Share prices for many smaller listed US businesses have given back some of their recent gains. Single-digit returns are a sign that the market may have already factored in the price recovery post-COVID.
Our focus is on quality businesses within the small cap market. In particular, Fathom (FTHM) and Open Lending (LPRO), both highlighted in our August monthly reports, have made excellent progress. The former reporting revenue more than double the same period last year and the latter growing at north of 100% per annum. We also look across the continents to Europe and how companies, such as Lastminute.com (LMN), are recovering nicely as Europeans get back to enjoying holidays.
This sell-off has impacted the short-term performance of Forager’s International Shares Fund. In this week’s video, listen to Harvey Migotti and Gareth Brown talk about how they are seeking to take advantage of this sharp sell-off, which is creating some likely bargains in companies demonstrating good operating performance.
Read the full interview here
Hi everyone and welcome I’m Gareth Brown and today I’m joined by my fellow portfolio manager on the Forager International Shares Fund, Harvey Migotti.
Today we’re going to talk to you about markets in general, but in specific the smaller cap end of the market. The broader market has been going fairly strong over the last couple of months. It’s up about a percent since the 30th of June in the US but the smaller cap end is hiding a pretty sharp sell-off in the smaller end of the market.
That’s right so if you scratch the surface you see that the russell is up one and a half percent but underlying there’s been a lot of market rotation and actually quite a lot of pain. So for every Google and Alphabet and Apple that has grounded higher since the end of June. The russell is actually down six percent. So that’s 75 under performance versus the broader larger cap index. Now the larger cap index as of the last few days also started to move downwards and there could be some convergence but there’s been some pretty big under performance and quite frankly, it’s created some bargains as well in the process.
Now that smaller end of the market is an area where we have a comparative competitive advantage at times finding attractive investments. So it often makes a decent part of our portfolio but I think we’ve played it relatively well. We were selling quite aggressively a lot of these stocks that have done well in May and June but we have been caught up in the downturn. So it has impacted performance somewhat as can be expected.
I thought the useful thing to talk about today is, as we’ve gone through reporting season, some of these stocks are probably deservedly in the in the penalty box for now they haven’t done so well, but we also have quite a few stocks that have just kept performing very very well in terms of operating performance and and they’re getting caught up in the downdraft and that’s sort of an area for us where we can often add to positions. So I thought maybe we’d talk about a few of those. Maybe we can start off with Open Lending.
100% and what I would say is, if when we looked at our portfolio I would say a good 75, 80 percent has actually beaten and raised and surpassed expectations. But since the whole market is sinking they’re a bit tied up and when you compare them relative to a Google that’s been very resilient there’s a disconnect brewing. So great opportunity I think for the next kind of six to 12 months in a lot of these names. So Open Lending in particular had a really good set of results, the company’s growing well over 100% year-on-year growth. It is set to be 30-35 over the next few years per year. Pretty incredible and the business is still very attractively valued. You look at the price to earnings multiple, it’s much more fair than many other names that are growing similar amounts, particularly names in the software space or some of these sectors that are still very very hot.
So that’s one that we continue to like and because the company is beating expectations and taking numbers up it’s actually getting cheaper on a valuation basis. So we actually did top up that position after the numbers and we’ve actually seen the bounce in that one. It’s one of the few that’s done quite well last month or so.
That’s right so that’s Open Lending. Okay let’s move on to Fathom. Fathom is a disrupter in the real estate brokerage area in the US, it really is a software provider. Can we maybe outline the situation there?
So Fathom is kind of a digital real estate brokerage. Imagine a broker without any bricks and mortar properties where an agent can join and have all the tools they need to get the leads to close transactions etc. It’s growing really rapidly with over 70% year on year during the last quarter and is set to continue. They’re taking a lot of share and they have a lot of agent growth. They have a pretty disruptive model where the agent pays a fixed fee per year to the company, rather than you know a big chunk of every house sale and that’s causing a lot of agents to come to the business.
Now ‘how do they make money?’ you might ask given that they’re doing this. Well it’s through all the bolt-on capabilities that they’re starting to offer, say ancillary products such as mortgage titles and so forth and also obviously lead generation. If Fathom actually generates the leads the agent goes and sells the property there is a profit split. So it’s a really beautiful model and here we have business growing seventy percent year. That surpassed expectations every single quarter since it’s been public just over a year ago and has derated quite a bit over the last kind of four or five months.
Again a great opportunity we’ve increased our size in that company. We love the management team it’s founder-led significant stake in the business and we think the company has a bright future ahead of it. So very positive on that one over the coming months.
One from my sphere of influence is lastminute.com which is an online travel agent and a seller of package holidays in Europe to the big five countries in Europe. I think it’s really been left behind in this travel recovery that’s going on. It might be something that’s new to a lot of you out there but delta is not really having an impact on travel in Europe. The recovery is continuing at a pace we have stocks like Wizz Air that are hitting record highs, Ryanair back towards the highs recovery is accelerating. You look at airport numbers so I’ll give you the numbers for Vienna because I know them the best but back in May throughput of Vienna was down about 86% versus the same month in 2019 so that’s the same month’s pre-pandemic. In June it was down 75% in July, it was down 53% and in August it was down 44% so just a rapid recovery there and you can’t even see delta in terms of the numbers of people getting back to the skies.
My in-laws were traveling through Vienna airport the other day and said it felt as busy as anything they’ve been through there pre-covid. The opportunity here is that last minute has done a very good job of cutting costs out of its base. So by the month of June it was back in profit again. It made about four million of net profit in the month of June which was in line with the same month back in 2019 and it did so with sales significantly lower than what it had two years ago. Because of the pandemic we’re seeing a recovery happening before our eyes in terms of traffic taking back to the skies in Europe. Now of course we’re at the tail end of the European summer holiday period. This gets quiet now for a few months but it bodes very well for 2022. So early indications are the financials are really starting to stack up the market’s ignoring it. It’s back down towards recent lows.
It certainly feels like an opportunity and I mean I bet most of us here in Australia can’t wait for everything to reopen and flood out and go on our holidays and see family abroad and so forth you know provided that flights are cheaper.
I’m hopeful I can do our Christmas video from Vienna but we’ll see, fingers crossed. Well that’s probably a good spot to stop, we’re working hard looking to find the next new opportunities in the smaller cap area and indeed across the world of opportunities available to us. Thank you very much for your time and we’ll tune in again in the next couple of weeks and give you an update.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.