We all know the theory, buy low and sell high. But how do you really feel about buying a stock when it’s bombed out and on its knees? In this episode of Buy Hold Sell two value investors look at 5 stocks that have fallen on tough times and are firmly out of favour with investors.
Steve Johnson from Forager Funds and Marc Whittaker from Investors Mutual try to remove the emotion and deliver some thoughtful analysis on Pact Group, Iselect, Thorn Group, Fletcher Building and Isentia. Tune in for some candid views on a selection of stocks that have been relegated to the sin bin.
Welcome to buy, hold sell. Today we're going to be talking about out of favour stocks with a couple of value managers. I'm joined by Steve Johnson from Forager, and Marc Whittaker from Investors Mutual. We'll start with you, Marc. Bit of a bomb out not so long ago. Pact Group buy, hold or sell?
Pact Group (ASX:PGH)
Marc: Pact Group for us is a core holding actually, so it's a buy for us. It's had a bit of short-term pain. Obviously, input costs have been going up, resin costs are rising on lower fx. And also, its customer base has been a little bit softer, so the top line is struggling a little bit but. But what we like about it is we've got a new executive chair, Raphael Geminder who's coming. It's a big chunk of stock, very focused on getting the cost out program correct, doing it the right way. Good margin of safety on this stock, a seven percent dividend yield fully covered, fully franked. Relatively low payout ratio. So a lot of head room to cover that dividend If earnings continue to be a little bit soft. But we like it, in a good place market leader in what it does, rigid plastics manufacturing. We like it, it's a buy.
James: Steve, there's no CEO at Pact Group at the moment. Buy, hold or sell?
Steve: It's never held us back really. I'd say hold on this one, it's actually not a stock that I know particularly well and it's a space that I think you need some expertise and some fairly deep knowledge in, in terms of understanding the different technologies and different competitive advantages in that space.
And there's quite a bit of change taking place from my understanding in terms of the different types of packaging that people are using for different products. So, I think the price is interesting and the yield is interesting for a pretty robust defensive type of business, but we don't know enough about it to put it in the buy category.
James: Alrighty. Let's talk comparisons. Competitive space, Iselect. Buy, hold or sell?
Steve: We're a bit in the same boat as Mark here. It's a core holding for us, so I'm going to say buy but, the price is up quite a bit from where we were buying it fairly aggressively and, we were buying it at a level where we thought we weren't taking a lot of downside risk. I think today's price, you need a viable ongoing business here to justify that price.
We think that's likely or be it not certain, the case for consolidation here is compelling. I've seen a lot of takeover bids come out over the past couple of weeks or so, this one's going to be I think there's going to be a bit more argy bargy around price and things like that. But I think the case for putting two businesses together here, that there's a lot of overlap in costs.
They're pretty dominant market players, I think. So, Compare the Market is a shareholder now in Iselect, and I think the case for putting those two businesses is the cream on the cake in terms of getting a lot of value here.
James: Marc, buy, hold or sell on Iselect?
Marc: Look, probably six months ago, it was probably a buy. I think it was at a good discount to NTA. The trail book in the health and life insurance, so the business was probably worth 50 or 60 cents a share, I think. Trading currently 72. Is there enough margin of safety for us to buy this business? I've always been a bit sceptical about the business model and just how viable a business it is, and that's precluded us from owning it for a long period of time. And, I guess the history of four CEOs, a history of never really meeting earnings guidance has probably justify that position to date.
I'd really like to see it at a reasonable discount to that sort of 60 cents valuation. If we could get that, then it would, it would be interesting. But for us, it's sell at the moment.
Thorn Group (ASX:TGA)
James: Thorn Group, it's been a thorn in the side for a number of people, buy, hold or sell?
Marc: It has been a thorn in the side, I think it might be one for Steven as well. But look, it's still a buy for us. Look, we talk about margin of safety in stocks which trading at big discounts of value. Trading at about half times book, and you're basically paying for the equipment finance business, largely and that's about it. You're getting the Radio Rental business for free, it's an 80 year old brand.
So it serves a need in the community, it has a function, you're getting it for free. ASIC overhangs are largely in the past, and we think with new management and a good conservative approach to doing business, we think it's well placed. It's a buy for us.
James: Steve, you've got a view?
