Buy Hold Sell: 3 stocks smashing expectations and 2 overlooked winners
As Kurt Vonnegut once wrote, "peculiar travel suggestions are dancing lessons from God.” I don't know quite what he meant either, but what I do know is that, peculiar or not, the market seems ready to believe we're all in a much better place to consider travel and all that comes with it - getting all sparkly for some fine wining and dining, for example - than it has for some time.
After all, online travel agent Webjet (ASX: WEB), jewellery retailer Lovisa (ASX: LOV) and global winemaker Treasury Wine Estates (ASX: TWE) remarkably smashed expectations this reporting season, despite the vigorous headwinds COVID hurled their way.
In this episode of Buy Hold Sell, Centennial Asset Management's Matthew Kidman puts the trio on the chopping block, to see if the fundies are throwing their cash at these stocks as they climb higher.
Aberdeen Standard Investments' Michelle Lopez and Monash Investors' Simon Shields join Matthew in the hot-seat to share their high-conviction views on these reporting season-winners. Plus they each reveal a company they believe has been overlooked by the market and is worthy of your attention.
Note: You can watch, read or listen to the discussion below. This episode was filmed on 3 March 2021.
Matthew Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Matthew Kidman and we are going back to look at some of the stocks that performed well during the earnings reporting season. And to discuss this, we've got Michelle Lopez from Aberdeen Standard and Simon Shields, from Monash Investors.
Simon, I looked at the Webjet result, and there were arrows everywhere going down, down, down. But there was a lot of cash on the balance sheet, looks like it's gonna survive. Buy, hold or sell?
Simon Shields (BUY): Well it was actually a beat versus expectations, so it's a buy for us. The cash burn was moderating. Everyone liked the optimistic outlook, even though there wasn't guidance given. And what we do know about these travel stocks, the analysts when you're coming out of a travel downturn, is they generally underestimate that consumer response. And so the market is starting to anticipate that, still not fully doing it, we think it's a buy.
Matthew Kidman: It's come a long way. But I've got to say I booked my first trip last week. Webjet, buy, hold or sell?
Michelle Lopez (HOLD): It's a hold at these levels and I'll tell you why. I agree this is a solid business actually. And it is leveraged to the reopening of travel and particularly the leisure part of the market, which is where we're more optimistic on. However for us, if you take into account the highly diluted equity raise that they did last year, which is 150% of shares on issue and also could be a further $100 million euro convertible notes that they did in June, what you've got now is a share price, that's equivalent to say $5, pre-COVID. So that recovery has been factored in. And in fact, there's very little risk being attributed to the recovery pathway, which is not a given, there is still a lot of uncertainty about how this plays out. So from a valuation perspective, it's a hold.
Matthew Kidman: Okay, we're all training ourselves how to socialise again. And when we get out there, we've got to look good. Lovisa, accessories, buy, hold or sell?
Michelle Lopez (HOLD): Look Lovisa had a commendable result. I must admit, it's a hold. Two things: So the business itself has been uncharacteristically resilient, for what is a fashion retailer. We have not invested, there's too much execution risk from a global rollout strategy. And presently the valuation looks very full. So commendable results, strong business model, with good margins for a retailer, but it's in the price. So it's a hold.
Matthew Kidman: It really ripped didn't it, Simon. Buy, hold or sell?
Simon Shields (BUY): It's a buy for us. Yes, it really ripped. It's a stock we've been across for a long time. And I agree with Michelle, to the extent that the rollout is very important. But we're very confident in the rollout. When you look at the penetration in Australia and look at the lack of penetration in some of the other markets where it's growing very quickly. And the fact that it can get its hands on quite a large store network very quickly like it did in Europe, these opportunities do come up from time to time. Every time it opens up a new store, the payback is about a year or less. So it's a tremendous business, management's first-class, excellent execution. And when we do our DCF, we get lots and lots of upside.
Treasury Wine Estates (ASX:TWE)
Matthew Kidman: Okay, Treasury Wines, knocked for six with the Chinese tariffs, should we be relaxing out on the Grange or throwing it in the bin. Buy, hold or sell?
Simon Shields (SELL): That's a sell for me. It was a positive surprise on the result because they were able to redirect some of the sales that would have otherwise gone to China to elsewhere. But our big problem with this stock is the trend in the United States towards lower price wines. And that's our biggest concern over the business. That's why we got out of it originally, and for us, it's still a sell.
Matthew Kidman: Michelle, Treasury Wines, some great products. China doesn't want it anymore. Buy, hold or sell?
