Eleanor Swanson was having difficulty convincing the investment team to buy into Afterpay.
It was 2019, and Swanson, then 28, had just left Macquarie’s successful high conviction fund to set up a new shop – Firetrail Investments – with eight others.
And Afterpay, which had listed on the ASX just a year earlier, was far from the buy-now, pay later giant which would eventually be sold to American payments firm Square in a $39bn deal.
“It was the classic millennial thing … My friends were using it, we are more accustomed to shopping online,” Swanson says. “I said it was a fantastic company. I had experienced it first hand and was using it for shopping.
“But some of the older guys in the view took the view that it was a short-term bubble. They didn’t see it as having longevity.”
One colleague described the share price – $8 – as “crazy”.
After considerable discussion, Firetrail decided it was worth a closer look. In her internal pitch, Swanson argued Afterpay shares were worth at least $50.
“We looked at how the customer transacted on the platform,” she says. “The customer might use it twice in the first year, but by the time they have been on the platform for three years they are using it 20 times a year.
“The average value of the order was also increasing.
“When you put those two metrics together – the frequency of spend, and the average order, and assumed a growing penetration of the millennial market – we were getting an enormous upside.”
The pitch was convincing. Afterpay – and the investment along with it – become a major success.
Firetrail, with a small cap fund now worth some $300m, sold out when Afterpay’s share price rose above $90. Its hedge fund held on until it rose above $100.
Now Swanson will make her debut at Sohn Hearts & Minds in December – one of 16 stock pickers predicting the best equity plays for the year ahead.
An analyst at the small cap fund, Swanson’s remit stretches from healthcare to biotechs and industrial stocks. (Swanson, who has also worked as an analyst at JP Morgan, is the daughter of ClearView Wealth managing director Simon Swanson.)
For her Sohn conference pick – to be revealed on the day – she has chosen a small cap Australian company in the tech sector.
“It is playing into the global growth thematic,” she says.
“It is an Australian company which has built a product here and is now taking it offshore and building a global business.”
Firetrail’s small caps fund can take in companies with market capitalisations of more than $200m up to ASX 50 companies.
Swanson says the fund has a flexible approach to stock picking, looking for a combination of growth and value stocks.
“Our investment philosophy is that every company has a price,” she says. “We do have more of a bias to companies with earnings as we believe share prices follow earnings. But we are very happy to play in the growth part of the market … we see a company’s valuation as very important.
“We would never buy a company just because we liked the thematic or like the space.
“We always build a proper model and figure it out. We want to see if there is upside based on where we think the earnings will land relative to market expectations. One of our best stock picks has been where we have found an angle on a company the markets have not cottoned on to yet.”
Swanson cites Beacon Lighting as one of the fund’s successful small cap investments.
“Eighteen months ago, we cottoned on to the fact they were rolling out a trade strategy instead of just focusing on the retail market.
“It has been a great performer for the fund. Finding that angle gave us a great point of differentiation to model out the earnings.”
Swanson says a background in science has given her an insight into healthcare and biotech stocks. Her picks have included New Zealand wound care product company Aroa Biosurgery.
“It listed on the ASX about June last year and it was one of our top picks. We actually invested just before the IPO when it was hard for companies to get their hands on capital.
“We stepped up pre-IPO and then helped them underwrite the IPO a few months later. It has been a great performer for us.”
The fund’s favourite industrial stock at the moment is outdoor advertising company oOh!Media.
“We think the market is underestimating how strong the advertising market is going to be next year,” Swanson says.
“Australians have saved over $150bn during lockdowns, not being able to travel or go out to dinner and having benefited from stimulus payments.
“We think there is enormous pent-up demand and there are companies which will want to make sure they get their share of the pie.” She says oOh! Media has a big presence in airports, which she believes will benefit as Australians resume domestic travel.
“We think they are going to be flat to up on their revenue prior to Covid whereas the market is thinking they wont be able to get back to where they were in 2019.”
She also likes Ardent Leisure, the leisure and outdoor theme park company whose fortunes were hit by the tragedy at Dreamworld on the Gold Coast in 2016. Her analysis sees the company potentially generating earnings before interest and tax at $120m compared to its current $80m.
She believes its US leisure centres, which operate under the brand Main Event, are turning around and generating more revenue, becoming its main asset.
Swanson, whose short career in funds management has never seen a down market, says she has benefited from the rush of IPOs on the ASX in the past 18 months.
“It has been an incredibly hot market for IPOs,” she says.
“I have learned a huge amount in terms of how to do due diligence. You have to make sure you not only speak to the chief executive and the chief financial officer, but also talk to their customers and ex-employees to get a holistic view of a company.”
She says the fund takes a three-year view when it looks at whether to invest in an IPO.
“We are not going to jump into an IPO because we think it is going to go up 20 or 30 per cent on one day,” she says. “Our favourite company is one which is genuinely coming to the market because it has a huge growth opportunity and needs capital.
“It’s always a red flag if a company is coming to the market opportunistically for no reason, or driven by private equity or the founders wanting to get out.”
Swanson says she is more than happy concentrating on the small cap sector in Australia.
“There are so many fantastic companies acrossall parts of the market – outstanding resource companies, mining services, financial services.
“Our big cap team is excited if they find a company that has 30 per cent upside. But (at the small cap fund) we are excited to find a company which has 200 to 300 per cent upside. The opportunities are so much more elevated with small companies. We always have at least 20 stock ideas.”
The annual Sohn conference started in New York in 1995 to commemorate the life of Ira Sohn, a Wall Street fund manager who died at the age of 29 from cancer.
This year’s conference in Australia, online as a result of the Covid-19 pandemic, will feature a video appearance by Warren Buffett’s colleague, Charlie Munger. It will also hear from Caledonia Investments chairman Mark Nelson and Regal Funds chief investment officer Phil King.
The local conferences, which began in 2016 have raised more than $30m for medical research.
The Sohn Hearts & Minds Conference will be held on December 3.
This article was originally posted by The Australian here.
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Eleanor Swanson of Firetrail Investments sat down with Equity Mates Media ahead of this year's conference. Eleanor shares the story of her first investment, breaks down the small cap landscape and shares some of the best companies that she's come across during her time in the markets.
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