Investor Webinar 27 October 2021

In today’s webinar (see transcription below):

• An update on Top Pick Flight Centre (ASX:FLT)
• How to play the inflation cycle?
• Gold, Gold, Gold!!

 

You can watch last week’s Investor Webinar here

 

Transcription

 

Marc: Good morning on Wednesday, the 27th of October. It’s time for our weekly webinar again. Good morning, Stuart.

Stuart: Good morning. It’s good to be here.

Marc: We’ve got a lot of stuff to talk about. One of them is Flight Centre. We wanna talk about inflation and goals as well, obviously, if you’re talking about inflation. But let’s kick it off, Stuart, with Flight Centre.

Stuart: Yeah. So, we put Flight Centre on Marc and Stuart’s top picks last month around about the 6th of September. Stocks gone up. It’s eased back a little bit. So, people are asking, “Do we take a profit now?” Well, you can do that, but we think Flight Centre has got a further run. So, let’s run with what we were talking about last month when we introduced Flight Centre as an opening-up play. And this was the 8th of September that we talked about. Now, at the time, we’re in the last of the lockdowns. Part of the country is still locked down. There’s a little bit in Tasmania. But basically, once we get through these last lockdowns between now and Christmas, that’s it. No more lockdown is reasonable. In which case, we start moving around the country and around the world in spectacular growth fashion. And we think that kicks off from about now. So, calendar 2022, resurgence in international travel. Flight Centre is one of the…it’s not just a leading travel company in Australia, it’s a leading travel company on a global scale. So, benefits are not just from an opening-up in Australia, but an opening up of the world to travel around. The stock is still very cheap on consensus earnings from FY23. At the time we started talking about it, it had just broken out of a six-month trading range. We think there’s a heck of a lot more where that came from.

Marc: Yeah. Just on that chart, Stuart. So, this one is from early September. Since then the shares reached $25.

Stuart: Right.

Marc: And so that was more than 30% up in just a couple of weeks. So, we were happy with that. But like you said it’s fallen back to only 6%, 7% up. But again, yeah, that’s just what happened in the last couple of weeks.

Stuart: I was gonna touch on that for a second. Go back to that chart, if you will, because that illustrates the point I wanted to make. This stock works in cycles. It was very popular with traders at home pretty much from the moment lockdown happened because people could see it was cheap. But look at how volatile it is. I think there’s a cycle here and the cycle lasts about five months. It runs up, people take a profit, it runs back. But the trend… Look at the trend. That trend is definitely pointing up. And that trend is not gonna stop anytime soon. So, we’re probably at the tail end of the latest five months cycle in terms of the way people are trading that, and then we’ll see another upswing. That’s why we’re sticking with this one.

All right. So, what are the key strengths? Dominant position in Australia. If you’ve read the story of Flight Centre going back from its IPO in 1995, it’s grown to be the number one player in travel. The online players couldn’t knock it off. Traditional mum and dad in shopping malls and so forth type propositions couldn’t knock it off. It’s now going after, I’ll say, global dominance, but a position is just a bit every continent. It’s not just Australia, New Zealand, but the America’s, EMEA. It works in both leisure and in business travel. And that’s important because businesspeople are gonna be traveling a lot at the moment to check on assets they haven’t been able to look at for the last two years. And that’s where the company intends to expand potentially to be the world’s most dominant player.

Took out a bit of extra funding during the troubles we had to make sure that it stayed alive. So, not only did it not stay alive, but basically it remains a pretty much top of mind travel company. You just watch the news. There’ll be Flight Centre ads coming up to remind you that these guys are out there ready to take your business as soon as you’re ready to travel again.

Valuation, very attractive, particularly from the second-half of the financial year we’re on at the moment. It’s still on about 10 times EBITDA for FY23. But look at the way in which earnings continue to roar on consensus into 2024. And at that point, you can get it for just seven and a half times. So, it’s rare for a franchise this good to go this cheap. Now, as we said at the time, governments… I wouldn’t rule out them doing something really stupid like locking people down again. We don’t think that’ll happen, but we didn’t think that COVID was gonna be a thing two years ago either. And yeah, who knows? In that environment, you might see the government banning travel again. This time around the demonstrations would be a little more vociferous. But that’s the risk that you run with the stock.