Steve: So we own the stock and it's a buy too. It's not without its issues this business, but I do actually think it's a good example of a turnaround where there's been a fair bit of progress made here over the past couple of years. Some issues that have been put behind it, a new management team in there, and importantly a new chair who we've had some good conversations with him and we think he's got the right strategy for the business.
This is a business that you can touch and feel, go and have a walk around some of their new stores at Paramatta and places where they've got this new format. And I think there's a good chance of that actually being successful. We're actually more optimistic about the Radio Rentals business that everyone hates, than we are about the equipment finance business.
You've got Axsesstoday and I think there are going to be problems in that sector with the speed that which it has grown. It has been sort of a bit of a saviour for this business because it has grown in an environment when Radio Rentals has been suffering. I would like to see them do something with that longer term and that the retail Radio Rentals brand becomes a potential growth engine for the business. It's hard for anyone to see that now, but I think there is a place for it in the world and that it can grow over time.
So, at half book value, I would have picked it as one of my turnaround stocks for later if you hadn't put it in the show.
Fletcher Building (ASX:FBU)
James: Fletcher Building fell out of favour 12, 18 months ago. It hasn't refound favour. Buy, hold or sell?
Steve: There's a bit to like here in terms of I think, the business itself, I just can't come at the valuation, so I'm still going say sell on this one. Even if we assume that it's going to turn around. Normally, with these turnarounds you want to say okay, in a nice world where it turns and it goes well, you're going to double your money or do better. And we struggled to come up with a scenario for that for Fletcher so, it's a sell for us.
James: Too expensive for Steve. Buy, hold, or sell?
Marc: It's a buy for us. It's actually been a holding in our portfolio for some time, so I guess we're there, but we're happy to keep being there. Look, it's still the market leader in New Zealand and we think the cycle in New Zealand is actually stronger for longer. There's a good pipeline of infrastructure work, the new government there has got a lot of plans around public housing like the Kiwi Build project, and that's really going to help prop up the cycle over there for what we think is the next two to three years.
Look, the balance sheets been repaired, so obviously post all these write downs with the troubles in the construction division. They've raised equity, so they've repaired the balance sheet so we've got some comfort around that. And there's also the strong likelihood of a couple of asset sales at the formica business for over a billion dollars, ideally. And also the roof tiles businesses, so that really puts the balance sheet and a very strong position.
And as you say, new management as well. A good cost out opportunity, a bit of a turnaround in the Australian business as well. That gives us some comfort that the stock here is reasonable value. It's reasonable value, so we're happy to keep holding it at these levels.
James: Last one Isentia. It was a market darling and then fell on some really tough times. Buy, hold, or sell?
Marc: Again, it's a sell for us. Optically and I guess on the face of it, it looks quite reasonable. It's one we've looked at for a long period of time, or over a long period of time in many different ways and we never quite got the conviction to own the business. Again, they're similar in a way to Iselect, just continually disappointing. And I think for a long time they were actually just over earning.
I think that the margins that were accruing at the expense of their content providers was just way too high, and the prices they were charging to their customer base was just way too high. So we've had a reset in a way, but I would question whether the resets seen the whole way through. And, you know you've got competition and technology coming in, which is arguably disrupting the offering as well. So a sell for us.
James: Steve, Isentia? Cheap on face value, buy, hold or sell?
Steve: There's a very important comment there about over earning and I think that's something to really look for in all of these situations, you know was that level of profitability ever relevant? And with this stock it's clear that it wasn't. We've been pretty negative about it for a long time. Not only is pricing under pressure, but market share is under pressure and it's going to keep doing that.
So you've got a big competitor here, Meltwater that's looking at the marketing and going, we're prepared to throw some money at this. There used to be a bit of a competitive advantage here that you needed a whole bunch of people to read newspapers and watch TV and put it together. And, if you had all of those people, there wasn't much point in someone else doing it. So much of media now is online and you might be in a newspaper somewhere, but your online presence and your social media.
And they're doing all of that stuff, but it's far more competitive and they're probably people doing it better. So, I think there's a lot of contraction in revenue still to come here before you've seen the baseline. It has fallen a long way now and it's getting much, much closer to a level where we're starting to get interested. So look, I'll still lean on the sell button, but that the price is getting more interesting.
James: Well if you're going looking at looking for stocks in the bombed out sector, tread carefully because there might be a few grenades.