Under the Radar Report

FUTURE PROOFING YOUR PORTFOLIO

Thematic drivers to get your stock motors running.

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AI

Artificial intelligence is actually common sense translated into computer code. When repeated often enough, the results of analysing events create a probability curve, which can be used to anticipate events based on historical experience through a process of machine learning. Many problems will be created by these developments, but just as many will be solved. In some implementations of AI, decisions are made millions of times per second in real time. The error rate has to be miraculously low, anything other than an effective error rate of zero will be unacceptable. Utilising AI for autonomous driving, for instance, does not lend itself to the traditional Silicon Valley model to move fast and break things.

Our broad investment thesis is that most gains from AI will come from evolution not revolution. Beneficiaries will include large companies that have the data already. Woolworths (WOW) has recently purchased an increased stake in its Quantum analytics unit. Coles (COL) and Wesfarmers (WES) share flybuys data, while the big banks, CBA, WBC, ANZ, NAB have data and systems in place.

Native digital companies like online retailers, Afterpay (APT), Kogan (KGN), Temple & Webster (TPW), Booktopia (BKG), even City Chic (CCZ) and Nick Scali (NCK) have good datasets on their customers’ behaviour which can optimise operating efficiency. Volpara Health Technologies (VPT) is using AI to scan breast images, improve breast screening accuracy, and identify conditions which could otherwise have been missed. Austal (ASB) has data from years of vessel response to sea conditions, with a contract from US Navy to introduce autonomous capability on one vessel. Appen (APX) provides some of the core data which allows its customers to deliver AI functionality.

The stand alone AI opportunities will find it very hard to succeed. US giant C3.ai sets itself up as a leader in providing intelligent functionality for clients’ data sets. On the ASX, names include Brainchip (BRN), Livetiles (LVT), Linius Technologies (LNU), Bill Identity (BID), Bigtincan (BTH) and AI-Media Technologies (AIM), formerly Access Innovation. We’ll keep an eye on these and others to identify those which might have a sustainable competitive advantage.

Batteries

To manufacture lithium ion batteries for electric motor vehicles of the future over 180 giga factories are under construction or planned around the world. This will expand annual production capacity six-fold over the next few years from 500 giga watt hours to 3,000 GWh.

Over 70% of the world’s gigafactories are currently in China but this will shrink with construction in Europe and North America to levels of 17% and 12% respectively.

The rise in battery plant construction spells growth in lithium demand. Close to 700 tonnes lithium on a lithium carbonate equivalent (LCE) basis is required for every 1GWh of lithium ion battery cell capacity.

This presents as a very strong market for Australian lithium producers. While Australia will not have giga factories, some companies such as Under the Radar pick Pilbara Minerals (PLS) are looking at downstream upgrading or refining facilities to produce lithium salt or lithium hydroxide to add further value.

Further, nickel demand in lithium ion batteries has a similar trajectory to lithium. Current nickel demand for batteries is around 250k tonnes but this is forecast to grow to around 1.4m tonnes by 2030. Nickel sulphide producers such as Under the Radar Report pick Panoramic Resources (PAN) are well placed as nickel sulphide suppliers to the tight battery nickel market. Stay tuned for another ASX nickel stock coming your way!

As an alternative to lithium batteries, another Under the Radar Report stock Redflow (RFX) manufactures batteries using zinc-bromide flow technology. These batteries not as compact as lithium ion, but have key advantages of unlimited shelf life and more constant power delivery, making them more suitable for various domestic and commercial applications. The potential energy storage market is substantial, but Redflow’s sales progress has been slow. Well worth watching

Crypto/Blockchain

As a rule, financial innovations should be taken with a healthy dose of scepticism, and crypto currencies are no different. With 150 million people said to be exposed to crypto through some medium, their conclusion that this has value actually creates value. The importance of the blockchain technology as a platform should also not be underestimated.

Governments around the world effectively printing money through monetary policy initiatives does provide a need for alternative assets and our preference has been gold miners, which are of course leveraged to the gold price.

The energy usage of the main crypto businesses however, is indefensible. China has now banned all crypto transactions, giving credit to the narrative that governments will not allow crypto to grow so big that it undermines their ability to control their own currency.

If you are going to China, you won't take your crypto wallet with you. Crossing borders with crypto wallets, combined with a capacity to transfer crypto currency interpersonally within a country, in exchange for cash perhaps, may interest authorities once international borders open again.

The bottom line is that, as with all investments and speculation, it’s buyer beware. Our advice is not to be overexposed. As Warren Buffett might put it, “when the crypto tide goes out, we will see who has been swimming naked.”