Michelle Lopez (SELL): I'm agreeing with Simon on this one, it's a sell. I think the market is really underestimating what this China situation means for them and the earnings gap that is now coming their way. They've got to redirect a lot of wine to other regions and the US is one of those regions that they're going to do this. And that's not where the market is at. So I think that risk is not properly priced in. And there's management change that they're working through. It's not just the new CEO, it's the whole level of management below him as well. So there's very strong execution risk on that one.
Matthew Kidman: Now, Michelle, is this something that didn't get any love from the market that was overlooked? We need to take out our pens here because you're going to tell us something that we've missed.
Michelle Lopez (BUY): The one that stands out for me is Nanosonics. I clearly saw something in that result that the market did not, because it was off 8% on the day but has since recovered. So Nanosonics, the core product that they have is high-level disinfection in hospitals and clinics around the world. They dominate Australia and New Zealand, they've got 50% US share, and they're about to ramp up in EMEA. And to give you context, the amount of units that they sold in the second quarter of 21, was higher than the amount that they sold in third quarter of 20, which was pre-COVID.
That means two things: First, it's a real recovery, especially given limited access to hospitals. But secondly, it poses them well for the consumable part of the business and consumables is their recurring earnings. And that's 70% of the business. And then, their balance sheet is rock solid, $90 million of cash on the balance sheet, they've got a second product coming out to the market, which has got an addressable market as large as their first.
So it was sold off, but I think what's more interesting is it's off 30% since the beginning of the year, and for me, what I'm seeing now is that second product, which is still relatively unknown, isn't factored in now, as much as it was. So it was quite an interesting opportunity to buy.
People Infrastructure (ASX:PPE)
Matthew Kidman: Okay, Simon, you've got to beat that, something better than Nanosonics that all of us haven't worked out yet.
Simon Shields (BUY): People Infrastructure. So People Infrastructure is a workforce management company. It's got its own platform, so there's a bit of digitalization there, it white labels for others. And it's in some sectors that are pretty hot if you like. So home care, for the aged or people through the MDIS, as well as resources, as well as some tech. Now, it had a result and beat expectations. But what the market didn't like was that the CEO was leaving.
Simon Shields (BUY): Exactly, he had only just started as the CEO, but he'd been at the company for like 17 years. It didn't really suit him being the CEO. So off he went and somebody else will come in. We think, even as late as a couple of days ago, the Aged Care announcements from the government on how they're going to be going more emphasis towards in-home care for the aged, that's going to be pushing things in the right direction for PPE. On 13x two year PE with double-digit growth. It's a bargain.
Matthew Kidman: Well, Simon did it last year, he disagreed with everything the other guests said. He's done it again, there's no lunch for you two.
Questions Without Notice
Matthew Kidman: Questions Without Notice. And we're going to get them from the readers this time. I want to start with you, Simon, you're on a roll. Robert writes into us and says:
Service Stream (ASX:SSM) didn't have a bad result. But the market has just punished it. Can you give us an explanation why?
Simon Shields: Well, Robert, Service Stream did have a bad result, unfortunately. It downgraded last year, it disappointed in this results. You might call it a solid result, but it's clearly losing market share, you can see in the margin and in the revenue. The NBN share is losing, it seems to be losing share elsewhere. For professional managers, what we saw was that the management's getting harder to talk to. It's always a sign when they're pulling their heads in that they've got something that they just don't want to talk to you about. You have to read between the lines. We're out of it. And we don't think we're going to be going back here until we can see this company turning around.
Matthew Kidman: Okay, another Question Without Notice, and we'll go to you, Michelle. Simone has written:
What company has been bid up strongly since the result, but has probably been bought up too much?
Michelle Lopez: So for me, I think Westpac (ASX:WBC) is one of those stocks that have run probably a bit too hard. And again, taking a longer-term view, the banks in general, yes, they're in a sweet spot at the moment, but the growth is structurally challenged. One of the clear things that came out of reporting season was the release of provisions that many of the banks had put through earlier, as a response to COVID. And Westpac was one of the most aggressive banks to release that provision. They released something like $500 million, which was half of the economic overlay. That was the quarterly result that came through, so there was actually no detail as to the underlying business itself and the operating conditions, whether they've won share, whether you know what's going on from an earnings perspective. That's my one, good question Simone.
Matthew Kidman: If you enjoyed that episode, please subscribe to the Livewire YouTube channel.
What stock do you think has been overlooked by the market?
Michelle pitched Nanosonics, Simon pitched People Infrastructure. But we would love to know what you think! Let us know what Aussie-listed company you think has been overlooked by the market in the comments section below.
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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.