MoneyWeek writers’ top investment tips for 2021
Eleven of MoneyWeek’s best writers outline their top tips for 2021, ranging from a Latin American e-commerce giant to a Canadian oil play.
The trouble with providing a tip for 2021 is that I have no idea what the defining events of the year will be, just as I had no idea what would characterise 2020.
Bottom-up investors, those who study businesses rather than themes and trends, must necessarily take a longer-term perspective because it takes longer than a year for corporate strategies to play out and for traders to take notice. I give my investments ten years at least, but one that might deliver more quickly is D4t4 (Aim: D4T4).
If you squint, the name looks a bit like DAtA, which is what D4T4 is all about. The company owns Celebrus, software that captures data from digital interactions with customers so that a company’s systems can interact in real time – to make a sale or intercept a fraud, for example. The software is patented. According to D4t4 it is uniquely flexible and at the vanguard of customer-data capture. Most of the companies that currently use it are involved in finance, but it may attract a much wider customer base.
D4t4 has the potential to be a substantially bigger business if e-commerce develops in the way the company expects, but there are many ways promising technologies fail to grow out of their niches. D4t4 is not just a jam-tomorrow stock, however; it is a highly profitable firm today. Revenue will fall this year because customers increasingly choose to buy the software as a service, paying an annual fee instead of a larger one-off licence fee.
In exchange for lower income immediately, D4t4 is winning recurring revenue and the company should begin growing total sales again as new recurring revenues build up.
Churn, the company says, is almost non-existent, but customers often extend their usage once they have seen what the software can do. A share price of 250p values the enterprise at about 17 times last year’s adjusted profit and 27 times forecast profit for the year to 31 March 2021.
I’m a huge fan of those fallen heroes where the mere mention of their names causes apoplexy. Three outstanding examples were the tech giants Microsoft, Apple and Amazon. Following the 2000 telecoms, media and technology crash, each was as popular as nuclear winter. Since 2005, their share prices have increased by ten, 30 and 60 times respectively.
But telecom companies never recovered. Many trade below asset value, yet have decent-enough balance sheets and can pay solid dividends ad infinitum. Most importantly, there are catalysts for a rerating. Globally, the whole sector is cheap and nudging up profit forecasts. Two of the cheapest are in the UK.
First – apoplexy alert – is BT Group (LSE: BT.A), whose price is only pennies higher than when it listed in 1984. It is finally getting broadband right, is bolting on multiple other services and looks on track for 5G. The pension deficit and high capital expenditure are all in the price. Meanwhile, for the first time ever, the regulator is turning friendly. Trading at less than a third of its net asset value, BT’s 2021 price/earnings (p/e) ratio is just eight, while it yields 5%.
Vodafone Group (LSE: VOD) is an even easier story. The problem has been its high debt of around £28bn. Recently it announced that it would list its telecom mast business (the largest in Europe) in Frankfurt next year. The expected valuation is €20bn. Problem solved. Investors also ignore its major businesses in countries as diverse as India, Germany, Italy or Kenya. Yes, I have found its service and pricing appalling, but it’s really about business customers. Here it is performing well.
The expression “bargain” is much-abused in markets, but both these stocks are screamingly cheap and hence unloved. And come the hangover after the current global debt splurge, they’ll still be around.
Talk of the demise of technology stocks is overblown – there’s much more profit to come. Even if economic recovery can sustain bombed-out, “old-economy” stocks beyond the opportunistic rallies we’re seeing, many tech stocks will generate better long-term earnings growth, and this makes investors money. Given this, and believing a tip for the year should offer some excitement, I’ve turned to Latin America’s Amazon, eBay and PayPal all rolled into one: MercadoLibre (Nasdaq: MELI). Shares in this $80bn ecommerce giant, which is based in Argentina, are listed in the US and easy to trade for those who like some risk.
The company is expanding rapidly in any case, but the pandemic has accelerated growth, and the recent figures were the best yet. It’s performing well, from the merchandising of goods such as electronics and clothing to the processing of payments via its fast-expanding MercadoPago payments business. It offers credit, advertising, shipping and logistics too.
People turned to the internet to overcome pandemic lockdowns. Not only will they continue to use the internet, but they will also use it more, and for a broader range of products and services. This is a global phenomenon, but Latin America is at an earlier stage of digital transformation and therefore has more to leverage from it. E-commerce hasn’t yet hit 10% of the economy, much less than in the US or China. And while there’s no doubt the region presents unique challenges, over half of MercadoLibre’s sales stem from fast-recovering Brazil.
Research suggests the group has nearly 30% of Latin American e-commerce overall. There are competitors, but its sizeable position seems all the stronger given that Amazon comprises a mere 4%.
Just as in the UK, how people shop and pay is changing fundamentally. With 100 million people using the platform out of 650 million in the region, MercadoLibre has an enviable base upon which to generate substantial growth as these unstoppable forces change how we live and behave.
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