Buy Hold Sell: 5 stocks battling for blue chip status

Buy Hold Sell

Livewire Markets

The term "blue chip" was first coined in 1923, when an employee at Dow Jones observed several stocks trading at US$200 or more a share. As any good poker player knows, blue chips are more valuable than their red and white counterparts. 

Just like in poker, these "blue chip" stocks are also highly valuable - and while the term no longer applies to expensive stocks, it has become synonymous with high-quality dividend payers that have made a name for themselves over the ages.

Really, the ASX 20 is an exclusive, members-only club, reserved for some of Australia's most valuable businesses. Think CSL, BHP, Macquarie - these stocks are market leaders, household names, and often global success stories worthy of adoration. 

So in this episode, Livewire's Ally Selby was joined by IML's Hugh Giddy and Atlas Funds Management's Hugh Dive for their analysis of five stocks battling for blue chip status. 

And spoiler alert: These fundies can't agree on anything in this episode - except that one of these stocks is a screaming sell. 

Note: This episode was filmed on Wednesday, July 20th 2022. You can watch the video, listen to the podcast, or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're going to be taking a look at some of the stocks battling for blue chip status. Those that are climbing their way up the index into the ASX 20. And to do that, we're joined by Hugh Giddy from IML and Hugh Dive from Atlas Funds Management.

QBE Insurance (ASX: QBE)

Ally Selby: First off the ranks today is QBE Insurance. It's outperformed other insurers like Suncorp and IAG over the past year. It's lifted around 11%. Hugh, I'll start on you this time. Is it a buy, hold or sell?

Hugh Giddy (HOLD): It's a hold. Rising interest rate's helped them, but I think the market knows that. But I think with inflation, you're getting higher claims, and I think you might see that coming through.

Ally Selby: It's trading on a P/E of 17 times, and has a market cap of $17.4 billion. Hugh, over to you. Is it a buy, hold or sell?

Hugh Dive (BUY): I disagree with Hugh. I think it's a buy. Rising rates with a hardy premium cycle. It's very positive. They have actually seen some returns on their investment flow for the first time in 10 years. Also, the business has been much more simplified. There's not the nasties that we've come to expect from QBE. There's no Argentinian worker's compensation, Ecuadorian crop insurance or Columbia third-party motor, which has deviled investors over the years. It's a much more simple story. I think it's a strong buy. And you also have the falling Aussie dollar, which is a big beneficiary for QBE, unlike the domestic insurers.

South32 (ASX: S32)

Ally Selby: Next up, we have South32. It recently bought a 45% stake in a Chilean copper mine. Hugh, staying with you. Is it a buy, hold or sell?

Hugh Dive (SELL): Sell. Catching a falling knife. Underlying unfriendly governments, which are only going to have their hands out for more taxes. And at the same time, the commodities are heading south. There's no sign that's going to fall with a slowing environment. Stay away.

Ally Selby: Its share price has also fallen recently. It's down 24% over the past 12 months. Hugh over to you. Is it a buy, hold or sell?

Hugh Giddy (SELL): Sell as well. Similar reasons. Just because the share price is down, it doesn't make something a buy. Commodity prices are on the nose. That's not a major fall yet.

Sonic Healthcare (ASX: SHL)

Ally Selby: Okay. Next up, we have Sonic Healthcare. It has a market cap of $16.4 billion, and it trades on a P/E of 11 times. Staying with you, Hugh. Is it a buy, hold or sell?

Hugh Giddy (HOLD): I think it's a hold. They've benefited a lot from COVID testing. That's fixed up their balance sheet. I know other Hugh really likes it, but I see it as a stock with very little organic growth. It's a solid company. You can own it. It'll pay you a dividend. But I can't get excited.

Ally Selby: Okay, Hugh, we know you like Sonic. The share price has fallen around 16% over the past 12 months. Have you been buying the dip?

Hugh Dive (BUY): Yeah, similar to Hugh. I recognise that they've had a very good COVID-19. Massive increases in profits, and they've used that instead of paying shareholders big special dividends to pay off their debt, which has let the company exit COVID-19 in a very good shape. In the long-term, we've got an older, sicker population, doctors are more worried about malpractice, scheduling more tests and pathology. Unlike other healthcare companies that don't require billions of dollars in FDA approval for new drugs, it's an industrial boring process that suits me.

Brambles (ASX: BXB)

Ally Selby: Next up, we have Brambles. It's a reusable pallets, crates and containers giant. Over to you, Hugh. Is it a buy, hold or sell?

Hugh Dive (SELL): I think it's a sell. 25 bits of wood, 80 nails. The technology hasn't changed from what the US Marines used to deliver pallets into the Pacific. They made a big misstep by not going ahead with Costco (NASDAQ: COST) and moving towards plastic pallets. That whole market's in a bit of flux. Competitors will move in. Trades on 30 times. As a fund manager, I run a concentrated portfolio, so I can only own one. I like the exposure to fast-moving consumer goods, but I'd much rather have a high-quality company at a much lower level, which is Amcor (ASX: AMC). So I've got to choose between the two. You don't want to have both in your portfolios because you'd have the same exposure. Amcor is a much higher choice. I'd choose that over Brambles, so sell.

Ally Selby: Its share price has done okay over the past year. It's down around 1%. Over to Hugh. Is it a buy, hold or sell?

Hugh Giddy (BUY): I see it as a buy. I think that the decision on Costco reflects discipline around capital. Plastic pallets are extremely expensive. They are lower cost to repair. And so you don't get as much loss. The wooden pallet. It hasn't evolved, but it's more about the network, not the technology. It's about having a system that runs well. A well-oiled system. The current pricing pressures have actually exposed how profitable or unprofitable each customer is. So they've been putting up prices, and people have no alternative.

Computershare (ASX: CPU)

Ally Selby: Okay, last but not least today we have Computershare. It's one of the rare companies that actually benefit from rising rates. Staying with you. Is it a buy, hold or sell?

Hugh Giddy (HOLD): It is a hold. I believe we owned it based on the expectation that rates would go up, but that was at $15. At $24-$25, I think that's pricing in the higher rates, and what it's not pricing in is the possibility that if we do get a little bit of a slow down, which we seem to be getting. And with that, their core business lines are going to be a bit slower. Financial transactions, mergers, capital raisings, that sort of thing could be under pressure, even though interest rates are helping.

Ally Selby: Okay. It's had a really successful past 12 months, it's up 65%, but it's expensive. It trades on a P/E of around 49 times. Hugh, is it a buy, hold or sell?

Hugh Dive (SELL): I think it's a sell. I'm much more negative than Hugh. I think looking at the future, all the good news and the rising rates have been priced in. What hasn't been priced into that 49 times is the impact of distributed ledger technology. What does that do to the registry business in five or ten years' time? Does it look the same as it does right now? Probably not. And I think investors aren't getting a margin of safety for the risk you're taking at that particular price. Too rich for my blood.

Ally Selby: Okay. Well, that's all we have time for today. We hope you enjoyed that episode of Buy Hold Sell. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.


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Buy Hold Sell

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.

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