Investing is all about making educated assumptions - below is a couple of important assumptions with regard to our strategy for investing moving forward:
1 – March’s panic liquidation low at 4402 is unlikely to be breached but if it is the move lower will only be a brief news driven dip hence MM are bullish and buyers of equities / risk assets moving forward.
2 –April is likely to be a “calmer” month than March as equities form a base prior to moving higher.
It’s extremely hard to know if we are going to see a “V” , “U” etc style recovery from COVID-19 with much of the world including the US & ourselves still bracing for the worst of the virus outbreak but we are fans of accumulating stocks believing the panic washout is behind us i.e. the last quarter was the worst in over 30-years when the ’87 crash shook the world.
We believe the ASX has found or is looking for a major low.
At Market Matters we write a straight talking, concise, twice daily note about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. Below are 8 stock ideas across 4 sectors, for a free trial to Market Matters click the 'CONTACT' button on the left.
1 Tweaking our Energy exposure.
Crude oil and the Energy Sector has been one of the major casualties of this virus outbreak because it followed closely on the coattails of a “spat” between Russia and Saudi Arabia around production levels, the result being crude has fallen by 70% which is clearly a painful scenario for producers.
We believe these current price levels are unstainable across the industry hence while we might not see $US60/barrel any time soon a 50-100% rally would most certainly not surprise.
We like the Energy Sector into current weakness
Crude Oil Chart
While there’s been nowhere to hide in this battered sector BPT has fallen only -34% compared to STO which has tumbled over 50% as some pundits believe the companies in balance sheet trouble, we believe they’re wrong and it represents strong value at current levels.
We own BPT from higher levels while this week we have bought STO
We like both BPT and STO into current weakness.
Beach Petroleum (BPT) v Santos (STO) Chart
2 Healthcare Sector.
The Healthcare Sector has produced the best performing local stocks post the GFC but as COVID-19 has illustrated we must keep our eyes firmly on the road ahead as opposed to the rear-view mirror. The tricky situation for the investor in today’s environment is these stocks have largely become the “go to group” hence reducing the value on offer, even in todays depressed market. MM is very mindful that after this savage correction investors are going to be far more cautious to push valuations to their dizzy heights of January and February.
We like selective pockets of the Healthcare Sector.
Ramsay Healthcare (RHC) $57.28
Private hospital operator RHC has fallen aggressively with the overall market and we believe it’s now offering good medium-term value and will be especially attractive on a pullback to the mid / low $50’s.
We like RHC here
Ramsay Healthcare (RHC) Chart
Healius (HLS) 2.07
Before the coronavirus HLS was on a number of private equity companies shopping list for a classic buy and break-up scenario. However COVID-19 has seen debt markets dry up hence the market has lost confidence that the vultures can raise money for such a bid. However when things improve we think it will be back on the menu, and of course a number of parties have most of their due diligence already worked out – HLS has already received bids at $3.25 and most recently $3.40, I’m sure most investors wish they had a say in what the board considered a fair price now the stocks ~40% below the respective offers.
We like HLS around $2.
Healius (HLS) Chart
3 Consumer Discretionary Sector
The Australian consumer has gone into forced hibernation with plenty of speculation around whether it’s going to be a 1 or say 6-month siesta, either is clearly damaging to businesses likes casinos and hotels. However, like with much of the ASX200 if the businesses are strong enough to weather this storm their current share prices are attractive from a medium-term time horizon.
We like selective pockets of the Consumer Discretionary Sector.
ASX200 & the Consumer Discretionary Sector Chart
Aristocrat (ALL) $21.35
ALL has been crushed over 50% as investors scrutinised the business due to closure of casinos and licensed venues but we feel they have focused on the bad while ignoring the companies casino apps which should help soften the virus blow, we regard this as an excellent opportunity to buy a quality business.
We like ALL around $20.
Aristocrat (ALL) Chart
Crown Resorts (CWN) $7.60
Casino and resorts operator Crown have been in the eye of the storm of the fallout from COVID-19, but we feel in 1-2 years’ time this is a business that may look very cheap. Before lockdown I rode the Triumph over the Harbour Bridge each morning and looked across at Barangaroo always thinking that it will become an impressive strategic asset, one which will be extremely hard and expensive to trump in the future.
Obviously CWN’s income has been slashed by the virus but the stock is trading at an almost 50% discount to its historical book value plus apartment sales (75% under contract) will deleverage its balance sheets fairly aggressively from 2021.
We like CWN into weakness.
Crown Resorts (CWN) Chart
4 IT Sector
We felt the IT Sector was largely too rich in mid-February which has proved correct from a relative performance perspective, following the savage correction there are a couple of stocks attracting our attention at MM. One of the main attractions of a number of these stocks is relatively constant revenue flow combined with the on-line presence i.e. no expensive labour-intensive shopfronts.
We like selective pockets of the IT Sector.
ASX200 & its IT Sector Chart
Xero (XRO) $67.91
MM is a large fan of this on-line accounting business, it has low debt a sustainable revenue stream with excellent growth prospects, it’s not cheap but we believe this is one case where the business justifies the price.
We like XRO into weakness, ideally sub $65.
Xero (XRO) Chart
Altium (ALU) $28.59
We like this multinational software business its debt free and actually had $US80m cash on hand at the end of 2019 – a long time ago now! Technically I can see another dip towards $25 but this is a stock we like moving forward around current levels.
We like ALU here.
Altium (ALU) Chart
what do you mean why you say 'we like share x into weakness?"
Hi Darcy - simply that we are more positive on it at lower prices.