Buy Hold Sell: 4 stocks exposed to the housing cycle

Australians' love affair with residential property is on the rocks. Data from Corelogic shows an aggregate fall of around 3% for all dwellings across the 5 capital cities in the last year. Sydney (-5%) has been the most heavily affected followed by Perth (-2%) and Melbourne (-0.6%). So how does this flow through to listed companies and stocks exposed to real estate activity? In this episode of Buy Hold Sell Matthew Kidman asks Charlie Aitken from AIM Funds and Ben Mcgarry from Totus for their views on 4 stocks that could be feeling the impact of a cooling property market. Tune in or access the transcript as they share their views on Nick Scali, REA Group, Wesfarmers and Boral. 

Matthew Kidman:         Welcome to Buy, Hold, Sell. My name's Matthew Kidman, and today we're joined by Ben McGarry from Totus and Charlie Aitken from AIM Funds. We're talking about Australia's biggest asset class, residential property and the current downturn. First stock, Ben, Nick Scali sells furniture to that mid-range market. Been a cracker over the years. Buy, hold, or sell?

Nick Scali (ASX: NCK)

Ben McGarry: It's a hold. We've actually owned Nick Scali in the past. It's a great business. Got a roll-out story there, but it is exposed to, if and when housing slows, turnover in housing drives people to upgrade the couch. The other red flag there is that Anthony Scali, who knows the business better than anyone, has sold down part of his stake recently, so for us, it's too hard here, a hold.

Matthew Kidman: Charlie, do you follow the genius, or do you buck the trend and buy Nick Scali?

Charlie Aitken: I agree with Ben on that one. I think it's a very well-run business. It's a bit of niche business. It's got a bit of a specialty in what it sells. I think it does it very, very well, but as Ben said, the founder selling down or heir of the founder selling down, there's a few headwinds there. To me, again, sort of weak hold, but acknowledge it's a good business.

Matthew Kidman: Let's go to the big end of town. REA, it's dominated its space for a couple of decades now. Buy, hold, or sell?

REA (ASX: REA)

Charlie Aitken: That's a hold for me. I mean, it's very tempting to want to short it as a play on. Real estate volumes are collapsing, but their margins are expanding. They're doing a good job. They've moved into other areas. The shorts have been killed in this for a long time, and there's always a chance that News Corp mops up the minorities, and that's the biggest worry you have in a short, that you have a takeover. They're at 63% or so. So for me, it's a great business, great ROE, but probably not the way to play the downturn in the residential property market.

Matthew Kidman: It's got a lot of levers, Ben, and a lot of shorters have suffered on the back of it. Buy, hold, or sell REA?

Ben McGarry: If we had to own one stock that's exposed to housing through a downturn, it's REA. So, that's a buy for us. Volumes have been weak, but they've always been able to offset it with the price lever and increasingly selling related products like financial services products to their clients. So, it's a buy for us.

Matthew Kidman: Even bigger end of town, Wesfarmers. They've got Coles. They've got Bunnings. They've got consumers everywhere that rely on their housing. Buy, hold, or sell?

Westfarmers (ASX: WES)

Ben McGarry: It's a sell for us. Stock's up 25% in the last three months. We think that's more than priced in the good work of their new management team, which has been exiting underperforming businesses. You've got a number of their businesses that have benefited from a strong East Coast housing market. That will be a headwind for them in future years. So, it's a sell.

Matthew Kidman: It's been on a tear, Charlie.

Ben McGarry: It has been, quite surprising, actually.

Matthew Kidman: Big end of the market. It's been lifting.

Charlie Aitken: For a top 15 stock, just announcing a demerger gets you a 25% rerating. I think that's unsustainable. I think they're spinning out Bunnings at peak cycle. It'll be peak Bunnings right now. As Ben says, if we all know when house prices are rising, everyone puts a lick of paint on this and does a little bit of that. We're all do-it-yourself upgraders, aren't we, when the house price's rising? That all changes. That is changing now. So, I actually think as much as the market thinks Bunnings is going to be worth more without Coles, I actually think Coles could be worth more without Bunnings. It could be the other way around. The spinoff of Coles could be very, very cheap, and Bunnings could be very expensive. So, I'm a seller where they are now. I think it's an amazing price they've got to for just announcing a demerger. I think there's genuine downside risk in that stock.

Matthew Kidman: Let's go to the coalface, building materials. Boral, buy, hold, or sell?

Boral (ASX: BLD)

Charlie Aitken: I'm still a bit dubious. Boral's had a big bounce in recent times on a slightly better than expected result. The jury's still out on this Headwaters acquisition in the US. I think that is a huge bet for the company at an interesting time in the US housing cycle, so I think it's a hold. I'm not certain on Boral. I think if I wanted to play a US housing cycle, there's many other pure players I can buy in America. This is a bit of a hodgepodge of Australian infrastructure exposure and US exposure. For me, it's a hold.

Ben McGarry: It's a sell for me. I think the market fell in love with it for the East Coast infrastructure exposure it's got, and then it's diluted that with the Headwaters acquisition. The early signs from Headwaters have all been bad. The Aussie large cap companies making transformative acquisitions off-shore, the track record isn't great. A slow-down in housing will be another headwind for them. Stock has had a pop after the result, so it's a sell for us.

Matthew Kidman: A housing slowdown? It sounds like the roof is going to cave in. Get out of the house.