Stay away from Lightspeed POS, this investor says

You may not want to hear it but those ballooning tech names that plumped up your portfolio last year are going to be more of a problem this year. That’s the view coming from a number of angles right now, where Jason Mann of EHP Funds says as far as Canadian e-commerce company Lightspeed POS (Lightspeed POS Stock Quote, Chart, News, Analysts, Financials TSX:LSPD) goes, the company’s got some growing to do.

Tech stocks had a good week last week, with names like Apple , Amazon and Alphabet all posting strong gains. The tech-heavy NASDAQ was up 3.1 per cent, beating out a 2.7 per cent rise by the S&P 500 Index.

But underperformance by tech stocks and by growth and momentum names more broadly has been the theme so far this year, after a wild 2020 which saw growth and momentum stocks plow ahead to record gains.

After the initial pandemic-inspired pullback of February and March, the Russell 3000 Growth Index surged to a 53-per-cent gain between April and the end of December, while the NASDAQ gained a remarkable 72 per cent over that period compared the S&P’s still-impressive 48-per-cent increase.

Yet the story has been different so far in 2021, as the market has grown cagey of momentum stocks, despite the euphoria surrounding retail trader favourites like GameStop and AMC Entertainment.

Year-to-date, while both indexes are at record highs, the S&P is up 11 per cent compared to the NASDAQ’s nine per cent gains. On the tech side in Canada, the S&P/TSX Composite is up almost ten per cent whereas the S&P/TSX Capped Information Technology Index is up eight per cent.

The chart for Lightspeed, which has posted huge gains since its IPO two years ago, has been representative of tech’s movements over the past 12 months, where the stock delivered a massive 373 per cent between the end of March 2020 and January 1 2021. Since then, however, the stock has been up and down and currently sits at even year-to-date.

Mann says it’s less a problem with the company in Lightspeed’s case but a circumstance where the still-scaling business has yet to show the earnings growth needed to justify its share price.

“Lightspeed along with some of the other let’s call them high growth, expensive tech companies in Canada had a great run which was put to the test in the last six weeks,” said Mann, chief investment officer at EHP Funds, who spoke on BNN Bloomberg on Friday.

“Our fear is that the market has not been as keen to pay for these very expensive companies, particularly when growth is becoming less scarce,” he said. “When you tend to overpay for growth is when there’s only a handful of companies doing that, and that was true for a couple of years but it’s less true now as you get this cyclical expansion.”

“Lightspeed scores really well for us on price momentum but scores terribly on valuation and volatility. It has negative return on equity and no earnings to speak of. It did miss on a recent quarter, although not as meaningfully. Debt is not a problem, no issues there, but really, it’s the willingness of the market to continue paying a very high multiple that will drive the price, or they actually grow into their valuation,” Mann said.

“They may very well but I think in the medium term you’ve got better opportunities and companies that are actually cash flowing right now at much more reasonable prices,” Mann said.

The push and pull between growth stocks and value stocks seems to have landed the latter into favour among investors these days, a change from at least a decade of relative out-performance by growth where gains by companies like Amazon and Apple were really the driving engines of market growth.

And while growth tech names still occupy a huge portion of the market, thoughts are now turning to more neglected regions to play out the post-pandemic economic recovery.

It will be a conceptual change for lots of investors, says Jeffrey Mills of BMT Wealth Management, who argued recently in a CNBC post, “Let’s not forget that over the past ten years, growth has outperformed value by an average of seven per cent per year. I think many investors still haven’t come to terms with the idea that value can outperform for an extended period.”

“The problem is that current prices [for growth stocks] necessitate a level of future growth that will be very difficult to realize,” Mills said. “I still believe this to be the case.”

“For example, Zoom is down 43 per cent from its all-time high but the stock still trades at 84x next year’s earnings. Tesla is similar, down 23 per cent from its high, but still trades at 145x forward earnings,” Mills said.