US giants, Paypal and Square, are aggressively participating in the crypto exchange, alongside the recently listed Coinbase and Robinhood. It is very early days to find ASX listed companies with attractive fundamentals and valuations dependent on crypto, but companies we are keeping an eye on, with blockchain or crypto interests include DigitalX (DCC), Novatti (NOV) and Yojee (YOJ).

ESG (Environmental, Social, Governance)

In just a few short years of existence ESG has become a hot topic. Increasing presentations and annual reports includes ESG statements. We’re sure the corporate speak is initially ignored by many. But that isn’t the case when it impacts the bottom line.

Many factors are at play here, but the most dominant is global warming. Inaction has implications. Whole markets could close to the company’s products or face penalty tariffs if the product supply is not carbon neutral or breaches target thresholds. Europe is at the forefront of this trend and was underlined this week by the strong showing of progressive parties in Germany’s election. Fighting climate change is one of the mainstream positions in Germany, Europe’s biggest country.

Investment funds are increasingly making choices to cease investing in companies that are not taking steps to improve their ESG record. Banks are also being more selective in their lending practices. The coal, oil and gas industries have born the brunt of this trend so far. In reality, most companies are under pressure to reduce their emissions, whether they are in manufacturing, mining, retail or anywhere where power is used.

In our stock coverage, we are increasingly seeing companies proactively developing strategies to reduce emissions.

One of our lithium picks for example, Vulcan Energy (VUL) deliberately set out to produce carbon neutral lithium. Developing a project in Germany which will recover lithium from geothermal brines. Geothermal energy will power the process with a surplus for external sale. That stock has almost doubled and we first tipped it less than three months ago! (1 July 2021/Issue 453).

Cognisant that its nickel production may be used in battery manufacture, Panoramic Resources (PAN), Under the Radar Report’s nickel pick, is looking at renewables as a means to drastically reduce carbon emissions from its Savannah mine. It is looking at hydro, solar and wind options and the addition of an electric vehicle fleet to replace diesel equipment. Get on board, there’s money to be made.

Fintech

This has been Under the Radar Report’s most successful sector, kicking off in our first few months when we picked the point of sale technology company ThinkSmart (TSL). We got the story right but had to cease coverage once it listed in the UK. This would have been a ten-bagger for anyone who bought in after the relisting.

We first covered another point of sale specialists Afterpay (APT) and Zip Payments (Z1P) in 2017. The first was merging with Touchcorp. Both were a fraction of the giants they are now. It has rarely paid more to be early.

There are still a number of players in the point of sale technology sector, now better known as Buy-Now-Pay-Later, which includes a small but innovative Israeli based operator Splitit (SPT). We are also running the numbers on Douugh (DOU).

Small Caps have made a mark in other fintech sectors like EML Payments (EML) in store credit cards, while SelfWealth (SWF) and 8VI Holdings (8VI) are in social investing. Billing software provider Novatti (NOV) has acquired 19% of one of our old tech dividend paying stalwarts, Reckon (RKN). Bill Identity (BID) has grown fast.

There are many different ways to play this highly competitive arena, where are any number of private companies are poised to go public. One that comes to mind is Stripe, a payment services provider IPOing in the next few months with a US$100bn plus valuation. Elsewhere Square, PayPal, and the internet giants including Apple all have huge ambitions in the financial space. Do not expect the big banks anywhere to give up their dominance of financial transactions easily. It promises to be a very interesting time. Don’t worry, Under the Radar Report will come up with more money making opportunities, which is the only safe bet.

Founder Stocks

Founder stocks have been a key to big returns in the past and this trend will continue. Why? These people are psychologically wedded to their companies. They don’t issue capital, they focus on keeping the company strong by growth and they think about the long term. Most executives are simply laser focused on the next bonus period. Founders think about their legacy. They are not afraid to pay dividends, being beneficiaries themselves. These companies are interested in attacking the status quo. That’s right, they’re disruptors.

We have made big money, averaging 10 bagger returns from the likes of Nicholas Molnar at Afterpay (APT), the Tudehope brothers at Macquarie Telecom (MAQ), Antony Scali of Nick Scali (NCK), Bill Beament at Northern Star Resources (NST) and Jake Klein at Evolution Mining (EVN).

We could go on, but which of our current favourites are founder led? A lot of them! There’s Tim Fung of Airtasker (ART), Ruslan Kogan of Kogan (KGN), David Teoh at Tuas (TUA), Charles Chen at Vmoto (VMT), Christian Damstra of Damstra (DTC), Greg and Wayne Hooper at LaserBond (LBL), and let’s not forget Oxford professor Dr Ralph Highnam of Volpara Health Technologies (VHT). All these stocks are current or recent best buys.

