Why Sydney Airport looks cheap to David Moberley

As a young Macquarie analyst, David Moberley was among the first to appreciate the profit potential of a new breed of technology stocks when he slapped a "buy" rating on REA Group in 2009.

The online real estate portal was not anything like the market darling it is today, but Moberley picked up on its potential and recommended it to clients.

It was an inspired call on a stock that was ignored by the rest of the sell side, but even Moberley was surprised how the price kept rising.

"It went from $6 to $12 in 12 months and I was thinking, 'it's gone way too hard'. I couldn't get my head around it. And then it went to $20. It was $125 yesterday."

The REA experience has stuck with Moberley, who moved to the buy side and now heads up the long-short equity strategy at Paradice Investment Management.

He will be pitching what he hopes is another big winner at next month's Sohn Hearts & Minds conference.

Moberley has yet to decide which stock he's going to present, but he shared a newly initiated position.

To find bargains at the moment, investors have to look into the sectors that have been hit by the pandemic. And while most travel-related companies have recovered their valuations, Sydney Airport is still trading at a 40 per cent discount to its intrinsic value.

Often these are hollow victories. Investors that don't own the stock like it, but those that do hate you.

— David Moberley, Paradice Investment Management

The persistent discount is because of the lengthy expected delay for international travel to resume.

But he's comfortable buying the stock based on the number of years he's discounted back last year's normal earnings to get the current share price: which is about five or six years.

Based on that logic, the stock is cheap if international travel and normal trading conditions resume within that period. Any move towards an earlier than expected resumption has the potential to flow through to the share price.

"Equities sometimes trade like options, so very small changes in expectations can drive big changes in price," he says. "The stock can re-rate quite aggressively."

Although there are bargains around, Moberley says this is a particularly challenging time for fundamental investors.

That's because the fierce rally in markets has been fuelled by policy responses. Moberley has found he has sold out of stocks, even though he correctly forecast the earnings, but the price kept rising because he had underestimated the discount rate.

"We want to spend time on stocks but we keep getting dragged into the macro."

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Eyes on US election and vaccine

Neither he nor the broader market has conviction at the moment, and both are awaiting the US presidential election outcome and further news on a vaccine.

The election result and the policies that may emanate from it could drive the market's expectations about inflation. "Inflation will drive the yield curve, which is going to drive value versus growth. That is what we are focused on."

But he's in the camp that believes ultra-low interest rates and the cheap capital they feed high-growth companies is deflationary, rather than inflationary.

"The lower you drive rates, the more you drive deflation but [central banks] are using the old textbooks."

Moberley's strategy allows him to short stocks but this has been a tricky time to bet against certain high-growth companies. When it comes to his short bets, however, he keeps his cards very close to his chest.

It's another lesson he picked up from his sell-side days when he was bearish on Cabcharge, which at the time was a market darling.

"We were noticing a couple of new competitors had come into the space and were offering incentives directly to the drivers," he says.

To determine the actual market effect, he sourced all the Amex spending at Macquarie on taxis and published the aggregate data. It showed a constant gradual decline in Cabcharge's share of payment volumes.

That, he says, allowed him to identify the early stages of Cabcharge's descent from a dominant monopoly to a structurally impaired business.

"Often these are hollow victories. Investors that don't own the stock like it, but those that do hate you and management won't talk to you.

"Being negative doesn't win you many friends."

So he's keeping any bearish thoughts to himself. He does, however, offer an insight into the two ingredients required for a good short: "an independent mind and good risk management".

The Sohn Hearts & Minds Investment Leaders Conference takes place on November 13.

This article was originally posted on The Australian Financial Review here.

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