Welcome to Fear and Greed's daily interview. I'm Sean Aylmer. We're now very close to the end of the year and so I wanted to take a look back at one of the more volatile sectors of the market, tech. What's happened this year? Who are the big winners and losers and where are the opportunities for investors? Remember, this is general information only and you should speak to professional advisor before making any investment decisions. Elise Kennedy is the Vice President of Equity Research at Jarden, a semi- regular here at Fear and Greed. Hello, Elise.

Welcome to Fear and Greed's daily interview. I'm Sean Aylmer. We're now very close to the end of the year and so I wanted to take a look back at one of the more volatile sectors of the market, tech. What's happened this year? Who are the big winners and losers and where are the opportunities for investors? Remember, this is general information only and you should speak to professional advisor before making any investment decisions. Elise Kennedy is the Vice President of Equity Research at Jarden, a semi- regular here at Fear and Greed. Hello, Elise.

Thanks for having me again, Sean.

Thanks for having me again, Sean.

Not at all. Well now, I mean the last few days hasn't been great for the tech sector. It's kind of at a pretty rocky 2022 overall, would you say?

Not at all. Well now, I mean the last few days hasn't been great for the tech sector. It's kind of at a pretty rocky 2022 overall, would you say?

Absolutely. As you say, it was down the other day, but it'll probably be up again the next day. It's really hard to tell.

Absolutely. As you say, it was down the other day, but it'll probably be up again the next day. It's really hard to tell.

What's been behind it? Why the volatility in tech particularly 'cause it's probably been more volatile than many other sectors?

What's been behind it? Why the volatility in tech particularly 'cause it's probably been more volatile than many other sectors?

Oh, absolutely. Even if you look at the index as a whole, you've got the ASX 200 using that as a benchmark, that's down 2%. So overall markets have been challenged but then you look at the tech sector within that and it's down 31%. Now what's behind that? And why is that happening? And why is it up and down? It's a combination of factors but primarily it's got to do with those rising interest rates. So the U. S. rates for example, that's gone from start of January was around 1. 8%. It's around 3. 68 now RBA rate gone from a similar 0. 1%. Now we're at 3. 1. And how this plays an effect is that it weighs on the valuation, particularly for the tech stocks because that's where a lot of their valuation is on the rate and the price. And then also they're often the ones that have to borrow in the markets, given that most of them aren't free cash flow positive. So that again is one of the reasons that they're hit a lot harder than the general index.

Oh, absolutely. Even if you look at the index as a whole, you've got the ASX 200 using that as a benchmark, that's down 2%. So overall markets have been challenged but then you look at the tech sector within that and it's down 31%. Now what's behind that? And why is that happening? And why is it up and down? It's a combination of factors but primarily it's got to do with those rising interest rates. So the U. S. rates for example, that's gone from start of January was around 1. 8%. It's around 3. 68 now RBA rate gone from a similar 0. 1%. Now we're at 3. 1. And how this plays an effect is that it weighs on the valuation, particularly for the tech stocks because that's where a lot of their valuation is on the rate and the price. And then also they're often the ones that have to borrow in the markets, given that most of them aren't free cash flow positive. So that again is one of the reasons that they're hit a lot harder than the general index.

Okay, so I mean something that's worth pointing out is that the bond rate or the cash rate which flows through to bond rates are often used to price or value other assets. And what we're saying is when rates are rising, future earnings for companies like tech stocks don't look quite as good. That's kind of, I'm just trying to put that into very plain English. Is that fair, what I've just said?

Okay, so I mean something that's worth pointing out is that the bond rate or the cash rate which flows through to bond rates are often used to price or value other assets. And what we're saying is when rates are rising, future earnings for companies like tech stocks don't look quite as good. That's kind of, I'm just trying to put that into very plain English. Is that fair, what I've just said?

You nailed it. Well done, Sean.

You nailed it. Well done, Sean.

Right. Okay. So how closely does a local tech sector follow the U. S?