Lithium

Lithium is a major new industry for Australia and the ASX, having almost emerged from nowhere in the past decade. Under the Radar Report got in early with positive recommendations on Orecobre (ORE), Galaxy Resources (recently merged with Orecobre), Kidman Resources (purchased by Wesfarmers) and Pilbara Minerals (PLS).

All have turned out extremely well over time, but this did require initial bravery, which investing often does. We have since extended our lithium coverage to companies at the development stage such as Lake Resources (LKE) and the US based and ASX listed Piedmont Lithium Inc. (PLL).

Under the Radar Report perennially hunts for disruptive developments that create new industries. Lithium is one such example, but it was not obvious. The periodic table’s lightest metal has long been used on a small scale for lithium ion batteries because of their high energy storage capabilities due to high energy density properties.

What changed? The recognition of global warming led to the emergence of an electric vehicle industry accelerated battery technology, that’s what. Lithium has properties suitable for mass battery manufacturing, even though designs and individual compositions may vary.

The EV and lithium industries are still at the beginning of a massive ramp up. Global annual demand is 300k tonnes lithium carbonate equivalent (LCE) and forecast to increase to 900k tonnes in 2025, then to 2m tonnes in 2030, 3.5m tonnes in 2035 and over 5m tonnes in 2040. That is what a ramp up looks like, which is what we at Under the Radar like to see.

Med-Tech

Medical technology has been a rich vein for Australian investors, driven by a small population, a strong education system and a global market hungry for health related solutions. It has paid big dividends to be exposed to medtech Small Caps. Early on in our evolution and indeed, its evolution, we picked a small pancreatic cancer treatment specialist Sirtex Medical (SRX), which had some swings and roundabouts but ended up delivering a return of 6-fold on our initial tip price. We have taken profits at different points on the encapsulation specialist Clover Corp (CLV) because of its ability to serve Omega3 in a digestible form to the giant infant powder manufacturers. This has delivered similar returns, as have our trades on the Green Whistle analgesic producer Medical Developments (MVP).

We are once again positive on CLV and MVP and this issue includes one that have successfully called and still like, Beamtree Holdings (BMT), called PKS when we first covered it last December. It’s already up 51% and we think it’s got a lot further to go. Such is the leverage when you have a largely fixed cost based and huge sales potential with a global market at your fingertips.

Mining Technology

Who says Australia is just a giant quarry? In the fast growing lithium space, Lakes Resources (LKE) announced a partnership with US based Lilac Solutions for technology and funding to develop Lake’s Kachi Lithium brine project in Argentina. This will use Lilac’s disruptive technology to produce high purity lithium at higher recoveries and lower costs than established technologies.

Lilac Solutions must be making an impression because they have received funding from Breakthrough Energy Ventures, who’s investors include Bill Gates, Jeff Bezos and Michael Bloomberg.

Under the Radar Report has uncovered stocks at the cutting edge of mining technology, which are often Small Caps servicing the gorillas of the mining world, like Rio Tinto (RIO). Long may this continue!

RIO’s new Gudai-Darri iron ore hub is its most technically advanced iron ore hub in its system. The mining giant awarded Southern Electrical (SXE) the $65m contract in late 2020 for instrumentation and systems works. Subscribers have benefitted from recommendations for this stock on several occasions, which we currently rate SPEC BUY.

With higher gold prices and the transition to electric vehicles, exploration is on the up. The engineering consultant GR Engineering (GNG) is in the thick of it, focusing on design and construction. The stock is a SPEC BUY based on its record work in hand, a reflection of its technological edge.

Renewables

Renewables is a massive new sector that has emerged from virtually nowhere. It mainly comprises solar and wind but also includes hydro, established earlier for peak rather than base loads.

Most of the power generated by renewables is zero carbon and is a replacement for coal and gas generation. The main issue is that it cannot provide base load power on a 24 hour/day basis without supplementary power generation, such as from gas.

Large grid scale batteries are being established as part of the solution to end the use of gas and coal. These have been successful and further advances in technology are expected to provide reliable back up.

The capital investment for renewables is high with low utility style returns. However there has been big investment in projects in Australia by utilities, overseas groups, infrastructure funds, private equity and pension funds.

Opportunities for small company investment in renewables is limited, the pool being reduced by corporate activity. We made good money from wind farm owner/operator Infigen Energy before it got taken over by Spanish energy giant Iberdrola.

Under the Radar Report has been a supporter of Genex Power (GNX), which is developing a renewable energy hub in North Queensland. Its flagship project is a 250MW pumped hydro project which is targeted to commence operation in 2022. A 50MW solar project was completed in 2018 with an additional 270MW solar project to follow, also in 2022. A wind project is in its early stage. Valuation growth is expected as the completion of the hydro project is advanced.