Gyms and pokies

The Paradice fund manager is more bearish about the broader economic environment. He is underweight the consumer sectors given disposable income still looks “relatively challenged” despite economic conditions appearing “incrementally better”.

“I’ve got to say the consumers have probably been even more resilient than we expected in reality,” he admits. “But it’s definitely been a quite tough environment for a lot of the consumer names.”

That doesn’t mean Theodore has not been investing in the space. He says some consumer-facing businesses are bucking the trend, such as gym operator Viva Leisure and poker machine maker Light & Wonder.

Regarding the former, Theodore says investors have been concerned about the impact of poor consumer confidence on the business, which has weighed on the share price (it is down 6.4 per cent year to date).

Instead, he says, the low-cost gym operations have increased earnings and revenue “strongly” in the past two years, thanks to consistent member growth.

He says the business is expected to increase earnings at a compound annual growth rate of 30 per cent over the next three years, and is currently trading at a price-to-earnings ratio of less than 10.

Light & Wonder, which boasts Aristocrat Leisure’s former chief executive Jamie Odell and former chief financial officer Toni Korsanos as its executive chairman and vice chairman, respectively, is another company to have bucked the trend.

Products gaining traction

Theodore says the pokies manufacturer’s consistent earnings, dominant market position, and signs that its products are gaining traction in the US mean it is likely to beat its $1.4 billion EBITDA guidance by FY25.

Commenting on its rivalry with Aristocrat Leisure, the fund manager says both are leaders in the industry from a product perspective but Light & Wonder is trading on a much lower multiple.

“Light & Wonder is growing at probably twice the rate that Aristocrat is growing earnings,” Theodore says. “It’s also trading at a 50 per cent discount on a PE basis.”

Year to date, the shares are up 35 per cent.

Before Theodore joined fund management, he spent more than a decade on the sell side working at UBS as an analyst covering gaming, engineering and contractors stocks. He was also head of emerging companies research.

It was there that he met Perpetual’s stockpicker Anthony Aboud, who was his then boss and had a big influence on Theodore as a young analyst when “analysing stocks and assessing risk”.

(Also, working there at the same time was hedge fund Totus Capital founder Ben McGarry.)

‘Tomorrow’s winners are all small caps’

Theodore then switched to the buy side, joining US investment giant BlackRock in 2015 from Sydney where he would become lead portfolio manager of its industrial long-short fund in 2020. However, a restructuring of the Australian equities business early last year led to the high-conviction equities team being wound up.

Eager to venture back into small caps, Theodore was handpicked to launch a second small-cap strategy for Paradice that targeted high-net-worth individuals, retail investors and smaller institutions. The firm’s first fund has been closed to new money for almost two decades.

“Tomorrow’s winners are all small caps, typically,” Theodore says.
“If you look at some of Australia’s biggest and best companies, they’ve started as small caps. Being able to find those that graduate from small caps and ride the wave through is always the most rewarding and interesting.”

Investing in the smaller end of the sharemarket means Theodore is no stranger to grappling with volatility or when company founders sell down their stakes – the “red flags” to look for when investing in the space.

“One of the things we’re looking for is when insiders are selling stock because it’s a reality these businesses have a lot more information than we do,” he says.

“If they are seeing there’s value to be found elsewhere … then that should be a signal for all investors.”

He points to the family-tracking device Life360 as a good example of a founder-led business that has “executed very strongly”.

“When we launched this fund, we looked at the company that had a top 15 app in the US, which is quite amazing,” he says. “It’s an Australian-listed company and the market capitalisation was around $2 billion, whereas every other company around that position were these giants of tech.”

Its shares have rocketed more than 150 per cent so far this year to trade at around $19 apiece, with a market value of $4.4 billion.

“It has all the things we look for in an investment – a good balance sheet, founder-led, a large addressable market, and a product that has a lot of consumer appeal.”

Having now spent more than two decades in the finance industry, Theodore says being passionate and thinking more long-term is critical to being a successful stockpicker.

“This isn’t just a job; it’s all-encompassing – markets are always on and it’s very dynamic,” he says.

“Both the world and the industry, with the amount of brokers and news not to mention social media, has increasingly become shorter and shorter in terms of thinking.

“In all the noise, be careful not to lose the bigger picture.”