Following the British victory over Napoleon, an economic crisis swept the land, spurred by rapid declines in spending to support the war effort. British nobleman, Baron Nathan Rothschild, is credited with being one of history’s great contrarian investors, coining the term “Buy when there’s blood in the streets, even if the blood is your own.” Following his own advice, he reportedly made a fortune betting against conventional wisdom.
The volatile responses to the potential impact of a full-blown trade war between the US and China seemed to have reached a turning point, when on 1 August the US announced a 10% tariff on an additional $300 billion in Chinese goods imported into the US. Effective on 1 September the new tariffs combined with the existing 25% tariffs on $250 million in Chinese imports effectively levies tariffs on everything US businesses buy from China.
Global markets led by the US DJIA (Dow Jones Industrial Average) tumbled and then tumbled again as the Chinese government responded by allowing the Chinese Yuan to fall to its lowest level in a decade.
Markets rebounded slightly when the Yuan appeared to stabilise. The bloodletting returned as nervous investors began to move their money into bonds, sending yields plummeting.
Many equity investors are firm in their belief stocks are a better investment over time, with a variety of historical comparisons to back up that belief.
However, those same investors often forget in times like these government bonds, especially US treasuries, come with a guarantee the investor will not lose his or her principal investment. Bonds are sold at auction and when demand is low, bond yields – interest earned over the life of the bond – go up to attract more buyers. When the bond market is flooded with buyers, yields fall. Hence, rapidly falling yields are seen as a sign of lack of confidence in the economic growth necessary to fuel stock price appreciation.
The last event in the chain as of 8 August in the US was a stabilizing of bond prices, igniting yet another market rally despite the dismal news on the trade war. First, here is the performance of the DJIA since the fall, from the Reuters financial website.
Now here is the performance of the ASX All Ordinaries index over the same period.
The advice to buy when there is blood in the streets, considered a contrarian view, has its own contrarian counterpart — “don’t try to catch a falling knife.”
Investors can find expert opinions that the worst is yet to come, suggesting those who took the risk and bought into the recent bloodletting may well have grabbed onto that proverbial falling knife that may continue to fall.
Others are advising investors to buy in the belief the worst is over.
There is no such thing as certainty in share market investing. There are no guarantees the bloodletting of the past week is over nor are there guarantees the knife will fall no further.
However, “market darlings” with solid historical performance operating in sectors likely to remain robust over time are well worth a look. Contrarians and other bargain hunters see opportunity in tough times.
On the ASX, the WAAX stocks, our own version of the US FANG tech stocks – Facebook, Amazon, Netflix, and Google — took a severe beating with Appen Limited (APX) leading the plunge, and the others – Wisetech Global (WTC, Altium Limited (ALU), AfterPay Touch Group (APT), and Xero Limited (XRO) not far behind.
The share price performance of the five WAAX stocks has been outstanding to say the least, with Altium on the ASX the longest, and Afterpay the most recent. Here are the listing dates and percent increase:
- Altium listed 30 September 1999, up 839%
- Xero listed 30 November 2012, up 1,011%
- Appen listed 30 January 2015, up 4,441%
- Wisetech listed 29 August 2016, up 580%
- Afterpay listed 30 June 2017, up 717%
Altium’s performance is particularly impressive, given its long history and stable performance following the GFC.
Altium has grown from its origins as a designer of electronic circuit boards, now operating primarily as a SaaS provider (Software as a Service). The company’s flagship product is Altium Designer, a CAD (Computer Aided Design) software package allowing end users to create 3d printed circuit boards, a key component required to power the growth of the “Internet of Things” (IOT).
Altium offers other solutions for its customers including Altium Concord Pro, an on-site data management system used in conjunction with Altium Designer. The company also provides its customers with training courses and webinars as well as an online chat and resource forum, Altium Live.
