After every stock market bust and boom there tends to be a changing of the guard. Think back to after the GFC, when commodities and financial stocks faded from glory and gave rise to stellar gains in health and tech names.
Behavioural and societal changes arising from COVID-19 are expected to shake up the financial world order again. In this episode, Catherine Allfrey of WaveStone Capital and Matt Williams from Airlie Funds Management opine on who the winners could be.
They discuss 1) Kogan - which has tripled since its March low and seen its P/E skyrocket to above 60x; 2) Resmed - whose business didn’t hit snooze during the pandemic; 3) Ansell - benefiting from a boom protective equipment demand; 4) Xero - a tech stock poised to become a future hero, and 5) Mineral Resources - which is riding a rejuvenated commodities boom.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 3 June 2020.
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Matthew Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. I'm Matthew Kidman, and today we're going to talk about those companies that have thrived in the coronavirus epidemic, pandemic, world shutdown. There have been some and market leadership normally does change when markets have this kind of correction. To help me talk about it today, Catherine Allfrey from WaveStone, Matt Williams from Airlie.
Matt, we'll start with you. The Australian Amazon, Kogan, rocketing to a new high, posting record numbers week in, week out. Buy, hold, or sell?
Matt Williams (Sell): It's a sell. It's had a great COVID bounce, no doubt about it, but look, the shops, the rest of the shops, its competitors, starting to open back. At 40 times earnings after the bounce it's had, not for me.
Matthew Kidman: Strange, wasn't it? The management couldn't wait to sell their stock last year and now it's at a record high. Buy, hold, or sell, Catherine?
Catherine Allfrey (Sell): It's a sell for us as well and don't get on the mail list. It's insidious. Every type of product, they're out there to sell. No offence to them, they've done a great job through COVID, but like Matt says, at 35-40 times, it's very expensive for the growth outlook.
Matthew Kidman: Okay. Let's go to healthcare. Resmed, we know that they help you with your sleep. Ventilators as well in a crisis. Also towards a record high. Buy, hold, or sell?
Catherine Allfrey (Buy): It's a long term buy and it's actually been a WaveStone favourite for a long period of time. This is a successful Australian company that's just been a powerhouse for many, many years. Yes, it's at a record high, but it can still deliver double-digit growth and it's delivering strong returns from its business. We're still backers.
Matthew Kidman: In the great rotation that we've experienced over the last few weeks, Matt, Resmed seems to be a funder for other investments, but is it time to go back and have a look. Buy, hold, or sell?
Matt Williams (Hold): I'd love it to be a bigger funder and fall a lot more to buy some. Look, I think it's a hold. It certainly, as Catherine says, it's had a great track record. It's been a fantastic company, but it too, look, it's had a bit of a COVID bounce with the latest quarterly, with the respirator business. Look, at 35 times earnings, which is what Resmed is, I'd rather buy it than Kogan at 40 times. Put it that way, but a hold for me.
Matthew Kidman: Okay. A stock that helped us in the hospital and helped us at home, Ansell. Buy, hold, or sell?
Matt Williams (Sell): It's a sell for me. Again, another COVID bounce, surgical and exam gloves. They can't keep up with demand. That'll tail off at some point. Look, I've been around long enough that I know Ansell, if it's had a good run, it's not a bad thing to do is take some profits.
Matthew Kidman: Catherine, it's been a terrific performer, it's up 40-50%. You had to be long. You want to still be that way? Buy, hold, or sell?
Catherine Allfrey (Sell): I've got to sell as well on that one. Again, 70% of the business is benefiting from this COVID virus, but at the end of the day, as Matt says, at some point it will revert. There's also a lot of new competitors coming into that PPE space, and I just think the valuation, it's up there now.
Catherine Allfrey (Buy): The one that we bought at the bottom was Xero. We went into that at $68. Yes, it's had a great bounce. The result was okay. They are calling out the fact that business formation clearly is difficult during a virus, and also there'll be some small businesses that do close of course, during this time. But I think the overriding trend of accounting software in the cloud and the use of that software by businesses to justify government grants, for example, and the whole digitalization of the payments just plays totally in Xero's space. They're clearly a leader here in Australia and New Zealand, and also in the UK, and they're also in the US. They've got over two million subscribers. It's been a phenomenal performer and I think it'll keep going. It'll be a powerhouse.
Mineral Resources (ASX:MIN)
Matthew Kidman: Matt, something that you think we can jump onboard and go for a ride?
Matt Williams (Buy): Given the bounce the market's had since the low, only a month or so ago, it's hard. But I like Mineral Resources and look, it's had a great run. And for full disclosure, we've been shaving some of our exposure. We've got a massive overweight position. We've been shaving a few above $19, but when I look medium term, we're still happy holders. It's got a unique mining services business, it's got a net cash balance sheet ready to deploy on its next investment, and there's plenty of opportunity for it at the moment. I think the market will hopefully be excited by whatever this investment has been. Their track record is phenomenal. They've had a return on invested capital of over 20% for 15 years. We think it's a great medium-term company to buy and hang onto.
Matthew Kidman: Do you stick or flick the winners? It looks like you might flick them as they disappear just like the virus.
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- Earlier in the week Cath and Matt discussed how they're building disciplined 'offence and defence'-style portfolios to navigate the current environment. Watch that interview here
- Looking for ways to play the financial sector rebound? Cath and Matt discuss five stocks that have run too far or have legs to move further here
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