Earlier today I released my special monthly update to Rask Invest members, it’s called the ‘Stocks On My Radar’ update.

I release it around once a month to Rask Invest members. The stocks are usually under-the-radar small-cap growth companies that may be too small or high risk to make the cut as an official investment idea for the Rask Invest model portfolio.

While the 4 small-cap companies from this month appear very impressive, I had to release this month’s update with a stern warning:

Past performance is not indicative of future performance.

This is the official line from the finance police. But I think it’s very important to remember right now, especially if you are — like me — investing heavily in Australia’s most promising growth companies.

Take a look at the share price returns, taken from Yahoo! Finance, from these tech companies so far in 2018:

  • WiseTech: up 53%
  • Altium: up 114%
  • Afterpay Touch: up 187%
  • Webjet: up 71%
  • Appen: up 82%

Those are the kinds of returns dreams are made of. (These companies are not included in the Rask Invest model portfolio.)

ASX Techwreck 2.0

The five ASX tech companies listed above are impressive. WiseTech, for example, is a great business on many measures.

I was talking to one of Australia’s prominent hedge fund managers in Sydney last week who said to me:

‘Sure, WiseTech is at the arrowhead of logistics software. But is it worth this many multiples of its yearly sales? No, I don’t think so.’

This skeptical view of ASX tech share valuations has appeared in almost all of my recent discussions with guests on The Australian Investors Podcast.

Here’s what I think about some of these ASX technology stocks…

Can the returns continue throughout 2018? Sure, anything is possible.

Do I think they will? No.

Look back at any long-term share market graph and it won’t show you a straight line. It will show you ups, downs and many years of side-stepping. Investing is about balancing risk and potential benefits.

It’s not about finding companies with the best ideas or business models and paying any price for their shares. That’s what seasoned investors call “euphoria” — and I think it can be very dangerous.

My Warning To Rask Invest Members

At the time of publishing this email, the four current investment ideas in the Rask Invest model portfolio — all of which I own — have risen between 12% and 45% (in Australian dollars).

That sounds great, right? A 10% return in a couple of months!

But remember my warning: Past performance is not indicative of future performance. 

Here’s what I told Rask Invest members:

“I love strong performance as much as the next investor — obviously, it makes me look good! — but Rask Invest has been live for just three months and two of the ideas have been active for much less than that. Short-term performance is more often driven by behaviour, not sustainable fundamentals. It’s important to know the difference.”

I’m not predicting Techweck 2.0, and I’ve been wrong more than a few times. But I do believe the recent returns from the ASX tech sector are not sustainable.

Indeed, I believe the prices of some of these tech companies have gotten well-ahead of their intrinsic valuations. And the more stretched their valuations become, the lower potential return investors must be willing to accept. At these prices, I don’t think there is enough of a margin of safety to justify buying some of these promising ASX tech stocks.

What Now?

I’m comfortable holding the four shares in the Rask Invest model portfolio for now. But I keep pinching myself, I regularly update my valuations and I try to keep my expectations and forecasts conservative — no matter which way the model portfolio is heading.

Patience doesn’t lose an investor money.

Owen Raszkiewicz,
Lead Adviser of Rask Invest

 

Disclaimer: This article contains general financial information only and should not be relied upon. This information does not take into consideration your needs, goals or objectives. Therefore, you should consult a licensed financial adviser before acting on any of the information presented here. Past performance is no guarantee of future returns. At the time of publishing this article, Owen Raszkiewicz does not have a financial interest in any company mentioned. 

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