Buy Hold Sell: 5 value stocks set to prosper in a bear market

Buy Hold Sell

Livewire Markets

Value stocks have been long forgotten. But during this bear market, will they be remembered by investors and come back into vogue?

In this episode of Buy Hold Sell, Simon Shields from Monash Investors Limited and Anthony Aboud from Perpetual Investments join Matthew Kidman to talk all about the potential resurgence of value stocks and their future prospects. They are: 1) Telstra, an old Australian favourite with potential for a 4-5% yield; 2) JB HI-FI, a retailer who is winning throughout the covid crisis; 3) AP Eagers, the biggest car dealership in Australia, whose stock price has more than halved in the last 12 months. 

Simon and Anthony also reveal two of their own stocks that are both compelling and of good value. 

Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 6 May 2020. 

Access the podcast

Edited Transcript

Matthew Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. I'm Matthew Kidman, and today we are talking about compelling value stocks. They've been forgotten, but maybe, just maybe with this bear market, they're back in vogue. And joining me to talk about these stocks, Simon Shields from Monash and Anthony Aboud from Perpetual.

Let's start with you, Simon. It's an old favourite. Everyone in Australia knows it, Telstra, buy, hold or sell?

Telstra (ASX:TLS)

Simon Shields (Sell): Telstra is a sell. No growth for the next four years, which probably means it's going to go backwards. It's debt's equal to its equity. Its dividend payout is right at the top - 90%, so it's probably going to be coming under pressure on the dues. It's on a 16 times PE, sell.

Matthew Kidman: Anthony, zero interest rates for the foreseeable future, Telstra might give you 4 or 5% yield. Buy, hold or sell?

Anthony Aboud (Buy): Well, I call Telstra a buy. I think that they've done a good job. They cut their dividend a few years back, and they're invested in the 5G network, improving their front-end and back-end systems, et cetera, et cetera. I feel that they've got one thing, which is a scarcity, which is a dividend yield of 5% or more, where the bank's not offering that anymore. I think a little bit of upside comes if they spin off the infrastructure business, InfraCo, which is going to be their business, which the European peers have. And the amount that Australians are willing to pay for infrastructure assets, they'll be able to spin over 15 times versus their six-and-a-half times multiple here.


Matthew Kidman: Okay, let's go to retail. And it's been a cracker during the COVID crisis. JB Hi-Fi, still value though. Buy, hold or sell, Anthony?

Anthony Aboud (Hold): I've got that as a hold. I recognise that they're great retailers. Everyone called their death when CDs and DVDs were not going to be able to be sold through JB Hi-Fi anymore, but they've done a very good job of pivoting. The only issue I’ve got, Amazon, remember them? They will be right in their firing line when they eventually come and dominate Australia.

Matthew Kidman: Okay Simon, it seems like everyone in Australia has visited a JBH, just to fit out their home recently. Buy, hold or sell?

Simon Shields (Hold): It's a hold. Yes, I think it's been a real winner through the whole COVID. It's had great growth, but that growth really starts to slow down as soon as we get through this. It's got a strong balance sheet, but again, I think at the price, 16 times, it’s no good, hold.

AP Eagers (ASX:APE)

Matthew Kidman: Okay. Everyone's fitted out their home with electronics, but no one, just no one has bought a car. AP Eagers, biggest car dealership group in Australia, very, very cheap, buy, hold, sell?

Simon Shields (Sell): That's a sell. It's suffered terrible EPS downgrades, and it will come out of it strongly, but it won't recover very quickly to where it got to. It's net debt is way too high, two times debt to equity. And even though the PE's low, when you look a few years out, it's very dangerous. I'd say sell.

Matthew Kidman: Cutting costs rampantly Anthony, and surely we're going to start buying cars of some description again. Buy, hold or sell?

Anthony Aboud (Buy): I've got it as a buy. I think that obviously, the macro is very poor in the short term, 25 months of declining car sales, with 48-and-a-half percent decline in April, year on year. However, we're not all going to be catching Ubers. We're not going to be driving the same car we drove in the next five years. There will be an uptick in our best of breed. They have the largest market position, best management team. I've got mid-cycle earnings of about 65 cents a share, which means that could be $10 within three years.

Premier Investments (ASX:PMV)

Matthew Kidman: Okay, Anthony, here's your chance. What's a compelling value stock that you can tell the audience about right now?

Anthony Aboud: Yeah, my stock is Premier Investments. I think that they're, again, still a balance sheet. The consumer is under pressure, no doubt, but I feel that they are the best of breed management team. And I think during this period of downturn, they're going to take advantage of the weakness of the retail mall operators. And so I feel that there's a real chance they could either variabilize their rent or decrease their rent, which would be merged and upside at the other end of the cycle. So, I like Premier. 

Service Stream (ASX:SSM)

Matthew Kidman: Okay, Simon, what's compelling in your eyes and good value at the same time?

Simon Shields: Service Stream's a buy. They maintain infrastructure, water, gas, NBN, wireless networks, great track record of growing their earnings. The market's got very conservative forecast for them. And on those conservative forecasts, 12 times PE, great balance sheet. It's a buy.

Matthew Kidman: As they say, beauty is in the eye of the beholder. And when it comes to compelling value, Anthony can see a lot of value and beauty, but Simon just can't see it.

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Buy Hold Sell

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.

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