MoneyTalks: Here are Totus’ top two ASX tech stocks and what they have in common with big US tech
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MoneyTalks is Stockhead’s regular recap of the stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at the top ASX tech stocks.
Today we hear from Ben McGarry – a portfolio manager at Totus Capital.
He was also one of its founders nearly a decade ago and worked in both buy- and sell-side research for over another decade prior to that.
“There’s only a few great companies and you certainly have to kiss a lot of frogs as an investor to find your prince or princesses,” he said.
“And the industry is also inherently cyclical – I started in the industry in 2000 during the tech wreck and went through the ’07-08 US housing recession bear market and wanted to build a product that could navigate strong markets but also those more volatile periods.
“The net result has been good delivered uncorrelated return over 10 years of almost 16% when the market has done 10% – including dividends.
“And we’ve had good periods of outperformance when market has been volatile like that first quarter of 2020 – and 2015 when the market got a bit choppy.
“Our average performance when the ASX is down is still a positive number which is different to other funds throughout Australia.”
McGarry said his fund is similar to most other traditional growth investors although it does sometimes go short as well as long.
“On the long side we’re not too different to traditional growth investors looking for companies that have good industry tailwinds, good industry structures, high return businesses – we like founder-led businesses,” he said.
“And we’re not growth at any price, we do like to see a pathway to profitability or positive unit economics or ideally strong cash generation.
“But where we’re different is how we look for shorts, which is a bit of a mix of businesses where the economics have been poor for a long time or businesses that are experiencing structural change or businesses where there’s aggressive accounting or misalignment between management and shareholders, where management might be aggressive sellers of the stock.
“It’s a bunch of things we’re looking for on the short side to give us reasons to focus our research on particular areas.”
Totus invests in US stocks as well as ASX stocks and the big US tech stocks make up a fair proportion of the portfolio. McGarry specifically named Alphabet (NDQ:GOOGL), Microsoft (NDQ:MSFT) and Amazon (NDQ:AMZN).
“We still think mega-cap tech is reasonably priced and looks attractive both in absolute and relative terms compared to what else is available in the market,” he said.
“The other area where we’ve generated returns in is Aussie midcap stocks.”
“The two stocks we are big [on] in that space are Objective Corp which is a $2bn software businesses which is founder-led and has customers in the government sector,” McGarry continued.
“It has a sticky customer base, high degree of recurring earnings and is a founder-led business.
“Tony Walls still owns over 60% of shares on register so it’s our biggest Australian holding.
“After that is Dicker Data, another founder-led company. David Dicker is the founder and still a massive shareholder.
“Both companies aren’t well covered by sell-side research so we look for companies that don’t need a lot of external capital to grow, can fund growth internally and we get an edge by doing our own research and not relying on broker or sell-side to tell us what to buy and sell.”
McGarry said he didn’t set out to be a dedicated tech or software investor but it is a recurring theme in the portfolio.
“You’re looking for great companies that take a long-term view – and you avoid that CEO cycle where a new CEO will come in and potentially sandbag earnings, dress things up for a period of 4-5 years to maximise their compensation then leave and the shares and the business have to reset,” he said.
“We find when founders are involved they take the right decisions for long-term.
“If you look at Amazon, Jeff Bezos is still there as a shareholder and chair. And last quarter was a great example where they chose in their retail business to wear cost inflation. They see strong inflation coming through with labour and supply chain issues.
“They chose to take a lower margin to buffer that impact for customers and try to build that trust and gain market share that’d pay off in the long term.
“I suppose management teams with a shorter term focus might’ve just raised prices to offset that cost inflation and potentially damage business in long term by taking that easier path.
“When we look around at businesses we want to own, there’s founders taking long-term decisions where if you’re a patient shareholder it pays off.”
McGarry also bought up Facebook/Meta saying it was another perfect example.
“Mark Zuckerberg is saying ‘I’d be willing to spend US$10bn to build our Metaverse ambitions and that’s going to grow next year and we don’t expect to make money meaningfully out of it for a few years’, that’s not something a higher gun CEO will do.
“So it’s not something we set out to do but if you look at Objective, Dicker Data; they all have the same mindset in how they run their businesses which is what’s best for the long term.”
McGarry again stressed he wasn’t a top Wall Street and ASX tech stocks-only fund but said you had to have some understanding of technology as the world become digitised.
He pointed out Microsoft’s prediction that digital and IT spend will grow from five to 10 per cent of GDP over the next decade.
“Traditional businesses are becoming more and more tech enabled or tech driven,” he said.
“So when we’re looking for tailwinds and high quality businesses, tech is just a sector that sticks out and a lot of these things are easy for us to channel check and use. We’re taking on [Microsoft] Teams, we use 365 and Outlook, a lot [of data] is stored in the cloud.
“We’ve got other businesses in the book, we’ve been holders of Smartgroup (ASX:SIQ) for 7-8 years now, from time to time we’ve had investments in the resources space. We liked the structure of the iron ore market, but we’ve had difficulty of late getting our heads around valuation in financial space.
“It’s been a popular or good performing part of the market on the expectation that rates are going to rise but we’re finding more opportunities are in that tech space at the moment.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
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