Buy Hold Sell

The price action of a company on the day it reports is a strong indicator of where investor expectations were sitting. Strong share price performance on the day of reporting has been shown to continue for months after the result. 

Shares in Resmed, Pinnacle and JB Hi-Fi all spiked on the back of their recent result updates, clearly exceeding market expectations. In this episode of Buy Hold Sell we’ve asked Rachel Cole from NAOS Asset Management and Josh Clark from QVG Capital if they think the recent strength in these stocks will endure. We also asked each of our guests to nominate a stock that they believe the market has overlooked and represents good value today. 

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Transcript:

James Marlay: Welcome to Buy, Hold, Sell. My name's James Marlay, and we're in the thick of reporting season, and everyone knows in reporting season it's all about expectations. Today we're going to talk about a few stocks that beat expectations. Joining me is Josh Clark from QVG and Rachel Cole from NAOS, and we're going to talk about a few stocks and see how they went against expectations. Pinnacle Funds Management, it reported on a down day in the market and popped 7%. Maybe not the best result, but maybe better than expectations. Buy, hold, or sell?

Rachel Cole: Yeah, it was quite bizarre actually. For us it's a sell, we think given very strong equity markets over recent times, mix that with the fact that their fund growth is slowing, it doesn't bode well for the outlook. I think it means that going forward it makes it harder for them to grow as they have done in the past, so for us it's a sell.

James Marlay: Okay. Funds management, you should understand the space pretty well. Buy, hold or sell on Pinnacle?

Josh Clark: You'd hope so. Look, I think Pinnacle's a sell as well. Always reluctant to sell a business where you've got a high quality management team and one of the best distribution teams in the market. They did a great job in the last financial year in terms of fund inflows, but they've definitely slowed into the second half and I'd expect that tougher environment to continue, not least of which would be the fact that a few of their boutiques aren't above their benchmark at the moment. So you've potentially got a bit of reluctance from institutional investors allocating more capital, and you're also a much bigger business now, so growing off that bigger base is much harder. I think Pinnacle's a sell.

James Marlay: Okay. Resmed, it's been a really good, consistent long-term performer. Perhaps shouldn't have been a surprise that it delivered a good result, up a bit on the day. Buy, hold, or sell?

Josh Clark: I think Resmed's a buy. I mean, it's a double-digit grower with really high returns on capital, 20% plus, that I think is sustainable. In in the US, they've done a great job of grabbing further market share and that's continued recently. You're growing the quality of your revenues with the software-as-a-service business that they now have, and then if you continue to see weakness in the Aussie dollar, shareholders will benefit from that. I think Resmed's a buy.

James Marlay: Rachel, have you got a view on Resmed?

Rachel Cole: Yeah, I agree with Josh. I think it's a buy. Very high quality business, they've got a very large addressable market and a very high quality product which is market leading. We believe that they'll continue to be able to grow. Then the other thing that's coming up is their replacement cycle, which should give them a bit of a boost in terms of their growth looking forward. They've been able to deliver time and time again, so we think that that'll continue.

James Marlay: Hard to bet against them.

Rachel Cole: Yeah.

James Marlay: JB Hi-Fi, that's a stock that people have been betting against, and sent the shorters covering with their recent result. Defied the odds in the retail space. Buy, hold, or sell?

Rachel Cole: Yeah, it's a sell for us. They've definitely been proving the shorters wrong, but looking forward I think their margin is a bit unsustainable. If you look at the result, a lot of it was driven by that Good Guys margin, which had a bump. We think that looking forward, we've got more competitive pressure, and particularly in the consumer environment it'll be pretty hard for them to sustain that.

James Marlay: Josh, it is a tough environment for the retailer, for the consumer. Buy, hold or sell on JB Hi-Fi?

Josh Clark: Look, I'm not convinced that the shorters are going to make a lot of money out of this one. I think it's a hold. If you look at, as a case study, if you look at Best Buy in the US, they've done a great job of using their scale and location advantage to fend off Amazon, and that's ultimately been a success story. I think JB Hi-Fi has some of those elements and it should be able to do a similar thing in Australia. Cashflow is fantastic in this business, so you can see a mid-single digit type tailwind to your shareholder return, and it trades on a fair multiple, but beyond that there's not too much to get excited about. So it's a hold for me.

James Marlay: Okay. I've asked both of you to bring along a company, a result that you have taken a look at where you think you might be seeing something the market has missed. Josh, I'll let you tee off.

Josh Clark: I think Cooper Energy is probably one that fits that bill. There's not a huge amount in the portfolio that's reported this early into reporting season, but that was a result that came out. Share price didn't move, the earnings were entirely in line with expectations, but the market's overlooking the quality of the business. You've got a business where the majority of the CapEx is behind them. They've just done $34 million of pretax earnings, which should go to a run rate of more like 180 in the next couple of years as they bring their production online.

Commissioning is very low risk and very near term, so that should be sorted out within the next couple of months, and then you're paying eight times pretax cashflow on, or sorry, pretax earnings I should say, on a business that's got a lot of growth options that aren't quite valued in that eight times. I think Cooper's definitely a buy.

James Marlay: Okay, great. Rachel, have you got one that you think you're seeing something different, where you see something that the market might be missing?

Rachel Cole: Yep, hopefully. My one is Lifestyle Communities. It's actually reported today, it's come off a little bit on the basis that their settlement numbers have slumped into the next year, which is the guidance they've given. However, that's been due to some planning delays and essentially just some part and parcel issues of what they do is getting approvals. We think that that's a near term issue that will wash out, and essentially be down to timing. We think the market's probably focusing too much on that.

We really like the business long term because of its growing annuity revenue stream. Very good management who are well aligned with the business as well. You've got the CEO being the largest shareholder of the business, so we like that stock going forward.

James Marlay: Okay, great. Remember on the day, there'll be lots of movements around the share prices. See if you can look through and find some of those long term winners.


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Comments

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Maureen Ostrowski

I appreciate the comments here.

eric wells

Very interesting, I am a strong supporter of Richard Murray and JBH. Cheers, Eric Wells