Picking ‘hidden COVID-19 winners’ with Oracle’s Luke Winchester
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Look closely, and there are still a number of “hidden COVID-19 winners” on the ASX, says small cap investor Luke Winchester.
Stockhead recently caught up with Winchester – who manages the Emerging Companies portfolio at Oracle Investment Management – to get his views on the outlook following a memorable year.
COVID-19 has made some marquee names out of high-profile tech stocks which have hitched a ride to changing consumption patterns and posted big returns.
But already this month, November’s ‘vaccine market’ has caught a lot of investors on the hop.
It prompted a sharp move into traditional value stocks (e.g. banks). Online retail names (while still up big for the year) were subject to an even sharper selloff.
It raises the question – is the post-Covid online boom a structural shift, or will growth rates cool off if the world can return to (at least some) normalcy?
For Winchester, it’s more of the latter.
“We’ve been happy to sit on the sidelines” of the ecommerce theme, he said.
“Our view has been that a lot of the big numbers they’re reporting are more of a pull forward in demand, rather than anything really structural,” he said.
“So we’ve missed some of those big winners, but our focus is on the names we think are sustainable for the next one, two or three years.”
In that context, Winchester reckons there’s still “a few businesses who are benefitting from Covid, and for whatever reason the market hasn’t caught on”.
In the tech space, he highlighted three names in the Oracle portfolio with the rationale behind their investment:
“They’re a reseller of lottery tickets online, so you had a structural shift there anyway. But obviously with the enforced shutdowns it meant people couldn’t go to the newsagent.”
The result was that COVID-19 acted as a customer acquisition event. “They’ve now kept a big chunk of customers who were forced to use their service,” Winchester said.
“I think one reason Jumbo’s been left behind a bit by the market is a material component of their revenue is tied to lottery jackpots,” he said.
“When there’s big jackpots people buy more, and they’ve been through a run where they can’t get the big jackpots to scale up.”
Jumbo booked consolidated revenues of $22.3m in the September quarter, a two per cent fall from last year which “doesn’t look great”, Winchester said.
“But if you look at the granular detail of their model adjusting for jackpot size, we think they can book anywhere from 25-40 per cent growth based on certain jackpot sizes over certain periods.”
“So that’s one we think has been left behind but is no doubt a structural winner.”
Winchester said that among the ASX-listed cloud computing plays, RHP is flying under the radar.
“They’re a reseller of predominantly Microsoft cloud products. You only have to open up Microsoft’s quarterly earnings report to see the growth they’re seeing in cloud, and Rhipe is their biggest distributor in the Asia-Pacific,” he said.
“So they’re riding that tailwind, but I think they’ve been left behind because investors have been a little bit slow to the story.”
“They’ve got exposure to small businesses which may be struggling in the pandemic, but I think they’ve been conservative in how they thought that would impact them.”
“And their trading update the other day showed 40 per cent profit growth through Q1, so I think that’s starting to shine through.”
The telecommunications play provides technology used in the digitisation of various communication channels such as voice calls and text — a sector with tailwinds in a post-Covid world.
“If you look at a standard Zoom invite – down the bottom there’s a dial in number to the Zoom meeting. That’s an MNF product and it’s been flying obviously,” Winchester said.
“The reason they’ve sort of been left behind is they do have some ‘old world’ segments. For example, they collect money on roaming fees for international calls, which has gone to zero.”
“Some of their telco revenue has slowed down too. But if you focus just on the growth of their wholesale voiceover business it’s doing very well, so we think over time that will slowly keep shining through.”
“The logic there is that we saw insurance companies get hit on fears companies would be forced into liquidation and there’d be a downturn in premiums,” Winchester said.
“But it just hasn’t occurred. That’s partly a credit to the federal government with the stimulus they brought in, which really helped people keep their businesses afloat.”
“So for those stocks demand is holding up, and they continue to take market share from smaller brokers.”
And while Winchester and his team have stayed away from some hot tech names this year, two of the other higher weightings in the Oracle portfolio are also tech stocks — Objective Corp (ASX:OCL) and Dicker Data (ASX:DDR).
“What we really look for are businesses that can continue to go well if the vaccine works, and we get a boom in economic activity then these stocks will still do well,” Winchester said.
“And then on the flipside, if you think about macro risks – hiccups with the vaccine rollout or if US government stimulus can’t be passed — we still think these businesses will outperform. That’s what we’re trying to find.”
“So our largest weighting is still tech, but like I said it’s profitable tech, cashflow generative tech. We don’t hold any of the high growth names that are still burning through cash.”