TOL - 17th Mar, 2023
Buy Hold Sell: 3 heavily sold-off stocks (and 2 now on fundies’ radars)
In this episode, Firetrail's Blake Henricks and Market Matters' James Gerrish assess some of the clangers of the February reporting season.
If there was one theme that stood out to this anonymous writer this February reporting season, it was that companies that missed earnings expectations were hammered by investors.
Think Downer (ASX: DOW), which has seen its share price sink more than 16% after it missed consensus forecasts by -12% (and downgraded guidance by -18%, after already downgrading by -15% in December). Or Domino's (ASX: DMP), which plummeted nearly 37% after it missed expectations in its half-yearly result. Or Star Entertainment (ASX: SGR), which has seen its share price fall nearly 15% since it reported results - with net profit after tax missing consensus by -14%.
But they say you should buy when there's blood in the streets...
So in this episode, Centennial Asset Management's Matthew Kidman was joined by Firetrail Investments' Blake Henricks and Market Matters' James Gerrish to analyse these three heavily sold-off stocks.
Plus, they each point to one stock that is on their radar (or has been recently added to their portfolio) off the back of results season.
Note: This episode was filmed on Wednesday 8th March 2023. You can watch the video, listen to a podcast, or read an edited transcript below.
Edited Transcript
Matthew Kidman: Hello, my name is Matthew Kidman and welcome to Buy Hold Sell, brought to you by Livewire Markets. Reporting season for the half year to December 31 is in and there were some clangers. And when you brought out a bad result, investors were pretty nervous. They were happy to sell you off. And to talk about some of those clangers today, we're joined by James Gerrish from Market Matters and Blake Henricks from Firetrail.
Blake, let's start with you, Downer by name, Downer by share price, Downer by sentiment. Downer, buy, hold or sell?
Downer Group (ASX: DOW)
Blake Henricks (HOLD): It's a hold. I mean it looks like a sell. It's had the triple whammy - it's had earnings downgrades, accounting irregularities, and now the CEO, CFO, and chairman have all left the building.
Matthew Kidman: There's no one left.
Blake Henricks: Who's running the place? Well, I guess the good news for Downer's shareholders is that they do have long-term government contracts. The struggle's always been how predictable the earnings are. They haven't been particularly predictable, but sentiment is way too negative. Any sense of good news or an idea that they're reducing the cost base, I think this stock can do well. But for me, it's a hold at the moment.
Matthew Kidman: James, every rock they look under, Downer finds something else to make us worry. Buy, hold or sell?
James Gerrish (HOLD): It's a hold, but only because the horse has bolted. I struggle to sell stocks that have fallen so hard and there's still value in this business. So there will be a turnaround, as Blake made mentioned. They're getting a whole new management team. They're getting a whole new vision for what comes next for Downer. So I don't hold it, but if I was there, I'd continue on with it. I guess it comes down to a psychological thing as well. I like clearing out some of the duds, so that could be another angle to take on Downer as well.
Star Entertainment (ASX: SGR)
Matthew Kidman: A stock that's got the wrong name - at least Downer had something descriptive of where it's going - Star Entertainment. It's regulatory, it's capital raisings, disaster. But it's pretty low now, at $1.40. Buy, hold or sell?
James Gerrish (BUY): It's a buy. It was a buy at the capital raising for sure. So at $1.20, they raised $800 million. I think that was a really good level to get Star. At $1.40, it's a less certain buy, but I think they've cleared off one area of their business that was a real headache, which is their balance sheet. They can focus on all those other issues they've got from a regulatory standpoint, competition and the like. So it's a buy, just, at $1.40.
Matthew Kidman: It was an emergency capital raising, but interestingly, not many capital raisings have been worthwhile going into. But if you took this, you're up a little bit from the $1.20s to the $1.40s. Buy, hold or sell for Star?