Right. Okay. So how closely does a local tech sector follow the U. S?

Yes, so I mentioned earlier about the Info- Tech being down about 30 odd percent. You've got the Nasdaq similarly down about 30%. So it's quite a close comparison and I think that's also got to do with the factor of we're both seeing in the markets, rising in inflation wage at all time or employment that flows. It's that weighing on the wages. So I think that's where those two types of sectors are actually quite aligned.

Yes, so I mentioned earlier about the Info- Tech being down about 30 odd percent. You've got the Nasdaq similarly down about 30%. So it's quite a close comparison and I think that's also got to do with the factor of we're both seeing in the markets, rising in inflation wage at all time or employment that flows. It's that weighing on the wages. So I think that's where those two types of sectors are actually quite aligned.

What about, you also mentioned earlier about the need for debt in a lot of these tech stocks because a lot of them aren't actually making money yet? In this environment are you looking to invest in those that are making money vis- a- vis those who aren't?

What about, you also mentioned earlier about the need for debt in a lot of these tech stocks because a lot of them aren't actually making money yet? In this environment are you looking to invest in those that are making money vis- a- vis those who aren't?

Absolutely. I think that's where you've seen in the tech stocks that have performed better than some of the others. The reason that has tended to occur has to do with the free cash flow generation. So those that perhaps like an LTM and a WiseTech are two that I cover in my sector coverage that have performed better because they generate cash versus say Zero hasn't done as well because they've been still investing a lot more and haven't been able to generate as much of the free cash flow. It actually went backwards in their last result back in August. So absolutely, I think that's one of the challenges that a lot of these smaller businesses and probably even more profound effect in the earlier stage VC space.

Absolutely. I think that's where you've seen in the tech stocks that have performed better than some of the others. The reason that has tended to occur has to do with the free cash flow generation. So those that perhaps like an LTM and a WiseTech are two that I cover in my sector coverage that have performed better because they generate cash versus say Zero hasn't done as well because they've been still investing a lot more and haven't been able to generate as much of the free cash flow. It actually went backwards in their last result back in August. So absolutely, I think that's one of the challenges that a lot of these smaller businesses and probably even more profound effect in the earlier stage VC space.

Okay. So let's talk about some of these stocks. WiseTech Global, I kind of love, I think the management of that company is very good and it's got very sort of stable management, I suppose. But this year it really has bounced around a lot for a pretty good company.

Okay. So let's talk about some of these stocks. WiseTech Global, I kind of love, I think the management of that company is very good and it's got very sort of stable management, I suppose. But this year it really has bounced around a lot for a pretty good company.

Yeah, look, I think that's again the market getting caught up on a few things and also thinking our trade volumes are changing. But as I've highlighted to a few people who have wanted to short this name, of the 31% growth rate that they've had since 2016 on the revenue line, their bulk of that, about 16% of that 31, has come from large contract wins and getting more global rollouts happening versus 3% from volume. So that's one thing that I think some people get caught up on there. But the other thing as I mentioned is they're spinning off so much free cash flow and we see that each result that they present. And I think when we see that they've got 460 million sitting on the balance sheet as they last reported, they generate between 150 to 200 million plus each year to add to that balance sheet and they've got a history of making acquisitions. So I think that's where that is very different to say another name that is using that much cash rather than generating that much cash.

Yeah, look, I think that's again the market getting caught up on a few things and also thinking our trade volumes are changing. But as I've highlighted to a few people who have wanted to short this name, of the 31% growth rate that they've had since 2016 on the revenue line, their bulk of that, about 16% of that 31, has come from large contract wins and getting more global rollouts happening versus 3% from volume. So that's one thing that I think some people get caught up on there. But the other thing as I mentioned is they're spinning off so much free cash flow and we see that each result that they present. And I think when we see that they've got 460 million sitting on the balance sheet as they last reported, they generate between 150 to 200 million plus each year to add to that balance sheet and they've got a history of making acquisitions. So I think that's where that is very different to say another name that is using that much cash rather than generating that much cash.

