Why the 'covid spending economy' will flourish |
Tweet | ![]() |
<p><strong>Lex Hall: </strong>As the name suggests, Forager Funds Management seeks to unearth unloved gems. They have two funds, one Australian and one international, and both have beaten the index in the past 10 years. So, I thought today I would check in with Forager in-chief, Steve Johnson, to see where they're seeking value and what he thinks of the outlook in general.</p>
<p>Steve, welcome to Morningstar. Thanks for joining us.</p>
<p><strong>Steve Johnson: </strong>It's great to be here.</p>
<p><strong>Hall: </strong>Now, the first thing I wanted to ask you was that you made a comment recently in one of your updates. You said the "COVID spending economy" will continue through the year. What makes you think that that will be the case?</p>
<p><strong>Johnson: </strong>Well, I don't think that this is true globally, but particularly here in Australia, consumers are in rude health. The savings rate here in Australia is as high as it's ever been at about 20 per cent of disposable income. That surprised a lot of people, but it is a fact, and we are still in an environment where there are lots of things that you can't spend money on and international travel is off the cards probably for the most of this year as well. So, I think you are still going to see people in that frame of mind where they're feeling more confident about life out there. They've got money to spend, and there's only a limited number of things to spend it on. So, I'm pretty confident about that.</p>
<p>I'm also confident that post COVID the retail environment in Australia is probably going to be better than it was leading up to it, and I think that's something that a lot of people have forgotten here that the three or four years leading into 2019 was a really horrible period for retail spending in Australia.</p>
<p><strong>Hall: </strong>OK. We're going to do a second video in which we'll talk about a lot of stocks. But there's so many interesting stock picks in both of your funds. So, I thought I'd sort of – we could dwell on that a bit. Forager Australian Shares Fund has outperformed the All Ords since its inception about 10 years ago by 3 per cent. What are you seeing out there in particular that's of value today, Steve?</p>
<p><strong>Johnson: </strong>It's a very bifurcated market here in Australia. You've got a small collection of very, very expensive tech stocks, and I think outside of that a very sensibly priced market. I mean, we're quite resources and banking heavy here. So, we're exposed to a value factor in general, but we're still finding plenty of opportunities, and we've got a very full portfolio of businesses that are outside that very rapidly growing tech space. So, I think looking outside that area it's still a pretty perspective market in general.</p>
<p>We're adding a lot of software businesses by business-to-business, so enterprise software companies to our portfolio over the past few months in particular. It's a sector that we're pretty optimistic about long term that's been hit very hard by COVID, and it's taken the market a while to realize that. So, share prices have sold off a lot recently, but there's some good opportunities in that space in particular.</p>
<p><strong>Hall: </strong>Let's switch to the International Shares Fund. It's outperformed the MSCI AC World Net Index since its inception by 3 points—or 3 per cent, I should say. It's up 48 per cent from June 2020. There are some interesting picks in it. But before we get into them, Steve, you recently said that some fund managers have drawn the conclusion that buying rapidly growing companies is the only thing that's going to work in the future, but you're a bit sceptical about that. Why do you think that?</p>
<p><strong>Johnson: </strong>I think it's the wrong lesson to draw that there are some very important lessons to take out of the past ten years. These businesses are—or lots of these businesses that have grown a lot are wonderful businesses and I think we got the valuations wrong 10 years ago by forecasting growth for too short a period or not forecasting enough growth or not understanding how profitable some of these businesses were going to be at scale. So, those valuations were wrong, and I think we need to update the way we think about the world and it being a global economy and the economics of some of these technology businesses and be open minded to them being worth a lot more than a traditional investor might have valued them at 10 years ago.</p>
<p>That doesn't mean that argument works at any price, and I think we've seen the success of the sector feed on itself. The fact that things have gone up has convinced everyone that they're going to keep going up. I think it's a very dangerous lesson to draw because at really high prices you can be paying for an enormous amount of growth for a very long period of time, and you're taking a lot of risk that that doesn't happen. And my favorite example is probably Microsoft. Out of the dotcom bubble there was actually nothing wrong with that business at all. It grew its earnings for 15 per cent per annum for the subsequent 15 years, but the share price went absolutely nowhere over that period. It started at 60 times earnings and finished that period at 12 times earnings. That was a wonderful time to be investing in the business at the end of that period, but it wasn't at the start and I think it shows you that you can pay too higher price for almost any business.</p>