Blake Henricks (HOLD): It's a hold. I think there were three issues going into this capital raising. One was the balance sheet, that's been taken off the table. The next one's the government, trying to tax the staff further. If it was just about that, I'd say it's a buy, because I find it hard to believe the government will issue a licence and then ensure that it makes no money. So I think that can be unwound. The bigger challenge is the earnings update they delivered before the capital raising. That led to close to 60% earnings downgrades across the market. It has a lot of fixed cost leverage in the business and if gaming revenue slows any further or Barangaroo competition from Crown picks up any further, I think the earnings are vulnerable. So for me, there's just a bit too much going on. It's a hold.
Domino's Pizza Enterprises (ASX: DMP)
Matthew Kidman: Okay. They might deliver the pizzas quick and fresh, but the share price is a bit stale. Domino's Pizza, buy, hold or sell?
Blake Henricks (BUY): Domino's is a buy for me. It was $160 bucks. You're now buying it for $48, but why I think it's a buy is the response to the result was fair and predictable. It was a shocking result. They got the pricing wrong and it just shows how tough inflation is for all companies to manage. But I think they pushed too hard on delivery pricing and we're seeing that across global Quick Service Restaurants. Everyone's talking about delivery and trying to manage that pricing. Interestingly, takeout picked up. I think we'll sit here in a year or two's time and say, "That was a bit of a hiccup on pricing." I don't think the business is dead. They're good innovators. It's a buy.
Matthew Kidman: It's a global business, but it shows that inflation is hard to deal with. Buy, hold or sell for Domino's?
James Gerrish (SELL): It's a sell, Matthew, for us. I think it's a growth business on a growth multiple that's not growing and they completely misunderstood their customer base. They've driven this concept of being price-conscious for so long and then they drove through price increases that were just poorly executed. So is a multiple of 26 times the right multiple for a business like this? Probably not. I think it's lower and I think it's a sell.
AGL Energy (ASX: AGL)
Matthew Kidman: Okay, let's get out of the darkness of all those bad results. Let's look at something from results season that you are adding to the portfolio, it might have come down a bit, but it might have been a good result. What have you got for us?
James Gerrish: I'm going to drag you back into the darkness. So AGL Energy is a company that we've just bought after the result. Their result was quite predictable. Their earnings were a miss, they were down about 30%. There were some timing issues. The stock dropped 15%, but if you look out to FY24, their earnings look a lot better. After some of these legacy contracts roll off, the rhetoric around this stock will change. It'll change from being so universally negative to being a company that's at the base of this decarbonisation thematic that they're all talking about now, Matthew. So AGL is a stock we've bought recently.
Matthew Kidman: So the gaslight's still on?
James Gerrish: Hopefully.
Medibank Private (ASX: MPL)
Matthew Kidman: What about you, Blake? Something you've got that you've added to the portfolio - it could have been something that's done quite well or something that you think the market's underappreciated. What's one you picked out from the recent reporting season?
Blake Henricks: One we've added to the portfolio is Medibank Private. So it is boring...
Matthew Kidman: And it's had problems. For a boring stock, it's had some problems.
Blake Henricks: It had some problems in cyber, but I think what the results showed was that these problems have been well baked in and are probably going to be quite short in duration. And the reason we know that is because, through the period since they had the cyber attack, they lost 0.7% of their customer base, so less than 1%. And interestingly, the high-frequency data in February revealed they went back to net additions in the Medibank business. So where we feel pretty confident that this cybersecurity is going to be a one-off. We saw it with Optus as well, they've bounced right back. And we love boring businesses at the moment. It's very tough out there and that's one we like a lot.
Matthew Kidman: So the health plans are in. There are some buys from a very difficult reporting season. If you enjoyed that show as much as me, give it a thumbs up. And don't forget to subscribe to the Livewire Market's YouTube channel where there is just loads of great content.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Featuring
Blake Henricks,
Firetrail Investments
Deputy Managing Director at Firetrail Investments as well as Portfolio Manager for the Firetrail High Conviction Fund. Blake’s primary sector responsibilities are Consumer, Oil and REITs. 16+ years’ experience investing in equity markets
........
Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.
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Livewire Markets
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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