Expert stock pickers reveal why its time to sell Xero and TechOne

Stockheads

01-14

The tech sector was one of the best performers on the ASX over the past year, surging almost 50 per cent, but market watchers are now urging caution.

On Wall Street, the so called Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla, have scaled such giddy heights, they are now worth more than the entire European market.

But Goldman Sachs chief global equity strategist Peter Oppenheimer says the US market is increasingly vulnerable to a correction.

“Over recent years the biggest US tech companies have far outstripped the rest of the US equity market in terms of earnings growth,” he said.

However, the extraordinary ramp-up in capex spending mega-cap technology companies are making is reducing free cash flow and the scale of future profit growth.

On the local bourse, Catapult Wealth financial adviser Dylan Evans says investors should consider selling software giant Xero, which rallied more than 50 per cent last year.

“It is difficult to buy at current valuations,” he said.

Morgans senior investment advsier Andrew Eddy similarly feels TechnologyOne, which doubled in price last year has

“The rapid re-rating in share price sees the stock now trading at 70 times,” he said.

Here are their other tips:

Catapult Wealth financial adviser Dylan Evans

BUY

Cleanaway (CWY)

A market leader in waste disposal and recycling, Cleanaway offers defensive cashflows and moderate growth. Government targets to increase recycling rates above 80% by 2030 should be supportive.

Seek (SEK)

Business looks to be in good shape operationally and has completed some key IT projects. Just needs to see a recovery in job market activity to perform.

HOLD

Macquarie (MQG)

Growing strongly, but still looks expensive when compared to offshore peers such as Goldman Sachs and JP Morgan.

ANZ Group (ANZ)

ANZ has appointed an external Ex-HSBC candidate as its new CEO from July. He looks to be a good fit to execute ANZ’s key projects, including the integration of Suncorp and roll out of the new ANZ plus retail platform.

SELL

Sims (SGM)

Metal prices and energy costs are both highly volatile, the business operates at low margins, and is reasonably capital intensive.

Xero (XRO)

A high-quality business with recurring and growing revenues. Despite this clear quality, it is difficult to buy at current valuations, with market expectations for growth high even compared to recent history.

Morgans senior investment adviser Andrew Eddy

BUY

Sigma Healthcare (SIG)

Expecting shareholder votes in late January to provide the final approval for the transformational merger with Chemist Warehouse Group creating a leading healthcare wholesaler, distributor, and retail pharmacy franchisor. Stock will see index buying.

Light & Wonder (LNW)

Now trading at a much lower multiple post Dragon Train litigation, earnings growth outlook remains positive and with a deleveraged balance sheet, strong investment returns should continue.

HOLD

GQG Partners (GQG)

The negative Adani news back in November has caused some uncertainty and FUM outflow, however GQG is structurally well placed to benefit from improved markets and long-term investment performance remains intact and FUM inflows should return.

IRESS (IRE)

With the turnaround strategy well underway, the business is becoming more resilient with cost outs and a de-gearing of its balance sheet, improving the customer proposition with new product initiatives will drive organic revenue growth.

SELL

Ventia (VNT)

The ACCC cartel proceedings create both earnings and perception uncertainty particularly with a number of contracts held with Dept of Defence at risk of renewal, this will likely weigh on the stock for some time.

TechnologyOne (TNE)

The rapid re-rating in share price sees the stock now trading at 70 times which is excessive despite the impressive track record of execution.

This article first appeared in The Australian.