Ann: Pause in Trade, page-83

The following from Markets Live - Financial Review

Fidelity portfolio manager Kate Howitt has just spoken about WiseTech Global at the Morningstar conference this afternoon. Here's some of what she said.

We initially invested in WiseTech as a pre-IPO stake and we are very, very selective about that because we are paid to invest in liquid shares. So it's a big deal for us to lock ourselves up in something illiquid.

But we invested - our effective price was below $3 - so WiseTech gets up to $30 and that's a ten fold gain.

That's been an excellent investment for us but clearly the valuation arrangement has flipped. When we first invested there was clear room for re-rating.

It was under loved, under discovered.It has definitely flipped into this very very rich rating. as time has gone by we have sold our position down, We have taken money off the table particularly because it's a very volatile stock.

All these stocks when they get to very high PEs - as soon as there is a hiccup in underlying earnings or even just a sentiment change - you can easily lose 30 per cent in a matter of months.

But you weigh that up against the potential for these firms to grow into the future.

When you actually do the cashflow calculations, the true software companies - if they want to double their sales they dont' have to build a second widget factory they develop the software and they can sell it to twice the number of people and that's twice the revenue with no marginal cost. most of the cost that they are incurring now - and this is particularly true of WiseTech - is to develop functionality for the future, to entrench their strength and their positioning.

Richard at WiseTech is on a mission to make sure that no one else can compete with him or replicate what he is doing.

That means that the expense that is going on is for the future. So the PE is high. A triple digit PE does feel strange and nervy.

But WiseTech is worth more if it does continue to develop new products for the future so part of what you are seeing with these software valuations is the inability of our accounting standards to differentiate between old school investments for the future - which were capex and didn't go though the P&L versus new style investments for the future which go through the P&L rather than the balance sheet.

So when you unpack all of that and look at the cash flow that should come from the investments being made today, basically WiseTech is a company that is building more and more widget factories but it's going through the P&L and the balance sheet so the P&L metrics look really expensive.