So, why are we sticking with it? You would have noticed that in fact, this is News just this morning, Singapore just reopened. So, as of the 8th of November, no quarantine required for visitors coming to Singapore, which includes from our country, because we unlock the borders as of next week 1st of November. Again, global travel brand, so it’s benefiting from multiple reopenings, not just the reopening that we’re going through here. You’ve got that five months cycle thing that I think we’re spotting there just because of the kinds of people who are trading the stock at the moment. Watch out for those risks. We were staying there. But this stock has got more life in it yet.

Marc: Yeah. And I think important points to Marc and Stuart as well, looking at that chart earlier, as long as we keep making higher highs and higher lows, which is what we’re seeing now, actually, we spiked to $25. So, that was clearly higher than previous highs since March 2020. That’s a good sign. Right? So, that’s really what you wanna see.

Stuart: Let me summarise in one sentence. There’s a reason why Graham Turner is a billionaire, and it’s called Flight Centre. So, invest like Graham.

Marc: All right. Good stuff. Then something completely different. Inflation. Inflation, you know, there’s a lot of talk about that. And I think we wrote a little bit of news last week where if you follow the things like Bloomberg TV and some of the financial TV coming out of the U.S., “transitory” was the buzzword, and I got so fed up with that word transitory. We should have a swear jar for that one. Every time someone said it on TV, put something in the jar there. But [crosstalk 00:06:24]

Stuart: But the trend towards using… They’re talking about transitory inflation. It’s probably transitory, Marc.

Marc: I hope so. Yeah. In any case, we think it’s here to stay for a little while longer. So, the question for investors is how do you sort of incorporate that in your investing? What should you do? So, first of all, what’s happening? Basically, this inflation cycle that just started a couple of months ago, really, is it COVID-driven one, right? So, you see inflation going up, expectations about future inflation are going up, and really what’s driven that is, well, lack of investing, in a broad sense, through COVID. And I’ll touch on that with the semiconductor shortage that we see. But I think also, you know, governments have been or companies have been slow to invest during that cycle. There was recessions, etc. So, right now, what we’re seeing is shortages, in part, because of lack of investment, but also and especially for Europe, where I think we’ve talked about this before that Europe shot itself in the foot going too hard on green to too fast, basically, which is fine if you wanna go hard on green. But if then you have summer with low winds [crosstalk 00:07:35]

Stuart: Get ready for the lights to go out, basically, if you wanna go that green.

Marc: Renewable sources haven’t really been delivering, which means that the EU has depleted its gas reserves, and now Russia is laughing its ass off. That’s led to, obviously, higher energy prices, but also it’s a big input, of course, for many industries. So, it’s led to production prices going up, especially for things like aluminium smelters. It’s just an example where we saw a whole bunch of issues in, not just EU, by the way, but globally.

Stuart: That’s right. [crosstalk 00:08:07]

Marc: [crosstalk 00:08:07]

Stuart: …tell me the price of aluminium goes up. The price of magnesium goes up. It doesn’t matter what commodity you are, it’s being crimped at some point through all these things that are going wrong.

Marc: Yeah, exactly. And then this is an important one as well because this touches on a whole lot of industries. The lack of investing last year in semiconductor manufacturing capacity, especially in Asia, has led to the current shortage in semiconductors, which is hurting a lot of industries, including the car industry. And the interesting side effect of that is fewer new cars can be produced, meaning that people need to keep driving the old ones. And this sort of plays into the AMA story that we had last week or two weeks ago, which isn’t an opening up late but this helps them as well. So, you see production stops, again, leading to high prices. And I think this is an interesting one for Australia. Disrupted migration patterns are causing labor shortages. And not just skilled labor but also for the harvest season. Berry picking has been… I think right now the berry crop is in, but only because there were some last-minute changes to migration allowed into Australia to help the farmer get the crops in. But in a broad sense, we’re seeing wage inflation and we’re noticing that we’re looking to hire a few people and we’re noticing that it’s hard to get the skills, and secondly, it’s very hard to get them at the price that you want. So, that’s what’s going on. How is the market reacting? Well, bond yields, obviously, are rising on the back of this. Bitcoin is going up as well. And of course, we’ve got ETF…

Stuart: Which we’ll talk about in a moment.

