Amazon has not yet perfected its fresh food offering in the US and its ability to take the oxygen out of the fresh food sector in Australia appears overstated, value investor John Ayoub says.
“The reality is Amazon won’t affect the earnings of these companies now and not for some time,” Wilson Asset Management’s Ayoub says.
“If we take a step back, the market is very vulnerable to noise. The fundamentals are taking a back seat and people are concerned about the outlook. If there’s any incremental development that makes people more concerned, you see the knee-jerk reactions. Amazon’s a wonderful business and whatever they set their minds to they eventually get there.
“[But] food is a unique dynamic, very different from moving boxes around. Amazon are happy to get things wrong time and time again and the fact that they’re moving into the bricks and mortar space (via its acquisition of Wholefoods) tells you ‘we haven’t mastered this yet but we will eventually’. If you bring that back to the Australian market – Woolies, Coles and Metcash – they do have a moat.”
Ayoub works alongside Matthew Haupt on the $462 million WAM Leaders large cap-focused listed investment company.
“To say that Amazon’s going to come over here and take over the fresh food and distribution [market] is probably a little bit of an insult to those who fought the battle over the last couple of years,” he argues. WAM Leaders has a stake in Woolworths.
Before he started his career, first in corporate finance at Ord Minnett and then broking at Credit Suisse, Ayoub spent a year on the professional golf circuit having won championships at club level.
“That was my gap year, travelling around the world with my golf clubs. It was a wonderful experience, I played some amateur events and then I tried my hand at professional. It was my backpacking except I backpacked with golf clubs, played some great golf courses and got to meet a lot of great people.”
His preference is a fast green. “I’ve just always putted better on fast greens,” he says.
His favourite course is Royal Dornoch in the far north of Scotland, where the Championship course was ranked fifth in the world and best in Scotland by Golf Digest last year. He admits he is “nowhere near” the level he used to play at.
At 24, he retired his golf clubs professionally. He already had an inkling that he wanted to work in financial markets.
“[Studying] law provided me the foundation but what drove me was a different challenge every day and the financial markets provide that. You really don’t know what’s going to happen tomorrow, it’s constantly evolving and you can never master it as much as people think you can,” he says. “I was lucky enough to be mentored by Russell Aboud (Manikay Partners), Stephen Aboud (LHC Capital), Mike Bassett (Regal) and Mark Nelson (Caledonia) and they helped shape me in those early days.
“My background was in small caps but over the time, one of the things I liked about being on the Credit Suisse sales desk was you get exposure to all these great fund managers from various different firms and you learn a different perspective, there’s more than one way to make money. There’s not a right or wrong in this industry, it’s just timing.”
As for broking: “I learnt a lot, had a great time working with wonderful people which I’m thankful for, but the industry’s changing.”
Don’t lose money
Tabcorp, Westfield, James Hardie and The Star are some of the stocks on WAM Leaders’ radar. The LIC floated in May 2016 and Ayoub says that he and Haupt were humbled by demand for the offering.
“We’ve seen Brexit, we’ve seen Trump,” he recalls and the LIC was fully invested for their purposes by August. “We were always of the view we would be patient deploying – and as Geoff [Wilson] says the first rule of investing is not to lose money and the second rule of investing is not to lose money – you’re cautious to go in straight away.”
The strategy has benefited from positions in Aristocrat Leisure, Treasury Wine Estates, Qantas and Janus Henderson. “Going forward we still like Orora, Challenger and Janus but we are looking at more of the beaten up names from here,” he says.
Tabcorp is a new position. Like Downer, Boral and Janus, the market has taken time to process the acquisitions that they’ve made. “Post deals people focus more short-term than long-term,” and with a 12- to 24-month view: “We think post the deal with Tatts – if approved – plus changes to point of consumption taxes and any proposed advertising bans Tabcorp will be well placed to capitalise on a lot of those changes.”
At James Hardie, Ayoub believes the industry dynamics still remain robust. “The market will give them more credit for the capital they’ve spent, we’ll start to see the rewards from that going forward.”
Westfield has suffered under negative sentiment towards real estate investment trusts. “Their portfolio is A-grade and there’s a lot of demand for those A-grade destination centres. The value of Westfield and their portfolio should shine through.”
And the blocking of the ASF Group’s proposed $3 billion casino and integrated resort on the Gold Coast is good for the Star, he says, where near-term earnings are not that compelling but the VIP cycle is almost certainly “very close to the bottom”.
QBE Insurance has been one of the weaker picks for WAM Leaders. “We were caught out by a left-field event in Latin America. We’ve made a couple of other little mistakes, we held a few small caps at the start of the year riding the momentum and when the market rotated out of small caps to big caps we got caught with those, like Ardent Leisure for example.”
He still thinks there is plenty of value in small caps, it’s just a matter of doing the work on as many opportunities as possible.
Growing up in Sydney, Ayoub was exposed to the cut and thrust of markets at an early age.
“I was pretty lucky, a son of migrant parents who came to Australia with very little and they set up a fruit shop and worked really hard. I spent a fair bit of time at the markets with my dad and learned how to negotiate from him. Looking back, I became a trader for my dad so to speak, because he was a tough negotiator and he knows how to find a bargain.”