The last three weeks have been a bloodbath for a number of ASX tech darlings that led the stimulus-fuelled 2020 bull market.

It’s a notable rotation in the context of post-COVID markets, and this week Stockhead spoke with pro investor Ron Shamgar to get his thoughts on the shift.

As head of Aussie equities at Tamim Asset Management, Shamgar has stayed nimble to start the year — trimming some winning 2020 positions and pivoting to companies positioned for the next phase of the recovery.
 

Hitting the BNPL brakes

For starters, Shamgar explained what to look for when “momentum” plays run out of momentum. The simplest example in ASX tech is BNPL.

“They’re momentum stocks in the sense they’re valued on a revenue multiple (rather than an earnings multiple),” Shamgar says.

When momentum takes hold “usually everyone else in the sector is valued against the market leader which becomes the benchmark”.

In the case of BNPL, Afterpay (ASX:APT) was always the leader. “So if it’s trading at 35x revenue multiple, the competitors at lower multiples are considered cheap,” he added.

“The problem is these businesses are still growing, but that growth is starting to slow down and as enthusiasm wears off, momentum slows and the revenue multiple contracts.”
 

The i-word

Investor Heath Moss told Stockhead recently that “inflation is coming“.

(Here’s why that’s important for ASX tech investors).

Central banks have flagged higher inflation, but they’re not too worried about it. And as an investor, Shamgar says it’s not necessarily a bad thing.

“To me it’s more of a short-term sentiment impact,” he says.

“If a company continues to outperform on revenue or earnings, eventually the share price will follow — regardless of inflation.”

And more broadly, “inflation is better than deflation”.

“I actually think it can be good for equities if it reflects broader economic growth. Businesses that have pricing power, which still includes some ASX tech stocks — I think they’ll do well in an inflationary environment.”
 

Pricing power

So, who can maintain margins as post-COVID stimulus is wound back?

One of the top holdings in the Tamim portfolio is EML Payments (ASX:EML).

One thing that differentiates EML from BNPL is that it’s making a profit.

“This year they’ll make around $200m of revenue, and about $55m of EBITDA,” Shamgar said.

“They hit an all-time high around $5.80 (per share) a few week ago, and they’re trading around $5.40 now.”

And he attributed that consistency to the fact that “1. they’ve got earnings, and 2. they’re continuing to grow”.

“It’s not like everything is getting sold off, but I think investors need to be a bit picky. Whereas last year it was a case of you could buy anything and it would do relatively well.”
 

Playing the pivot

Elsewhere, Shamgar highlighted three other stocks — all in different sectors, but all tied to specific tailwinds as part of the ongoing economic recovery.

For starters, despite what you may have heard at the height of the post-COVID ecommerce boom, bricks & mortar retail isn’t dead.

Another Tamim holding is Dusk Group (ASX:DSK), which sells homeware products across a physical network of more than 100 stores.

Shamgar said one of the key challenges for ecommerce stocks that investors need to be aware of is cyclical comparisons (‘comps’) to 2020 sales.

Dusk books more sales through stores compared to online, so “they’re not going to be cycling through from those elevated lockdown sales”, Shamgar said.

“I think they’ll continue to print good numbers. They’re cashed up, trading on single-digit PE multiple with a double-digit dividend yield.”
 

Look inward

The federal government this week provided some clarity around its stance on international arrivals; borders are unlikely to open until next year.

For Shamgar, that’s an opportunity to invest accordingly around the domestic travel thematic.

Due to a lack of supply, Australia’s second-hand vehicle market is “really booming”, Shamgar said. And one way for ASX investors to get exposure to that is RPM Automotive (ASX:RPM).

Currently trading at around 40c, Shamgar said RPM is on track to book around $50m in revenue and $5m EBITDA this financial year.

“Their management team has a really good track record. We think they could reach $100m of revenue and $10m EBITDA by the end of this calendar year on a run-rate basis. And if that’s the case we think the stock is worth more like $1,” he said.

Accompanying car sales, the vehicle financing market is also running hot.

On that front, Shamgar likes Money3 (ASX:MNY) — a pure-play platform for used-car finance that’s now expanding into new car sales.

More broadly, Australia’s jobs market is rebounding while consumer confidence is at decade-highs and Shamgar said MNY is growing its loan book “really strongly”.

In a recent presentation, the company flagged a target loan book of around $600m by the end of June, flowing through to net profit after tax of $36m.

“That’s a stock we think is worth over $4 (currently $3.08), and it’s another effective way to play the domestic travel thematic,” Shamgar said.
 

Propadee

Lastly, Shamgar said property investors shouldn’t ignore how to get exposure via the ASX to the post-COVID real estate boom.

And one company that’s still quite cheap and benefitting from that is non-bank lender Resimac (ASX:RMC).

“They got a market cap of around $1 billion, and they’re on track to do $110m of net profit after tax with a PE ratio under 10 and a strong dividend yield,” Shamgar said.

In addition, companies like RMC are benefitting from conditions in wholesale debt markets, which is allowing non-bank lenders to raise funding at historically competitive rates.

“It’s allowing them to compete with the big banks and offer consumers really attractive mortgage rates, which allows them to grow their loan book further,” Shamgar said.

“So those are the stocks we’re looking at, as we switch out of the momentum tech stocks we think will struggle in the short term.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

Featured Companies

You might be interested in