6 high-conviction stocks from the experts for your watchlist

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett's status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? [00:00:31][15.6]

Alec: [00:00:32] I'm very good, Bryce. We're still in lockdown here in Sydney, but the content train keeps rolling on. And I'm excited to bring these two experts that we're featuring today to old friends of the show sharing some stocks on their watch list. [00:00:48][16.4]

Bryce: [00:00:49] Absolutely. Let's talk stocks. [00:03:56][187.8]

Alec: [00:03:57] Let's talk stocks. So as many people know, we do a show on Ausbiz four times a week. You can check it out on their website or on our YouTube channel. But as part of that, every Wednesday, we do watch this Wednesday where we speak to one expert investor from Australia or around the world. And here three stocks on their watch list. We like we love this segment partly because we get to just sit back and let them tell us about stocks, but also because it's just such a rich source of information about a lot of companies that we never heard of before. So we wanted to feature two of our recent watch list Wednesday episodes to give the podcast listeners a bit of a taste of some of the stocks that the experts are looking at. So we've got Andrew Paige and Owen Draskovic, two names that a lot of people are probably familiar with. And first up, we're going to start with Owen, who pitched three stocks. Two that people are probably quite familiar with, one that I had never heard of before. [00:05:02][65.2]

Bryce: [00:05:03] Nice one, Ren. Well, before we quickly jump in, just a quick reminder to everybody that this is by no means a buy, hold or sell recommendation while you will hear a. A lot of conviction and excitement coming from both investors in today's episode. Please do your own research. This is a watch list. Only by no means is this buy, hold or sell. So let's get stuck into it. And it is our pleasure to welcome back to the Ausbiz studio here on Equity Mates Owen Raszkiewicz. Oh, and welcome. Owen is the founder of Rask Vest and he's a long time friend of the show. You must go and check out the work that he's doing on Rask, as well as many of the podcasts that he's running as well. But we are here to chat stocks three that are on your watchlist own. And as always, we'll go through the stock. Why you like it, what it does if no one's heard of it before, and a bit of a bit of a thesis. So we'll start with Laser Bond on the ASX. Its ticker is LBL SmallCap in surface engineering. What's the deal? [00:06:06][63.1]

Owen Raszkiewicz: [00:06:07] Yes, so one is about one hundred million dollar market cap. So it's probably the one of my three that viewers probably haven't heard of. I'm guessing you guys might have heard of it because you operate in the stock market and you're up to date with a lot of companies. But lazybones is a really interesting business. So it actually is still predominantly owned by family and it actually does surface engineering. So let's just break that down. What it actually means, surface engineering is basically the process of rebuilding or reengineering the surface of a piece of equipment. So if you think about one of those big Caterpillar trucks at a mine site or you think about a conveyor belt, think about all the components that go into that, it's not something you can just go down to to your local Bunnings store. And I'll just get a bearing for this for this week for someone new truck. That's not the way it works. So the key thing to remember with Life-Support is it actually creates products to their original specifications and sometimes up to 10 times better using sophisticated engineering techniques. They have manufacturing sites across the eastern seaboard of Australia and they look like they're going to expand into WA because there are a lot of big mining clients over there, but also into Queensland. I see some opportunities there. So it's one hundred million dollar company. What's really interesting about and what we like is that the business is going from just effectively repairing equipment for customers to now licensing its technology and its knowhow. So basically it said, you know, we are experts in Australia at this surface engineering what we do, how can we expand overseas? And the easiest way for the business to do that is basically to license its knowhow and its technology to customers and to partners in the United States and also in Europe. And it started to win some of those deals. And the really important part about this is that it's gone from being a kind of capital intensive business to being one that just licenses no help, which is great for margins. So this is a business that's effectively underpinned by repairing manufacturing equipment, by creating like new products and replacement parts for these machinery, for this machinery and these devices. But then it's the third pillar, which is the really exciting growth element, which is the licensing of technology. So there's lots to go for, lazybones. Founder alignment, skin in the game, profitable, growing good balance sheet for small cap company. It's one to watch. [00:08:37][150.0]

