Momentum or value? It’s the perennial question for investors looking to either join the crowd by piling onto a flavour-of-the-month or to sort through the stack for that fundamentally sound but underperforming gem.
Even the choice between the two strategies goes in and out of fashion, however, and this year the bulls seem to be favouring the value play. Which is too bad for a name like Lightspeed POS (Lightspeed POS Stock Quote, Chart, News, Analysts, Financials TSX:LSPD), who according to portfolio manager Alex Ruus, has flown too high and should be a Sell.
“With the market ripping the way it has over the last year, people start to treat the stock market like it’s Las Vegas and they just ride the momentum, [saying], something went up last month so it’s gotta go up this month,” said Ruus of Arrow Capital Management, who spoke on BNN Bloomberg on Friday.
“Some fund managers employ that strategy, and momentum can work in the short term but I think if you look over the very long a more value-based approach tends to be much more profitable over the long term,” he said.
Lightspeed seems like a classic growth play, with the company still in the early stages of expansion and sporting the top and bottom numbers to prove it. The Montreal-based e-commerce company saw revenue climb a full 84 per cent to $221.7 million over its latest fiscal year (ended March 31), yet it also managed to more than double its net loss to $124.3 million compared to a loss of $53.5 million a year earlier.
“While helping our customers meet the challenges of the past year, Lightspeed grew its scale, established itself as a leader in the key U.S. market, launched a series of new product offerings, and continued to deliver strong results,” said CEO Dax Dasilva in Lightspeed’s fiscal fourth quarter 2021 press release in May.
Lightspeed has also been growing by leaps and bounds via M&A activity, recently closing on its latest acquisition in business-to-business e-commerce platform NuORDER for $206.9 million. Last fall, LSPD made a pair of big purchases in the US market in ShopKeep and UpServe, while earlier this year it picked up New Zealand-based retail management software company Vend for $204.7 million.
It’s all part of Lightspeed’s ambition to be a major player in e-commerce, going beyond its origins in point-of-sale capabilities for restaurants and retail and developing a complete suite of online business solutions. The company has even proposed a name change to better reflect its grander ambitions, saying in a recent notice AGM meeting circular that the name Lightspeed Commerce “more accurately represents the full scope of services provided by the Company today as we continue to build ourselves as the one-stop commerce platform for merchants around the world to simplify, scale and create exceptional customer experiences.”
Ruus says Lightspeed has so far been very impressive in its build-out, but he cautions investors against falling for the line of buying the stock because you like the company.
“I’m a seller here,” Ruus said. “Lightspeed to excellent little company [but] the only caution I give is I believe we’re setting up for a significant correction in what I call the profitless go-go tech stocks of the last couple years.”
“Lightspeed is excellent and I believe they will be profitable soon but they’re valued at a very, very high multiple of sales and the earnings multiple really isn’t there yet and stock has done extremely well,” he said.
Ruus says a name like Microsoft, with a proven track record of earnings growth, should be a better play over something like Lightspeed, which he thinks is due for a correction.
“I like what management is doing and where they’re going but I just think there are so many better opportunities in the market to put your money to work,” Ruus said. “If you want technology, Microsoft is a great place to be. There’s a company that actually produces free cash flow for shareholders, pays a dividend, is growing like crazy and has a much more sustainable position.”
“Lightspeed is a smaller player and smaller technology players while they can show some real hyper-growth at times are more susceptible to being upended, so I’d be a little bit cautious there after the huge run it has had. Again, it’s an excellent company but there’s a difference between owning the stock and owning the company and at these levels the stock is very expensive,” Ruus said.
The shift from growth to value dominated much of the markets over the first half of 2021, floating boats in sectors such as financials, industrials and energy while giving less attention to the high-flying tech stocks.
The second half of the year may run along much the same. A recent CNBC poll found that 70 per cent of Wall Street investors believe value stocks will continue to do better than growth over the next quarter.