Investor Insights

Digital transformation is accelerating due to COVID-19, presenting investors with compelling investment opportunities. In part two of our whitepaper series, we discuss why the very best businesses are often undervalued by public equity markets and what this means for investors. For example, in 2006, Salesforce was trading at 104 times earnings, which many thought was far too expensive.

One of the thematics from the last few months has been the material change in retail spending. With COVID-19 related lockdowns and restrictions on population movement and activity, the ability to spend on services such as out of home entertainment and activities has been significantly curtailed.

With so many economies and businesses on their knees, numerous market commentators are pessimistic about the near-term future of global share markets.   But Macquarie Bank’s Chief Economist and Global Head of Macro Strategy, Ric Deverell, is not one of them. He’s just released a chart pack that offers three reasons to be optimistic.

When we started the Montgomery Small Companies Fund 12 months ago, data centre operator NEXTDC (ASX:NXT) was one of the first businesses we bought.  On our analysis, the shares were cheap.   One year on and the share price has almost doubled.

The digital transformation of the enterprise is a long-term trend which is now accelerating as a direct consequence of the COVID-19 pandemic. Privileged business models operating with the benefit of this structural tailwind, therefore, should be considered carefully for an investment opportunity.

The share price of Reece (ASX:REH) – Australia’s biggest supplier of plumbing and bathroom products – has outperformed the broader market for many years. Encouragingly, the company recently reported healthy trading during the COVID-19 period. With renovation activity forecast to rise over the next 12 months, I think this is definitely a business that investors should be watching.

In December 2019, my colleague Gary Rollo, wrote “Is PointsBet Holdings worth a bet? ” and the answer to this question was well and truly put to bed last Friday.

With more than six months of COVID-19 disruptions behind us, there have been some clear winners emerging as a result of changes in spending patterns and the shift to online. One such business has been Redbubble – a growing online marketplace providing print-on-demand products based on user-submitted artwork.

While small company shares demonstrate greater volatility than big company shares, over longer time frames they tend to deliver higher returns. Over the short-term they can involve more risk because of their lower liquidity, their sensitivity to management’s decision-making and their sensitivity to general economic conditions.

The conventional wisdom today is that Facebook is a mature behemoth that is under intensifying risk of being penalised in a multitude of possible ways by regulators. It is certainly a behemoth. The scale of Facebook really is quite difficult to imagine.

What do A. P. Eagers Automotive (ASX:APE) and Super Retail Group (ASX:SUL) have in common? Well, for starters, these firms have seen their revenues turbo charged by our changed spending habits since the start of Australia’s COVID-19 travel restrictions.

The majority of companies on the ASX100 and ASX200 have now reported. Many have beaten estimates. And, reassuringly, guidance is less negative than most market watchers had expected. This brings hope that FY21 may not be so bad for equity investors after all. One pattern has emerged from this reporting season and we may have run theory to thank.