Alec: [00:08:38] Nice one on. That's that's a good one. Laser bond ASX Ticker LBL. I'm sure many people will have just heard about it for the first time. If we move to the second stock on your watch list, I'm pretty confident most people will have heard of this stock before Bryce and I hear it Equity Mates use the software Bryce more than me because he has told me in no uncertain terms that he wants to be the account Equity Mates. But the company, the company is Xero. ASX Ticker XRO famous for accounting software. It's rare that you become famous for accounting software. So the company's doing something right. So for people who don't know the company, can you give us a brief overview about what it does and then tell us why it's on your watch list? [00:09:27][49.5]

Owen Raszkiewicz: [00:09:30] Yeah, sure. So, OK, I've got it. Bryce is the accountant, so I'll [00:09:34][4.0]

Bryce: [00:09:35] know the accounting there as the accountant. [00:09:37][2.6]

Owen Raszkiewicz: [00:09:40] Well, so let's be honest. O0 is a piece of software that you get that effectively maximizes the time that an accountant has to spend on your account. So it looks like you're a small business or a medium business like Equity Mates, let's say. And you need a tool that can take your receipts in, can process all of your, I guess, inventory if you have that or it can do your accounts, payable your accounts receivable, monitor your cash flow, send you signals. If things aren't going right, they can't even help you pay staff, pay superannuation, those types of. So that's what a zero is best known for, and the business started in New Zealand, as you guys know, then expanded into Australia. Both of these markets, zero dominates. So I guess predicting the success of zero in New Zealand and Australia is pretty much a no brainer. It has won these markets. The key front here for zero right now is in the UK, where the financial system and the tax system is eerily similar to what it is here in Australia and over there that's actually taking strides. It is eating the pie. It is eating the cake of Sage, which is the incumbent business there. But what's really interesting to know about zero, and I think this is what quite a few people actually miss in quite a few analysts actually means is that it's probably not going to come close to winning in the US. So some investors have it in their faces that zero will win the upside, but we tend to think not. There's a big, big business in the US called Intuit. If you look up into it, I think it goes by the typical interview and that is a business like zero that is just dominated its market, its home grown market, which is the USA. But outside of that, zero can still win virus three core markets, but also by adding on functionality like extra features for Peyro, single touch payroll's would have done most recently. If you looked into your zero recently Bryce you would have seen that maybe job kaper and different types of subsidies were available through Zurich and we see zero playing a much bigger role in the ecosystem for financial planners and small business. Some of the key facts that we've just looked at before I jumped on the call was that our valuation has zero between one hundred and twenty in one hundred and thirty five dollars a share, which is marginally below the current share price. But one thing to be mindful of is when we recommended zero, I think the valuation that we had on it was about fifty eight dollars. So this is quite a while ago, but over time the valuation has actually crept up as it's continually, I guess, pound the pavement and beat the thesis that we put in front of it. And we see no end in sight for zero in that respect. And that business is only now starting to gush free cash flow. So we like it. It's a business I own. So happy to keep holding [00:12:14][154.6]

Alec: [00:12:15] on on Xero. You mentioned Intuit, which are correct me if I'm wrong, but their accounting product is cookbook's. They're obviously big in the US, zero big in Australia, hopefully one day big in the UK. What how do you think about that competitive dynamic of obviously zero is trying to win in the US, but is Intuit trying to expand into the UK, into Australia, into New Zealand and if they go head to head here on their home court, why do you think Xero can beat Intuit? [00:12:48][32.7]

Owen Raszkiewicz: [00:12:50] Yes. So this is a fantastic question, Ren. It's actually one that we've asked since the beginning of our zero. And I think one of the things that's really interesting about zero is it's basically as good as Intuit no matter where you kind of compare it. So if you're comparing it in the in the US, the UK or Australia, it's as good as if not better than any of the software that's available in the market. So one of the things that Zero does is beautiful accounting software. That's the tagline is, you know, and so I think the reason that Quickparts launched its cloud based service in Australia wasn't because it thought that Australia was the market that it had to compete in. I think it was just to compete against the euro to see how it fared. And so I think that's an interesting dynamic. You've got this behemoth of a company from the US competing in Australia, probably because they just wanted to see how they go in Australia. If you want an anecdote in a book, software is actually cheaper than zero. Zero is still growing faster than anyone else. So I think that kind of the accountant always says, look at the bottom line to figure out how your business is going and zero is winning here in Australia. All the while, cookbook's has been here, so and it's cheap. So I think it's a great question. It's a great point, something you want to monitor closely. I think in this instance, there's no reason why you couldn't own both companies in a portfolio. [00:14:11][81.1]

