The selloff that started in early September has gathered pace to put the Australian share market into correction territory, wiping out 12 months' worth of gains. With risks elevated, it’s time to look for defensive businesses that can grow their earnings regardless of the business cycle.
That’s exactly what we look for in this episode of Buy Hold Sell. While the time is right for defensives, James Miller from Firetrail Investments and Justin Braitling from Watermark Funds emphasise the need to be selective.
Tune in below to hear them discuss their views on three defensive names and nominate one that could grow through the challenges that may lie ahead.
Ben Clark: Welcome to Buy, Hold, Sell, I'm Ben Clark, and today we've got Justin Braitling from Watermark, James Miller from Firetrail, and we're going to talk about some defensive equities to own. The correction is on, and we're all probably looking for some businesses that can grow their earnings regardless of the business cycle.
So James, I'll start with you, Sydney Airport, one of the bigger ones, buy, hold, or sell?
Sydney Airport (ASX: SYD)
James Miller: It's a hold for us. Sydney Airport, great asset, it's probably at least a decade until we get a second Sydney airport, but just in this rising rate environment these infrastructure names could come under some pressure.
Ben Clark: Yep. So-called bond proxy, do you like this one, Justin?
Justin Braitling: I'd agree, I think it's a hold at these levels. The recent traffic numbers were a bit soft, and with the currency where it is, outbound travel is going to struggle I think in the months ahead. You've got the productivity commission report to be released soon, and there's some concerns around the sort of returns that Sydney Airport are generating. So I think it's a hold.
Caltex (ASX: CTX)
Ben Clark: Okay. Well, let's stay in Kurnell - Caltex, next door, but morphing into a retail sort of business. Buy, hold, or sell?
Justin Braitling: They're offering sushi and everything, dry-cleaning ... I think Caltex is probably a hold here as well. Again, we're seeing some of these consumer patterns unfold which are a bit disturbing. Premium fuel volumes were down in the last half, and they made a lot of money in driving premium fuel through their canopies, and so that's up, that's done. The volumes now are slipping. So refiner margins look okay, I think in the medium term, so that's probably a hold.
Ben Clark: Yep, okay. Management's done a pretty good job with a very tricky business. What do you think on this one, James?
James Miller: We like Caltex, it's a buy for us. The market did get concerned post results, it fell after they didn't come through with capital management and their plans there, but we're still looking at a company that's a seven-billion-dollar market cap. Got about two billion dollars of property value, and then it's trading on about 11 times PE. So to us it's a cheap, defensive asset that is a great buy for us.
Invocare (ASX: IVC)
Ben Clark: Okay. And we're jumping into the funeral markets, that's quite a leap. Invocare, potentially we're going to have a negative death rate this year, which is quite unusual. Is this the time to buy Invocare?
James Miller: Invocare's a sell for us. We're seeing their margins declining, we're also seeing them spend more capex. So competition in that space, in terms of funeral homes, has really increased. They're having to spend to upgrade their homes, and that creates earnings pressure for them, balance sheet pressure possibly as well. So no need to be there.
Ben Clark: Okay, Justin, I saw the CEO of Propel today said, “There hasn't been two consecutive years of negative death rate since 1990.” Is it time to get into Invocare?
Justin Braitling: We need a good flu season, don't we? It was a benign flu season.
Ben Clark: That cold winter.
Justin Braitling: Cold winter, cold snap. I'd agree with James, it's a sell. They underinvested in the business, there's a lot of catch up spending going on now, but it's a very benign volume environment, growth environment. They have no more acquisitions to do, I think they announced an acquisition the other day of two million dollars or something, that's how thin it's getting. So I think that's a sell.
Ben Clark: I haven't got a buy out of you yet, so have you brought along a good buy idea in the defensive area of the market?
Woolworths (ASX: WOW)
Justin Braitling: I think it is time to look at the defensive sectors, and you want a defensive industry that's got a bit of a tailwind, and I think the grocery retailers at the moment have got their tailwind. You're starting to see a bit of food inflation come through, following the drought, and I think you're going see a more benign competitive environment as well. Aldi have stopped rolling out stores, Amazon are still years away from having any impact, and so I think Woollies is well-positioned.
Ben Clark: Okay, that's good. And James, what have you got for us? A defensive stock that can grow over the next few years in a bit of a volatile environment?
Amcor (ASX: AMC)
James Miller: Yeah, similar in that consumer space, Amcor's a buy for us. It's a company that used to trade on 20 times price to earnings. Now if you look three years forward it's on about 12 times. It's had a tough couple of years, raw material costs risen, increasing their herding earnings, but looking forward at their valuation and also what they've done with the great acquisition of Bemis in North America, it really is the truly dominant global flexibles packaging player now, with some defensive earnings as well. Cheap valuation, with earnings growth, it ticks all the boxes for us.
Ben Clark: Okay. Well look, everyone needs a bit of defence, and there's a couple of stocks that have struggled in recent years, but they both seem to be coming back, so well worth having a look at.
Very good article. Was able to speed thru the transcript instead of a timewasting video. Well done! Tony
I wouldnt listen to any views from Justin Braitling! I am one of MANY disgruntled shareholders of his ALF Lost so much money!!!
Hi Tony, each to their own and glad you enjoyed the article. Some people prefer the videos, others prefer to access via a transcript. We try to make the content available in all formats. James