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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt picks the 2 most tempting buys at the moment and explains why they appeal to him.
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The Motley Fool: What are the 2 best stock buys right now?
Emanuel Datt: Since June, approximately 50% of Dusk Group Ltd (ASX: DSK)'s store network has been closed due to the ongoing COVID-related restrictions in New South Wales and Victoria. But one thing we did notice that we felt was significant was that the company's revenue actually fell by far less than this percentage of the store network falling.
To us, that indicates really excellent customer loyalty and love. Accordingly, expect that, as social restrictions loosen in NSW and Victoria, the company will be able to benefit from this reopening.
In addition, the company has had plans to expand the chain internationally for some time now — but this has really been delayed due to the lack of international travel. But now, as we're seeing, international travel's opening up somewhat, and we expect that to move a bit quicker as the broader society reopens.
We're really expecting the company to really charge out of the gate on this front at some time in the very near future.
MF: How early did your fund buy into it?
We first took a position just after the [initial public listing] IPO. It was, I would say, early this year. I think it was January or February this year, so it was sort of in the low $2s that we started to buy.
[Editor: Dusk shares closed Monday at $3.26.]
We should point out that we still think Dusk, even after this price rise, still looks undervalued by some margin on a peer-to-peer comparison basis. That's really just based on current operations, it's not attributing any sort of value uplift or growth factor that's usually achieved by these retail teams once they go international.
Woolworths Group Ltd (ASX: WOW) is a great example of what the growth multiple could potentially be over time.
MF: And your second-best buy at the moment?
ED: SelfWealth Ltd (ASX: SWF) is our second-best stock buy right now.
SelfWealth is an online broking and wealth platform that has grown to become the number 3 player in the local retail broking market, and that's from a standing start in 2016.
MF: It's number 3 already?
ED: Absolutely. It overtook NABtrade a few months ago.
To grow to number 3 from literally zero in the space of 5 years is really a great achievement. Basically, the company has almost 100,000 active clients and continues to win an outsized proportion of market share. We feel that there's a significant opportunity to continue to grow via the rollout of new product — also, the ability to cross-sell to a captive audience via the ecosystem.
There's been a new management team that joined about 6 months ago, and they're sort of all digital natives so they've found their feet fairly quickly. Accordingly, the company is continuing to expand and sell their product at a rapid pace.
We consider the company to be undervalued on a peer comparison, on a transactional basis. We've seen all transactions of similar companies priced at around $2000 a user, or thereabouts. This sort of implies that the market has significantly undervalued the company, and notwithstanding the significant opportunity to expand into other ancillary business lines itself.
MF: SelfWealth is in an industry where there's a lot of competition, so what makes it stand out for you?
ED: I think just the sheer brand power is quite incredible. You see other competing brokers, Superhero is probably one of the biggest competitors out there, but if you look at alternative forms of data like their web traffic, SelfWealth's engagement rates are really significantly higher than their competitors.
For example, SelfWealth's engagement rate in the sense of time on the website has risen 35% over the last 90 days, whereas Superhero engagement has risen only about 5% or 6%.
Even though these competitor brands do like to spend a lot on their PR and marketing and all that sort of thing, SelfWealth is more or less just chipping away quietly in the background and getting runs on the board.
And SelfWealth also does have a big advantage because all the stock is held within a customer's HIN — their direct name — rather than a custodial model that a lot of these other discount brokers tend to operate using. That's very important from a consumer protection angle, as well.
