2 ASX shares that are on the right side of history: fund manager


The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Investors Mutual Limited senior portfolio manager Simon Conn reveals 2 hot ASX shares to buy for years to come.

Hottest ASX shares

The Motley Fool: What are the 2 best stock buys right now?

Simon Conn: Pact Group Holdings Ltd (ASX: PGH) and TPG Telecom Ltd (ASX: TPG), which are both top-5 holdings in the fund. Both look cheap with good management, and I think are really well-positioned for the next 3 to 5 years.

MF: If the market closed tomorrow for 4 years, which stock would you want to hold?

SC: I think both those stocks are ones that you’d be happy to own for the next 4 years. I think they’re both fundamentally very solid businesses, and well-managed, and have got really good businesses that are well-positioned to continue to grow and pay good income over the few years. 

I think the long-term structural trends for both industries, telco and packaging, are strong.

MF: They’re both sectors that don’t really go out of fashion, are they? There’s always a demand for them.

SC: Well, that’s the thing. We’re seeing a lot of disruption in the economy, [with] startup companies. There’s a lot of money around for startups or for new competitors, private equity-backed startups, so it’s a very competitive market. So you need to have a really strong competitive advantage, and also an ability to fend off competition.

Pact has really positioned themselves well at the centre of this circular economy trend, which is a big megatrend. We’re seeing a lot of consumer goods companies, such as Nestlé SA (SWX: NESN), Bega Cheese Ltd (ASX: BGA) and the like, moving to more sustainable practices, and that means using more recycled resin in their manufacturing. 

With Pact’s recent result, they announced a couple of contracts that they’ve won using recycled resin in their manufacturing process. Actually, today, they’re opening the Albury facility, which is their first reuse facility in the country, and that’s a real strong theme, I think, which will play through.

They’re the largest rigid plastic manufacturer in the country. That’s a very defensive business, so they’re effectively making the packaging. They just make sure that this enables fluids and liquid products to move from factory to the consumer or through industry. So whether it’s milk bottles, yoghurt tubs, margarine containers, the like. 

Because of the nature of the product, it has very resilient demand, very consistent cash flows. The volatility obviously comes from the resin price, because obviously, they buy a lot of resin. If they can lock in more reused resin, that’ll mitigate that cost, and because they’ve got the technology and the scale, they’re the natural go-to partner for a lot of these companies looking for a partner in terms of that circular economy solution.

Looking back

MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.

SC: Jeez, that’s a hard one. This game, every day is a battle. 

The COVID sell-off was a massive period of dislocation in the market, but I suppose not buying enough of these good-quality businesses, enough at the bottom. The share prices rallied very consistently off that, had a very sharp correction, and then they rallied very significantly. 

I suppose we should have bought more of the stocks we liked, because they all rallied significantly over the intervening 2 years.

MF: Did you have much cash in hand at the time?

SC: Yeah, look, what we did was we took the cash up to a reasonably high level, but there were numerous capital raisings, as you’re aware, in 2019, and we’d used that to participate in a lot of the capital raisings, which was a good performance for the fund. 

We did use the cash quite significantly, but the consumer discretionary sector is obviously one that rallied significantly. I suppose in hindsight we could have had more exposure to that… I suppose we were surprised at how quickly the economy took off, to be honest.

MF: I think everyone’s very keen to see, for the rest of this year, whether the same fast recovery happens or whether it’s more of a traditional long recovery.

SC: I think the last few years have been very volatile, and the reality in the world is, I don’t think that’s changing, mate. 

We haven’t seen a conflict like the scale of the one in Ukraine for many years, so many investors today have really no recollection of what this creates, and it’s a long time since we’ve seen this sort of escalation of commodity prices, so I think that creates a new paradigm for investors. 

The other thing that’s really compounding is that central banks around the world continue to hold rates at very low levels, where inflation is significant. Australia’s not as bad as the US, but you’ve got virtually zero cash rate in the US, and yet you’ve got inflation [at] 5%, 7%. It’s very negative real rates, and yet inflation is becoming more entrenched with the oil price at these sort of levels. 

It’s a very tricky environment for many investors, and I think the markets remain volatile. So in that environment, I think you’ve just got to stick to good-quality companies that are making cash flow today. 

There’s been a lot of companies in the market that have been bid up successfully, like concept [stocks], the PointsBet Holdings Ltd (ASX: PBH), or be it some of the more speculative tech stocks that don’t make money, and never made money, and people have been thinking that they’ll generate enough market presence to generate good cash or get taken over, effectively. But I think the market’s appetite to keep funding these things is becoming less certain, and so I think there’d be more discipline around making money, being profitable. 

A great sign of having a profitable company is paying a dividend, so I think those companies will come back into vogue. I think that’s definitely what we’ve seen over the last few months, the tech sector coming off and a lot of good-quality companies rerating.

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