Buy Hold Sell: 3 stocks that smashed expectations (and 2 the market missed)
The S&P/ASX 200 has lifted nearly 5% in February after what was irrefutably a disastrous start to 2022. Perhaps it's partly because so many of our local legends have smashed expectations, helping to drive the benchmark higher.
Think financial administration big-cap Computershare, which saw a surprise 7% increase to its FY guidance thanks to its newly acquired Corporate Trust business. Or real estate juggernaut REA Group, which reported a 37% year-on-year increase in revenue, but has since seen its share price fall even further.
And don't forget furniture favourite Nick Scali, which beat Citi expectations after reporting net profit after tax up a whopping 75% compared to the first half of 2020 (but down 6.6% compared to 1H21). Its order book now represents 85% of its second-half sales forecasts. Let's hope they can deliver.
So in this episode, Livewire's James Marlay was joined in the studio for the first time this year by Shane Fitzgerald from Monash Investors and John Lockton from WILSONS for their analysis of these three result-smashing stocks.
Plus, they also name a company that released a stellar first-half earnings result that was underappreciated by the market so you can add it to your watch list.
Note: This episode of Buy Hold Sell was shot on Wednesday 16th February 2022. You can watch the video, listen to the podcast or read an edited transcript below.
James Marlay: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay, and I'm joined by Shane Fitzgerald from Monash Investors and John Lockton from WILSONS. We are in the thick of reporting season and the mood is a little bit dour, but not too bad, it's slightly improving. We're coming out of lockdown. And today we're going to be talking about a few stocks that absolutely crushed expectations. And our guests are going to talk about a few that are flying under the radar.
But Shane, I'm going to start with you. Computershare. It had a great result. Is it a buy, hold or sell?
Computershare (ASX: CPU)
Shane Fitzgerald (BUY): It's a buy for us. Computershare is a great business, a great franchise, but the real interest in the stock at the moment is its exposure to interest rates. The upside surprise came from the Corporate Trust acquisition they did, and the level of growth that that business put on, just from the simple increase in interest rates that we have already seen, was pretty impressive, so there's more of that to come. It's a buy for us.
James Marlay: John, are you a buyer on Computershare? Do you agree with Shane's views?
John Lockton (BUY): We're a buyer of that story. I think it's got the cyclical benefit at the moment with interest rate leverage. It's also got the longer-term structural theme on the trend of outsourcing. So it's a buy.
Nick Scali (ASX: NCK)
James Marlay: Nick Scali, it keeps defying expectations. I read an interesting stat that 85% of its second-half sales are on order and need to be delivered, which obviously puts a bit of pressure on the supply chain. Is it a buy, hold or sell for Nick Scali?
John Lockton (HOLD): It's a hold for us. It's had a phenomenal time over the COVID period, done phenomenally well, and we just worry a little bit that that earnings momentum won't be there in 2023.
James Marlay: Shane, Nick Scali's much loved in the small-cap sector that you guys surround yourselves in. Is it a buy, hold or sell?
Shane Fitzgerald (HOLD): It's a hold for us as well. Look, everything that can go right for this business at the moment is going right. The housing market is just crazy strong, and also because people are not going on holidays their spending patterns have changed. My wife has changed all the furniture in the household. I'm not joking. New lounges, everything! So the operating environment doesn't get much better than it is right now. Why is it not a sell? Because its valuation is pretty modest in terms of the multiple it is on - it's priced that these expectations are going to come off.
James Marlay: Well, Shane. It sounds like you might need a bigger house for all of those new couches your wife's been buying.
Shane Fitzgerald: I need a new garage because that's where all the old furniture is. My car's on the street.
REA Group (ASX: REA)
James Marlay: REA Group, another big stock that delivered a good result. Is it a buy, hold or a sell?
Shane Fitzgerald (HOLD): That's a hold for us as well, mainly on valuation grounds. Great business, but once again the macro environment for it at the moment is about as good as it's going to get, but it's a hold on valuation grounds.
James Marlay: I called my real estate agent today to ask him about the rental market. In his own words, he said, "It's going nuts." Buy, hold or sell on REA Group?
John Lockton (BUY): Through the near term, we would be a buy on this stock. It does have the issue with higher interest rates and valuation, but we think a good chunk of that's probably in the share price, which has fallen over the last quarter or so. Its Aussie story is going well, and it's also got an improving global story too. So looking through the short term noise, we're a buyer of REA.
2 results the market missed
James Marlay: John, those were a couple of stocks that really did crush expectations, but what's the stock that you thought delivered a great result but was just overlooked by the market or didn't get the response that you were hoping for?
News Corporation (ASX: NWS)
John Lockton: I'd flag News Corp. Again, another quarterly beat. It's done almost two years of quarterly beats, powered by the US advertising recovery as businesses need to spend to drive the top line. And News Corp has a great funnel to collect that extra advertising dollar. I think more importantly, what the market's missing is this business is worth more than the sum of its parts in terms of the current share price. There's the potential that they reconfigure their asset base. And we think that, ironically, even selling assets would highlight just how strong some of those core properties are within News, and you could see a materially higher share price than where we are at the moment.
EML Payments (ASX: EML)
James Marlay: Okay. Shane, have you got a stock that delivered what you thought was a good result, but the market yawned at?
Shane Fitzgerald: Yes today, EML. I thought EML had a good result today. It was in line with market expectations. It was in line with company guidance and its stock got sold off 10% at one point today, which I thought was crazy. When you look at EML, it's had a rough time the last nine months due to regulatory intervention in Ireland, the COVID impact in their gifts and incentive business. But underneath it, what you see in EML is its earnings in the gifts and incentive business has at least $10 million in benefit to come through when malls reopen again fully.
A 1% increase in interest rates at $15 million EBIT. How big is that? That's a 20% increase, right? So there's plenty of earnings growth in EML, and the real kicker here was this company did 20% top-line revenue growth when it was constrained on growth because of the regulatory intervention. Once they've got the wind behind their sails, the growth rate in this business will be quite impressive. We think it looks fantastic at moment.
James Marlay: Well, there's a lot of news that comes out during reporting season, but not all of it gets priced in straight away. I hope you found a few ideas from that show of Buy Hold Sell. And remember if you did enjoy it, subscribe to us on YouTube. We've got new videos coming out every week.
Which stellar 1H22 earnings result do you think the market missed?
Which company do you think released a stellar earnings report this February that was underappreciated by the market? Let us know 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.