Marc: Yeah. We’ve got ETFs that went up in…that started trading last week, which in part has driven the Bitcoin price, but also it’s an inflation hedge potentially and the interesting thing is that gold hasn’t gone up as much as it probably would, as it has in previous cycles, in part, potentially because Bitcoin is there as well as a hedge. So, the question is, what can you do? Well, the obvious thing really is to buy stocks that have pricing power that can actually sort of incorporate inflation in their pricing for their customers. So, you need to look at market leaders. You need to look at companies that have specific technologies, have specific positions in their markets. And so Adsorbate [SP], obviously, is being acquired now, but that is a great example of a market leader.

I think Appen with their technology and the way they help their customers, it’s been a very good example. We’ve got that one in our topics list. So, we were very glad, actually, that that’s making a comeback now because we feel that Appen still has a lot of room to expand. Then there’s a company, ASML, that you probably never heard of. But these guys have 80% market share in the most critical manufacturing tool for semiconductors in the world. So, they beat the Japanese competition over the last 20 years. And now they hold 80% market share across all different types of tools for so-called lithography, but they have 100% market share in the most critical tool of all, the most expensive systems, 100 million euros each. So, that’s another market leader and you can…

Stuart: And when you’ve got a 100% market share, you can charge just like you’re an 800-pound gorilla, right?

Marc: That’s what I was gonna say. They can charge anything they want. So, they’re being kept in check by the big players like Intel and TSMC and Samsung to not charge excessive pricing. So, their gross margins are between 50% and 60%, basically. Then on a smaller [inaudible 00:11:33] the stocks that we’ve talked about a lot of Weebit Nano, a very unique technology, I think, and in a great position. BrainChip. And that actually there’s a big report on the Pacific Research website that we published a couple of months ago. That’s a revolutionary technology.

So, when you look at, you know, what do you invest, look for companies that have, you know, these attributes. Also, if you run a software company, it doesn’t always mean that you can simply keep charging whatever you want. But if you have a SaaS model, it’s a lot easier because a lot of the times people are so integrated that the specific software that you offer, it’s very hard to disconnect from them. A good example that I actually didn’t put up here is Zero, obviously. But also I think WiseTech, I think, PointZero, 3DP, it’s a small one, K2F. These are companies that address the institution… Sorry. The utilities market, but once they’re in, they’re in, right? And they can sort of try to expand a service offering and charge more. And then lastly, gold. I mean, gold stocks, some of them have rallied, but gold, in general, hasn’t really done anything, Stuart. So, that’s another thing. Look at gold stocks. And you’ve prepared a presentation to take us through that.

Stuart: Yeah. So, those of you who’ve been following us for a while would know that I’m a gold bug, it means I’m pretty optimistic of the long-term future of gold as part of the monetary system. Now, this is the chart of Bitcoin for the last year or so. You’re gonna say that Bitcoin made another high above or closer to $65,000 US per coin recently. That’s taking people by surprise, but it’s a reflection of the fact that people are looking for stable non-fiat currencies to store some of their wealth in. And Bitcoin now comes top of mind, but in a way that previous generations thought of the yellow metal. So, yeah.

