As we consider different areas to allocate funds into the current market weakness potential tax loss selling should definitely be considered as June slowly evolves. The ASX200 is up almost 6% for the calendar year hence there will not be the number of candidates which would typically be available in a down year. However if an investor is considering buying a stock which is well in the red this financial year patience maybe be rewarded as it’s a candidate for selling in the coming 1-2 weeks.
Around 10% of the ASX 200 is down by over 10% this year, with the ones catching our attention listed here;
CYBG PLC (CYB), Brambles (BXB), Star Entertainment (SGR), Navitas (NVT), Domino’s Pizza (DMP), Janus Henderson (HGG), Santos (STO), Healthscope (HSO), Medibank Private (MPL), Westfield Corp (WFD), Vicinity Centre (VCX), Harvey Norman (HVN), Carsales (CAR), Vocus (VOC), TPG Telecom (TPM), Myre (MYR) and Telstra (TLS).
We actually own 3 of these stocks but fortunately from good levels. It has not gone unnoticed at our end that one of these 3 holdings is already underperforming the ASX200 over the last 5-days i.e. ASX200 -1% whereas CYB -1.5%, TLS +1.3% and HGG +1.9%. The first question to ask ourselves is do we want to increase any of these 3 holdings if weakness does unfold in coming 1-2 weeks.
TLS is not far from our $4.60 sell area so that’s clearly not a candidate. HGG has recently tested our $44 initial target area making us more of a seller than a buyer although we are giving the holding a little room at present. CYB is a stock we still like at current levels although it may experience some significant volatility this week with both the ECB announcement (don’t expected any change to policy, but they may drop the reference to ‘downside’ risks to growth) and the UK election. We will consider averaging CYB around $4.25 if it falls on selling that we perceive to be tax loss selling not negative news out of Europe.
CYBG PLC Daily Chart
Once we take out the sectors and stocks that we simply don’t like around current levels, the condensed list is very short.
1. Healthscope (HSO)
HSO is a stock that we have been watching for a while, pretty much since we took profit on our holding over $2.30 in February. With the stock now ~10% lower our attention has certainly been twigged. Previously we have written that we may consider HSO closer to the $2 region if tax loss selling eventuates, however we continue to see some risk around earnings. Earnings trends that are shown in the chart below are obviously weak, and trending down. (red line is estimated earnings per share)
That in itself is not necessarily a major issue if the market has factored / priced in that trend, however in the context of HSO, consensus expectations get more bullish from 2018 onwards with a gradual rise in earnings per share from 10.5cps in 2017 to 16.25cps by 2020 – which is pretty optimistic in our view and creates some obvious risk of disappointment.
This looks a reasonable ‘technical trade’ if taken at lower levels however it would certainly be one to only give a relatively small amount of room to.
Healthscope (HSO) Weekly Chart
2. Domino’s (DMP)
DMP is a stock we have not been involved with over recent years, the volatility clearly puts it in the aggressive basket and frankly, we’ve viewed the stock as exceptionally expensive and a crowded trade full of ‘tip sheet monkeys’. DMP is now trading on a valuation of 41x earnings as the market continues to price the company for strong growth however the recent 30% correction has tamed down the crazy valuations of mid-2016. That said, it’s still hard to argue in favour of this stock on fundamental metrics without a good pair of rose coloured glasses on – and the shorts certainly have been building here.
Technically we could buy DMP under $50 with clear stops under $40 – this feels more like a trade than an investment.
Domino’s Pizza (DMP) Monthly Chart
3. Myer Holdings (MYR)
Myer is potentially the “basket case” stock of the 3, but it’s certainly in the headlines on a regular basis. The stock is down, close to 25% for the financial year and today is challenging its 82c all-time low, you only have to walk through one of its store to realise this is a company in trouble, it’s almost spot the customer! However, there is potential sugar coating with MYR in the form a takeover, potential from Premier Investments (Solomon Lew).
Back in March, Premier invested $101m into the structurally challenged department store, sending the stock up a few % over $1.20, here we are a few months later, a painful 29% lower. We believe there is a strong possibility of a takeover offer in 2017.
We will consider buying MYR under 80c in the next 1-2 weeks – this is a particularly aggressive play.
Myer Holdings (MYR) Weekly Chart
James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.