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Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Shaw and Partners senior investment advisor Adam Dawes examines three potential bargains.
Cut or keep?
The Motley Fool: A2 Milk Company Ltd (ASX: A2M) has lost around 40% since October. Would you cut or keep it?
Adam Dawes: So A2 Milk has been a definite under-performer.
[But] I like the whole idea of Dogs of the Dow theory, where last year's stocks that were underperforming are going to be this year's stocks that are going to perform quite well.
I think A2 Milk has shown to the market that potentially the daigou [Chinese reseller] channel was a lot more than what they originally expected it to be. And that daigou channel was what we thought was not going to be a lot of their revenue, but now we worked out that it is a fair bit of their revenue going forward. So I think that channel definitely has hurt them.
And obviously COVID has definitely hurt them as well.
I think management is very, very good in A2 Milk. So I'd be okay to hold A2 Milk going forward.
It's a business that will continue to do well and I think it's a business that overall has a lot of promise because now I think it's been rebased, it's settled down and the market has grappled with potentially that revenue from that daigou channel that's not there anymore.
So I'm happy to hold. I wouldn't sell it.
MF: How about Magellan Financial Group Ltd (ASX: MFG), which has lost 65% since August?
AD: This one is an interesting one because generally there is this whole side of what goes on with the business and the re-rating. Basically it comes down to three profit downgrades, a management change, and then… potentially the new management will get all the skeletons out of the closet and then continue to move from there.
So Magellan's one of those ones where we've had that three downgrades, we've had the management change. So if that rebasing is about to happen.
For me, it's definitely a hold.
But the concern is that when the new management comes out and potentially reduces the fees — because Magellan is quite high in their overall management fees, if Magellan reduces those fees, it's a sell.
At the moment the funds are underperforming. There's a lot of cash that's sitting there as far as those funds, they're soaking up that cash and they're hopefully getting that performance back up and on track, but the new management potentially will come in and reduce those fees. If they do that, then it's a sell because you are not going to get as much revenue going forward. You're not going to get as much revenue or money coming in.
So I'd be really cautious about Magellan. It's a hold, definitely here for where we are around $14, $14.50, $15. I think it's definitely a hold.
But if new management comes in and reduces those fees, then it's definitely a sell for me.
MF: Hold onto it, but really keep a close eye on it.
AD: Absolutely.
MF: Life360 Inc (ASX: 360) shares have been slaughtered this year. What should we do?
AD: Look, this one's an interesting one because Life360 is certainly back in the green, after the company redressed its 2022 guidance. And putting it out there, I think this company is a takeover target. No doubt about it.
Because of its subscription revenue, that's grown by more than 50% this year. So I think it's actually one of those ones that will do quite well. Life360 boasts more than 40 million active users per month and 25 million of those, which was in the US. And it's got 1.3 million paying circles at the end of April. That's up from the previous corresponding period.
But it's been a rough space and a rough time because the share price has obviously tumbled more than 60% since the start of the year. And it's fallen 25%, since this last time, this year as well.
So I think overall Life 360 is an interesting business. I think you've got to be careful, but I think it's a takeover target.
You never buy a stock for a takeover, right? You never do that, but I think [if you've already got it], you'd hold onto it.
I don't think it's a sell because I think the tech space is definitely for a rerating at the moment, [with the] Nasdaq Composite (INDEXNASDAQ: .IXIC) down 26% or whatever it is today year to date.
I think there's some value that's started to come into that space and the likes of Xero Limited (ASX: XRO), the likes of 360, there's some value there because of what they've actually got, that user base.
And [Life360] actually does make money. It's just not what the valuations were six months ago to a year ago. So I'd be a little bit careful, but I think Life 360 has got the user base, it's got the revenue coming through the door and is potentially a takeover target down the track.