Bryce: [00:14:13] So I want to close out usually those that come on here, give us some small to mid caps, but you're going to close out with a mega cap in Apple. The ticker is AAPL. What's the thesis here? Was it on your watch list? [00:14:29][15.9]

Owen Raszkiewicz: [00:14:31] Yeah. So we've gone from a tiny Australian small cap all the way up to the world's biggest company, which is Apple. So obviously the creator of many devices that, you know, and use the iPhone, iMac, the iPad, which is what I'm recording this on right now. This is a company that has traditionally been known for hardware. So ever since Steve Jobs these days, the iPhone in 2007, right up until today with the iPhone 12 and 12 Macs, it's clearly the best smart device in the world. And I don't just say that because it's got over a billion users of the iPhone. It actually is in terms of functionality. And we're starting to see that play out now in terms of privacy with the current CEO, Tim Cook, constantly banging on about how much better the privacy and security of the devices. And that has been proven over many years. The real secret sauce behind Apple, and this is some point of contention among analysts. And it's something where I think we've got an edge at risk, which is that the key behind Apple is not its hardware, even though I just said it's the best smartphone, iPad or tablet. It's the best laptop, it's the best desktop in the market. That's actually not the key jewel in this crown. The jewel in the crown of Apple is its subscriptions and its services business. So this is things like the App Store, the iCloud, all of these different things that you kind of you don't really notice that's going on underneath the surface until you paying it and you realize, hey, I can't access my my photos on my iPhone until I pay a dollar forty nine every month to Apple. And the key here is that over the next five years we actually forecast that services revenue. So all of the software that and subscriptions that Apple offers, all of that is actually going to make up about seventy three per percent of the overall revenue, which is in stark contrast to what it was in 2007, say, when it's basically one hundred percent hardware. And so over the next five years, we see a dramatic shift in this business. And the key point here is that the margin that the business earns on the on the services side of its business will blow away the margin that it earns on hardware, which is already very respectable, I think, in the 40 to 50 percent range. So this is a business that's already two point forty two point two trillion dollars US in market capitalization. It's got a lot of cash. It's got some debt. It's just incredible free cash flow. But it's what it's doing with that free cash flow, which is really impressive. Over five hundred million paying subscribers to Apple subscriptions at the moment. And it's it's it's within its Ren where you see that hitting a billion users. So lots more free cash flow coming in as a result of higher margins in the services business. [00:17:07][156.1]

Alec: [00:17:08] So and you said there that the services business is going to be almost three quarters of Apple's revenue in a few years, it's currently two point two trillion dollars, market cap, biggest company in the world. How big do you think this market cap is going to get? Have you projected that out? [00:17:24][16.1]

Owen Raszkiewicz: [00:17:26] We haven't projected. I don't have the numbers on hand, Ren. But I would say that, you know, what tends to happen is that as a business gets more profitable, the valuation multiple actually expands. So what we what we would say is that as the business becomes higher quality, which is pretty crazy to think that this business could become higher quality, we will see that that market cap expand even further. I think just in closing, one part of this, one of the risks that people see with Apple is that the business will be broken up because it's going to be so profitable. And if that does happen, you've got to remember that as a shareholder, you will just get, you know, a part of each business. So it's not like that disappear. The second thing is that, you know, we tend to be scared off by large numbers, but the market cap is really just an arbitrary figure. It's not necessarily the number itself, it's how it changes over time. So we discounted cash flow analysis to get to our valuations. We kind of suggest that enterprise value to just kind of cash flow. It's slightly above our fair value. But again, you're paying you're paying a modest price, which is a slightly higher price for a very high quality business that we think still has quite a few years left. [00:18:32][66.4]