<p><strong>Hall: </strong>OK. You've sold out of a few stocks recently. Celsius Energy Drinks, Ulta Beauty, Farfetch, and Uber in particular. What do you see about Uber that made you want to sell? Was it just doing so well that you had to get out of it or…?</p>
<p><strong>Johnson: </strong>Yeah, it's just price related on every single one of those stocks. We're really happy with how the businesses are performing, and we'd like to own them again at some point in time. We bought Uber at $23 thinking it was worth $50. We've probably updated that valuation a little bit. The food delivery part of the business there is going much better than we had anticipated. There's maybe a case for a fair value of $60 or $65 there now, but it was trading up into the $70s at one point in time.</p>
<p>So, for us, again, we need to make sure that we're not just stuck and anchoring ourselves to an old price. So, we're updating our models and I'm saying to the team every day, are you sure that we're not just reacting to a share price going up here? Are you confident in your valuations? Have you updated it enough for what we've seen over the past 12 months from these companies? But when we answer that and we say, yes, and I'm being super bullish here, and even if I make a more bullish case, I don't think we're going to make great returns from today's stock price. It's time for us to cut the stock. And we're still finding plenty of interesting new things to add to the portfolio. About a third of the portfolio in our International Fund has been added in the past six months alone. So, while ever there are plenty of new things to buy, the hurdle for something staying in the portfolio needs to be fairly high as well.</p>
<p><strong>Hall: </strong>Good lesson for retail investors, too. And while you're on that, you've bought into Whole Earth Brands which specializes in zero and low-cal sweeteners, I think, Twitter and Boohoo. Twitter and Boohoo, why in particular? What do you see there? Boohoo is an online retail or fast fashion player, I think.</p>
<p><strong>Johnson: </strong>I think they're both good examples, those companies, of a willingness on our part to buy businesses that we think can grow over a long period of time, but where we still think we have some edge around why we're buying it. And that's the category that I would put us into, deep fundamental research, and try and understand something about a business that's not anticipated in the price at the moment. And this whole value growth debate, I think, it's been hijacked over the past few years. I think for decades, good value investors have been buying good quality growing businesses where they've got some insight into it and where they think they can buy it at an attractive price.</p>
<p>Boohoo is a pretty easy one. There are ESG concerns over that stock that we think are being completely overblown. In fact, we think that company has taken steps over the past 12 months that are going to make it one of the more ESG-friendly businesses in its sector. It is in the business of selling clothes and it's not easy there to do things that tick all of the boxes. But I think relative to the competition, they've made some huge strides. And it's been a wonderful investment and a great business for a long period of time, and we can see that continuing for some time yet. So, as those ESG concerns fade away, we think you'll see the true value of the business turn up in the share price.</p>
<p>And then, with Twitter, I mean, it's been a disappointing stock for the best part of a decade. It was still trading under its IPO price 12 months ago. And our view there is, you had two activist investors come onto the register. You had to board appointments from those activist investors. And the message from all of that was things are going to change at Twitter and we've seen an enormous amount of change over the past 12 months. Money is being spent in the right places; the tech stacks being updated. Anyone that works in the advertising industry will tell you that finally they are able to actually find the people they want to market to on Twitter and that's because a lot of these changes that have taken place. So, it's always been—the number of users and the time on the side, it's always been a wonderful asset that's been growing over the past decade, but their execution around turning that into revenue and profits for shareholders has been horrible. That's changed in the past 12 months and we think it's got a lot of prospects ahead of it. It's really the early stages of turning those very active participants on the Twitter platform into revenue over time.</p>
<p><strong>Hall: </strong>OK. Some really compelling arguments there and some interesting stock ideas, too. Stick around to another video with Steve in which we'll drill down into a few more Australian names and one international one as well. But for the time being, Steve Johnson from Forager, thanks very much for your time and your insights today.</p>
<p><strong>Johnson: </strong>Thanks a lot.</p>
<p><strong>Hall: </strong>I'm Lex Hall for Morningstar. Thanks for watching.</p>

