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Trading Diary

Trading Diary – 19 September 2019

This week we’ve realised a profit on our holding in Rhipe (RHP) and reallocated this capital to a new position in Flexigroup (FXL). Following this change, we continue to hold a total of 18 stocks in the Model Portfolio.

Sell

Rhipe (RHP)

Position closed at +15% profit

The uptrend in Rhipe looks to be pausing for the time being. It’s unconfirmed whether the stock is moving into an accumulation trading range or whether this will turn out to be a distribution. I suspect this is an accumulation trading range. However, it’s challenging to know how long the stock will stay range-bound. 

Rhipe’s fundamentals are still strong. RHP is a high growth company. Earnings are scaling up with revenue growth, and the company still has plenty of blue sky opportunity ahead. However, at 7x revenue and 41x EBIT, the stock is expensive. Valuation might be the reason for the pause in the uptrend. The fundamentals will take some time to catch up with the recent rise in the share price. 

Not only that, but the market needs continuing confirmation that they can achieve their expected growth. The industry in which Rhipe operates is competitive. They are resellers of cloud-based technology products. Sure, once they have a customer signed up, the customer is likely to be sticky. However, the competition to acquire customers is expected to be fierce, and no company can claim any real competitive advantage that a rival cannot overcome. 

In any event, I’m optimistic about the future for Rhipe. However, the odds must be in our favour for both timing and direction of a stock’s next move for us to maintain our position. There’s no use sitting in stock moving sideways. At this stage, it’s tough to know how long the sideways move will last. Therefore we’ve sold and redeployed our capital.

Buy

Flexigroup (FXL)

Technicals

Flexigroup appears to have put in a bottom in February this year. Since then the stock has slowly made progress on heavy volume. The stock is now back at the top of its trading range. A move above $2 would be very positive.

Fundamentals

The stock is cheap by conventional metrics. It has a PE of 10 and a price to sales ratio of 2.6x. These metrics compare favourably with Afterpay and Zip, the leaders of the latest online consumer finance boom, who have price-to-sales ratios of 37 and 15, respectively. Neither are profitable yet and therefore their PE ratios are immaterial. 

Growth has been non-existent for the last few years. This lack of growth accounts for the valuation discrepancy between FXL and its hyper-growth peers.

Narrative

The company is undergoing a major strategic overhaul. FXL was left behind in the digitisation and impressive growth of the online consumer finance space. Having been a leader in store for many years with their Certegy product, FXL missed the boat online. Now they’re playing catch up. 

Flexigroup, while completely missing the boom in online consumer finance is still a steady, low growth lender. Moreover, FXLs lending business has been very profitable over time. 

Flexigroup is now trying desperately to play catch up in the online consumer finance space to participate in the boom started by Afterpay and Zip. They’ve relaunched their consumer brand both instore and online under the Humm banner. They’ve also simplified and rebranded the rest of their product suite to make it more appealing and consumer-friendly. The market is undecided whether Humm will be able to achieve the same rate of consumer acceptance and growth as APT and Z1P. 

The stock appears to be under accumulation. Increased volume and improving momentum indicate interest in the issue. The stock is cheap, and the business has stabilised. If the company can ramp up growth, even if not to the same level as their competitors, there is significant upside potential from here. 

By Danny Sandler

Founder of Ocean Asset Management.