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Ask A Fund Manager
In part 1 of our interview, Forager Fund senior analyst Alex Shevelev explained how his Forager Australian Shares Fund (ASX: FOR) spots bargains that others are ignoring. Now in part 2, he reveals the boom US company listed on the ASX that doubled his money in just a few weeks.
Overrated and underrated shares
The Motley Fool: What's your most underrated stock at the moment?
Alex Shevelev: RPMGlobal Holdings Ltd (ASX: RUL), I think that is the most underrated stock. And I think it's underrated partially because many investors are not looking at it and are not appreciating just the quality of revenue and cash flows the business produces. And also not appreciating the opportunity for the business to grow over long periods of time.
I mentioned the very sticky revenue [in part 1]. That's a really attractive characteristic for a business and a management team as incentivised as [chief executive] Richard Matthews is usually difficult to find.
MF: Because of the recurring revenue, I guess you're not too worried about the cyclical nature of their clients, the mining companies?
AS: The products themselves are very sticky with the end clients. Every once in a while a mine may close, but the environment we're currently seeing is very positive for a lot of their clients. So actually, they're more likely to take on more technology rather than less.
In 2020, we saw a low in their sales. In 2021, in the first quarter, that bounced back really quickly. And we think that's as a result of those mining companies really seeking that technology coming to RPM because they've got very good quality products. And signing those based on a subscription model, which we think should start to be more recognised over the next little while. The stock also has very little institutional coverage from brokers, and that sort of keeps it under the radar.
MF: What do you think is the most overrated stock at the moment?
AS: There were some tech and consumer discretionary names that had, at the beginning of this year, some characteristics of extraordinarily high expectations from investors. Those businesses have fallen in price quite dramatically over the last couple of months as those expectations became a little bit more reasonable.
In fact, some of those stocks are becoming potentially more reasonably priced and, if this continues, may actually become attractively priced.
MF: Are you holding some cash in order to take advantage of some opportunities?
AS: We are. We're holding some cash and we've also, as we mentioned [in part 1], have Mainstream Group Holdings Ltd (ASX: MAI), which is under multiple takeover offers. So we think that's an opportunity that will turn into cash in the near future.
MF: If the market closed tomorrow for 5 years, which stock would you want to hold?
AS: I'm not going to surprise you with my answer, I don't think. I think the cash flow characteristics for RPM and just the stickiness of that revenue is something that you can be quite confident of over a 5-year time horizon.
Looking back
MF: Which stock are you most proud of from a past purchase?
AS: We talked before about market dysfunction, and one of the ones we bought during that [last year] is Life360 Inc (ASX: 360). It's a family tracking app. It's got about 28 million global users, and out of that, about 900,000 families pay for that service.
We invested in June 2020, while there was still a hangover from the COVID dysfunction, as well as post-IPO disappointments. The business had only recently listed and hadn't performed well subsequent to its IPO [initial public offering].
Now, interestingly for Life360, they had been growing their users quite quickly over the past couple of years, both organically and via acquiring paid users as well. Paid users would cost in terms of marketing spend. And the business was loss-making because they were spending a lot acquiring those paid users.
Interestingly the organic growth itself was quite quick. So really, the paid user acquisition was just cream on top, and that paid user acquisition was coming at very high returns on that spend.
Then the business was trying to introduce a lot of features into their membership plans, and they were looking to increase the value of those membership plans. So when we looked at the business, we saw that if they hadn't been spending all that very high-returning money on marketing for the product, they would still be growing organically, and the earnings multiples at that point were very reasonable. They're doing quite well now.
They announced a small acquisition recently. They're looking at a larger acquisition, and they're also looking to dual-list in the US, where the market for these sorts of businesses is more mature than it is in Australia.
MF: Do you sometimes get suspicious about US companies that choose to list in Australia? If your business is so good, why wouldn't you just list in the US where there's more capital?
AS: I think that's fair above a certain size.
So the Australian market for 360 has allowed them to list on an exchange but at a scale that would not be possible in the US.
Now that they have grown quite quickly over the couple of years that they've been listed in Australia, they've had the access to capital here. They can now look to list in the US given their larger size.
MF: Life360 share price did pretty well immediately after you bought it in June 2020, didn't it?
AS: Yeah, so what happened after that was we started getting a little bit more recognition that the business wasn't completely going away because of COVID, that the business had actually had some sustainable characteristics to it, and we think it's quite a sustainable revenue stream and a quickly growing revenue stream.
Then most recently, we saw more news around the US opening up — more kids leaving the house. And that's really helpful for Life360 because the parents are going to be using the app to monitor those children and their driving behaviour and their location.
MF: It's almost like a tech stock that's also a COVID recovery story, isn't it?
AS: That's right. And we put it into both of those buckets when we were considering the risk from it. It was definitely not a COVID beneficiary, but it was a business that benefited from the reopening.
And, yeah, as you can see in June, I think the stock was about $2, now they're trading closer to $5.40.
MF: The company also hired Randi Zuckerberg as a board member this year, didn't it?
AS: That's right. Yep. So they've enhanced the board in the last couple of months, and that's really helpful getting them on the radar, both with Australian investors and with the US investors, if they do choose to list over there as well.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
AS: The fund is up about 112% [in the 12 months] to April.
But we really had the opportunity to actually do better than that. There was really the most prospective environment during those first couple of March, April, May months that I'd seen since 2009. So we really took advantage of a few, but we didn't necessarily have as much cash as we would have liked to take advantage of the others. We've had a good result, but it could have been better.
Our cash levels at the end of March got very, very low as we saw lots of prospective opportunities. A lot of stocks that were interesting businesses that we knew, or even some that we held, that were [sold] off dramatically, often on small volumes, especially for smaller stocks. We had the opportunity to pick up both new investments, as we've talked about with Life360, and more shares in companies where we had already been invested, at really discounted prices.
