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, Tribeca Investment Partners portfolio manager Jun Bei Liu gives her thoughts on what to do with Appen, Redbubble, Cettire and Temple & Webster shares.
Cut or keep?
The Motley Fool: The Appen Ltd (ASX: APX) share price has halved over the past six months. What would you do with it?
Jun Bei Liu: Appen for me is very difficult to hold. We don't hold Appen.
MF: Have you held it in the past?
JBL: A long time ago — years ago. In the early stage of the [COVID-19] pandemic, we took the profit because it was just too expensive.
Every other tech, remember, was underperforming because the pandemic was hurting their supply chain and things, whereas this company was doing super well. So we just felt it was too expensive, the earnings multiple. So we sold it.
I think this company is very difficult to hold because the earnings keep disappointing. Whether it's really caused by the COVID disruption or whether it's just large. Those large tech companies are really cutting back on some of the spends.
Quite a few articles overseas have talked about all the tech companies now cutting staff. Even those larger venture capital companies in the Silicon Valley have told all their portfolio companies to watch their spending. So I think anyone [who] operates in that whole tech supply chain, is going to experience pretty tough environments. So I think for me, that's difficult to hold, you'll be selling it.
We did have a takeover offer [recently]. It didn't last long — put on the table and then withdrawn. So, yes, there is opportunity for M&A. It is the largest player in that whole space.
But it's just hard to invest something for M&A to come through. It just didn't work, what my kids would call "'sus". It just looked… not great. So I think investors would need more fundamental evidence to hold this one.
The Motley Fool: Luxury goods retailer Cettire Ltd (ASX: CTT) has lost almost 90% of its valuation this year. What do you think?
JBL: Unfortunately, this company was listed during the hey times of e-commerce and things. I do think it's a great little business. It's got great brands.
And I do think demand for luxury goods is very defensive. We always see during tough times with a recession or really tough times, luxury good sales always goes up.
MF: Is that right? I would have instinctively thought luxury goods would be the definition of discretionary, but it's interesting that you say it stays stable in tough times.
JBL: Very strong, very defensive. They're very stable.
But look, if you look across Europe, back then there was a lot of Russian spend. So clearly the war's going to make it tough. So, there might be some differences. And back then, there's a lot of Chinese consumers always buying things when they go on discount. [But] luxury spend is always really stable and defensive.
But for this company, the challenge is the COVID. There's been huge amount of spend by consumers online. Now we're cycling some of those numbers, all the e-commerce companies are going through such a struggle, just because we're cycling some really big numbers.
On a longer term view, I think these businesses will do very well. It's just over the next couple of years, the earnings will have to re-base and all the companies used to make very skinny return on equity.
All of these numbers have increased significantly during COVID, but these margins have to contract because competition will pick up in the next 12 months when things get tougher. So my view is that space is really hard. I would hold it, but I'm not sure about buying more at this point. The competition for online retail is going to be tough. This is also not to mention, I think, the outlook for Australian consumers. It does look a little bit tougher as well with rising interest rates, rising energy prices, rising cost of living, it's going to be tough.
MF: The third one is Redbubble Ltd (ASX: RBL), which might be in a similar situation?
JBL: Yeah. I think Redbubble is an identical situation.
Redbubble even more so because quite a large part of its business was selling [face] masks. I think during the peak of the pandemic, it was something like 20% of its earnings was masks. And clearly that's going to come off.
Now the management's done a good job, trying to diversify into other things. It's just that, you're cycling some really strong comparable periods and management just can't commit to what it looks like. They don't know what it looks like and the competition will pick up. So that one is a lot harder to really have a high conviction of, because [we] don't know what the future categories might be.
MF: It's unfortunate with these marketplace-type companies, the barrier to entry isn't that high, is it?
JBL: That's right. So I think what's important though, for these companies, it's very important for them to keep reinvesting in brands, because, if you don't have a brand, you don't have anything — because anyone can set up an internet website.
I actually think during this whole pandemic period, I really think that Temple & Webster Group Ltd (ASX: TPW) will come through really strongly. They managed to get to number one in their online furniture, homeware category.
Yes, the margin's going to come back, but that's the one I'll be looking really to buy more of when the share price does become weaker.
