Investing in technology

Investors who dig deeper and are patient will reap the rewards

The sharemarket is up and running and chances are that it will keep going for the rest of the year. There is more than one reason why this might be the case.

First, while governments here and around the world have saddled themselves with trillions of dollars of debt (for a variety of reasons, but in Australia it is basic mismanagement – aided by an obstructive senate – of revenue versus expenses).

But while that has been happening, businesses have taken advantage of low interest rates to improve the strength of their balance sheets by paying down debt. That being the case, many companies are in the position to make takeovers, which also propels the stockmarket.

There’s something else, though: an appetite for stockmarket risk – almost a maturity of thinking – that is being picked up by investors. The adage that holding big shares for long enough is no longer sufficient to guarantee a long-term return. There is no such thing as a blue-chip share: technology has seen to that.

So a bit more digging has to be done by investors to discover the companies and their stories about how they can change an industry. These lessons were learnt years ago by REA Group and Carsales in the disruption of the media landscape. But the disruption now occurs in all industries and, provided the investors are patient and the prize is large enough, there is potentially plenty of reward.

As I write this, I have brought up the best-performing shares from the ASX 300 for the past year. Broadly, there is a theme based around technology and disruption.

On top of the list, for now, is Clean TeQ, a resources company that is a technology business. The tech is a new method for extracting minerals from slurry. It is tapping into the demand for nickel to go with lithium battery technology, along with scandium to create new lightweight aluminium products. The mining story is that it owns and operates the Sunrise nickel/cobalt/scandium mine in NSW.

With all these companies I highlight, it might be too late to buy the shares. It might not. But it gives you a sense of what to look for. The trick here is to find the companies and their stories; to back the story and the balance sheet.

Another company on the best-performed list is the a2 Milk Company. When a2 milk came out, others in the industry laughed and did not believe it could be sold. But it was brilliantly marketed and tapped into demand for Australian products in China. Now most dairies have followed a2’s lead. In the meantime, its cash flows have soared and the shares are up 255% in the past year.

There are others. Costa Group, the fruit and vegetable wholesaler, is cashing in on Chinese demand and in the meantime expanding its holdings around Australia to protect its supply.

There is Afterpay Touch, an ingenious business that harks back to the old days of lay-by. It allows a consumer to collect an item from a store today but to make four equal payments – via their credit card – as payment. Afterpay makes its money mainly from the retailers, who are keen for instant cash. There is also a $10 late fee on consumers if they miss a payment for whatever reason. It has cut through, and the shares have doubled this year.

If you have not heard of these companies, then chances are you are not digging deep enough to find the growth stories of the future.

But there’s one last company I want to highlight: New Zealand’s largest company, though it is in the process of moving its listing to Australia. It is Xero.

Xero is an online accounting system whose main rival is Australian-based MYOB. It is the brainchild of New Zealand entrepreneur Rod Drury, who had already built and exited several other tech companies. He started working on Xero 11 years ago. It now has more than 250,000 users in New Zealand and more than 500,000 in Australia.

The only thing is, Xero has just become cash-flow positive for the first time in its history. In other words, the development of the business has taken a decade of patient investors and the patience of Drury’s own money to start seeing a return. It’s been a rocky ride but the expectation of a payday has seen the shares rise from $ 4.65 five years ago to more than $28 today.

Mind you, in the heady days not long after its stockmarket listing the shares touched $ 41.85 … so if you bought then, you might have other thoughts.

But this also is an example of how investors are maturing: they are prepared to fund a rapidly expanding business through almost 10 years of losses to find their financial return way into the future. It’s something that US investors have understood and backed for decades. Here we’ve generally preferred our returns to be pretty much immediate. Maybe things are changing.