Volatility in equity markets will remain and fundamentals will drive buying. Lupton opts to ditch high multiple trades like Docusign for discounted companies like ZIM.
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The transition to value stocks from high multiple, growth companies is justified, said Jonah Lupton, growth stock investor and fintwit giant, in the latest edition of Opto Sessions. He added that the first time US Federal Reserve chairman Jerome Powell said inflation was here to stay was a cue to churn out of growth stocks. “I did some selling but certainly not enough. I mean, I got smoked the last six weeks of 2021 and I still have some deep scars from that.”
Now, however, the selloff in big tech stocks is overdone, Lupton said, adding that volatility in the market would persist.
“If I look at my portfolio with just a lot of growth stocks were down 30–40–50% from the highs in November. Now some of them have bounced 30–40–50–60% off the lows from just a couple weeks ago.”
Fears of sharp interest rate hikes, or many small ones, from the Fed in 2022 to curb inflation has investors selling growth stocks like big technology companies that focus on garnering subscribers over profits. To do so, the companies borrow money, which is getting more costly amid rising interest rates from a near zero regime for the last few years.
Lupton believes that, in the near future, earnings will make all the difference. It is strong earnings projections that are supporting markets even now. Barring a few misses from firms like Facebook’s parent Meta [FB] and Netflix [NFLX], most companies have forecast a rosy picture for the rest of this year.
“[Going] forward, as we see these rate hikes start to take effect, I just think fundamentals will absolutely matter,” Lupton said.
“[Going] forward, as we see these rate hikes start to take effect, I just think fundamentals will absolutely matter” – Jonah Lupton
He cites the example of Docusign, a technology gainer from the pandemic. The company has a revenue growth rate of about 20–25%, which means operating profit would grow at around in the mid-teens and net profit growth would be 11–12%, Lupton explained. Yet, after the selloff, the stock was still trading at 45 times its earnings before interest, tax, depreciation and amortisation (EBITDA) and is higher after the bounce back. “Just in terms of valuation, if we’re looking at the numbers and being fair, I don’t know why DocuSign should trade at 55 times 2022 earnings.”
In sharp contrast is Israel-based ZIM Integrated Shipping, in which Lupton has a big position. The company was listed on the NYSE in early 2021. The IPO was priced at $15 a share and closed at $71.94 on 16 February. Despite the appreciation, the company’s valuation is “almost laughable” in light of its expected full-year financials for 2021, Lupton said. “it’s like one of the best performing IPOs for 2021 that no one really talks about.”
ZIM’s enterprise value right now is at $8.5bn on the back of an operating profit of nearly $6.5bn and free cash of about $4.5bn, he explained. “It’s literally trading at two times trailing free cash flow!”
The company has had a good run owing to the current supply chain issues, which puts the pricing power in ZIM’s hands, Lupton acknowledges. “Those [high shipping freight prices] are going to have to come down at some point.” Still, the expected large dividend warrants a further appreciation in its shares, Lupton said.
To hear more insights from Jonah Lupton, listen to the full episode on Opto Sessions.
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