A cyclone has ripped through markets in the last three months, leaving the ASX200 down 10%, and many stocks down by a multiple of that. Yet with powerful forces at play, another sharp leg down feels just as feasible as a Christmas rally.  

It is paramount then that each stock in your portfolio can not only weather the storm, but capture an upswing too. So, for the penultimate Buy Hold Sell of 2018, we are hunting stocks with hurricane-proof balance sheets, good earnings metrics as well as growth optionality, and in defensive industries that could withstand an economic downturn. Tune in as Tobias Yao from Wilson Asset Management and Arden Jennings from Ausbil Investment Management  join Matthew Kidman as they review 5 stocks for stormy markets.

 

Transcript 

Matthew Kidman: Welcome to Buy Hold Sell. My name is Matthew Kidman, and today I'm joined by Arden Jennings from Ausbil and Tobias Yao from Wilson Asset Management, and we're talking about stocks in stormy markets. Some people would say it's a cyclone. Let's start with you, Arden. Service Stream, defensive, good announcements recently. Buy, hold, or sell?

Service Stream (ASX:SSM)

Arden Jennings: Yeah, it's a buy, Matthew. We really like the business. It's got management, they're a safe pair of hands. There's net cash on the balance sheet. It's trading at a below market multiple, and we really think the market underestimates the transition from NBN activations to the maintenance revenue within the business. They've just made a really creative acquisition into the utility space, which we think further diversifies the business. By all accounts, business is tracking well, so we're expecting a good first half result. It's a buy.

Matthew Kidman: Tobias, servicing the infrastructure world. Telcos, water, energy. Buy, hold, or sell Service Stream?

Tobias Yao: It's a buy for us as well. We really like the visibility of the business, sort of the future growth underpinned by NBN as well as the 5G rollout. They're definitely the best operators in the market, as evidenced by their industry-leading margins. 13 times PE, it's way too cheap. It's a buy.

Matthew Kidman: Okay, nothing more resilient than drugs. Generics Mayne Pharma. Buy, hold, or sell?

Mayne Pharma (ASX:MYX)

Tobias Yao: Mayne Pharma is a buy for us as well. The US generic price decline has stabilised, and we think they have a healthy pipeline of drugs to come on over the next couple of years. And the same time, we think they could potentially be a consolidator in the rapidly changing environment in the US. So they could pick up attractive assets and companies, so it's a buy for us as well.

Matthew Kidman: Defensive industry, but the share price hasn't been too defensive, been off a fair bit. Buy, hold, or sell?

Arden Jennings: Yeah, we think it's a buy as well. It is covered by our larger cap team, but like Tobias said, there is evidence of stabilisation in the generic drugs market over in the US. They're a top 25 provider over there now, so we do expect that gross margins can expand and they'll bid on the top line, which should lead to positive earnings revisions. It's a buy.

Matthew Kidman: Okay, nothing could be more defensive than child care, or so we thought. It's been a pretty hard period over the last 12 months or so over supply. G8, buy, hold, or sell?

G8 Education (ASX:GEM)

Arden Jennings: Yeah, it's a hold for us. Look, it was great buying at $2, there's no doubt about it. But at the current levels, it's up 50%. So it's a hold.

Matthew Kidman: It would be great selling at $3.

Arden Jennings: It's a hold currently. Management have done a good job implementing some new operational efficiencies within the business. New childcare subsidy changes coming in have had, it seems, a positive impact on occupancy, which is obviously the lead factor for the business and the driver of earnings. But until we see that stabilisation continue, we'll stick on the sidelines for now. It's a hold.

Matthew Kidman: Bounced like a moon ball G8 recently. Buy, hold, or sell, Tobias?

Tobias Yao: It's a hold for us as well. They've had a great investor day. Stock price has rallied, but we're still worried about the competitive environment and impact on occupancy rates. So it's a hold for us. We're going to take a wait and see approach as well.

Matthew Kidman: Okay, here's your chance. Where's something that's going to perform in stormy markets, which stock?

Austal Limited (ASX:ASB)

Tobias Yao: So for us it's Austal Ships. Austal, they build Navy and support vessels for the US government, and they also have a growing ferry business, and as evidenced by some of the contracts they've won. We think the market underestimates the margin uplift in the order book as well as the potential to grow the ferry side of the business very strongly due to the replacement cycle picking up. The stocks down 15 times PE going at 15%. We think that's very compelling.

Matthew Kidman: Arden, it's going to be hard to beat a shipbuilding business in stormy waters. Have you got one for us?

Arena REIT (ASX:ARF)

Arden Jennings: Yeah, look, one that we like is Arena REIT. That's a recent addition to the portfolio. This is a property owner of roughly 167 properties. 85% in child care, 15% in health care. What we really like about the business is that it's got a long WALE, so weighted average lease expiry of around 14 years. It's got low gearing, around 24%, but they've got annual rent reviews, and we've seen what's happened with G8 in the investor day. Occupancy seems to have stabilised, and feedback is that conditions are improving in that sector. They've got annual rent reviews as well as five-year market rent reviews, and they're achieving 5% uplift in rents, so we like the earnings outlook for it. Interestingly, though, as sort of a bonus optionality for us, is that Folkestone, which has been taken over by Charter Hall Education, actually owns 4%, and we think, this could be a prime candidate for M&A.

Matthew Kidman: Well, they've put the mouth guards on and the shoulder pads, and they're ready for some defensive work in very tough times.