Two human resource stocks to watch

In my economics degree in the late ‘80s, I wrote a paper on full employment and the need to get our jobless rate to 5%. Unemployment was about 7% at the time.

In December 2021, the unemployment rate fell to 4.2% – the lowest in more than a decade. Prime Minister Scott Morrison spoke of a “once-in-a-lifetime” opportunity to drive unemployment below 4% this year. The Reserve Bank expects the same.

If the government is right, we’ll have the lowest unemployment rate in almost 40 years. One must go back to 1974 to find an unemployment rate with a ‘3’ in front of it.

In raw numbers, 13.2 million Australians were employed in December 2021. Of course, not all had as many hours as they would like (underemployment). But from the Covid low in May 2020, another 1.1 million Australians are employed.

Think about what that means for companies. They had to fill an extra 1.1 million positions and do all the extra work that comes with that. For example, advertising jobs, interviewing people, checking CVs and references, and organising paperwork.

This is the main reason I like human resource stocks. I’ve been doing more work on Xref and CV Check, both of which use technology for resume and reference checking.

I agree with the government and RBA’s assessment that unemployment will fall below 4% this year. If anything, unemployment could be lower than expected (which would pressure inflation). Much depends on the supply of immigrant labour.

Even if unemployment meets the RBA forecasts, I expect an increase in labour market turnover as more people who are employed swap jobs in search of higher wages – the “great reshuffle”, as Treasurer John Frydenberg calls it.

On one hand, companies are desperate for workers, amid signs of worsening labour shortages in some industries. On the other, in-demand employees are likelier to move jobs as higher wages are offered. That’s what happens in a employees’ market.

Practically, this means many more people changing jobs – and many more companies needing to check resumes and references as part of their diligence on new hires. There’s so much at stake if companies hire people with bogus details.

False education credentials and fake job histories have become a plague. The Internet has made it easier for people to get fake copies of degrees, inflate their work accomplishments and embed false information on their social media.

Companies that don’t do sufficient due diligence on new hires – or use technology to help them vet candidates – are taking a big risk. That’s good for Xref and CV Check. Here is a snapshot of their prospects:

1. Xref (XF1)

I first covered Xref for the Switzer Super Report in October 2021 (‘2 HR-related stocks that should get a boost in 2022′). The other was IntelliHR (IHR).

Xref was 65 cents at the time. It now trades at 67 cents, having peaked at 80 cents early this year. Like other software-as-a-service stocks, Xref lost some ground in late January, amid the broader global sell-off in the technology sector.

To recap, Xref has an innovative platform for online pre-employment verification. About two-thirds of its revenue comes from automated reference checks. Employers can pay for one or multiple reference checks and Xref completes them within 24 hours.

Xref last year said it had record lead generation. In a booming jobs market, more companies are using technology to vet potential hires.

In a January trading update, Xref said sales of $10 million in the first half of FY22 were up 96% on the same period a year earlier. That is a good result: the first half of the financial year is usually the weakest for Xref due to financial year-end.

Xref said: “New business demand and current client usage during the holiday period has been unprecedented and suggests that our Q3 and Q4 FY22 performance will be strong. In tandem, we are preparing to launch new products to grow the marketplace and platform subscriptions. It is a very exciting time in our growth journey.”

Although Xref’s first-half performance exceeded expectations, its share price fell (albeit in a falling market in January 2022). That’s a potential opportunity for experienced long-term investors who understand the risks of micro-cap stocks.

Further price weakness in Xref and other emerging tech stocks this quarter would not surprise. The global tech sector has further to fall as inflation surges and investors adjust their expectations for the timing of future rate rises. Underperformance this year of high-priced growth stocks, such as parts for the tech sector, is likely.

At 67 cents, Xref has tripled from its 52-week low of 23 cents. Capitalised at $124 million, much growth has been factored into a company.

My interest is longer-term. I like Xref’s technology, platform and business model. It’s a globally scalable model that solves an obvious problem for customers. The challenge is attracting companies and cross-selling other products so that the platform has higher margins and more ‘touchpoints’ with customers who find it harder to leave.

2. CV Check (CV1)

CV Check listed on the ASX in July 2015 through an Initial Public Offering. About $11 million was sought at 20 cents a share, capitalising CV Check at $37 million on listing.

CV Check is worth $56 million today. As Xref soars, CV Check has underperformed. Its 12-month total return is -16%, Morningstar data shows. From a 52-week high of 20 cents, CV Check has drifted to 13 cents on low volumes.

CV Check provides a range of pre-employment screening services for individuals and companies. The company says more than 800,000 people have used its service to order a police check (for $49.90), which CV Check usually completes in under a day.

More than 26,000 small and medium-size enterprises have used CV Check to manage background checks of potential hires. This could include reference checks, credit history, anti-money laundering, employment verification and other checks.

I doubt enough job candidates realise how technology algorithms are cross-checking their CV against published data – and the risks of providing false job information.

In its latest trading update, CV Check said revenue for the second quarter of FY22 was $6.5 million, up 83% on the same period a year earlier. Capitalised at $56 million, CV Check had $12 million in cash and no debt.

In the first half of 2021, CV Check completed the acquisition and integration of Bright People Technology. The company says it “has seen strong revenue growth from new customers and returning customer increasing their spend with us”.

CV Check is also growing its workforce compliance monitoring and management tools – and other areas of strong growth in this market. They added $2.6 million of incremental revenue in the first half of FY22 and CV Check expects continued growth this half.

Like Xref, CV Check has rising revenue growth, off a low base. Its products are well placed for this market and it has a reasonably large retail and SME customer base for its size.

Of the two stocks, I prefer Xref. I like emerging software-as-a-service companies that demonstrate they can rapidly scale their opportunity by adding more products and services for global markets. It’s early days, but Xref is making good progress.

CV Check hasn’t done enough since listing. Recent signs are promising as management integrates new acquisitions and quickens CV Check’s growth. But if resume and reference checkers can’t do well in this jobs market, they never will.

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at 17 February 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.