A tornado has ripped through markets in the last three months, knocking the S&P/ASX 200 Index down 30% in just 30 days. With countries shutting borders, economic activity plunging and forecasts of a sharp recession gaining traction on the back of Covid-19, risk assets remain susceptible to more damaging gusts of wind.
It is paramount then that each stock in your portfolio is able to not only weather the downturn, but capture an upswing too. In this episode of Buy Hold Sell, Tim Serjeant of Eley Griffiths and Chris Stott from 1851 Capital join Matthew Kidman to review 5 stocks touted to have defensive earnings streams, as well as growth options, strong balance sheets and, are operating in industries that are better placed during recessions.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 11 March 2020.
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 defence. Got to be defensive out there, markets are cratering. Joining me is Chris Stott from 1851 Capital and Tim Serjeant from Eley Griffiths. Tim, Auckland International Airports, is it defensive or is it a piece of infrastructure that looks like a ghost town? Buy, hold, or sell?
1. Auckland International Airport (ASX:AIA)
Tim Serjeant (Buy): Auckland is a buy for us, Matthew. Look, there's clearly going to be some significant short term earnings impacts, but it's a regulated asset by us largely and yeah, we think that regular asset base will double and triple over the next five and 10 years. It's going to be more priced closer to where the 10 and 30 year bonds are doing, not this year's [inaudible 00:00:44] but [inaudible 00:00:45]. So it's a buy for us.
Matthew Kidman: Pick your seat, Chris. Get on any plane you want. Buy, hold, or sell?
Chris Stott (Sell): You could. Sell for us, Matthew. Short term impact of the virus will put a lid on it for the next few months, but at some point there'll be a great buying opportunity but not quite yet.
2. NextDC (ASX:NXT)
Matthew Kidman: Okay. Here's one that's actually up since the 20th of February. Market's down 20%. NextDC, buy, hold, or sell?
Chris Stott (Hold): Hold. One of the best results of reporting seasons, some had strong announcements in terms of winning new customers, but valuation wise it's still quite high so I'll hold for now.
Matthew Kidman: The cloud doesn't stop for a virus, Tim. NextDC, buy, hold, or sell?
Tim Serjeant (Hold): Hold, Matthew. Agree with Chris. We've seen some transactions in the space recently. Macquarie buying AirTrunk and the Future Fund buying a chunk of Canberra data centres. That's helped propel NextDC short term, but I think it's a hold for now.
3. Integral Diagnostics (ASX:IDX)
Matthew Kidman: Okay. Normally healthcare doesn't skip a beat, but we haven't got time. We're testing for the virus. Why would we go and get an image? Integral Diagnostics, buy, hold, or sell?
Tim Serjeant (Buy): Look, we think it's a buy. Couple of reasons, one is I think indexation over the next couple of years is going to help underwrite the revenue line and volumes should benefit from higher modalities like MRI and PET, which Integral is favourably exposed to. So it's a buy.
Matthew Kidman: It's done pretty well. Down on 9-10%, market's down double that. Buy, hold, or sell?
Chris Stott (Buy): Buy. Really strong management team in the right sector at this time with the virus around so I think they're well-positioned so longer term, so buy.
4. Johns Lyng Group (ASX:JLG)
Matthew Kidman: Okay. Defence generally has been pretty porous. Market's getting through it quite easily. What's one stock you think can actually make that tackle and stop the onslaught of the selling?
Chris Stott (Buy): Johns Lyng. So the ticker is JLG. So they're a building services company, well exposed to strata management. That's been a growing part of their business recently as well as on the insurance side of the business, they're well-positioned to benefit from the catastrophic events we've had in Australia unfortunately over the last few months. So still we think they're under-owned out there by the market, well priced, a really strong management team again. So for us, it ticks a lot of boxes. It's fairly defensive in this market.
5. EBOS (ASX:EBO)
Matthew Kidman: Okay. How about you, Tim? got something out there that's going to save the world for us?
Tim Serjeant (Buy): Don't think they'll save the world, but EBOS. EBO is the ticker. The genesis of that business is the Symbion health business. And so it's the largest pharmaceutical wholesaler in the market, but also they own the management contracts to the Terry White Chemmart brand and also BlackHawk, the dog food business. But I think the key to that business is its scale and the investment they've made in automation and their logistics network. They have a unit cost advantage over the peer group. And I think given what's going on at the moment, you're probably going to see short term, healthy volumes for PBS dominant medications.
Matthew Kidman: There you have it. There's still plays out there with the shoulder pads, on the mouth guard in, and still making those tackles very defensive.