Here’s how we should pick stocks after the ‘tick-like’ COVID recovery, according to two money managers
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It would be fair to say that even the most bullish of investors were caught off guard by the swiftness of Australia’s bounce-back from the COVID-19 pandemic.
In March last year, we were at rock-bottom depths as the ASX slumped to below 5,000, a level not seen since 2013.
But how quickly things have turned around in just over a year, as this snapshot tells the story:
Unemployment: 6.2% in April 2020 vs 5.1% in May 2021
GDP growth: -7% in Q2 2020 vs +1.8% in Q1 2021
ASX 200: 5,000 in April 2020 vs 7,275 today
As we hunkered down in lockdowns and worked from homes, pockets of winners on the ASX emerged.
Stocks in e-commerce and BNPL for example, were suddenly hot commodities, lifting their share prices sky-high.
But then something happened in November.
US pharma giants Pfizer and BioNTech announced they had the cure for COVID-19, sending jitters to those who were long those lockdown winners.
Those announcements had recalibrated market sentiment towards a possible opening of the economy.
Since then, market conditions have been quite dynamic and fast changing as many companies and industries have had to quickly adopt from COVID lockdowns to vaccine reopening.
Stockhead spoke to Head of Australian Equities for Tamim Asset Management, Ron Shamgar, to get his views on what investors should need to look out for now as a full reopening looms.
“Last year we saw the COVID winners of lockdowns in the e-commerce platforms and BNPLs as consumers stayed home. But as vaccine is being rolled out across the world and in Australia, it has turned those winners into vaccine losers,” explained Shamgar.
And this table illustrates Shamgar’s point, showing how some of the COVID winners have lost their shine this year.
According to Shamgar, the excitement over growth stocks last year has seen COVID winners struggle to cycle the elevated levels of demand they had, which has led to downgrades and subsequent share price falls recently.
He pointed that in the BNPL sector for example, the downfall has been exacerbated by the lack of profits and revenue multiples attributed to the stocks contracting.
In addition, we have had concerns over future inflation and the prospects of rate rises, he said.
Shamgar explained that the way to make money in the markets now is to bet on a roaring rebound in the economy.
“Consumers are now out and about and traveling again, and so the vaccine winners are brick and mortar retailers, travel stocks such as new and used car sellers, and service providers of auto parts, and consumer finance providers,” he added.
That’s also the view shared by Niv Dagan, an executive director of Peak Asset Management.
Dagan said the COVID-led recovery has not been an “L” or “V” shaped, but more like a ‘tick’.
According to him, excitement over new IPOs has subsided recently.
“Private companies climbed over one another to go public in 2020, to grab all the money on offer in a hot share market.
“However, of late, the ‘fizzle’ has definitely come off on the back of the prospects of higher inflation and interest rates rising in 2022,” Dagan told Stockhead.
He pointed to four IPOs that have recently come off their peaks in a big way:
Take for example, fintech neo-bank Douugh (ASX:DOU), which rallied over 450 per cent on the back of the neo-bank craze in its first month as a listed company, only to hit some “compliance issues” and fall back to 11c.
Another fintech, Credit Clear Ltd (ASX:CCR), listed at 35c in October, and rallied to as high as $1.20 in its first week of life on the ASX, only to fall back to the low 60c.
The company’s app provides the payer with an option for paying in instalments and allows the payee to access business intelligence about its customers.
Although CCR has been delivering consistent revenue, its share price has tanked possibly due to the over-exuberant valuation it received back in October.
Technology company, 4DMedical (ASX:4DX) IPO’ed at 73c, and climbed as high as $2.98 only to currently trade at around $1.28.
The company, which is the inventor of a medical imaging system called XV Lung Ventilation Analysis Software, reaps revenue from both software and hardware.
However, investors are concerned that their stake might be diluted with the expectations that the company might be raising further capital to develop its technology. 4D Medical has already tapped the market for $40 million in March.
Finally, Nuix (ASX:NXL) was probably the biggest flop of all.
The company has recently lost its CEO and CFO, and has been embattled with legal issues since its listing as a unicorn only several months ago.
Nuix’s share price is 80 per cent down from its highs of $11.86 back in January.
For Dagan, this has really come down to ’buy the rumour and sell the fact’.
“The market is experiencing an over-hyped retail interest, coupled with a higher expectation of management’s ability to execute as a whole,” he said.
Shamgar agrees, saying that investors would now have to be more choosy over their stock picking.
“Overall we believe investors can’t just buy a sector thematic anymore, but be more choosy and find companies that will continue to outperform regardless of the current concerns,” argued Shamgar.
Here’s a list of other stocks that have experienced the biggest drop from their 52-week highs.