So, what’s causing the run up in Bitcoin? Central banks everywhere are pressing the printing presses to print more money. We’ve just talked about inflation. Well, here is in chart form with the first big resurgence of inflation since in the last 15 years, basically. And yeah, that’s replicated right around the world. When people see that data, they think we’ve got to find a way to protect ourselves. And bitcoin is now so easy to trade. That’s why people are going into it. But now let’s look at something that people will also think about. The blue line there is the price of gold. That’s actually trended back just lately. But I’ve said it before and I’ll say it again. Gold is like Bitcoin, only it was invented in 10,000 BC. So, it’s had a lot more time to become optimized as a store of value.

Now, this is the discovery I made just this morning. I’m quite excited by this. Look at the orange chat. Now, I’ve levelized both gold and Bitcoin in US dollar terms going back to the 7th of August 2020. That was the recent high for gold at over $2,000 an ounce. So, there you go. There’s Bitcoin taking off as of October last year. Gold is more or less flatline, but it’s trended back. Now, imagine if gold had kept pace with Bitcoin what it would be trading at. There it is right there on that chart, $10,945 an ounce. Now, we’ve said before in various presentations we’ve done. The correct price for gold is probably 10,000 US dollars an ounce. That’s how you would match it up. You would match up gold to the amount of paper that’s out there that has represented expansion of the Federal Reserve’s balance sheet in recent years. Well, blow me down if the efficient market hasn’t started pricing that into Bitcoin. Now that tells me that there’s a snapback at some point. Either the orange chart turns south, or the blue chart turns north, or maybe a bit of both. Either way, look for a rerating of gold.

Marc: So, my question, the obvious question is, if gold was supposed to be at $10,000 an ounce, why isn’t it there yet?

Stuart: Yeah. It’s easier for central banks to keep the price under control. Most gold is sitting in Central Banks’ vaults somewhere. The traditional Fort Knox that you’ve heard of before. A lot of it is in private hands, you know, socked away in safes somewhere. And obviously, there are ETFs to trade gold as well. But you and I have grown up in an environment where people don’t actually think of gold as a hedge on inflation. Or there are other ways like buying gold stocks. So, the combination of those two things makes the metal somewhat easier to manipulate. But then there’s catch-up. And we saw that catch-up, for instance, between 2016 and 2020. I think we’re gonna see it again.

Ways to play it. Well, the big guys who are now turning into globally big operators. Now, what a lot of viewers might not appreciate as well. Australia has always been a big gold producer. I mean, our country was built on gold beginning with the Victorian gold rushes in the 1850s. But what they probably don’t appreciate is Australia is now the number one producer. It’s not South Africa anymore. Those mines are too difficult to work. It’s Australia. So, the Australian gold mining companies are now becoming almost as important as the global players like Barrick and so forth. So, Newcrest, Northern Star, Evolution Mining are the triumvirate that investors need to be looking at. We’ve got a few that we’ve talked about recently. We’ve put Geopacific Resources into our top picks’ list. They’re about a year away from that first gold pour on the Woodlark Gold Project in Papua New Guinea.

Recently, we wrote about Boulder gold, which owns about 3 million ounces near Kalgoorlie where the project is actually on ice at the moment until they solve the labor and other shortages that are afflicting the state of Western Australia. But when the premier graciously permits foreigners to enter his state in Western Australia, we’ll see a change there. Ora Banda Mining. That one is doing reasonably well. The data has gold project is through most of its teething issues and growing up reasonably nicely with a heck of a lot of exploration granular data too, to grow that project. So, that’s just a few. But hardly a week goes by in resources stocks down under, where we’re not talking about gold explorers or gold producers in some way. Gold is probably the most common commodity. So, there are multiple ways to play this one.

Marc: All right. Good stuff. All right. That’s all we have the time for. So, the message for this week apparently is gold.

Stuart: Not just gold. Gold, gold, gold.

Marc: Exactly. Yeah. Stocks haven’t really moved, some of them at least. And have a look at some of the background on some of these gold stocks, especially Geopacific Resources on the topics list, says Stuart. So, there’s quite a bit of research that we’ve put into this. Look it up in the publication section of the stocks on our website. And we’ll leave it there, Stuart. To everyone, have a good week. And we’ll see you next week.

Stuart: See you next week.