Alec: [00:18:33] Well, there we have own ratkovic from Raschein Vest. As a recap, his three stocks were laser bond, ASX Ticker Elbel zero, ASX Ticker zero, and then Apple, Nasdaq ticker a p. L three interesting stocks pitching the biggest company in the world is a is an interesting one from Ireland, but he's obviously got a lot of conviction around their services business. So interesting conversation there. [00:19:03][30.0]

Bryce: [00:19:03] That's right. Ren love hearing from Owen. And look, we are about to hear from Andrew Page from Straw Man Dotcom, founder and managing director. And again, always love hearing from from Andrew. He has such conviction and clear thinking when it comes to the stocks that he's talking about. And the next three are very clear example of that. [00:19:27][23.6]

Alec: [00:19:27] So not only does he have such clear conviction, he has a lot of excitement. So I think it's just important to stress that while Andrew is excited about these stocks, you do need to do your own research and don't just follow his excitement into a buy decision. [00:19:41][14.1]

Bryce: [00:19:42] That is right. Well, let's hear from Andrew. And it is our pleasure to welcome back again to Equity Mates Andrew Page. Andrew, welcome. [00:19:57][15.0]

Andrew Page: [00:19:59] Thank you, Bryce. Yeah, good to be here, guys. How are we? [00:20:00][1.9]

Bryce: [00:20:01] Very well. So, Andrew, for those of you in the Equity Mates community who haven't come across him before, is the founder and managing director at Strawman Dotcom. He's appeared on our podcast and on Osbey plenty of times. So go back and have a listen to some of the content we've done with Andrew, because he always has a lot of great things to say. And we're stoked that he's back to share three stocks on his watch list. And as Alec noted just before we went on air, that they're all in that microcap space. So looking forward to digging in, Andrew. First stock we might as well get stuck in is envirosuite ticket is Aves. What is the company and what's the thesis? [00:20:41][39.8]

Andrew Page: [00:20:42] Yes, so it's very sweet. I've actually had a long, tumultuous history with this company. It's been on Stralman for quite a while. It's done me pretty well, about a 50 percent compound annual return over that period. But it is it is a small cap company, about one hundred million dollars in market cap. And it does sort of swing from like stupidly cheap to stupidly expensive. So I'm a very, very much a long term holder here. But there has been some adjustments along the way with this one. And what's really interesting with this, and I'll get to what they do in a moment, is that they've really fallen out of favor of late. So I felt as though it was time to maybe shine a bit of a light on them. So these guys are environmental intelligence, environmental monitoring. So they connect up all these environmental sensors that are out there in the field that might detect things like odor or noise or vibration or dust, all kinds of different things. And they incorporate that all together to give their customers a real overview in terms of what's happening at their site. So the kind of sites of the kind of customers that they have are things like mines and ports. And more recently, airports are very big part of what they do, thanks to a very large transaction at the start of last year. And it basically puts all of this together in a way that's and I think this is the important thing. It's not just a descriptive thing in terms of what's happening with your sites, but it's also prescriptive and predictive as well. So a really good example here might be a mine that's thinking of doing some blasting. And if it lives anywhere near a local community, when you obviously blast a bunch of rock dirt, it throws all this dust into the air and it can annoy a lot of people. And that can sort of harm your social license to operate. That can be regulatory considerations. There are all kinds of things. So this kind of technology sort of helps you plan that and also helps you keep an audit trail of everything that you've been doing. So keep your regulators happy, but also not just in terms of doing good things, but actually helps improve the operational efficiency of your site. So it's a company that's sort of grown and changed rather rapidly over the years. They're doing that kind of stuff with water treatment plants and also with smart cities, also with pullets, as I say. And they've got about three hundred and fifty customers globally and they're doing about forty two dollars million in annual recurring revenue. So it's it's a company that is small, but hopefully it will be much bigger in the future. [00:23:13][150.8]

Alec: [00:23:14] And now, Andrew, you said you've had a tumultuous relationship with it, but you've had a 50 percent compound annual growth rate. So I think if I had a stock with a 50 percent compound annual growth rate, I wouldn't describe it as tumultuous. But guess different strokes. We we will move on to the next one, though. I'm interested to hear what your relationship with this one is Austco health care. ASX Ticker AHC This one's even smaller. Thirty four million dollar microcaps. So for people who haven't heard of the company, what does it do and then why do you like it? [00:23:53][39.3]

