Welcome to our inaugural Buy Hold Sell episode recorded on Zoom! With COVID-19 effectively cancelling the economy, generating cash flow is of utmost importance to a company's survival.
As such, we're brought together Steve Johnson of Forager Funds and Ben McGarry from Totus Capital to discuss stocks positioned to be either cash earners or cash burners in a cycle that'll likely be marked by Australia's first recession in nearly three decades.
The companies up for debate are 1) National Australia Bank, whose share price recently fell to 1996 lows, 2) Cochlear, hit by a triple whammy of COVID-19, an adverse court ruling, and the need to raise capital and 3) Xero, which is facing a fall in subscriptions as businesses close their doors. Steve and Ben also share 2 small-cap ideas they reckon will survive and thrive on the other side of the crisis.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 25 March 2020.
James Marlay: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name's James Marlay. I'm the founder of Livewire and I'm joined by Steve Johnson from Forager Funds and Ben McGarry from Totus Capital.
These two gentlemen are winners of the Top Short Picker in the case of Ben McGarry and the Top Long Idea for Steve from our recent Buy Hold Sell awards, so we've got some champions stock pickers on the call at a very important time. Looking at stocks, cash earners or even cash burners. You want to own some, you don't want to own the others.
Steve, I'm going to kick it off with you. Could be a proxy for all the banks, but National Australia Bank had a rough time. Buy, hold, or sell?
1. National Australia Bank (ASX:NAB)
Steve Johnson (Sell): I'm saying sell here, James, but not because of the current... Well, partly because the current environment we're in. But our experience with overseas banks is zero interest rate environments are very bad for bank profitability. You're going to see lower net interest margins. I think we're going to see lower rates for a very long period of time and that is not going to be good for the banking sector. I don't think there are liquidity issues though in the current environment.
James Marlay: Okay. Ben, buy, hold, or sell on NAB? It's gone from bad to worse.
Ben McGarry (Sell): I think it's a sell. I'm not a banks expert but I think about it simplistically. Their leverage plays on the economy which is going backwards fast at the moment. Look, the government's stepping in with some good support there. Maybe from a micro, bottom-up perspective, there's some things to be positive about on the banks. But, I think, in this market people are going to sell first and ask questions later, and overseas banks in places like Europe have been a disaster in a zero interest rate, QE-type environments. So, sell for us.
2. Cochlear (ASX:COH)
James Marlay: Cochlear, it's out in the market today with a massive capital raising. Buy, hold, or sell?
Steve Johnson (Buy): Buy. Buy the capital raising anyway. I think it's a nice discount. You've got a U.S. dollar earning business here. Some short-term cashflow issues over the next six to 12 months. But I like the business and you're buying it at a fairly attractive price.
James Marlay: Ben, capital raising out today. Do you like it? Buy, hold, or sell?
Ben McGarry (Buy): We'd buy it in the raising as well. It's always looked a bit expensive and had some earnings quality issues, but I think the board has done the right thing here. If you're going to panic, panic early, and they're getting a big bit of cash nice and early, which should see them through. So, that's a buy for us.
3. Xero Limited (ASX:XRO)
James Marlay: Okay. Ben, I'm going to stay with you on this one. I know it's a stock you guys have owned. Xero, cloud-based, well-positioned. Buy, hold, or sell?
Ben McGarry (Buy): Well we still own it, so I suppose it's a buy. A little bit less conviction. I think cutting your accounting software would be one of the last things you would do as a business. But I think we will see that the small business end of the market hit relatively hard. And Xero had an amazingly strong half last half, so they're starting a cycle, tougher comps. So it's a buy, but not in big size. I'd start averaging in.
James Marlay: Okay. Steve, Xero. It's one of the few WAX stocks that's held up okay. Buy, hold, or sell?
Steve Johnson (Hold): I'd say hold, James. I love this business and I'm still kicking myself for not owning it over the past few years and maybe look back at this as one of those chances to say, "Well you've got a chance again." But it has held up reasonably well and I think that there are lots of interesting alternatives out there at the moment.
4. Macmahon Mining Services (MAH:ASX)
James Marlay: Steve, let's stay with you. I've asked you to pitch us an idea, something that's going to produce some sustainable cashflow through this cycle. You have an idea for us?
Steve Johnson (Buy): Yeah. Macmahon mining services. They play a fairly small number here of long-term contracts on minings that are well down the cost curve and gold, which in Aussie dollars is very profitable at the moment, coal, things that I think the world is going to need. So, you're paying five times earnings for a business that I think is going to grow its earnings over time, and is not facing the same uncertainty that other businesses are in this environment.
5. Objective Corporation Limited (OCL:ASX)
James Marlay: Okay. That's one you know well. Thanks, Steve. Ben, have you got an idea? You're going to give us something that has the cashflow to make it through the cycle, or maybe something you don't think can make it?
Ben McGarry (Buy): Yeah, well, I'll go for a buy this time. Objective Corp has been a stock we've liked for some time. Really well-managed, recurring income, software business. It sells database management and information management software into the government. A net cash balance sheet. They've been buyers of stock. There's a buyback in action. I think that's incredibly well placed to survive and thrive and potentially pick off some competition through this volatility. So, Objective Corp, we own and would look to add through this period.
James Marlay: Okay. Well, it's not all doom and gloom folks. You just got to keep an eye on those stocks that can keep earning through this cycle.
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- For further ideas, it may be timely to revisit Steve's 'Recession proof, property proof' ASX portfolio that he designed for Livewire subscribers
- In Totus: ‘Cash Earners’ vs 'Cash Burners’, Ben discusses how you can find an investment style that can perform regardless of what is going on in the market
Very interesting commentary on market darling Cochlear, however,when you read about the court case in US where the company is facing costs and penalties almost equal to the capital raising you have to ask hmmmm. Plus they have cut the next dividend which doesn’t sound like a company I would want to invest in. A medical company that has all its eggs in the one basket which for me is some risk now.
Would be interested on your defensive 12 update you selected from 2019 in view of the virus and current circumstances. Very different times