Throughout Buy Hold Sell, fundies have generally agreed that the best businesses to own in the current environment are those offering highly scalable technology solutions; essential healthcare products; defensive dividend yields and commodities.
In this episode we cover a delectable cross-section of these companies: two of which are Blake Henricks from Firetrail Investments' favourites: Newcrest Mining, the gold giant whose outlook is underappreciated; and Telstra, offering a 4.5% dividend yield that he says will increase. For Jun Bei Liu of Tribeca, the counter is Zip Co, which is giving Afterpay a red-hot run for its money, and Domain, a digital company springing into growth.
Despite bringing their favourites, Blake and Jun Bei don’t necessarily agree with each other’s choices. But they do settle on one thing: selling CSL, Livewire readers’ most-tipped big cap for 2020. Find out why below.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 15 July 2020.
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James Marlay: Welcome to Buy Hotel brought to you by Livewire Markets. My name is James Marlay, and I'm joined by Jun Bei Liu from Tribeca and Blake Henricks from Firetrail. And we're going to be talking about a few of their favourites and a couple of exclusions.
Newcrest Mining (ASX:NCM)
James Marlay: Blake, let's start with you, Newcrest Mining, big, shiny, a little bit boring. Buy, hold, or sell?
Blake Henricks (Buy): It's not boring, James. I take offence to that. It's a buy. The reasons it's a buy is current expectations are that production is going to decline over the next five years. The market is seeing it as a two-trick pony, which is Lahiri and Katiya. We actually think they've got three outstanding growth projects. Two of them are Brownfield in Canada and Australia, high free cash flow generation. One of the best miners globally. Newcrest is a buy.
James Marlay: Gold price is up 19% year-to-date. It's been a great place to be. Buy, hold or sell on Newcrest?
Jun Bei Liu (Hold):: Newcrest is a hold for me. I agree with you on gold. We do prefer the others such as Saracen mainly for the consistency in terms of delivery. So they consistently delivered for seven years without disappointment. You pay a little bit more for the company like Saracen, but we do prefer that one instead. But I agree with Blake that Newcrest is underperformed at the peers. It's pretty cheap relative to the others. And potentially there's a bit of upside in terms of relative to expectations now heading into the reporting season.
James Marlay: Okay. Telstra? 4%+ dividend yield, been investing in 5G. Buy hold, or sell?
Jun Bei Liu (Hold): I'll put on a hold. I agree. It's dividend yield certainly is very defensive, especially in the face of banks and everyone else cutting dividends. But to me, it's a company whose earnings is going backwards. I think for me to go out and buy in a bullish way would only happen when competition really stabilises. Now in early signs, Optus is not really going to compete aggressively and Telstra's putting up their prices. But now the newly formed venture, Vodafone and TPG, even though they have a lot of debt, they might have to hold cash, but they just released a new plan that's cheaper than everyone else. So there is competition there and it will take a while longer for me to feel comfortable with it.
James Marlay: Okay. Blake, Telstra. Buy, hold, or sell? It's been around a while. We've all been on our phones using the data.
Blake Henricks (Buy): Telstra's a buy. And the reason it's a buy is 10 years ago, we were wondering how they were going to get rid of their declining fixed revenues. That's actually happened now. The NBN bought their network; 80% of the valuation today is mobile in the infrastructure business. If you take the mobile business, there has been a massive price war. It's been very, very damaging. In fact, we think Optus is close to breakeven once you strip out the NBN one-off receipts. So you've got a competitor on their knees. As JB said, prices are starting to lift. There's a long way to go in the mobile repair on the earnings. The second thing is the infrastructure. They carved out the infrastructure business to show the quality of this business. There's optionality around potential NBN privatisation. That 4.5% dividend yield is probably going to grow over the medium term. It's solid. No one wants the banks. Telstra is a buy.
Zip Co (ASX:Z1P)
James Marlay: Okay. Blake, buy now, pay later has been all the rage. Zip. Buy, hold, or sell?
Blake Henricks (Sell): Zip's a sell. When you think about these growing markets, it generally is winner takes all. Afterpay is probably going to be the one. And the other thing we've done is we actually took all the analyst expectations for all the buy now, pay laters and what the TAM (total addressable market) is, and I'll tell you what, this is going to be a huge market if they're all right. We don't think they are. It's a sell.
