26th August, 2024
AFR: Paradice’s Sam Theodore sees riches in these uranium stocks
The former Blackrock hedge fund manager’s recent trip to Paladin’s flagship Namibia mine has made him more bullish on the controversial energy source.
Published in the Australian Financial Review on 26 August 2024. See the original article here.
Paradice Investment Management’s Sam Theodore is visibly excited when he talks about his first trip to Africa a few months ago.
The crux of his journey was to visit ASX-listed Paladin Energy’s flagship uranium project in Namibia, where the miner flagged its first commercial production of the commodity in early April.
It was here that he got to know the management team over several days, sitting next to them on long bus trips to understand the business better.
“Spending time with Paladin’s management team was crucial,” Theodore says. “It’s a very important part of our investment process to have judgment on the management team and their ability to execute.
“Nothing beats kicking the tyres and seeing the site and meeting the people in person.”
It is this focus on management (and governance) that Theodore credits in part for his strategy’s outperformance. The Australian Small-Cap Opportunities Fund, which launched only in July last year, has returned almost 30 per cent, more than tripling the benchmark S&P/ASX Small Ordinaries Total Return Index’s 9.29 per cent return.
Paladin is not the only uranium developer Theodore is bullish on. He also owns Deep Yellow and NexGen Energy in a portfolio of 50-odd stocks.
He says uranium is the perfect example of a commodity with growing demand and limited supply.
“We’re seeing demand grow despite supply not being able to respond,” he says. “We’ve seen the long-term contracting price continue to increase month on month. I think the fundamentals are showing through, and they will become more acute over the next two years.”
Those supply issues sent the price of uranium to its highest levels in more than a decade last year, as Western governments – including Australia – renewed their push to develop sovereign nuclear energy generation. This also triggered a wave of capital raising from ASX uranium developers.
NexGen, a Canadian uranium hopeful that has a secondary listing on the ASX, is awaiting final environmental approvals and is poised to be a top-quality, low-cost producer, according to Theodore.
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.”
Joanne Tran is a markets reporter for The Australian Financial Review in the Sydney newsroom.
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