For two fund managers to disagree on all stock ideas is pretty rare on Buy Hold Sell, but this happens to be one of those moments.
Matthew Kidman hosts a discussion with Simon Shields of Monash Investors Limited and Anthony Aboud of Perpetual Investments about uncorrelated stocks; companies whose earnings are detached from the prevailing economic situation. They include 1) Woolworths, the supermarket giant trading on 23 times earnings; 2) GrainCorp, which just demerged its malt business and on Anthony's numbers is currently trading 40% below book value; and 3) A2 Milk, the infant formula favourite powering to record highs.
After politely agreeing to disagree on their prospects, Simon and Anthony each bring their favourite uncorrelated stock idea to the table before Matthew wraps up the debate with a sizzling punchline.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 6 May 2020.
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Matthew Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. I'm Matthew Kidman and we're talking about those stocks, those companies that don't really care what's happening in the general economy. They just do their own thing. They're uncorrelated and they're powering ahead. Joining me is Simon Shields from Monash, and Anthony Aboud from Perpetual. Welcome gentlemen, let's start with you, Anthony. The big retailer that's just powered through the COVID crisis, Woolworths, buy, hold, or sell?
Anthony Aboud (Buy): Still a buy. It's expensive, 23 times PE for next year, but they are good ... they've done very well through this crisis. They really showed that they are non-discretionary. They're an innovative culture. They've spent a lot of capital unlike their competitor, and we know how good the market structure is given Kaufland tried to come into this market and couldn't, and then you've got your spin-off next year. So for me, it's still a buy.
Matthew Kidman: Simon, we've spent half our COVID crisis at Woolworths or Coles, surely we're sick of it.
Simon Shields (Hold): I'm sick of it. It's a hold for me. Look, I agree with most of what Anthony said there, but ultimately it's only got a high-single-digit EPS growth, 23 times too expensive for me, not a sell, but a hold.
Matthew Kidman: Okay. Let's get our swag and go bush. GrainCorp had a demerger recently, agricultural-related. Buy hold or sell, Simon?
Simon Shields (Hold): Again, that's a hold for me. Very volatile stock being exposed, but the balance sheet's okay. The P/E is low, 10 times reflects the volatility of the earnings. Analysts tend to price good years always for ag stocks. You don't get good years every time. It's a hold.
Matthew Kidman: Anthony, the drought's over. Surely GrainCorp's going to prosper in this environment? Buy, hold, or sell?
Anthony Aboud (Buy): Buy. It's had a perfect storm. It is a demerged company. What has been demerged is the ugly duckling of the demerged company and they tend to perform very well. It's had a perfect storm against it with margins under pressure, a hundred million dollar plus trading loss last year, and three years of drought hurting grain volumes, but we're getting good rain in northern New South Wales, Southern Queensland, where they've got a good market share. They've taken a lot of costs out during the downturn. I think we're at the low end of the cycle. We're trading at a 40% discount to book value. I like it.
A2 Milk (ASX:A2M)
Matthew Kidman: And who would have thought babies don't really care about COVID, they just keep drinking and eating and doing whatever else babies do? They do that in China too. A2 milk been an absolute bull terror in this environment. Buy, hold, or sell, Anthony?
Anthony Aboud (Sell): I'm going to sell. I think that they've had great business execution, just like Crowded House and Phar Lap, it's been a great Australian success story. Its market position's very strong. They've done a very good job and there's potential good growth down the track. I just don't think the margin's sustainable, the overall margin of the company is 30%. But if you look at it in infant formula specifically, it's 40%, very much aligned on the daigou channel. So for me, when I look at their competitors, they're closer to 20%. So more spend on innovation, marketing, a new product, etc I think will bring that down, and at 35 P/E it's too expensive for me.
Matthew Kidman: Simon, obviously Anthony's not a Russell Crowe fan. So A2 milk, buy, hold or sell?
Simon Shields (Hold): A2 milk, hold for me. Look, I think it's an outstanding business. The track record's impeccable, they've done such a good job on execution, but to buy it at these prices, you've got to say that you're certain they're going to be able to continue to execute like that. I'm not ... I certainly don't think it's a sell. It's a hold.
Matthew Kidman: Okay. Here's your chance, Simon. One stock that's just running its own course. Doesn't matter what's happening out there in this bleak old world that you can tell us about.
Electro Optic Systems (ASX:EOS)
Simon Shields (Buy): Electro Optic Systems. It's a buy. It's high-growth government contracts; shouldn't have been affected by COVID, was because one of its customers had to shut down some military bases that was accepting the kit but still government contracts, they will get done. Did a capital raise and diluted the shareholders, but the P/E is incredibly low, 10 times for a company that even with the downgrade's growing 40% sales this year, will grow in excess of that for the following two years per annum. Absolutely. It's a buy.
Matthew Kidman: Anthony, you got something you can tell us about that's going to get us through this crisis?
Omni Bridgeway (ASX:OBL)
Anthony Aboud (Buy): Look I listened to Warren Buffett's the Berkshire Hathaway AGM. And one thing he mentioned when talking about business interruption risk, when it comes to insurance, he said there is going to be a lot of litigation over the next little while. For me, litigation finance company Omni Bridgeway, the old IMF, is extremely well-positioned, it's got a couple hundred million dollars in the balance sheet, could have another couple hundred million more once they settle on a couple of big cases, which are likely over the next few months.
They've got funds of over a billion dollars at a time ... so there's a massive amount of demand, the demand for their services have gone through the roof at a time when their biggest competitor globally has really struggled. And a lot of other competitors have struggled to raise capital. So they're in a very strong position. They're the largest globally. And for me, they're in a very good position and they dance to the beat of their own drum.
Matthew Kidman: When we're allowed to go back out and visit a restaurant I'm not inviting Anthony and Simon, they can't agree on anything.
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Interesting viewpoints! EOS is cropping up in multiple recommendations from different sources ... I'm going to take a closer look. OBL is new one for me - have to do some research.
Can Simon explain how he gets to a 10x PE for EOS?
Can someone explain Simons calculations for EOS p/e of 10. I’m getting well over 20 for P/E