There can often be pitfalls in pursuing a 'one or the other' strategy in equities. Hunting income can lead to yield traps. Chasing growth may result in overpaying for assets and being left with a thin margin of safety.
In this episode, Dr Don Hamson of Plato Investment Management and Chris Hall from Ellerston Capital discuss stocks that can provide a fine balance between both. Up for debate are 1) Aristocrat Leisure - the pokie machine manufacturer on a losing streak since COVID-19 lockdowns, 2) Coles - the supermarket operator seeing a bump up in sales, and 3) Link Administration Services - Trading at half-price following profit warnings.
Don and Chris also bring along two ex-20 stocks with strong prospects for capital price appreciation and growing dividends.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 20 May 2020.
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Edited Transcript
Jessica Amir: Welcome to Buy Hold Sell brought to you by Livewire markets. My name is Jessica Amir from Bell Direct. Today we're talking about five stocks that offer what we all want: income and growth. With us today from Ellerston Capital is Chris Hall, and we've also got Don Hamson from Plato Investment Management.
Aristocrat Leisure (ASX:ALL)
Jessica Amir: So let's start off with you, Chris. Today, we're talking about Aristocrat Leisure, one of your favourites. Buy, hold, or sell?
Chris Hall (Buy): Definitely a buy for me, Jess. I think the valuations look really, really compelling. They've been through a tough period, obviously, with all of the closures in the casino side of the business. But look, they're a market leader with regard to their software development in gaming and in hardware provision. I think they're going to have very, very strong free cash flow over the next two to three years.
Jessica Amir: So, strong for the next three to five years. Don, what about for now? Are we heading back to the casinos? Aristocrat, buy, hold, or sell?
Don Hamson (Hold): Hold for me. We won't be heading back there anytime soon. I think longer-term it's a good stock, but at the moment, we've got a hold on it.
Coles (ASX:COL)
Jessica Amir: Let's stay with you. Coles, second biggest supermarket in Australia. Buy, hold, or sell, Don?
Don Hamson (Buy): That's a buy for us. I think the lockdown has shown the great defensive quality of Coles. Not too expensive. So for us, it's a buy.
Jessica Amir: Great. Earnings uptick. What are we seeing with Coles? What do you reckon, buy, hold or sell?
Chris Hall (Buy): Buy for me too. I think the cash flow is very, very strong; very, very defensive earning streams. Trades at a discount to Woolworths. Feel very comfortable with the story here.
Link Administration Services (ASX:LNK)
Jessica Amir: One that's hurting a lot, but it's got a strong business. Link Admin: buy, hold, or sell?
Chris Hall (Sell): Sell for me, Jess. Company's had three profit warnings over the last two years. Feel as though the administration business is struggling a bit. The picture acquisition is a good business, but I think housing-related activity is going to slow or transactional volumes are going to slow. So I'm a bit concerned about the earnings outlook there.
Jessica Amir: Not only housing, but I think superannuation is also hurting Link. What do you think, Don? Buy, hold, or sell?
Don Hamson (Sell): Sell for me, too. Look, the only thing it's got going forward is valuation, but, yeah, it's got challenges in all its businesses. So for us, it's definitely a sell.
JB Hi-Fi (ASX:JBH)
Jessica Amir: All right, Don, what have you got for us? Income and growth? What's your key stock?
Don Hamson (Buy): JB Hi-Fi. We think it's doing very well in the current situation. It's defied all the trends in terms of beating the online capabilities. Valuation's okay. Good business momentum, good management.
Bravura Solutions (ASX:BVS)
Jessica Amir: Chris, what do you reckon, income and growth?
Chris Hall (Buy): Bravura Solutions. It's a mid-cap stock. It's an enterprise software and solutions company. It's compounding at 15% per annum. The yields still quite attractive as well. Very, very defensive earning stream. 75% of its revenues recurring. Definite buy.
Jessica Amir: They have plenty of opportunity, but these guys think it might just be in Bravura and JB Hi-Fi.
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- In case you missed it, Don and Chris discussed 5 big-caps for reliable dividends (covering ASX, Macquarie, Wesfarmers, Fortescue and Goodman)
- Don and Chris also participated in a thematic discussion about how the rules of income investing have changed. Access it here
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