Buy Hold Sell: 5 defensives to arm portfolios against future falls
Since hitting a low in September, the S&P/ASX 200 has rebounded a whopping 12.3%. And while markets are typically forward-looking, there are still plenty of headwinds that could see our bourse head south.
So how can you protect your portfolio? Well, that's where defensives come in.
Defensive stocks typically belong to sectors where there is consistent demand for products or services throughout the economic cycle - such as supermarkets and food suppliers, utility providers, and the myriad of healthcare services. It also includes stocks with long-term track records of delivering consistent earnings in the face of the many challenges the market (and world) may throw at them.
In this episode, Bell Direct's Grady Wulff makes her Buy Hold Sell debut alongside Firetrail Investment's Blake Henricks and Blackmore Capital's Marcus Bogdan for their analysis of three defensive darlings.
Plus, they also name their top defensive pick to arm investors' portfolios against any future falls to come.
Note: This episode was filmed on Wednesday 23rd November 2022. You can watch the video, listen to the podcast, or read an edited transcript below.
Grady Wulff: Hello and welcome to Livewire's Buy Hold Sell. I'm Grady Wulff. Today, we're looking at five stock ideas for investors who are feeling a little more bearish in the current conditions to bolster their portfolios. Lucky to be joined today by Blake Henricks from Firetrail, and Marcus Bogdan from Blackmore Capital. Gents, thanks for your time.
Let's start with Amcor, the packaging company, it's quite defensive. Marcus, is it a buy, hold or sell?
Amcor (ASX: AMC)
Marcus Bogdan (HOLD): It's a hold. Great, defensive industries, protein, healthcare, pet food and coffee. Three of those sectors are starting to slow down now. It was a darling in 2022, but those upgrades now are starting to slow and they're starting to see some volume contraction there. So it's a hold.
Grady Wulff: Hold for you. Blake, do you agree or disagree? The shares are up 8.3% year to date.
Blake Henricks (HOLD): It's a hold as well. So it is a great defensive company, but everyone knows that. This stock was trading at a 20% discount to the market for the past four years. It's now re-rated to a market multiple, so it's trading on around 13.5 to 14 times PE. The defensiveness is well understood. The contractual pass-through is now beyond debate. There was some concern that they may not be able to pass through resin costs. They did that. So as a defensive, I think it really fits the bill. But I also share some of Marcus' concerns that if there is de-stocking in some of their sectors or any kind of slowdown, you will see some operational downgrades. And so for me, it's a hold.
Wesfarmers (ASX: WES)
Grady Wulff: It's a hold for both of the gentlemen here today. Now, let's jump into Wesfarmers, an Australian conglomerate, and the parent company to Bunnings and Kmart, two of my favourite stores. Buy, hold or sell, Blake?
Blake Henricks (SELL): It's a sell. Everyone loves Wesfarmers, and everyone knows about it, but two-thirds of the value sits within Bunnings. Now, Bunnings has done a great job through this huge boom. From 2019 to 2022, their sales grew by around 35% and their profits grew the same. What that tells me is they've been putting a lot of cost in store. So as we see a downturn in the property market, they'll be able to hold earnings a lot better. What I'm concerned about is that if I'm looking for a defensive stock, I don't invest in a housing-related one and I don't invest in one with Kmart, Target and Lithium as well. So 20 times PE, it's not too bad, but I think there's downside risk to earnings and therefore as a defensive, it's a sell.
Grady Wulff: Shares in Wesfarmers are down 19% year to date, Marcus is it a buy, hold or sell?
Marcus Bogdan (HOLD): I think it's a hold. I think the diversified model has actually worked very well for Wesfarmers. It has done very well in its energy, fertiliser and chemicals business. Kmart is recovering. And for Bunnings, it actually held up remarkably well during the global financial crisis, which was also around housing. Yes, there are more elevated costs there, they're pushing into commercial, but I still think it's an outstanding franchise. So we've got it as a hold.
Healius (ASX: HLS)
Grady Wulff: Now let's jump into Healius, it's a healthcare company. Marcus, buy, hold or sell for Healius?
Marcus Bogdan (BUY): It's a buy. The stock has de-rated. It was the darling through COVID-19 because of pathology and PCR testing, but the base business suffered considerably. Now, as PCR testing is coming down, we do see the base business improving over time. It has a strong balance sheet which leads to capital returns, its price-to-book ratio is very attractive, and the PE on a normalised run rate is also attractive. So it's a buy.
Grady Wulff: Buy for Marcus. Blake, are you on the buy train? Shares are down 37% year to date for Healius.
Marcus Bogdan (SELL): Down 37%. It's a sell. The PCR testing is a one-off. They did two times their normal earnings in 2022. That's come off, the market now understands that. It's disappointing, but I wouldn't worry too much about that. When we actually look at the core business, what we're seeing is increasing amounts of telehealth. In-person visits to GPs are down 25%, and we're quite concerned about the referrals. So many things have reverted post-COVID-19, but one thing that hasn't seems to be telehealth. And on that basis, this industry has a defensive top line, but the industry's just never generated the returns that it should in our view. So for us, it's a sell.
CSL (ASX: CSL)
Grady Wulff: Conflicted opinions there. Now, I've asked you both to bring along a defensive stock that will remain resilient in the face of future volatility in the markets. What have you brought for me, Blake?
Blake Henricks (BUY): I've brought a stock, some of you may know it, it's CSL. It's large, it's liquid, it's healthcare. So to me, it ticks all the defensive boxes. It's in a defensive growth category. But I think what's really important is, the tougher the economy gets, the lower one of their key costs goes. And that's the plasma collection. So this is where they pay donors to give blood and they turn that into plasma. The higher unemployment goes, the more people want to give plasma and the costs come down. And so on that basis, it's really attractive as a defensive. Now, today people say, "Oh gee, it's on 40 times PE. How can you possibly buy that?" 2023 is already written. 2024, the earnings are looking very strong in our view, and you're seeing it in a mid to high-20s PE. They expense all their R&D. It's a very well-run business. And for a defensive, I can't go past it.
Ramsay Healthcare (ASX: RHC)
Grady Wulff: You have it there. CSL for Blake. Marcus, what have you brought us?
Marcus Bogdan (BUY): I'm going to stay with healthcare and go with Ramsay Healthcare. It's disappointed the market over several years, but I do think the private hospital business has really three things going for it. One is the substantial backlog we're seeing in each of the key markets, as surgeries were deferred. Now they will come back on over time. Secondly, the rise of chronic disease continues. And thirdly, it's demographics. As we age, we need more healthcare. They've got a very strong property book, which I think, at some stage, they will try to monetize. So based on that, it's a buy.
Grady Wulff: So CSL and Ramsey Health Care are the two defensive stock picks from our experts today. That's all we have time for today on this episode of Livewire's Buy Hold Sell. I'm Grady Wulff, and if you like that episode as much as I did, why not give it a like? Don't forget to subscribe to our YouTube channel. We're adding so much great content every single week.
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5 stocks mentioned
2 contributors mentioned
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.