9 awful calls from 2019
Each year we run the Livewire Outlook Series where we invite a selection of fund managers to share their prophecies for the new year. But we also enjoy throwing in some curly questions, and this year’s is one we think you’ll like.
“Which stock gave you a headache in 2019? What went wrong and what did you learn?”
From buying too early and selling too late to misjudging the merits of a strategy and factors out of left field, the fundies candidly shared with us where they got it wrong and the key lessons you can learn from their mistakes.
Our featured experts include:
- David Allingham, Eley Griffiths Group
- Ben Clark, TMS Capital
- Rachel Cole, NAOS Asset Management
- Josh Clark, QVG Capital
- Nikki Thomas, Alphinity Investment Management
- Blake Henricks, Firetrail Investments
- Andrew Mitchell, Ophir Asset Management
- Vihari Ross, Magellan Asset Management
- Matthew Kidman, Centennial Asset Management
Watch the video by clicking the player or read an edited transcript below.
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Matthew Kidman: There are a lot of Panadols taken in 2019, a lot of mistakes makin' and what were the ones that gave everyone a headache? And especially those professionals, what kept them awake at night?
So three o'clock in the morning, you're staring at the clock, scratching your head saying "Why?"
Andrew Mitchell: Looking at the ceiling.
Matthew Kidman: Yeah, looking at the ceiling, "Why did we invest in that this year?" What was the stock? And how did you clean it up?
Reliance Worldwide (ASX:RWC)
Andrew Mitchell, Ophir Asset Management
Oh, well that's half the problem. The one we really stuffed up this year was Reliance Worldwide (ASX:RWC). For people who don't know, Reliance is a company that does the plumbing fixtures behind the wall, US and Europe...
MK: And it is worldwide.
Exactly right. We thought it was a bit more resilient to the macro. And when you saw the US housing market come down a little bit and Brexit issues with the UK, it lowered its growth target, and we missed that. Stock got sold off. But what we really did wrong was we sold it pretty close to the bottom. Now this is a quality business. It had a lot of pain selling because it had raised a lot of money and the chairman had sold down. And I think we just needed to be a bit more patient and we could have at least got a better price, 15% higher than where we sold it.
Kraft Heinz (NAS:KHC)
Well Kraft Heinz (NAS:KHC) was one that we got wrong, and the lesson there really came down to quality. This is a business that was facing a lot of disruption risks, lower quality private label coming at them, people buying less from the centre of the store coming at them. And with 3G, it was all centred on a roll up story, and that became less probable as the underlying economics of Kraft Heinz started to deteriorate. In that situation the lesson is, it's really hard for even a well-run business to escape headwinds coming at them.
New Hope Corporation (ASX:NHC)
Ben Clark, TMS Capital
My stock is New Hope Corporation (ASX:NHC) or 'no hope' as I've come to think of it.
I was attracted to a great management team, an excellent balance sheet and really good assets and I thought that there was maybe a bit too much emotion about coal and what was going on in the coal market. In hindsight, I was too early, which I often find I actually am with cyclical stories. The cycle is still probably not showing signs of bottoming out. Probably the lesson I take out of it is that cycles tend to be longer on both the upside and the downside than I appreciate. And the entry point is difficult.
Nikki Thomas, Alphinity Investment Management
Amazon (NAS:AMZN) was a very interesting stock for me this year. Having seen it go through very strong positive earnings revisions through 2018 really as investment started to pay off and margins really lifted and we had this stock in the portfolio, not that big but in the portfolio. Then they decided to go after one day Prime and put $1 billion a quarter into chasing that down and building out their business and the earnings downgrades have been quite material. We've exited it because it just doesn't fit process. Stock price has kind of gone nowhere so it hasn't been a disaster in terms of what the share price did. But it tells you the market thinks about revisions, not just at the EPS line, it thinks about what ultimately drives the stock. It's not always just earnings, it might be about revisions or cash flows or different things. So it's looking for where the revisions are actually meaningful in the way the stock''s priced.
Bathurst Resources (ASX:BRL)
Josh Clark, QVG Capital
One stock that didn't go to plan would be Bathurst Resources (ASX:BRL). So they're a small coal producer in New Zealand and we bought the business on two times earnings. I was pretty confident that I'd make some money there and one of the things I learned was that cheap can get cheaper and there's a difference between value and a value trap. It's quite a fine line sometimes. To make money out of that stock, we really needed a re-rate in the valuation and the stock just didn't have the liquidity for it. And if you don't get a re-rate in the valuation, you need to get those returns back via cash. And that wasn't going to happen given the reinvestment requirement in the business.
Vista Group (ASX:VGL)
Rachel Cole, NAOS
Well, luckily I didn't have this one on the portfolio, but I embarrassingly spoke about it on Buy, Hold, Sell. That one was Vista Group (ASX:VGL) for me. Going into the half year result in August, the valuation was getting toppy and expectations were high. What happened was a few left field things came about for them and their outlook for growth was lower than what people were expecting. That came about through the transition to a SaaS model, which they will be migrating and starting that this year. I think what I've really learned from that is all high quality stocks will have a point where they're bad investments.
Virgin Money (ASX:VUK)
Blake Henricks, Firetrail
Didn't give me a headache. It gave the whole team a hernia and it was Virgin Money (ASX:VUK), which was the old Clydesdale. It got absolutely smoked. There's some bad news around it, Brexit, some NIM (net interest margin) pressures and then also capital concerns at one point. The biggest lesson was just how the market can overreact to bad news. Also a lesson was if you have conviction to keep buying, which we did. We didn't buy enough of it but it has doubled in the past little while. So it's definitely not a success story, but it definitely gave us a hernia and it's on the way back.
Matthew Kidman, Centennial Asset Management
A headache was a stock that I picked last year called Midway (ASX:MWY). It exports hard wood chips out of Australia and everything was swimming right for it. The currency was in its favour. Wood chip prices were up. The competitors globally were struggling on their various fronts. I got that wrong, what I should have learnt was when things are going good for a cyclical company, don't stay on board too long. That's your cue to leave. And sure enough, some of those things, the currency stayed with them, but prices fell, shipments were delayed and all of a sudden before you knew it, the outlook wasn't anywhere near as polished. Those moving parts are quite sharp and happened quite quickly. When you're on the rise in a cyclical type or structurally cyclical type of business, take advantage of that and sell.
Navigator Global (ASX:NGI)
David Allingham, Eley Griffiths Group
Navigator Global (ASX:NGI), great little business, solid foundations, great people, made a big acquisition where they took their funds under management from $10 billion to $6 billion. They didn't pay anything for it. Now in hindsight, the catch was $6 billion of incremental FUM (funds under management) ended up being $2 billion, and I think the market, the buy side and the sell side thought the number was going to be better. There's been downgrades, the stock went from $2.50 to $6 all the way back to $2.50. We're a strong buyer down here, we think it's got great legs and are a big believer in that business now.
What was your awful call in 2019?
We all have a few shockers! So, which stock did you get wrong in 2019 and what was the lesson you learnt? Let us know via the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.