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Are the likes of REA, Carsales worth chasing?

James Gerrish

Market Matters

Some of the ASX’s best performing stocks in 2020, which includes March’s COVID sell-off, would surprise a few readers although the pandemics influence has undoubtedly been driving the performance train:

Winners: Domino’s Pizza (DMP) +67%, Costa Group (CGC) +49%, OZ Minerals (OZL) +51%, Fortescue (FMG) +57%, Harvey Norman (HVN) +18% and Xero (XRO) +44%.

Losers: Commonwealth Bank (CBA) -13.2%, Crown (CWN) -29%, Woodside (WPL) -47%, QBE Insurance (QBE) -31%, BHP Group (BHP) -6% and Telstra (TLS) -21%.

The index remains well below its all-time high because the large caps have struggled from CSL & BHP both being marginally higher to the banks lower whereas the beneficiaries of the structural shift brought about by COVID has seen some pockets of the market soar. There’s no doubt that 2020 has been both a testing and fascinating time for investors but the rewards are clear to see and especially when compared with term deposits paying almost zero.

The question we will be posing to ourselves into 2021 is has the acceleration into the new world economy brought on by COVID run its course or is this a structural shift that will lead to years of outperformance? I have been in the markets for many years and I can honestly say its never been more exciting for the “Active Investor” although I stress open-mindedness and flexibility is a must – what worked in the rear view mirror has no guarantees looking forward.

CSL Ltd (CSL) vs JB HI-FI (JBH)

The 3 stocks I have looked at today are all trading around all-time highs hence the simple question being can their outperformance be maintained.

1. REA Group (REA) $125.46

Real Estate.com is the dominant local player most Australians use when looking at housing, an obsession of our fair country. This is undoubtedly a quality company with the only concern being its valuation, the Est. P/E for 2021 is above 50x, an ongoing rally in bond yields could easily weigh on the growth stocks as we saw in Q4 of 2018. At MM we like REA but its risk / reward is not compelling at this point in time leaving us as an observer, however if it continues to kick goals internationally this may quickly change.

During the pandemic REA was able to impressively cut costs and increase margins, if some of this is maintained things will look rosy for the stock as it expands and we could see ourselves on the register in 2021.

MM likes REA with stops under $115.

REA Group (REA) Chart

2. Domain Holdings (DHG) $4.04

Australia’s 2nd player in the real estate space continues to enjoy the updraft created by REA. This on-line classified business has recovered well since March but if we do see bond yields cause another pullback in the space, I would be more comfortable holding the cream of the crop i.e. REA Group (REA).

MM prefers REA to DHG.

Domain Holdings (DHG) Chart

3. Carsales.com (CAR) $22.60

Australia’s premier place for selling new & used cars, I’m sure most subscribers have at least referred to it once, it gets over double the visitors to its site than its nearest rival. The fall from grace of public transport has helped the stock as commuters look to buy cars as not everybody can work from home – me included! This is another company who dominates in Australia and is growing internationally, a great combination for a business who has been improving margins and upgrading its technology. Ideally this is a stock to buy into a pullback, but I’ve said that before and one has not been forthcoming!

MM is bullish CAR with ~10% stops.

Carsales.com (CAR) Chart

Conclusion

MM likes REA & CAR with 10% stops. – we believe both companies will perform strongly even when a vaccine is introduced but a kick up in bond yields is likely to see a period of underperformance aka Q4 of 2018.

NB MM believes bond yields have bottomed and will head higher moving forward hence I would leave room to average any purchases in the near future.

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Any advice provided is of a general nature only.

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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