Elise, what does WiseTech Global actually do?

Elise, what does WiseTech Global actually do?

So Wisetech Global is a logistics software stock. So what they do is if you've got freight forwarder like A DHL, you might have seen them, they will help move and give visibility of where and when that parcel is going through from the warehouse to the port, on the ship to your home.

So Wisetech Global is a logistics software stock. So what they do is if you've got freight forwarder like A DHL, you might have seen them, they will help move and give visibility of where and when that parcel is going through from the warehouse to the port, on the ship to your home.

Okay, fantastic. So all that shopping I did on Black Friday and I keep getting these emails saying this is where it's up to, potentially WiseTech Global was involved in that.

Okay, fantastic. So all that shopping I did on Black Friday and I keep getting these emails saying this is where it's up to, potentially WiseTech Global was involved in that.

Very well could be.

Very well could be.

Okay. LTM, you mentioned that. So what does LTM do and what do you think of that one?

Okay. LTM, you mentioned that. So what does LTM do and what do you think of that one?

LTM, it does a printed circuit board software which in itself can be complex but effectively if you think about if you build any electronic gadget, there's a small chip that exists within that to get all of the linking up of the dials and they do the software, not the hardware for that. And they've done exceptionally well because they've always been generating free cash flow that are quite transparent in their way that they account for that cash in terms of they don't capitalize, which means put some of their spend onto a balance sheet so it makes their financials look better, they don't do that. And I think they've just rebase the market as well in saying we've got these 2025 targets. We're going to hit them. I'm a bit more skeptical on their ability to be able to do that but the market believes them and then as a result the share price is held up very well.

LTM, it does a printed circuit board software which in itself can be complex but effectively if you think about if you build any electronic gadget, there's a small chip that exists within that to get all of the linking up of the dials and they do the software, not the hardware for that. And they've done exceptionally well because they've always been generating free cash flow that are quite transparent in their way that they account for that cash in terms of they don't capitalize, which means put some of their spend onto a balance sheet so it makes their financials look better, they don't do that. And I think they've just rebase the market as well in saying we've got these 2025 targets. We're going to hit them. I'm a bit more skeptical on their ability to be able to do that but the market believes them and then as a result the share price is held up very well.

Stay with me, Elise. We'll be back in a minute. My guest today is Elise Kennedy, Vice President of Equity Research at Jarden. Okay, then Zero is another one you mentioned and anyone in small business, not anyone but many people in small business would use Zero or certainly know about Zero. It's accounting software. I was surprised you said it doesn't make money.

Stay with me, Elise. We'll be back in a minute. My guest today is Elise Kennedy, Vice President of Equity Research at Jarden. Okay, then Zero is another one you mentioned and anyone in small business, not anyone but many people in small business would use Zero or certainly know about Zero. It's accounting software. I was surprised you said it doesn't make money.

Yeah, look, they're interesting 'cause they're doing all, which is over two billion on the top line. That means the revenue line but they're only generated for cash flow of about two mil and that's down from the 10 that they have delivered previously. So they're in a root, still an investment phase which we completely respect and understand 'cause there's such a large addressable opportunity for them to be able to go after that. But I think the challenge in this market is how long are you going to have to keep on spending that and are you in this type of market, if you need to spend more, are you going to have to borrow? I don't think that's as much of a concern, the borrowing side or the balance sheet component. But I think it's just wanting to see delivery of cash and that's where the jocks that I mentioned before are investors when the cost of that dollar is going up, want a better return for that and a better sense of certainty as to when you're going to start to get that cash out.

Yeah, look, they're interesting 'cause they're doing all, which is over two billion on the top line. That means the revenue line but they're only generated for cash flow of about two mil and that's down from the 10 that they have delivered previously. So they're in a root, still an investment phase which we completely respect and understand 'cause there's such a large addressable opportunity for them to be able to go after that. But I think the challenge in this market is how long are you going to have to keep on spending that and are you in this type of market, if you need to spend more, are you going to have to borrow? I don't think that's as much of a concern, the borrowing side or the balance sheet component. But I think it's just wanting to see delivery of cash and that's where the jocks that I mentioned before are investors when the cost of that dollar is going up, want a better return for that and a better sense of certainty as to when you're going to start to get that cash out.

