This year’s Wilson Asset Management shareholder presentations featured a galore of international and ASX-listed stock ideas poised to ride the coattails of an economic rebound in 2020.
After being bearish on markets this time last year, Geoff Wilson AO says that investors are now confronted with a “totally different environment” underpinned by easing monetary policy.
In particular, the US Federal Reserve over the past two months has injected around US$240 billion into the repo market (where banks and hedge funds get short-term funding by swapping securities for cash). This was the first intervention by the Fed into the repo market in a decade. For Wilson, it’s a strong sign that the Fed and other central banks are in an accommodative stance.
“QE4 has begun. That’s why in the US money supply is growing at nearly 10%, so we have low interest rates and money being pumped into the system. That’s why asset prices are going up.”
Supportive policies by central banks, bundled with factors such as robust employment conditions and consumer spending, makes Wilson and the WAM Lead Portfolio Managers optimistic that growth will accelerate in 2020 and provide a further tailwind for equity markets.
In this wire, I summarise some of the key points and themes raised by the Lead Portfolio Managers, and the stock ideas they presented.
Catriona Burns: Be discerning of valuations
Despite the outlook painted by the WAM team, the Lead Portfolio Manager of the WAM Global LIC, Catriona Burns, says it’s important that investors scrutinise company valuations closely. This point is underscored by the recent failed IPO of WeWork, and significant share price falls in loss-making companies Uber and Lyft after listing.
As part of her investment screening process, Burns looks for the following key characteristics in her investments for WAM Global:
- Strong management teams
- Growing profitability
- Undervalued, and with a catalyst for re-rating
HCA Healthcare (NYSE:HCA) - The largest for-profit hospitals operator in the United States is benefiting from a confluence of factors including favourable demographics, increasing demand for medical care and scaling opportunities from its network of 185 hospitals across 21 states. And yet despite having doubled operating income since 2012 and buying back 18% of its shares, HCA trades on a PE multiple of 12x, half that of its Australian counterpart Ramsay Healthcare. Burns points to re-rating catalysts such as potential earnings beats and capital management opportunities on the back of its strong free cashflow.
CTS Eventim (ETR:EVD) – Despite the doom and gloom surrounding the European economy with Brexit and trade tensions, Burns points to a stock opportunity underpinned by a structural growth theme. “The younger generation are increasingly valuing experiences over products,” she says. CTS Eventim is the Ticketek of Europe and has grown profits consistently over many years. It possesses a 65%-90% market share in its key countries of Austria, Italy, Germany and Switzerland, and is also seeing margin expansion as consumers shift to buying tickets digitally. Burns says she’s still excited about CTS Eventim’s prospects following a recent acquisition of the biggest ticketing business in France and synergy opportunities from the deal.
Kobe Bussan Co (TYO:3038) – This company can best be described as the Aldi of Japan. It stocks a limited range of goods at a significant discount to regular supermarkets. Kobe Bussan has been consistently growing same store sales since 2014 whilst improving margins and managing its balance sheet conservatively. With a target of boosting store locations to over 1,500 (from 840 currently) and increased coverage of the company from major brokers, Burns sees further upside for Kobe Bussan.
Matthew Haupt: Markets aren’t factoring in growth and a fiscal boost
Matthew Haupt, Lead Portfolio Manager of WAM’s large-cap Australian equities strategies, says central bank intervention is suppressing volatility and pushing asset prices up. However, for the market to run higher from here monetary actions need to translate into growth, and Haupt is upbeat that this will occur.
“We’re in this awkward period for a month or two where the data is slowly getting better but it’s really not going to get much better until 2020.”
Haupt is positioning the WAM Leaders LIC in accordance with the scenarios noted in the image below.
While continuous money supply will underpin equities, markets may be further supported by a falling US Dollar which would accompany any pickup in global growth, benefiting sectors including commodities and energy as well as companies linked to emerging markets.
Meanwhile, a flat yield curve (where short-term money costs as much as long-term money) reflects sentiment that there will be no growth in the economy. If the yield curve steepens (long-term money costs more than short-term money) as WAM expects, financials are poised to win.
Further support could also be delivered to Australian GDP if the government uses its promised budget surplus to deliver a fiscal boost and help reverse the fall in private spending.
James Hardie (ASX:JHX) – James Hardie is an example of a company being driven by both micro and macro factors. On the former, Haupt says WAM has been impressed by new CEO Jack Truong’s cost reduction strategy and continuous earnings beats. On the latter, lower interest rates are driving housing activity which may be further amplified by higher GDP. While WAM Leaders has reduced its holding in JHX recently, Haupt still likes the story.
CSL (ASX:CSL) – Despite its stellar performance in recent years, Haupt sees further upside in CSL following its heavy investment in building out plasma collection centres. These will see CSL generate not only volume growth but also price growth as the blood plasma market is expected to remain tight for the next 2-3 years. Still, Haupt warns investors over CSL’s high valuation. “We think there’s more to this stock if the market holds together, but if the market rolls over, these high valuation stocks will get hurt,” he says.
Oscar Oberg: Retailers a bright spot as tight credit conditions reverse
Adding to Wilson’s and Haupt’s views on the economy, Oscar Oberg, Lead Portfolio Manager for various WAM capabilities, said that tighter bank lending since the onset of the Royal Commission has artificially slowed the Australian economy. This should reverse in 2020 and benefit several quality companies.
As this trend plays out, Oberg sees the retail sector as one of the ASX’s bright spots in 2020. He says strong results and outlook commentary by the likes of JB Hi-Fi, Bapcor and Super Retail Group during the August 2019 reporting season boosted his confidence in the prospects for the sector.
Still, investors need to be careful of which retailer they pick due to high risk nature of the industry. He looks for the following characteristics in companies:
- A new management team turning around a struggling business
- Increasing growth via online channels
- Ability to generate a large proportion of sales offshore
Brickworks (ASX:BKW) – Oberg believes that the market is undervaluing the company’s Australian Building Products division, which is forecast to deliver flat earnings out till financial year 2022. However, following this year's interest rate cuts and WAM meetings with homebuilders, Oberg believes the outlook has improved significantly and profits should grow. Another catalyst for Brickworks is that consolidation in the US brick industry should provide the company with acquisition opportunities.
BWX (ASX:BWX) – The owner of Sukin, Australia’s number one selling skincare brand, has had a disappointing few years following a failed acquisition spree. With its share price tumbling from a high of around $8 in 2018 to below $2 this year, BWX appointed a new CEO who’s reduced inventories and aims to export the Sukin brand to the US, which if successful could drive earnings upgrades.
Australian Finance Group (ASX:AFG) – The largest aggregator of mortgage brokers in Australia tumbled over 30% following the Royal Commission, which recommended the banning of trailing commissions on loans. The proposal has been dropped and now AFG is seeing double-digit growth in loan applications and approvals, which should provide earnings upgrades.
Temple & Webster (ASX:TPW) – The share price of Australia’s largest online retailer in the homewares category fell heavily following its December 2015 IPO. Since then the business has recovered and posted around 40% revenue growth, and 43% since the start of this financial year. Oberg says the company will also benefit as the penetration of online retail in Australia, currently at around 4%, closes in with peers in the UK and US which stand at approximately 15%.
What are the risks?
While the managers’ articulated the case for optimism, there are risks as well. The next part of the presentation involved discussing concerns that WAM’s 50,000 shareholders and subscribers as well as each of the portfolio managers have about the economy, markets and superannuation rules.
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Interesting read Vish. Can't agree more with Catriona's point on scrutinising company valuations. Just because a company is great doesn't mean the current price is not overvalued. Wish I learnt this earlier on.