Buy Hold Sell: 5 resilient big caps

There have been some astounding one-day moves this reporting season among the market darling midcaps, including Altium jumping 20%, Webjet soaring 30%, Blackmores plummeting 25%, and Bingo getting kneecapped by 49%.

In this week's episode of Buy Hold Sell, we look past these wild moves to seek relative stability and resilience at the big end of town, among stocks with a market cap of $10 billion and higher, such as REA group, CSL, and Transurban.

Tune in as Matthew Kidman hosts Ben Rundle from NAOS Asset Management and Michael Wayne from Medallion. We hear their outlook for these three well-loved stocks, as well as their own nomination for a bigcap that offers investors resilience with some potential upside to boot. 

 

Transcript

Matthew Kidman: Welcome to Buy, Hold, Sell. My name is Matthew Kidman and I'm joined today by Ben Rundle from NAOS and Michael Wayne from Medallion. And we are talking about the big end of town. Those companies that are big and very resilient. Michael, we'll start with you. REA, one of the great companies of Australia. It has been on hard times on lately with the downturn in the housing market. Buy, hold, or sell?

Michael Wayne:  Look, it's a very high quality business. Probably hold at the moment. It's just a very tough point in the cycle for it. Twice as much viewing time, if not more than the nearest competitor. And nine out of ten real estate agents use their businesses, they've done an incredible job in boosting margins throughout the early part of the cycle. But management have flagged with the elections coming up things could get more challenging. So hold for now, but a good long-term hold.

Matthew Kidman: Okay. They've already reported, probably beat, but they were pretty pessimistic about the next six months. Buy, hold or sell?

Ben Rundle: Yep, they were. I think it's a buy. Look, I might not call the bottom here at the moment, but I think one of the best bits of investment advice I got was look at the companies that are taking market share in an industry that's in a downturn. And REA is certainly exhibiting that quality. It's a very, very high-quality business. So it might not be the bottom, but I think it's a buy.

Matthew Kidman: Okay. CSL reported today. Was down a few percent. Buy, hold or sell?

Ben Rundle: I think it's a sell. I think it was a weak beat, so I think that's why the market is selling it off today. R&D was lower, sales and marketing costs were higher. I think that's potentially trying to tell you something. I think of it as a PAD right for the time being and gets put in the sin bin, so sell for now.

Matthew Kidman: Michael, trades on about 40 times, give or take a point. Do we end up with blood on our hands if we buy this? Or is it a buy, hold, or sell?

Michael Wayne: I think it's looking more like a hold at the moment. It has been a buy sort of around that 175 level, but today's result was a little bit on the softer side, despite the fact that it upgraded its forecast slightly. The fact is this business does trade on very high multiples, but it does spend a lot on research and development, and it accounts for that immediately, as opposed to blending it out over, say a five, 10-year period. So that has the effect of depressing earnings, pushing up the PE. There is a bit of competition emerging from a pharmaceuticals company from Japan called Takeda. So it's something to keep an eye on. But a very high quality business that's performed consistently over the last couple of decades.

Matthew Kidman: Okay, let's hit the road, Transurban. It's also had its result out. Bit of a lukewarm response. Buy, hold or sell?

Michael Wayne: I've got a sell on Transurban. The fact is the free cashflow that's being generated in recent years, they've spent far more in capital expenditure, far more in dividends. So in order to maintain that growth trajectory that people have become used to, they really got to raise capital. The alternative is for the business to turn into a more bond like security where it just delivers a consistent income, as opposed to much growth. People forget that toll roads can be a risky business. Some of them really forays into the US, were not very successful. Some of them forays into Europe as well, haven't been that good, so I'm a seller of Transurban here.

Matthew Kidman: I pay a lot of tolls. Ben?

Ben Rundle: Yep.

Matthew Kidman: Feels like a good business. Buy, hold or sell?

Ben Rundle: I think it's a sell. You pay a lot tolls and they do increase prices as well. It is a very good business, but I don't think it's an own at any price. I think Michael's points a good one about them spending a lot of cash compared to their free cashflow. I've seen North Connects be delayed, so potentially that delays some of the cash that comes into the accounts and potentially that messes with their distribution, they got a kick up recently from the move in bond yields, and I don't think they're going to get that again, so I think it's a sell.

Matthew Kidman: Okay, you're on a roll, give us one that is awfully resilient and has got price upside for us.

Ben Rundle: Yeah, little bit of a cyclical, I wouldn't call it awfully resilient, but James Hardie I think is buy, look again very high-quality company, I think the earnings growth will come from North America, and we're starting to see some of the economic data out of there start to improve. Exceptionally high-quality management, very hard to compete with in taking market shares, very rare that you get it at these valuations, so I think James Hardy you can buy.

Matthew Kidman: Okay, Michael something you've got that you've spotted that's been resilient?

Michael Wayne: Looking across the ditch to Chorus is an ASX listed business, but basically, it's the largest Telco in New Zealand, they own the old copper network, and essentially, they're building a new broadband network and rotating customers from the old copper network onto the new network.

2019 is expected to be their last big year of capex so you can expect going forward as capex start to decline, free cash flow will pick up, and you can expect a pick-up in dividends as well. They don't pay any franking credits, which might actually work in its favour if labours Franking Credit Reforms get up, you might see a movement away from some of the high Franking businesses and these will start to become more attractive on a relative basis. So I think Chorus is a good quality business, despite the run up, I still think it's got more legs.

Matthew Kidman: We'd all like a bit more resilience, but at the moment the market's just not paying for it.