The evolving trade war, weakening global growth, a Chinese recovery, the Aussie dollar, and central bank policies including discussions with Philip Lowe; these were some key themes behind portfolio positioning discussed by WAM’s lead managers on a recent investor call.
Some of their preferred sectors based on the big picture views included consumer staples, healthcare, tech, retail and the automotive sector, and during the call, the managers outlined some stocks they think stand to perform.
Read on for my summary of the nine stock ideas that they outlined. I have also included the link to the full recording to hear the macro discussions in full, as well as Geoff Wilson touching on plans to close the discounts on two LIC’s in the WAM stable.
Entertainment One (LON:ETO); £2.8 billion
Just 2 months ago, Catriona Burns who runs the WAM Global Fund, made a strong case here on Livewire for Entertainment One (LON:LSE), the owner of kids TV franchises, Peppa Pig and PJ Mask. In her wire, Look past economic noise for offshore gems she wrote about the impressive scale of the global opportunity for the company’s brands as it moved into the US and China, in what is becoming an increasingly fragmented market.
Just a month later the company received an all-cash takeover bid from U.S. toy and entertainment company, Hasbro (NASDAQ:HAS) at a 31% premium. This puts the stock up 60% from the fund’s original entry price, a nice result for their biggest position.
Catriona pointed out that while the board of Entertainment One has recommended the all-cash bid, its shares are trading at £5.71, which is a slight premium to the £5.60 bid price, suggesting some speculation of a counter-bid. So, like its eponymous heroes in its house brands, Peppa Pig and PJ Mask, Entertainment One may have more adventures ahead of it just yet.
Bandai Namco (7832.T); ¥1.4 trillion
Catriona also talked about Japanese stock, Bandai Namco (7832.T), which produces profits from entertainment parks, toys and video games, so has the Chinese video gaming market growing over 20% p.a. as a strong tailwind.
A core part of the WAM process is to invest in companies that are not only undervalued but critically, have a pending catalyst than can drive a rerate. In the case of Bandai, it was recently added to the Nikkei index. This important catalyst forces active and passive funds to buy for benchmarking and indexing reasons respectively. The stock is up 24% since the inclusion announcement as these new players have appeared, to put it by 55% since from entry-level since Catriona bought in.
Waste Management (NYSE:WM); US$48.3 billion
She also mentioned Waste Management (NYSE:WM), the dominant waste management player in the US market which is highly consolidated and has seen some M&A. In mid-April this year, Waste Management acquired Advanced Disposal Services for $4.9 billion and Catriona made the comment in her presentation that the company's own synergy forecasts look conservative, so she expects the stock has further to run just yet as the full benefits or the acquisition flow through.
Western Areas (ASX:WSA/TSX:WSA); A$0.9 billion
Matthew Haupt, who manages the WAM Leaders fund looked at Western Areas, an Australian based explorer and producer of Nickel. Nickel is a key input for stainless steel but is seeing increased demand as a key ingredient for lithium-ion batteries. The market had been expecting Indonesia, the second-biggest producer of Nickel, to cease exports in 2022. But the nation shocked the market in August by bringing that forward to January 2020. The nickel price, which had been creeping up from its low of $12,000/t in June, then jumped abruptly from $16,000/t to over $18,000 on the announcement.
12 month Nickel price chart
Source: London Metals Exchange
Matt had expected this catalyst, holding Western areas to leverage it, however, the news arrived sooner than anticipated. While the market has caught up with events, Matt still thinks there is a longer-term opportunity here, saying:
“Although the valuation is looking quite rich now it's probably going to have a bit of a pause a while and we've actually reduced our weight, but again we think longer term, this one is a terrific company to own”.
Qube Holdings (ASX:QUB); $5.2 billion
Matt also touched on Qube, a diversified business centred around transport, and critical to Australia’s productivity. The stock is up over 28% YTD despite several headwinds, however, he argues that these are on the turn, providing an even stronger investment case for the stock:
"The negatives for Qube were around grain handling, which was down significantly and also auto imports, which was down significantly, but still managed to grow. They're earning 17 percent. So we think with those headwinds turning to tailwinds this year we think they can out perform again".
In the presentation, Matt showed the relative weighting against the index of the fund’s positions in these two stocks, along with the other top 10 active positions, which on this basis showed the highest conviction level in Western Areas.
A.P. Eagers (ASX:APE); $2.6 billion
Oscar Oberg, the lead portfolio manager of WAM Capital and WAM Microcap, looked at four companies, starting with A.P.Eagers, the second-largest car dealer in the country. In April it announced the proposed acquisition of Automotive Holdings (ASX:AHG), the largest dealer in the market, to create a large dominant player. Oscar made the case that synergies, cost savings, and asset sales will deliver double-digit earnings growth going forward, and also that this acquisition is timed well with what he thinks is the bottom of the new car sales cycle.
Eclipx (ASX:ECX): $0.6 billion
Eclipx is the leading fleet leasing and novated leasing company in Australia but was not an obvious buy after becoming a “reverse 6-bagger", losing 84% in price over the 18 months to March this year.
This freefall in price heralded the hire of UBS investment banker Julian Russell as the new CEO, with plans announced to take a scalpel to the business and cut out non-performing assets. This was a catalyst for Oscar to buy for the funds, and he made the case that if the asset sales are successful in coming months, the PE would be around 10 times, versus peers McMillan Shakespeare and Smart Group on 14 times and 18 times respectively.
This reminds me somewhat of the case for City Chic that Oscar made on Livewire 12 months ago, where an aggressive rationalisation of assets left a profitable and undervalued company (City Chic has more than doubled since then).
Australian Financial Group (ASX:AFG): $0.5billion
AFG is the largest aggregation platform for mortgage brokers in Australia, and in the Royal Commission was torched 30% during the panic that ensued, creating what turned out to be a great opportunity.
Since then APRA relaxed the cap on loans, we've had two interest rate cuts that have driven loan originations, and AFG has acquired the number two player in the sector, Connective Group, which he thinks should deliver significant synergies. Oscar said in the presentation that:
‘At 14 times earnings we think the valuation of AFG is attractive, and see a very strong profile for growth going forward’.
Temple and Webster (ASX:TPW): $0.2billion
Temple and Webster's listing in late 2015 spectacularly imploded. Having raised $62 million at $1.10 in an oversubscribed IPO, the chart promptly went in the wrong direction and within six months it traded at just $0.12.
However, for the last 2 years, it has been in recovery mode and has climbed steadily higher to make it a ten-bagger (and then some). This is another recovery story that Oscar likes, pointing out its strong momentum, 40% revenue growth, and the nascent stage of the online retailer market in Australia (5%) versus the US and UK (15%), saying that he expects it to ‘beat expectations over the near-term'.
Hear the whole presentation
In addition to the stock ideas summarised above, the conference call covered some of the managers' views on macro trends and thematics, as well as Geoff Wilson's discussion around the discount on the WAM Global and WAM Leaders LICs.