Andrew Page: [00:23:55] Quickly go back to your last point here. So I think one of the things that I love about investing in the small end of town is that you get a lot of opportunity that, you know, it's not as highly scrutinized as the big end of town, but that comes at a price. And that price is usually some pretty extreme volatility. So people can get super excited and things run up. A mimic is very, very scary and things fall down. So when I say that the history has been pretty tumultuous, I feel as if the business has kind of been doing some pretty good things, always a few little hairs on these kinds of companies. But you've you've got to have a very clear idea of what a fair value is for these kinds of businesses and sort of act appropriately around that. These are not the kind of companies that I think and given their upside potential, you might like Isatou. I first bought some embarrassment at four or five cents and that get up to thirty cents. It's it's not so much about trying to sell and locking winners or anything like that, but it becomes a. Very much part of your portfolio. So there's some sort of very sensible management that you need to do around that. So anyway, hopefully a little bit of extra context. Let's get back to Oscar Oscars. Actually had a bit of a name change not too long ago. This was formerly a zoo. And before I go into this, I had to give a shout out to a strong member called Welney or others with name Luke Winchester, who is often on base. I think he may have spoken to you guys before. Really smart Investa. He put this on Straw Man, which prompted me to have a look. And the more I've looked, the more I've liked it. So what these guys do in school systems, have you get a bit into a hospital, you know that there's a button beside the bed which will get the nurse to come along. And now that technology has come a long way, a lot of hospitals haven't kept pace with what the technology can do. And herein lies the opportunity. So it's really cool in terms of they can actually track where patients and nursing staff are around a hospital, also, should I say, nursing homes as well. And they can really just improve the standard of care, the operational efficiency, et cetera, et cetera. So it's a business that is is actually had a real knock around with Covid. They've been winning lots of sales, but you can't actually implement that when there's a lot of restrictions around hospitals and there's a lot of restrictions around nursing homes as well. So their results took a bit of a knock there. But in the background, they've actually been winning a lot of work. And what was interesting, this is very fortuitous. It wasn't planned, but they actually had an announcement today saying that they won big new contract with a hospital over in Singapore. And for those that don't know, Singapore has like world class hospitals and health care system, it really is top five systems in the world. And one of their big networks over there is big 800 bed hospitals taken on one of their systems, which is really great and interestingly enough, about this company. So it's a profitable company, about 30 Dollars million in sales and about three million dollars in net profit as well. No debt, six dollars million in cash, high insider ownership, long runway for growth here as well. And what's really interesting about this is that when you talk about sort of technology companies, when you talk about growth companies these days, in particular, you're talking about stratospheric price earnings ratios and often there's not a price to earnings ratio because they're not profitable yet. So it's a price to sales ratio that you have to use. Well, these guys are profitable, as I mentioned, and they're on a PE of eleven, which is really low. Now, I should stress that the very small micro-cap companies, they don't often demand the same kind of premium as their bigger peers because the liquidity there just makes it harder for people to get in and out. And that it just does it does dampen the premium. So perhaps we shouldn't expect them to trade on the same kind of premiums as an equivalent company with equivalent growth would be if it was much larger. Nevertheless, it seems as though it's a business that's executing well, big fat sales pipeline, a big market opportunity, some traction. And I think once they start getting access to some of their customers again and they can start implementing a lot of these sites, I think we'll continue to see sales and earnings grow quite strongly. I want to watch Andrew there. [00:28:04][249.2]

Bryce: [00:28:04] It's it's pretty clear that there are a lot of things that excite you about health care. Certainly put that one on on the watch list to close out your third stock AVEA risk group, tick. Ava, again. What is the company here and what's the basis [00:28:22][18.2]