Altium has grown both revenue and profit in each of the last three Fiscal Years and remains debt-free. The solid performance continues, with the Half Year 2019 Financial Report showing a 24% jump in revenue accompanied by a 54.6% rise in profit. Altium in China saw revenue increases of 49% and added a Beijing office to its existing offices in Shanghai and Shenzhen. The company is global in scope, deriving 48% of its revenues from the Americas; 32% from Europe, 14% from Emerging Markets and 7% from the Asia Pacific Region.
Afterpay remains an investor favorite, despite concerns over a Senate inquiry into the diversified financial sector, with the company ultimately escaping from any major regulatory changes. The share price began to decline with news of the inquiry last October but has rallied since the February news regarding new regulations for the “buy now pay later” (BNPL) sector in which it operates. From auyahoofinance.com
Afterpay offers retail merchants a platform bridge to customers, allowing the purchase of goods, with deferred payments. Available to both e-commerce websites and “brick and mortar” retailers, Afterpay covers the cost of the purchase and collects a commission from the merchant for each transaction. There are no fees for consumers, except for late payments.
Afterpay is already operating in the US market, where buy now pay later platforms are relatively rare, and will be expanding into the UK later this year. The company is hemorrhaging cash to further its aggressive expansion plans. Investors appear unconcerned about the capital expenditures, but some appear to have abandoned the company on learning that Visa, the world’s largest credit card provider, will be launching a pilot buy now pay later program using existing Visa cards by January of 2020. The 28 June announcement sent the APT share price plunging 15% at one point.
Appen Limited turned in the best year over year share price appreciation performance, up 120%. Its financial performance from FY 2017 to FY 2018 was equally stellar, with both revenue and profit more than doubling. Revenues increased 119% while profit was up 192%
The company is deep into the hottest sectors in technology, artificial intelligence and machine learning. The company has offices here in Australia and in the US and the UK, the Philippines, and China. Appen has served technology, government, healthcare, retail, automotive, and financial services customers in more than 130 companies around the world.
Appen’s early history in language recognition software paved the way for its current expertise in data collection and analysis needed for machine learning and artificial intelligence applications. Although the two terms can be confusing, a lay person’s way of looking at it is machine learning is an application of artificial intelligence.
In early March of this year Appen acquired a US based machine learning innovator Figure Eight, which will operate initially as a wholly owned subsidiary, with integration to commence at the close of 2019.
Xero is a New Zealand based provider of an accounting software platform catering to small and medium size businesses, as well as accountants and bookkeepers for use with their clients. The platform is cloud-based, and offered as a SaaS in Australia, the UK, US, Singapore, Canada and South Africa.
The company is growing its subscriber base and posted a 36% revenue increase in FY2019 but has yet to turn a profit. However, the FY 2019 loss was reduced by 63% from the previous year. Earning per share (EPS) for FY 2019 came in at negative $0.59 per share, with analysts estimating a higher loss for FY 2020 before turning positive in FY 2021 at $0.155.
Wisetech Global is a global provider of cloud-based software solutions for the freight and logistics industry, in business since 1994. Its 2016 IPO was eagerly anticipated and well received, with its opening day share price of $3.41 rising to $4.04 at the close, a 16% increase. With a few dips along the way, the share price has maintained its stellar performance.
The company has upwards of 40 offices in Australasia, Europe and the Americas, extending its reach to more than 130 countries, serving over 12,000 logistics companies using the Wisetech software platform. The company’s flagship offering is CargoWise One, a “portal to portal” solution linking the global supply chain seamlessly.
CargoWise One is suitable for small businesses operating from a single location to the biggest multinational companies. Wisetech also offers a digital research platform called Borderwise, providing end users with all the information needed for cross-border shipping compliance.
As of 8:45 AM on 9 August in the US the Dow Futures once again are pointing to a lower opening on yet another brick added to the Trade War wall of worry. Given the volatility of the past week, US markets could easily rebound and end the day in the green.
The WAAX stocks are moving upward but how long the mini rally will last is anyone’s guess. Of the five WAAX stocks, two appear to have the best chance of resisting the impact of a significant downturn or a global recession, should either come to pass.
Altium and Appen are high tech stocks operating in sectors with explosive growth potential.