Anton Tagliaferro on value versus growth

-- | 09/12/2020

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Lex Hall: What do you think about the continuing underperformance of value investing versus growth? Growth is dominating the discussion. Is that distinction still relevant, do you think?

Anton Tagliaferro: Look, again, it's been a very difficult time, the last five years, I think for value managers. I mean, I think it's partly being government policy where you've had interest rates cut to record low levels. That's what initially, I think, impacted pre-COVID. Since COVID, we've had another dose of interest rate cuts, which—the thing about a growth stock, you know, let's say a Tesla, which I think is probably recognised by many as quite a big bubble, the truth is, nobody knows how many cars Tesla will produce in 10 years' time or in 20 years' time, right. But if I had a model forecasting Tesla to grow to 5 million cars in 10 or 20 years and I assume some sort of profitability and I discounted it back at these very low interest rates, I could probably come up with some sort of very ritzy valuation.

But again, you're taking very long-dated view trying to make assumptions on what a company like that might make in 10 or 20 years' time and then discounting it back at lower interest rates, which is pretty risky sort of stuff. And if you did that, you could come up with all sorts of value. But again, if you look at Tesla capped at $500 billion compared to say Daimler Benz, which is the most prestigious car brand in the world, been around since—Adolf Hitler used to drive around—I mean, it's capped at €60 billion. So, it just seems quite out of whack. So, yeah, there is this divergence. But I'd say, some of it, you'd have to say, is effervescence and speculative, and at some point, they have to come back to reality.

Hall: Yeah. And the stock you've been questioning about a lot is obviously Afterpay. When did you first hear about Afterpay and what were your initial thoughts?

Tagliaferro: Look, I think, we've all looked at these companies when they first listed and whatever and again, it depends on how optimistic you want to put your forecast going forward. And okay, they've done well in terms of growing their revenue but what is the business model? It's an app. It's giving free credits, giving credit to people without necessarily a credit worthiness check. It doesn't sound like, A, something that can't be repeated by somebody else and B, something that's not easy to make money in.

Hall: Managers seem to be split down in the middle on Afterpay. Does it remind you of a stock in the past about which there was so much…?

Tagliaferro: I guess I could go back to 1999-2000 when we had companies like Solution 6 and Davnet and OneTel. And OneTel was going to become the biggest mobile company in Australia. Davnet was going to do all the fiber to the businesses, et cetera and they're no longer here. And they were growing at the time, but it's not that easy to set up a business from scratch and to build the dominant position and to make money. That's the reality of life. And I mean, people will even say about WiseTech, what a wonderful thing it's building with all these port logistics, whatever. And potentially yes, but then you look at what WiseTech has done in the last two to three years and it's taken over I think 20 different companies in 15 different countries and is trying to integrate all those systems into one system. Well, anybody who has run a business like I've run IML, you know, you try and integrate two systems and you know what problems you have. Imagine trying to integrate 20 different companies in 15 different countries. It's a pretty big ask I would have thought. And look, it may work, but the risks are enormous.

This report appeared on 2022 Morningstar Australasia Pty Limited

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