FYI | Jun 03 2020
By Peter Switzer, Switzer Report
Could ZEET be the next WAAAX stocks?
The outstanding revelation of the past bull market was the importance and ascendency of the tech stocks. In the US, the post-GFC boom in stocks underlined how crucial the FAANG (Facebook, Amazon, Apple, Netflix and Google i.e. Alphabet) stocks have been in driving US market indices higher. This chart of the Nasdaq screams out how significant these companies are (especially when you throw in Microsoft) in explaining why this hi-tech index is actually up for the year.
Effectively, these companies have snubbed the Coronavirus and actually leveraged off it. How? Well, locked up citizens do more Facebook, buy more from Amazon, use Apple’s services, live on Google and fill in the hours on Netflix.
Over the past three years here in Australia, we have noted the outlier stock price performance of WiseTech Global, Afterpay, Appen, Altium and Xero and so was born our version of FAANG, which we call the WAAAX stocks.
As a starting point, I think there are 4 stocks that have hi-tech potential. And yes, I own them but my commitment to them isn’t huge. Of course, I’m hoping over time they become new-age Xeros and Afterpays.
Afterpay is now a $47.71 stock but the analysts surveyed by FNArena think it’s 36.6% overpriced. But this stock has been overpriced in the teens, the 20s, the 30s and the 40-dollar region.
I missed it when it was under $10 at the height of the Coronavirus market panic and I’m kicking myself about that, but that’s investing. And on this subject, it’s worth remembering that Afterpay’s success wasn’t really overnight.
It took a while to get out of the $3 range but after that, it was an upward trend and every significant dip has been a buying opportunity.
The next group of ‘WAAAX’ stocks will find it hard to emulate the performance of the first group, just as the FAANG stocks Mk II in the US will struggle to match the FAANG Mk 1 companies’ performances. But there is a lesson that good, hi-tech companies that people use all the time is a sensible starting point to find future good performers.
So here’s my best current guess on what companies could become the WAAAX Mk II group and they have the nifty tag name of ZEET. I’ll look at each one alphabetically rather than in terms of the one that I have the most confidence in.
Zip Co ((Z1P))
Z stands for Zip Co Ltd, or Z1P on the ASX ticker code. It’s the runner-up to Afterpay and has always suffered because it was more mindful of being more committed to credit checks on customers compared to APT. That said, I’m seeing the ZIP signs outside more and more retail stores, which I think is a good real-world sign.
The chart also shows how the company has nearly recovered from the Coronavirus crash, which I’ll code as CC.
The analysts think in the short term that its share price will fall 6.7% but it was a $1.18 stock on March 19, after being $4.35 before the virus came to town to kill shop retail. As of now it’s $3.75, that’s a 217% gain in a little over a month. That’s the kind of company I’m prepared to give a chance for at least 12 months. By the way, if Zip Co can get back to $4.35 over a year, that would be a 16% gain!
After a crash, our overall market tends to gain anything between 30% to 80%. I reckon Z1P is likely to participate in that rebound, given how the market quickly reassessed the company’s worth.
And hot off the press, the AFR’s Street Talk reports that Zip is about to lift its holding in a New York-based bill-splitting business called Quadpay, from 15% to 100%. Backed by Bank of America in the US and Westpac here, Street Talk thinks fund managers will be forced to take another look at the company. I hope Street Talk is right, though I do recall a lot of local companies stumbling when they’ve ventured overseas.
On the other hand, this could be an opportunity made more possible because of the CC.
ELMO Software ((ELO))
Next up is ELMO (or ELO), which is a cloud HR and payroll company. Michael Wayne, founder of Medallion Financial and a guest expert on my Switzer TV: Investing show on YouTube, has been a great fan of this company.
- The fact that the management team has ‘skin in the game’.
- The founder’s involvement, which he says improves the chances that the interest of management is aligned to those of shareholders.
- The current clients include the likes of the Australian Government, IBM, Kmart, Healthscope, Sonic Healthcare, RMIT, Macquarie University, Komatsu, Cbus, Toshiba, Hyundai and Fujitsu.
- It’s the small-to-medium sized businesses of 50-200 employees that offer the greatest opportunity for penetration and cross-selling opportunities.
- He sees a “large addressable market opportunity, a low customer churn rate with a 110.7% customer dollar retention and a gross profit margin of 84.6%.”
It has had a big bounce off the CC but has lost some ground recently – but that could be profit-taking!
The analysts are on Michael Wayne’s side, predicting a 40% upside, with a $9 target that looks attractive with the current price at $6.42.
Michael says: “The share price has fallen ever since it announced its capital raising. Shares were trading close to all-time highs at around $8, however upon completing a $70m institutional placement at $7, the price has been under pressure ever since. A raising of that size, at that much of a discount, may have been viewed by the market as unnecessarily dilutive and opportunistic considering the company already had sufficient cash levels. Long term accessing the cash at this point in the cycle in our view isn’t the worst thing, as many competitors lead by private equity firms will likely be starved of cash for some time, allowing Elmo the opportunity to consolidate and improve its competitive position.”
EML Payments ((EML))
EML Payments Ltd is another E on my ZEET list. Its ticker code is EML. This is a favourite stock of my TV regular Julia Lee and has also been given the thumbs up from other analysts.
The company is in payments but has three strings to its bow.
First is online reloadable cards, which new age bookies, such as Neds and BetEasy, use.
Second, the company produces branded gift cards and has a big presence in shopping centres.
Third, it provides what is called virtual account numbers, which add security for payments between business customers and their suppliers. The system is based on a single-use card number, which is seen to deliver better efficiency and security compared to more conventional payments arrangements.
Before the CC, the company’s share price peaked at $5.66 on February 14, before slumping to $1.33. It’s now $3.64. That was a 173% rebound, which is pretty good for a company that lists casinos and shopping centres as major customers and these have been either closed or crushed by lockdowns.
This one-year chart of EML screams “promising”.
And if this company can get back to its old high, the gain would be 55%. That’s a bet I’m happy to be involved in.
Tyro Payments ((TYR))
T is for Tyro with the ticker code TYR. This is another payments business. What I like about this one is that it has a huge presence in cafes, restaurants and other hospitality businesses where we buy and tap with our cards. Recall that the FAANG stocks are very much businesses that we deal with all the time. So Tyro as a supplier of merchant facilities, with a banking licence, looks to have potential.
And as I’ve said, I do have my dough in this one and my business partner Paul Rickard is on Tyro’s board, along with the likes of ex-Telstra boss, David Thodey and Cathy Harris, co-founder of Harris Farm Markets. Also Atlassian founder, Mike Cannon-Brookes, is a major shareholder of the company. While that proves nothing that an investor can really invest upon, it is a notable fact.
The company listed in December last year at $2.75 and hit a peak of $4.49 on February this year before slumping to 97 cents on March 19. And this chart says a lot about the future of the company.
That completes my ZEET group. While they have already demonstrated their ability to rebound out of the CC, I suspect they’re all in the right space to benefit, not only from the inevitable comeback of normalcy to our economy over the next 12 months but they’re all in a space that has a new-age edge to them.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
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