Company Interview / Chris is VEE-ry impressed with this stock

Key points:

Chris Scarpato from Alvia Asset Partners favours old-world tech like VeriSign (NASDAQ:VRSN) for its monopoly on .com/.net domains.Perth-based Veem (ASX: VEE) wins attention with unique marine gyro stabilisers, targeting environmental efficiencyChris seeks value in high-quality companies facing short-term market impatience

Chris Scarpato of Alvia Asset Partners highlights two stocks appealing to Alvia's investment approach. VeriSign (NASDAQ:VRSN) stands out for its monopoly on .com and .net domain names, offering substantial pricing power due to long-term contracts with the potential for consistent revenue growth.

Despite declining .net usage, Chris views VeriSign as a lucrative, high-margin investment opportunity.

Chris also discusses VEEM (ASX: VEE), a Perth-based innovator in marine gyro stabilisers. Chris appreciates VEEM's focus on niche markets and collaborative efforts with clients. The company's original solutions, such as stabilising boats under varied conditions, show promise in reducing costs and environmental impact .

Amid uncertainty around short-term earnings and cost pressures, Chris stresses Alvia's strategy to capitalise on overlooked high-quality businesses. Through contrarian investing and patience, Chris envisions long-term returns.

Full unedited transcirpt below:

0:00

Getting back to the stock specifics now, Chris Scarpato from Alvia Asset Partners joins me. Chris, you are looking in terms of some stock specifics with the likes of Very Sign, which is listed on the Nasdaq. What do you like about this stock?

0:18

Good morning Juliet. Great to be here. Thanks for having me. Um, I think if you sort of take a step back, just, um, I guess the way we invest here, in our view, is really just focusing on, um, that that real fundamental quality. It's, um, it's really challenging in a market like this where you've got, um, you know, the indexes are being driven by those, those large and mega caps. Mega-cap tech stocks. Um, VeriSign is a good example of what you call a sort of an old world tech business. Um, it's actually got the exclusive wholesale rights to sell common net domain names worldwide. Um, that's an agreement they signed with with I can that regulates the internet sort of all the way back in the late 90s. Um, so it's really a monopoly on that, on those domain names. And they they've signed some really good agreements where they can increase prices that sort of 7 to 10% per annum. Um, so yeah, it's a really lucrative business. It actually, um, manages two of the root servers or the

1:18

catalogues, um, of the worldwide web. So it's a real, um, sort of mission critical business that sort of sits there in the background. It's probably what you call sort of a smaller mid-cap in the US. Um, and just has been has shown decades of, you know, share buybacks and earnings growth that really high margins. So, um, one of those sort of quiet compounds that we, we sort of look for here at Avia. So just talk us through, I guess some of the trends then that you're looking very closely at when you are getting stock specific then. Chris.

1:48

Yeah, I think we're we're trying to um, we're trying to be contrarian where, um, we see some really attractive opportunities. And, um, it all comes down to, to really just focusing on fundamental quality. We think the market at the moment, um, is getting a little bit, um, sort of short term focus. And I think, you know, where we find we can make some good returns. It's actually really investing in those high quality businesses that have a short term slip up. Um, and I guess the trends at the moment, obviously you've got, um, you know, cost pressure being quite persistent and a little bit of uncertainty around, uh, short term earning forecasts. So that's where we're really trying to play in the market, where, um, the consensus is has lost patience with what we deem as high quality businesses. And we're using that as an opportunity to, uh, to establish a position for our clients. So we touched on various I mean, just tell us why that. And also Veeam, first of all, I need to know what these stocks actually are. But why do you think that they are high quality? Yes. I'll jump onto them. Um,

2:48

and then maybe we can jump back to Verizon. But, uh, van's an interesting one. Um, and probably for some of your viewers with more of an Australian, uh, focus, it's actually a Perth based business, um, that has its own in-house manufacturing and R&D, um, for the marine industry, uh, particularly, uh, gyro stabilizers. So what gyros do is they stabilize, you know, marine vessels when they're in motion and when they're also stationary. Um, that sounds fairly straightforward, but I guess the difference there with their gyros is that they actually stabilize the boat, not just when they're stationary, when they're moving as well, which is quite a innovative concept. And it means that, you know, all these commercial shipping applications can use much smaller vessels, um, to get the same product, the same service done, um, with a much better outcome. So there's carbon footprint, you know, there's a massive cost saving as well. Um, they also do, uh, standard propellers. Um, and that goes from all the way, sort of your commercial or recreational applications all the way up to