19/05/2022 Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.

18/05/2022 One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?

11/05/2022 Here's what investors who are worried about a recession should consider today.

11/05/2022 Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.

29/04/2022 Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine

28/04/2022 Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.

27/04/2022 Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.

31/03/2022 Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.

30/03/2022 Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.

28/03/2022 Where are entertainment and streaming services headed?

24/03/2022 Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.

23/03/2022 Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.

17/03/2022 Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls

15/03/2022 Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.

08/03/2022 Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.

03/03/2022 Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.

23/02/2022 Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.

23/02/2022 A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.

15/02/2022 In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.

13/02/2022 Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.

31/01/2022 The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead.

23/01/2022 Christine Benz discusses how investors should handle the turmoil, whatever the life stage.

18/01/2022 Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul.

17/01/2022 Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.

24/12/2021 Our experts and analysts weigh in on what mattered for investors last year.

21/12/2021 New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship.

10/12/2021 And how does it match up against gold?

10/12/2021 Australian miners to be among the last standing as coal use fades.

08/12/2021 Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation.

03/12/2021 The gold-rated fund manager shares three ideas with long-term potential.

01/12/2021 Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.

30/11/2021 To understand your fund, get to know its underlying index.

29/11/2021 These companies are set to profit from the move to clean energy, says Lazard.

24/11/2021 The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.

17/11/2021 And how investors can protect their portfolios.

08/11/2021 Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.

05/11/2021 Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.

19/10/2021 These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.

15/10/2021 The ESG outperformance narrative is flawed, new research shows.

06/10/2021 Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.

01/10/2021 And how G8 Education and Link Administration are positioned for long-term success.

30/09/2021 What Reporting Season August 2021 told investors about the health of the financials sector.

28/09/2021 a2 milk is an opportunity to be greedy when others are fearful.

23/09/2021 Covid's winners and losers are returning to their prior trajectories.

21/09/2021 Sequence-of-returns risk matters for both retirees and savers. Here's why.

20/09/2021 Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.

15/09/2021 Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.

14/09/2021 Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.

13/09/2021 Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle.

10/09/2021 Hydrocarbons poised for a comeback.

09/09/2021 Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.

08/09/2021 What shorting ETFs means for long-term investors.

07/09/2021 Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.

03/09/2021 Miners bask in the glow of iron ore prices while bargains remain in coal.

23/08/2021 Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.

16/08/2021 But the sector lacks uniformity, says Morningstar's Christopher Franz.

11/08/2021 Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.

11/08/2021 Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.

10/08/2021 Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.

05/08/2021 We believe the transaction has a high chance of succeeding.

03/08/2021 The industry still has significant growth potential.

03/08/2021 Is one of the biggest sponsors of the Olympics positioned for an all-electric future?

23/07/2021 Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.

22/07/2021 Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.

21/07/2021 The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.

20/07/2021 The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.

12/07/2021 Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.

08/07/2021 Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.

08/07/2021 Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.

06/07/2021 Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.

02/07/2021 PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.

30/06/2021 Iron ore prices have been on a tear, boosting the profits of Australia's top miners. How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.

28/06/2021 Morningstar has recently initiated coverage of a food delivery app and a consumer finance product.

24/06/2021 Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.

22/06/2021 Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig

21/06/2021 Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.

18/06/2021 A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.

15/06/2021 Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.

11/06/2021 Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.

10/06/2021 Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.

09/06/2021 Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.

08/06/2021 They’re building an empire.

07/06/2021 A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.

04/06/2021 As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio

03/06/2021 The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.

28/05/2021 4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.

28/05/2021 The SEC continues to sort out its regulatory concerns.

27/05/2021 We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.

25/05/2021 Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.

24/05/2021 Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.

19/05/2021 American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.

18/05/2021 Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.

18/05/2021 Square's Bitcoin purchase is more marketing than operations

10/05/2021 If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.

07/05/2021 Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.

05/05/2021 Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.

04/05/2021 Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.

30/04/2021 The stock market and the economy are not the same. Here's why.

23/04/2021 EARTH DAY 2021: Why should investors care about deforestation and how can it can be taken into account within an investment portfolio?

21/04/2021 Do investors need to worry about inflation, and how do you prep your portfolio to protect you from it? Morningstar Investment Management's Dan Kemp explains.