Value stocks have registered a long-absent pulse recently, with a strong swing toward the theme in the US through September, and closer to home, several value managers have seen a turnaround in their performance. With value having been out of favour for so long, it’s easy to see why some disciples are getting excited for a possible return to form.
When looking at cheap stocks at the bigger end of the market, which is more efficiently priced, it's natural to ask: ‘Is this cheap stock good value, or is it cheap for good reason’? We screened the ASX50 for stocks with a PE well below the market average, and asked Daniel Moore from Investors Mutual and John Ayoub from Wilson Asset Management for their thoughts on whether these five cheap-looking large caps are value traps or whether they are the real thing.
James Marlay: Welcome to Buy, Hold, Sell. Today, we're talking about cheap large caps and to help me talk about this topic, I've got John Ayoub from Wilson Asset Management and Daniel Moore from Investors Mutual. Daniel, let's start with you. Computershare, buy, hold or sell?
Daniel Moore: It's a sell for us. It's a good quality business, but if you look at a number of their businesses, whether it's corporate registry, corporate actions or mortgage servicing, falling interest rates are bad for all those businesses and if you look at the outlook for those divisions over the next three years, it's hard to see any earnings growth.
James Marlay: Okay. It's on a really low PE, a little bit of yield, buy, hold or sell?
John Ayoub: It's a hold for me, for very similar reasons to Daniel, but I think they've been very cost-disciplined and they've still got some time to run their cost-out programme, so it saves them for the time being.
James Marlay: Okay. BHP Billiton, it's been a great time for the miners, iron ore is at high levels, they'll be paying out some dividends, still trading a bit less than the market, buy, hold or sell?
John Ayoub: We all know what they do. For me, it's a buy. I think global stimulus will come back in a big way given the turmoil that we're facing, 12 times, great yield, it's a buy.
James Marlay: Okay. BHP Billiton, you've got a view?
Daniel Moore: Totally different, we're a sell. If you look at base metals, nearly all base metals have fallen with the trade wars. Iron ore has been pretty stubborn, it's held up around $90. We definitely think there's downside. We think that's an unsustainably high price and that's 50% of their profits so we see supply increasing in the short-term as Brazil comes back onto the market and medium-term from other geographies.
James Marlay: Okay. Brambles, global logistics, it's been under pressure. It's looking pretty cheap, but it's faced a number of headwinds, buy, hold or sell?
Daniel Moore: It's a hold for us. It's a good quality business, they've got strong market positions in nearly every geography, but the valuation is a bit toppy for us. It's above 20 times. We'd love to buy it cheaper.
James Marlay: Okay. Brambles, buy, hold or sell, John?
John Ayoub: It's a buy for me. Buy back in place, supporting the share price, operationally things are improving, a lot of the cost headwinds that are abating. If they can sort out a couple of the contractor issues with its key customers that the market is concerned about, I think a great rating is in the cards.
James Marlay: Okay. It's a buy. Origin energy, it's been cheap and it had a few issues for a while. It's been a bit of one that people have been saying, "This could be a turnaround story." Buy, hold or sell?
John Ayoub: It's a hold. I can't see a catalyst right now. It's got a great free cashflow yield of 10%, good defensive attributes, but I can't see what's going to re-rate it now, so it's a hold.
James Marlay: Okay. Have you got a buy, hold or sell on Origin?
Daniel Moore: We're the same. We're a hold as well. The energy markets business has quite a good flexible power generation portfolio, which is good in a new renewables world and the AP LNG business is producing really good cash right now, but we have some concerns in the medium-term about LNG pricing, so it's a hold.
James Marlay: Okay. Last one for today, the big four banks. NAB has had a good year, up 24% or so. Buy, hold or sell?
Daniel Moore: We're underweight banks, but NAB is our preferred, so it's a buy for us. We're quite excited about the new CEO that's going to come in, Ross McEwan. He's got a great reputation from RBS and they've taken their medicine on the dividend, so they've cut their dividend, it's still around 6% yield and they've got $1 billion of cost-out that are going to come out over the next two to three years.
James Marlay: Yeah. Interesting. John, is NAB going to make the cut for you?
John Ayoub: It's a hold. It is the best of the banks for us as well, but we struggle to see banks re-rating, given the benign credit growth margin pressure and we will wait for Ross McEwan's strategy to emerge before we go to buy on that one.
James Marlay: Okay. Well, just because they're cheap doesn't mean they're a buy. If things are looking cheap, it's usually for a reason.
No offence James, but when is Matthew coming back? Haven't seen him for a while.
Hi Mark, no offence taken! Matthew is clearly in a league of his own when it comes to hosting. He does have a day job as a fund manager but we'll have him back on shortly. Cheers
Geeee James - as they say "everyone's a critic" (haha). Keep up the good work amongst the LVWR team !