3:48

defense applications. Um, what we like about Veeam is it's, um, it's still about 50% owned by the founding family, the Milosevic's, who are still actively involved in the business. Um, there's been recently a transition of the long, the long serving family CEO to a to a, um, external CEO. Um, they're still heavily involved, still owned a lot of business. Um, they're focused on the long term. They've been investing in their facility in Perth, um, ramping up for, for sort of more activity. Um, we really like the, the long term patience and the discipline. Um, and as I was saying before, Julia, when, when we see a slip up or a, you know, the market losing some faith in these businesses where we think the fundamental, uh, long term quality is intact, we, we take a position for our clients. Yeah. I noted that Sequoia initiated coverage on this stock a couple of months ago with quite a high price target above $2. Um, just tell us, I guess, where you sort of see growth and what does it

4:48

do in comparison to its peers, or how is it performing in comparison to peers? Yeah, it's a good question. I think, um, what we like about them is that they, um, they're in a niche market and then they're sort of the only pure play, especially in Giro. So it's similar to, um, I guess an example of uses like PWR Holdings, where they're sort of a first mover. They work really closely with their client base, um, in a growing market. Um,

5:18

I think probably where the where we've seen the opportunities. There's a little bit of uncertainty around, you know, defence spending. I mean, anyone who's, you know, following anything on the news these days would realize that there's only one way to spend defense spending is going. Um, and with with agreements like Aukus. Um, they're in a really strong position. Uh, so we think the, the application base is broadening. They've just signed an exclusive contract for some high end propellers, which they are manufacture in-house. Um, and yeah, I mean, Sukhoi is I mean, that's that's quite a bullish target. We're probably not as, um, we usually tend to be a bit more conservative. So we're sort of, you know, still building conviction there. Um, but we think, you know, longer term, they're providing a really innovative solution to the market that no one else, in our view, is really focused on doing. They're sort of doing it maybe in little bits and pieces, but not actually operating their business as a pure focus and actually working collaboratively with, um, with their key customers. So back to Verizon, which is on the Nasdaq. Is that going to sort of get

6:18

back to the lofty levels that it was trading out a few years ago, in your view?

6:23

I think, yeah. Um, I don't think it will. And that's not a key part of our thesis, I think. Um, we really think, um, it's sort of out of favor because it's, um, it's not one of the big tech stocks. And the concern around VeriSign is that with, um, you know, with domain names. Now, as you probably know, Juliette, you can have, you know, dot creating our dot Alvear. You know, there's so many different domain names. There's been a proliferation of different domains, which VeriSign doesn't exclusively sell. Um, so we think there's a bit of concern around the, the volume or the number of new domains. So dot net is definitely in decline. Um, but the the reality is.com is still by far the most trusted domain name. And I know personally I go to a website that's dot com or commu over, you know, dot someone's name and it feels like it's got more credibility. So I don't think it'll get back. And we're not sort of expecting it to get back to the multiples it was trading on. Maybe, you know, five, you know, 3 to 5 years

7:23

ago. But we think the um, the, the been the market is He's understating, um, the earnings growth in the business. And the fantastic thing is like this is running at sort of 70, 80% margins. Um, you know, the cost base is non-existent. And they've got, you know, even if, even if domain volumes are flat or slightly negative, you know, we think revenue growth will still be sort of 5 to 10% anyway, just because they've got that pricing, um, power in those contracts. And they're really long dated contracts, they're sort of between 5 and 10 years. Um, and actually the best thing about the contracts they have with, with I can is that, um, all the rights or the preemptive rights sit with, with VeriSign to renew them. So unless they don't hit their service level agreements, which they, you know, they have for the last 20 odd years, um, the risk of those contracts not being renewed is really low. So I think, um, the market is probably a little bit, um, disinterested in the business and sort of chasing new world tech. So we think there's a really good opportunity just to own a

8:23

quality old school business. Um, you know, that's, that's rated on multiple. And I think, um, that earnings growth will really see the share price, um, grow over the next sort of 3 to 5 years.