Six disruptive stocks
Just over 12 months ago Under the Radar Report came up with 3 disruptors, which have so far doubled the money of those brave enough to follow out advice. Let’s see if we can do it again.
Those disruptors were, the champion of the BNPL market, Afterpay (APT), which was $32 and is now over $101 a share. The hydrogen technology company Hazer (HZR) was 40 cents and is 64 cents at the time of writing, while the laboratory technology specialist LBT Innovations (LBT) hasn’t performed as well, but is solidly up 18%, having traded at 11 cents then and is now 13 cents now (it’s been as high as 22 cents).
Before I go into a little detail about why disruption most often occurs at the small end of town, I’ll go through our current candidates.
Investing beside titans with Tuas (TUA)
We picked Tuas for subscribers less than a month ago at 58 cents and it’s already up 30%, trading at 75.5 cents as I write. Guess what? We still like it!
The TPG spin-off is a newly established and disruptive entrant to Singapore’s mobile telco market. The stock offers an opportunity to invest along side the most successful operators in the space. The company is being run straight from the David & Vicki Teoh playbook, who control the company along with this long-time supporter, the Millner backed ASX listed investment vehicle Washington H Soul Pattinson.
We were pleased to see its shares rally after it reported its interim result for the period from 11 March (date of incorporation) to 4 September. It must be said that these are early days for Tuas’ business, but it is reassuring that it has managed to attract a decent number of initial subscribers without too much marketing expenditure. Its mobile network is expected to be complete within the current financial year (ending 31 July 2021) and more encouragingly, Tuas appears to have secured 5G spectrum on very attractive commercial terms. Its 5G network can be rolled out with little incremental cost, based on the brand-new 4G network that it recently constructed.
Radar Rating: Tuas has made a good start in its aim to carve out a niche in the Singapore mobile market, but a sharp share price spike since our recommendation suggests some caution is warranted.
Disrupting the friendly skies with Alliance Aviation (AQZ)
The company redirect assets to meet opportunities as they arise, and this is a tremendous strength in a business with fixed capital. Even if the reborn Virgin and Jetstar duke it out over the low cost domestic travel market as it recovers, Alliance is still in a position to generate substantial cash flow and retain flexibility to deliver benefits to shareholders over the medium term.
Alliance is probably the only airline in the world that has been profitable throughout 2020 and raising funds for expansion. The company increased its fleet by 35%, or 14 new Embraer aircraft and its available revenue passenger miles by a much higher rate, putting the company on the flight path for growth over the next couple of years.
We have always admired the company’s robust business model with revenue streams from four distinct sources, with the primary revenue being the long-term contracts with major resource clients. The company is a critical part of the just-in-time supply chain for resource majors. Alliance has always emphasised its “on time departure” performance because that is what motivates its clients. These long-term contracts are reliable revenues that permits a much lower capacity utilisation business model than most airlines. A wholly owned fleet is another element of Alliance’s flexibility. It remains to be seen how the introduction of new Embraer aircraft and changes in the market will change the dynamic; we note that Alliance has initiated passenger services in its own name.
RADAR RATING: Management has demonstrated its capability to build an attractive niche business while all around has been carnage. New capacity will allow the company to address new passenger markets with a solid backing from contract revenues from major clients.
Investing in AI with Volpara Health Technology (VHT)
Volpara is a med-tech disrupter, operating a software-as-a service business model that uses AI algorithms to improve the early detection of breast cancer by analysing breast images (mammograms) and associated patient data. It has integrated its breast screening technology with a software platform that incorporates patient tracking.
The NZ based company has a first mover advantage. While its competition has individual products and components, Volpara has a platform that enables it to screen, assess and track patients. This makes its integrated solution more powerful than fragmented product offerings.
The success of the company’s unique software has been demonstrated in its rapid uptake in the US and globally. At the end of March 2020, just over 27% of breast screenings in the US were using at least one of Volpara’s products. Its product suite now has established users in 38 countries.
Volpara is committed R&D, resulting in product launches. VolparaDensity 4.1 AI algorithm is due for release in coming weeks, which will further boost its sales momentum.
RADAR RATING: Volpara has transformative breast cancer screening technology with a unique integrated software platform. It’s generating sales momentum in the US market, benefiting from a new sales team.
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Why buying a basket of small caps is your best bet to profit from disruption
Disruptive forces such as fintech get a lot of press following high profile successes like Afterpay (APT) and Zip Co (Z1P). When we started covering these companies in 2017 their valuations were less than $500m. Fast forward to today and APT alone is over $28bn, while Z1P is a “measly” $3.1bn. This kind of appreciation of value sees many new the market forgetting about the past disrupters Seek.com and REA in the world of digital advertising. These companies are now the establishment.
All these companies led investors to making huge gains, but it’s important to remember that disruption most often originates in the world of Small Caps. As we said last week, disruption is the natural space for small companies looking to grow quickly by building market share at the expense of their bigger counterparts.
Disruption sometimes means smaller companies finding lower cost ways of doing business, unencumbered as they are by “legacy” technologies. Alliance Aviation (AQZ) isn’t widely known to be a disrupter because it’s in the aviation industry. But make no mistake, its success is due to its foresight in buying low maintenance planes on the cheap and utilising a superior business model based on contracts that avoid day to day competition for seats that ties up the bigger airlines. If you doubt that is disruption, go and speak to Virgin Australia’s outgoing chief Paul Scurrah.
The point about disruption is that over time it becomes obvious, such as in the above situations. But early on, when there is big money to be made, there is always a great deal of uncertainty, which translates to very high risk. Initially it is highly doubtful that a venture that involves shaking up an industry with a new business model or technology will be commercial. Trying something completely new is an unnatural business strategy and fraught with danger. It’s less obvious what the defensible advantage of the business is. Part of Under the Radar Report’s job is to work out which Small Caps are targeting the right competitive advantage.
On that front, sometimes we have track record to go by. David and Vicki Teoh should go down in business history as two of the great telco disruptors, as providers of low cost affordable telecommunications and internet service provision to the masses. We hope they can do it again in Singapore with Tuas (TUA).
Other times there is the technology edge that we see in Volpara Health (VPT). The med-tech utilising AI to provide advanced breast screening, which is integrated with software that provides for decision making and patient tracking. What makes this company different is that nobody else has come up with an integrated solution. Disruption is not only about being the lowest cost provider!
There are many companies that we’ve been on the right end of the disruptive wand, albeit with varying degrees of success: IT cloud specialist Macquarie Telecom (MAQ), online retailers Kogan (KGN) and City Chic (CCX), med-techs Nanosonics (NAN), Sirtex Medical (SRX), Medical Developments (MVP), Clover Group (CLV), geographic technology provider Nearmap (NEA), junior telcos like BigAir (BGL) and MNF (MNF)… the list goes on.
The key take-out comes back to diversification. By holding a basket of Small Caps that have disruptive potential you can be the beneficiary of some really big returns. That’s why Under the Radar Report spends so much time hunting for candidates for subscribers’ baskets.
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