Bargain or value trap? Fundie rates 3 ASX 200 shares going for cheap

Ask A Fund Manager

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Chester Asset Management portfolio manager Rob Tucker decides whether three heavily discounted ASX shares are value traps or bargains.

Bargain buy or value trap?

The Motley Fool: Let’s examine three S&P/ASX 200 Index (ASX: XJO) shares that have been devastated this year, and see if you think each of these fallen stars are now a bargain to pick up or if you’d stay away. The first one is Life360 Inc (ASX: 360), a software stock that’s plunged almost 30% since November.

Rob Tucker: Yeah, Life360 is a really interesting company. We use it in our family. I’m well aware of the business model and I think it will ultimately be successful. 

We probably have more of a value bend, so it’s probably not one for us just yet. But listening to the company on a webcast yesterday, I’ve followed very closely, if they can say what they’re going to do, which is [to] become cash flow breakeven this year, I’d look a lot closer at it.  If I was thinking interest rates were going to be cut, and these tech companies would have another leg to their story, Life360 would certainly be one I’d be interested in.

I’d really prefer to see it get to cash flow breakeven before I entertained it. I do like it. I think it’s a very strong story.

MF: You’re the first person I’ve run into who’s actually used the software. How do you find it? You obviously find it useful.

RT: Yeah, we’ve got [from] a nine-year-old to a 15-year-old — four kids. And we find it very useful just tracking them. I don’t need to ring them.

I say, “My son’s at the park having a kick of footy.” You can see, “Oh, he’s at 7-Eleven.” I quite like it for that reason.  There’s about 34 million users, with about one-and-a-half [million] paid subscribers. The Life360 story’s actually converting those users into paid subscribers. 

And they’ve got a bit of a pricing lever.  Most of the time in the US, it’s for crash protection and some driving awareness software in terms of alerting if they’ve had a crash, they can alert the insurance company and get the ambulance sent out and things like that. A lot of people in America use it for that reason. 

If they can convince people that there’s real value-add services in all the products they have, and the number of paid subscribers keeps growing, I think it will be a genuinely strong cash flow story. I’d like to see a little bit more, just another year or so of momentum before we entertain it. MF: Fair enough.

Next one’s Corporate Travel Management Ltd (ASX: CTD), which is down about a third since April. RT: Corporate Travel’s not one I spent that much time on personally. I’m obviously familiar with the business model, but not that close to the management team.

I’ll make a broad comment that I think corporate travel is being priced for an acceleration of travel expenditure, and that’s [why] I’m probably quite cautious over the next 12 months.  I think we’ve had a honeymoon [period] of revenge spending on travel in the backend of 2022. Everyone wanted to get away and booked travel. 

I think we’re going into a period of economic weakness… It is cyclical, and I think we’ve had a huge uptick, and I think [travel] probably softens off a bit over the next 12 to 18 months. I think for me, Corporate Travel’s still probably on the sidelines just because of the cyclical softness we’ll see in the next 12 to 18 months in travel spend.

MF: The last one is Insignia Financial Ltd (ASX: IFL), which used to be IOOF. That’s still 62% lower than pre-COVID highs. Bargain or value trap?

RT: We think that’s a really strong leverage to rising markets. It’s unbelievably cheap. It may be a value trap, but I think you’re, with a 7.5% dividend yield, being paid to wait for an uptick in the market. 

It’s a really high fixed cost base, so if the market does participate and funds under management rises, the fall through the bottom line will accelerate earnings aggressively. I think it’s really interesting here. I’d say it’s probably one we’d look at.

We don’t hold it, but it’s one that we’d look at quite closely.

I’m more on the buy side.

Of those three, for me, it’d probably be IFL, 360 with a little bit more cash flow certainty, and then Corporate Travel.

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