Okay. What about the online property groups? REA and Domain? The big two REA certainly is a lot bigger than Domain though.

Okay. What about the online property groups? REA and Domain? The big two REA certainly is a lot bigger than Domain though.

Yeah, it's a very cyclical year. If you've watched where house prices have gone, which is the key thing that these stocks are correlated to amongst other things. But REA has held up its value relatively well. I think as a number one player, if you do list your house, even though there's a lot fewer listings than we have seen historically, they're more normalized versus what we saw last year, then you will have to perfectly use that to entice other sellers. So I think that's where will you use two of them? Sometimes you advertise on both. That's where I think Domain has struggled and as a number two player, you often have to spend more than the number one player to get the attention share, to get the market share to drive some of what we call depth penetration. So I think for us we kind of look at those two as leverage the housing cycle, which is challenging as a whole. But you would preference REA in that because of Domain being a number two player? It's just harder.

Yeah, it's a very cyclical year. If you've watched where house prices have gone, which is the key thing that these stocks are correlated to amongst other things. But REA has held up its value relatively well. I think as a number one player, if you do list your house, even though there's a lot fewer listings than we have seen historically, they're more normalized versus what we saw last year, then you will have to perfectly use that to entice other sellers. So I think that's where will you use two of them? Sometimes you advertise on both. That's where I think Domain has struggled and as a number two player, you often have to spend more than the number one player to get the attention share, to get the market share to drive some of what we call depth penetration. So I think for us we kind of look at those two as leverage the housing cycle, which is challenging as a whole. But you would preference REA in that because of Domain being a number two player? It's just harder.

Yeah. Okay. The one I always find interesting is SEEK, and I would've thought it should had a really good year given that we've had incredible jobs boom and people are looking for staff. But that's not really the case. I mean I think it's down 35% in the last 12 months or so, or thereabouts.

Yeah. Okay. The one I always find interesting is SEEK, and I would've thought it should had a really good year given that we've had incredible jobs boom and people are looking for staff. But that's not really the case. I mean I think it's down 35% in the last 12 months or so, or thereabouts.

Absolutely, Sean. It should have had a good year. It's like every time that they beat, which they did at the result or their guidance they put out, everyone thinks that's the last upgrade. Jobs are going down now everyone's going to be unemployed. Which I don't know, I think it's held up relatively well still and I think probably the next result which we have in February could have the surprise to the upside where in the way that we are looking at it, I think that the jobs market is still good. They're not getting as many applications which makes some of their ability to price on what they call dynamic pricing harder. But I find that helps to remove some of the cyclicality in some of the other businesses like Asia Offshore are also going very well that it does seem exactly as you point out, that it is not really aligned to what we are seeing in that jobs market.

Absolutely, Sean. It should have had a good year. It's like every time that they beat, which they did at the result or their guidance they put out, everyone thinks that's the last upgrade. Jobs are going down now everyone's going to be unemployed. Which I don't know, I think it's held up relatively well still and I think probably the next result which we have in February could have the surprise to the upside where in the way that we are looking at it, I think that the jobs market is still good. They're not getting as many applications which makes some of their ability to price on what they call dynamic pricing harder. But I find that helps to remove some of the cyclicality in some of the other businesses like Asia Offshore are also going very well that it does seem exactly as you point out, that it is not really aligned to what we are seeing in that jobs market.

And another company that you've just started watching I believe is SiteMinder. Tell us about that, what it does?

And another company that you've just started watching I believe is SiteMinder. Tell us about that, what it does?

