The following article appeared on Livewire on August 19, 2020.
Cashless society, the shift to the cloud and food delivery are three structural growth trends sweeping global markets. 2020 saw the tailwinds fanning these trends escalate into a full-blown cyclone, and the stocks in today’s episode have surged as a result.
But investors should keep in mind that a good narrative doesn’t always convert to a great investment. In this episode, Joe Magyer from Lakehouse Capital and Bob Desmond from Evans & Partners share their insights on the household names of Visa, Microsoft and Hello Fresh. Each of our guests also share a company that they believe is a compelling opportunity with one of the ideas pitched being described as ‘wildly profitable’.
Click on the player below or read the transcript to access this exclusive episode of Buy Hold Sell, brought to you by Livewire.
Eddie Orchard: Welcome to Buy, Hold, Sell brought to you by Livewire Markets. My name’s Eddie Orchard, and today we’re looking at growth stocks with structural tailwinds. They’ve had a massive 2020. Will they continue moving forward? To help me do that I’m joined by Joe Magyer from Lakehouse Capital and Bob Desmond from Evans and Partners.
Bob Desmond (Buy): Buy for me. I think a lot of structural tailwinds just accelerated. You’ve got digital and we’ve got cash to card which has been there for a long time. I think one of the things that’s really interesting about Visa is their partnership with wallet companies. So they’ve got probably 70,000 locations now. Those are up 16% this year. Partnering with wallets, there’s an opportunity there to double that. They’ve got three and a half billion credentials in place and got potential to get that up another 65%. It’s a very high margin business. Cross border business will come back. That was down 40% this year. That’ll come back. Big buyer on Visa.
Joe Magyer (buy): It’s a buy. I’d agree with everything Bob said. I’d add, I don’t think most people realise, but 85% of the world’s transactions are still done with cash. So, there’s still a long runway. Visa has much more wallet share online than offline, and the pull forward with that has been helping. Tap and go has expanded rapidly in the States as a result of what’s happened with COVID. So still a lot to love with this thesis.
Microsoft (NASDAQ: MSFT)
Joe Magyer (hold): I think it’s a hold for me. I think Microsoft is extremely well-run. I think Teams and the explosion around that with COVID has been a big win for them. It’s really solidified the position of 365. That said, I don’t think the valuation’s been attractive as it has been in the past.
Bob Desmond (buy): That’s a buy for us. I think it is really well-positioned with enterprise customers. So sticky with the office and server businesses, but then they’ve got the structural growth with Azure. I think, Nadella is on record of saying 5% of spend of GDP is IT. That’s probably going to 10%. Clouds are only 20% outsourced, probably going to 80%. I think longterm, Microsoft is going to get a higher valuation. It’s not the business it was five to 10 years ago. We’re a buyer on that.
HelloFresh (ETR: HFG)
Bob Desmond (hold): I’m probably a hold on this one. I’ve used their product, like it, very good. I think they’ve still got to be proven out. The network effects, potentially, if they can get good cost per drop. I just think there could be a lot of competition there. So I think it’s all got to be proven out, and I’m probably a hold on this.
Joe Magyer (sell): This is a sell for me. So COVID’s been a big win for them in terms of pulling demand forward. That said, the business just has poor unit economics. They have one-year net revenue retention rates of 42%. It’s really hard to build a business around that. I think everyone here has probably had some Hello Fresh free offer pushed in their face more than once. I think it’s just really hard to build a long-term viable business around having such low customer retention.
Eddie Orchard: So what’s the structural trend then that you love right now, and what’s your preferred exposure to that?
MarketAxess (NASDAQ: MKTX)
Joe Magyer (buy): Electronic trading for fixed income. It’s not something that gets a lot of attention. People talk about stocks, not bonds, but MarketAxess is completely dominating that niche in the States. The way bond trading historically has been done, and there are lots of books about this from the 80s about Wall Street. You do it over the phone. You talk to an investment banker. There’s no liquidity. There’s no visibility in price. Spreads are wide. No one likes that. And so buyers of bonds, just like everyone else included in equities today, they want to pay lower brokerage. They want better liquidity and investors expect better execution across the board. MarketAxess provides that, it’s a founder led business, they pioneered the space, they are dominating and wildly profitable.
Lowe’s NYSE: LOW
Bob Desmond: It’s interesting, this is an old-world one. Nesting at home, we’ve all be spending a lot of money on our houses at the moment. We are in Lowe’s, the second-biggest home improvement retailer in the States, 35% comp in the last result. I think we’ve probably moved to a new spend on house. We’re going to be at home a lot more. This is an 11% margin business and the main competitor, Home Depot, has a 14% margin business. It has never cut its dividend since it listed but it’s been run pretty badly. They’ve got a new management team there nearly two years in, and we think they’ve got a long runway of getting that from being a really good business to being great business. So Lowes is our preferred stock.
Disclosure: The Lakehouse Global Growth Fund owns shares of Visa and MarketAxess.