Andrew Page: [00:28:26] of environmental intelligence that they're gone to? Med technology and this is security. So these guys have a couple of divisions. One is the technology division, which is about there's a lot of buzzwords in this. I'll try and break it down. But fiber optic intrusion detection technology, basically, they try and allow their customers to determine if there's been a breach of their perimeter, if there's been a breach of their pipelines, for example, if you're a guest network or something like this. So if you want to know whether someone has intrusion intruded in on your assets, these are the kinds of guys that you might want to speak to as well. So technology is about two thirds of their profit? Well, about half of their sales, two thirds of their profit. So this is the higher margin, faster growing, faster growing potential area, I should say, of their business. And then the other part of their business is a services business. Now, these guys ship things like bank notes around from mints to banks, things like gold from the gold refineries to the vaults that they ultimately get stored. And they'll even do the transport of high value works of arts, for example. So I'm sure you guys know with transporting all your incredibly high valued assets around the place, these are the guys that you might want to call to get that done. So it's kind of like am a God kind of service, but for central banks and gold producers in these kinds of things. So. Another one popped up on the straw man community, which I wasn't aware of until recently. Now it's ranked number 16th among all of our members. Again, a pretty small company. Hundred million dollar market cap revenue here has tripled in the last three years, and they have swung recently into EBITA positive. So on an operating basis, excluding depreciation and amortization, a few other things is a profitable business and they're only trading at six to seven times that EBIT level. So for those that are not in the know, it's not exactly a demanding valuation for a business and as I say, has tripled its revenue. I should caution your viewers that this is a business that is likely to experience pretty lumpy results here that had a huge contract win with the Indian Ministry of Defense a few years back. You know, they're going to replace that once that's going to be completed, which will be soon. So you'll have these big contracts come in, cash flows will fly up, and then they might they might not just be an even consistent runway there, but the opportunity looks pretty interesting. They've got some new products in the work, the strong tailwind in terms of the security sector there as well. So I think, yeah, good opportunity, good runs on the board and not too demanding a multiple. So another one to watch. [00:31:04][158.1]

Bryce: [00:31:05] Nice. Andrew. Well, thank you for your time. A reminder to everyone in the Equity Mates community that this is all about the watch list. By no means is it a by Holder sell recommendation by Andrew. Are all three of those stocks on Straw Man at the moment? I imagine there's some further research that our guys can go and look at and follow some some of the other straw man men? [00:31:27][22.0]

Andrew Page: [00:31:27] Well, yeah, absolutely. They're all the we cover the entire market, but there's a lot of research on those particular ones. And just to your point, there is. Well, Bryce, I mean, I can't emphasize this enough. It's really easy to borrow an idea of someone, but you can't borrow the conviction. So, you know, there's no replacement for doing your own research and becoming familiar with the stock, because when things get scary and they're likely to at this end of the market, you know, convictions, the only thing that's going to see you through all of that kind of stuff. So do your own research. But, yeah, go to school, man, and see what other people, as I'm sure [00:31:56][28.7]

Alec: [00:31:56] know, will. Well, Andrew, if I could borrow a conviction from anyone, I would try and borrow from you, because I love to say how excited you get about stocks, especially stocks that I haven't heard of before. So we appreciate you coming on and sharing your knowledge with the community. Thank you. [00:32:13][16.2]

Andrew Page: [00:32:14] Absolute pleasure, guys. Always enjoyed chatting. [00:32:15][1.7]

Alec: [00:32:16] Thanks, Andrew. All right. So there we go. Three small caps from Andrew Page. To recap, they were enviro suit, ASX ticker events, OPKO Health Care, ASX Ticker, HHC and Avea Risk Group, ASX Ticker, eBay. So that's six six interesting stocks to add to your watch list to do your own research on any closing thoughts here? [00:32:41][25.0]

Bryce: [00:32:41] Bryce. No major closing thoughts. I thoroughly enjoy hearing these these episodes from our experts. So if you would like to hear more of them, they are all available on our YouTube just 15 minutes each. Easy to digest and plenty of ideas in there to help build out your watch. So head to our YouTube channel for more or tune into Osbey every Wednesday to catch it live. Ren. I love my life, but I Ren always good to chat stocks. We have a pretty exciting week coming up this week. We with some big experts joining us on the show. So make sure you stay tuned to the feed this week. And as always, great to chat stocks and we'll pick it up next episode. [00:33:23][41.8]

Alec: [00:33:24] Sounds good. [00:33:24][0.0]

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