Absolutely. Yeah, so we recently started covering SiteMinder, which is an accommodation software stock. It's global, it's tapping into a lot majority of smaller hotels. So it's not your big hotel chain. So for example, if you go to your local boutique, you're own beach pad, actually having them use SiteMinder or one of the other products that they have called Little Hotelier. Now that again was hit hard by the COVID, it only listed last year on the stock exchange. But we see the resumption in travel as a positive for this name. We actually think sometimes if you do have pressure on pricing from a softer consumer, given all their ear enter rate rises, which we mentioned earlier, then this could actually drive the smaller hotels to need to find cost efficient ways to manage their bookings, to remain competitive and for $ 30 a month effectively this product can be, this is a really good tool that's global that may be able to benefit from that type of scenario.

Absolutely. Yeah, so we recently started covering SiteMinder, which is an accommodation software stock. It's global, it's tapping into a lot majority of smaller hotels. So it's not your big hotel chain. So for example, if you go to your local boutique, you're own beach pad, actually having them use SiteMinder or one of the other products that they have called Little Hotelier. Now that again was hit hard by the COVID, it only listed last year on the stock exchange. But we see the resumption in travel as a positive for this name. We actually think sometimes if you do have pressure on pricing from a softer consumer, given all their ear enter rate rises, which we mentioned earlier, then this could actually drive the smaller hotels to need to find cost efficient ways to manage their bookings, to remain competitive and for $ 30 a month effectively this product can be, this is a really good tool that's global that may be able to benefit from that type of scenario.

How do you remember all this stuff, Elise?

How do you remember all this stuff, Elise?

I read and read.

I read and read.

And recall though. Read and recall. That's pretty good. Tell me, what about 2023 and my final question for you, what as an investor should we be expecting in 2023 given that interest rates probably will top out probably in the first half of the year?

And recall though. Read and recall. That's pretty good. Tell me, what about 2023 and my final question for you, what as an investor should we be expecting in 2023 given that interest rates probably will top out probably in the first half of the year?

I hope you're right on that because then I think we might get a bit more traction and stabilization across the likes of tech because we know what pricing to put in there in terms of a rate. We also know with housing that once we know effectively what borrowing you can get from the buyer side or that there's going to be buyers there that can close in on financials. 'Cause if the rates just keep on going up, it becomes harder each time you go to get refinancing on what you can pay for a house. So my thoughts are similar to yourself in that we need to firstly see inflation rates start to normalize. There's still about seven, just over seven half percent in the U. S. the last was 7. 3 here in Australia on a quarterly basis. I think we need to see that stabilized first and then from there, hopefully a bit of easing in the employment market as we start to get some of the migration comeback. And then from there, I think exactly as you say, hopefully we get stabilization in the second half of the year. We start to see a return from value to rewards growth towards tech.

I hope you're right on that because then I think we might get a bit more traction and stabilization across the likes of tech because we know what pricing to put in there in terms of a rate. We also know with housing that once we know effectively what borrowing you can get from the buyer side or that there's going to be buyers there that can close in on financials. 'Cause if the rates just keep on going up, it becomes harder each time you go to get refinancing on what you can pay for a house. So my thoughts are similar to yourself in that we need to firstly see inflation rates start to normalize. There's still about seven, just over seven half percent in the U. S. the last was 7. 3 here in Australia on a quarterly basis. I think we need to see that stabilized first and then from there, hopefully a bit of easing in the employment market as we start to get some of the migration comeback. And then from there, I think exactly as you say, hopefully we get stabilization in the second half of the year. We start to see a return from value to rewards growth towards tech.

Elise, thank you very much for talking to Fear and Greed.

Elise, thank you very much for talking to Fear and Greed.

Thanks for having me, Sean.

Thanks for having me, Sean.

That was Elise Kennedy, Vice President of Equity Research at Jarden. This is the Fear and Greed daily interview. Remember, you should get professional advice before making any investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.

That was Elise Kennedy, Vice President of Equity Research at Jarden. This is the Fear and Greed daily interview. Remember, you should get professional advice before making any investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy your day.