James Marlay: Jun Bei, Zip Co's been the laggard in the buy now, pay later space. It's only gone up 100% this year. Buy, hold, or sell?
Jun Bei Liu (Buy): It's absolutely a buy for me. Well in many parts of the technology space, if the market is small enough, it's winner that takes all, but this is an enormous market. In the U.S., a couple of BNPL players have now, with all that investment, only penetrated 1% of the U.S. Market; 8% in Australia versus 1% in the U.S. Now Zip Co just bought into that market. And now Zip has exposure to eight different markets. Now, there's Canada, there's U.K. There's so many markets that could potentially be coming online. It's enormous now. And this market is real because we've seen Silicon Valley investors putting money in Zip. We've seen Tencent putting money with Afterpay. And potentially there will be more further M&A and activity picking up because they are taking notice that this is a real market.
So today Afterpay said they now can be sold through Google Pay, Apple Pay, all of that. QuadPay, which has been acquired by Zip, is already on there. So, the market is enormous and they bought a great platform onto it. And in terms of market cap, Afterpay at $18 billion, Zip, $2.5 billion. And Afterpay has 10 million customers. Zip has now, including the acquisition, over three, close to four million customers. So Zip has a long runway to go. By then probably Afterpay will be in the top five Australian companies, but Zip certainly will catch up quite a lot on that basis.
Domain Group Holdings (ASX:DHG)
James Marlay: Well, the Australians love anything more than buy now, pay later, it's property. Domain. Buy, hold or sell?
Jun Bei Liu (Buy): It's a buy for me. Domain actually represents a very interesting opportunity. It's highly leveraged to property listing numbers. Now property listing numbers, believe or not, actually has been negative for the last couple of years because properties just don't list long enough. They just sell like that. And in January, we actually are finally seeing that listing numbers started picking up quite strongly. And just before the lockdown took place, of course, everything collapsed. But since then we have seen this huge pent up demand. And so in the latest numbers, we're seeing the listing number now up 10%. Even in winter, people are selling their houses, even in winter, the minute a lockdown was lifted. Now investors have a unique opportunity at this point because the second lockdown in Victoria is seeing Domain's share price come off a little bit, but it will get reopened. And now this is a seasonally low period. So when spring comes, the earnings growth is enormous. Growth is much faster than REA and only one-eighth of the market cap of REA. So that's a good opportunity there.
James Marlay: Okay. Blake, Domain. Can you get us excited as June Bei?
Blake Henricks (Hold): I can't get as excited as Jun Bei on any particular day, but not on this one, either. It's a hold for me. Really solid business operating in a duopoly. This penetration we think is going to keep growing over time. But the listings are still the big question mark for us. Maybe if stamp duty goes, we might see a bit of a pickup in listings, less friction, but for now, it's a hold for us.
James Marlay: Okay. We've got a couple of stocks that you both like. Can you tell me something you don't like right now?
Blake Henricks (Sell): Well, I'd say we are funding some of these purchases through something like a CSL where great business, but there's probably not the tailwinds that it's had over the last few years in the next little while. So that's a good funder for us.
CSL (ASX:CSL) & Fisher & Paykel (ASX:FPH)
James Marlay: Okay. Jun Bei, you got something that you are using to fund your Zip shares?
Jun Bei Liu (Sell): He took my stock! I was going to say CSL. We're not going significantly underweight, but CSL, it's done well and it's pretty expensive and its earnings are going to be downgraded. So that's a funder, but of course other things like Fisher and Paykel, we've done very well out of it. And we just feel earnings at over 50 times is a bit too expensive and we're using that fund for other ideas. So that's a sell.
James Marlay: Well, our two guests might not agree on the stocks they love, but they definitely see eye-to-eye on the one to sell.
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- In case you missed it, Blake and Jun Bei also discussed preparing for August reporting season here
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No way will I sell my CSL shares.
Selling CSL has been the death knell for many a fundie over the years.
If the Aussie dollar picks up steam then CSL will see real headwind!!
Yes, lets sell one of the greatest Australian companies ever for something that could possibly fall 50% but will almost certainly not rise 100% in the next 12 months
Great! Z1P is cheap when compared with APT and DHG is cheap when compared with REA... how's about they all are expensive?