The 10% rally in the ASX200 in November set records as the biggest monthly move since the index was created. A shift in narrative from ‘if’ to ‘when’ a vaccine will be available saw investors flood to the market. In this episode of Buy Hold Sell, we ask our guests to consider five of the most traded EX20 stocks on the ASX, as recorded by Sharesight. 

Matthew Kidman is joined by Steve Johnson of Forager Funds and Ben Rundle from NAOS Asset Management. The trio consider companies including, 1) Flight Centre - the travel company that rallied 50% in the last month 2) NextDC - which rode a surge in demand for data centres throughout the year and 3) a2 Milk -  which hit record highs in June but is now losing ground with rising China tensions.

Notes: Watch, read or listen to the discussion below. This episode was filmed on 2 December 2020

Edited Transcript

Matthew Kidman: Welcome to Buy, Hold, Sell, brought to you by Livewire Markets. My name's Matthew Kidman, and today we're going to talk about all those stocks we've been trading like maniacs over this incredible year. To help me discuss that, I have Steve Johnson from Forager Funds and Ben Rundle from NAOS Asset Management. 

Flight Centre Travel Group (ASX: FLT)

Matthew Kidman: Ben, we'll start with you. It's been in the news. All their shops are closed, but the stock's gone crazy. Flight Centre. Buy, hold, or sell?

Ben Rundle (Sell): Flight Centre's a sell for me. Given the money they raised during the crisis, the enterprise value of the business at the moment is actually higher than it was pre-COVID. I think what investors are missing with Flight Centre is that the majority of their earnings actually come from the corporate side of the business and that corporate market, I don't think is going to recover as quickly as what everyone thinks. While the leisure market might be full when everyone's piling into airports to go on holidays, I think they're overestimating the benefit that Flight Centre will get from that.

Matthew Kidman: They raised a tonne of cash right at the bottom, share prices bounced. Buy, hold, or sell?

Steve Johnson (Sell): I'd agree with the sell on this. And I think the bull case might be, "Well, as this business recovers, all of that working capital comes back into the business and you can give the cash back to shareholders." 

I don't think anyone's going to look at it again and say, "We can run this with negative working capital because of what happened in the crisis." I don't mind the business, I think it's got some long-term issues, but again, I think the share price is fully pricing in the recovery that is going to come.

NextDC Ltd (ASX: NXT)

Matthew Kidman: We've learnt this year that data's more important than food. Data centres NextDC. Buy, hold, or sell?

Steve Johnson (Sell): I'm a sell on this one as well, and that is a view around interest rates rather than anything else. I think you should think of this stock as an infrastructure type stock. If you think interest rates stay near zero forever, then a 6% return from a NextDC might be attractive to you. It's not attractive to me.

Matthew Kidman: Ben, data. It's everywhere. It's incredibly important. We can't live without it. Very expensive stock. A defensive stock too, buy, hold, or sell?

Ben Rundle (Buy): Look, I'm going to go to the other side and say it's a buy. Steve does make some good points, but I think if you look at the business currently, their second-generation centres are adding capacity. They've got about 17 megawatts of contracted capacity that's not being built yet, and then their third-generation centres they're just starting to build as well. I think that with the incredible demand that you're going to get for data, they're not going to have trouble filling that capacity. That will drive earnings and continue to drive the share price. It is expensive, but I think it's still a buy at the moment.

The a2 Milk Company (ASX: A2M)

Matthew Kidman: Okay. It's been terrible trying to sell stuff in China this year. It's just flipped on its head. a2 Milk, struggling. Used to be a darling. Now, it's a fallen angel. Buy, hold, or sell?

Ben Rundle (Sell): I'm going to sell on a2 Milk. They did reiterate guidance at their AGM. However, it came with a lot of caveats and it was very second half weighted, which scares me. They're very reliant on that daigou channel, which I think if they have to stimulate demand in that channel, it'll come at the expense of margin. Also I question whether that channel in a post-COVID world will return in the same form that what it was. I think that potentially some of those guys might go through the cross-border e-commerce channels. I think for the time being, despite being a good brand, a2 is a sell.

Matthew Kidman: The investors have been on the money. No one in China wants our infant formula from the standard of the world anymore. It's been going down for a while now. Buy, hold, or sell, a2 Milk?

Steve Johnson (Sell): I've underestimated this stock for a long time so I'm probably not the person to listen to on it, but I'm still negative. I think it's a sell. Actually, I put vitamins and this product in the same sort of placebo boat. I don't know that it has all the health benefits that people think it has. If you have a well-balanced diet, you probably don't need to worry about it. But people buy the product, they like the brand. I just think that the growth has been overinflated by what's been going on in China and that's got some huge risks to it.

Kogan.com Ltd (ASX: KGN)

Matthew Kidman: Okay. The Amazon of Australia. It's also a bit of a cash cow for some of the executives. Kogan, buy, hold, or sell?

Steve Johnson (Sell): I'm a sell on this one as well. I just think it's super expensive. Next level of expensive. I actually struggled to sit down with this business, I'm the same with the Xero. Most of companies, I can sit and say, "Well, I can come up with a scenario where this business grows enough to justify today's price." I find that pretty hard to do with this one. It's all a price issue for me.

Matthew Kidman: It's been a terrific performer this year, but they've shot themselves in the foot recently with their governance issues. Ben, Kogan, buy, hold, or sell?

Ben Rundle (Sell): I think it's a sell as well. They've played the e-commerce boom fantastically, and they've been in the right spot at the right time. They haven't done the right thing by shareholders and I think that while everything's going well, those shareholders are forgiving. In 12 months' time when we're comping some pretty serious growth from COVID, those shareholders will be less forgiving so I don't want to be there. I think it's a sell.

Treasury Wine Estates (ASX: TWE)

Matthew Kidman: Stock of this week. Big tariffs on Australian wines. Treasury's been smashed. Buy, hold, or sell?

Ben Rundle (Sell): Look, I think Treasury is a sell as well. The growth driver in Treasury has been the Asian business for the last four years and China has been the bulk of that. There's going to be a huge inventory wash out that comes from this. I remember the Treasury from 10 years ago where they had inventory issues and they persisted and persisted and persisted and I just think that's going to weigh on the stock for quite a while to come. I will stick with the sell for now.

Matthew Kidman: The Chinese have given up on them. Now every Australian is going to have to buy a bottle of Grange just to get them through. Treasury, buy, hold, or sell?

Steve Johnson (Hold): I saw a puff piece in the paper yesterday saying the Europeans are going to get behind it as well, and probably lots of tax into Europe as well I'd imagine on wine. Look, I think this Penfold brand, it is a genuine premium brand and I think it will ultimately survive this and thrive long-term. I think that part of the business and the brand is worth quite a bit of money. Wine's a really tough business otherwise though. You make beer. You make it, you sell it a month later max, and you get to turn your assets very, very quickly because of that.

With wine, you make it, takes a year. It's got to sit in a cellar for 10 years. The capital tied up in that business is very high and it has always been a very difficult business and you compete with a whole heap of people that do it as a hobby. I learned with my family farming that any business where people do it as a hobby is generally a bad one. I would say hold given the price retraction though, and the quality of the Penfold brand. I think there's enough value there to say at today's price it's worth hanging on.

Matthew Kidman: There's a lot of action going on out there, but these two. They just can't get excited about anything.

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