Backing COVID winners AND losers

The financial year to June 2021 was a bumper year for the Australian share market. The ASX300 Accumulation Index return of +28.5% was the strongest financial year since 2007. A rapid economic recovery and sustained policy support helped drive the Australian share market higher through the year, with September 2020 the only down month. Consumer Discretionary (+46.1%) and Financials (+40.6%) were the best performers over the year with Utilities (- 18.6%) the clear laggard. BHP and the major Banks added the most to index returns at a stock level.

Brent Oil prices rose $5.50/bbl to $75.13/bbl in June as global demand remained strong. Iron ore prices surged to $US215.50$/Mt ending the month up $US14.00 $/Mt. Interestingly, Gold prices declined $136.80/oz to $1,763.15/oz on the back of lower inflationary expectations.

Markets have run hard and there is some media speculation they may fall in the near term. We have no idea if this will be true. Calling short term market movements is fraught with error.

Periods of change create fantastic opportunities for stock pickers as markets are often short term focused. To illustrate, we hold two companies in the portfolio with opposite short term earnings momentum but both are very attractive investments on a 2-3 year view. 

A 'COVID winner'

NIB Health (NHF) is a large private health insurer and “covid winner”. The consensus view is that profit margins are unsustainably high and it’s better to own the health providers as elective surgeries etc return. We agree NHF’s margins will fall but using long term, sustainable margins the company is very attractively priced. And in the meantime it generates very high cashflows, boosting the balance sheet. To us, fundamental underlying value is more important than short term earnings trends. 

A 'COVID loser'

By contrast, United Malt Group (UMG) was a “covid loser” as its products are used by craft brewers that were impacted by the shutting of bars and restaurants. 60% of revenue is generated in the US and 20% in the UK. These 2 countries have amongst the fastest vaccine rollouts globally and are in the process of re-opening. The company also announced a cost-out and efficiency plan that could add 30% to pre-covid earnings over coming years. Yet the stock trades on a valuation multiple well below market. NHF and UMG are both high-quality businesses at attractive prices and examples that give us confidence in the fund’s long term returns. 

I discuss UMG, as well as other of our core holdings in more detail in this recent podcast with Patrick Poke:

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The low-risk approach to Aussie small-cap investing

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Prime Value Asset Management is a multi-award winning, boutique Australian investment manager with an impressive history of building wealth with investors since 1998. To find out more about the Prime Value Emerging Opportunities Fund click here or the 'CONTACT' button below.