in, and he concedes it’s the biggest challenge for hedge funds that use “fundamental shorting” and rely on a valuation-focused approach.

So difficult, in fact, that even some of the best in the business like Bill Ackman of Pershing Square Capital are getting out of the shorting game. And many of Regal’s peers in Australia are also abandoning short-selling.

“But we’re tilting our approach, focusing a little more on an event as opposed to shorting just on valuation,” says King.

Many local investors will be surprised that Australian banks rank among the local value stocks on Regal’s shorting list.

“It’s always good to be short some value stocks; there are a lot of value traps out there and a lot of people who’ve been deceived by them.

“Banks will do well for a while, but over the next 10 years I find it hard to see the banks growing earnings, as they’re losing share in most aspects of the business to more nimble competitors,” King says.

And in global names, he thinks Tesla could be a candidate for short-selling: “I’m not saying we will, just that we’re going to look at it.”

“Tesla is a bit of a widow-maker on the short side for many long-short managers who have tried to short it on valuation.

“It’s always looked expensive and it still does…but many have been blown out of the water,” King says, referring to those managers who have shorted the company both on valuation and balance sheet concerns.

But in recent weeks, Tesla stock is up 50% after the announcement it will become part of the S&P500: “the single biggest index change in sharemarket history, and $150 billion added to the market cap despite there being any change in the fundamental outlook for the stock, I think that could be a great opportunity to short it.”

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