Buy Hold Sell: 5 stocks the brokers are backing
While people may debate the independence of broker research, one thing they do boast is access. Access to company management, to information and data that you may not be able to get your hands on, like expensive FactSet or Bloomberg terminals, analyst reports and free lunches, to name a few.
And while the old proverb states that there truly is no such thing as a free lunch, our brokers may have a leg up when it comes to company analysis.
These include Star Entertainment Group, Bapcor, James Hardie, Ansell and Metcash, all of which receive resounding "buys" or "strong buys" from Australia's sell-side.
But will our fundies agree? You'll just have to watch the episode to find out.
Note: This episode was filmed using Zoom on the 18th of August 2021. You can watch, listen or read an edited transcript below.
James Marlay: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is James Marlay. And today we're doing something different. We're scanning the broker universe to find out the stocks that the brokers love. These are a selection of five companies that have got strong buys on them from the sell-side community. And we're going to put those ideas to our two fundies, Kelli Meagher from Sage Capital and Emma Fisher from Airlie, to see if they agree with what the sell-side is saying.
So Kelli, let's start with you. Star Entertainment Group, it needs a bit of love at the moment. It's been in the doldrums. Is it a buy, hold or sell?
Star Entertainment Group (ASX:SGR)
Kelli Meagher (HOLD): It's a hold for us. I can see the appeal of a reopening trade. When things reopen, revisitation will obviously increase and the stock price may have a pop. But honestly, I just think there's too much regulatory risk. If I'm going to own a reopening trade stock, I'd rather own a much cleaner story that doesn't have the regulatory risk, like a travel stock, like Corporate Travel (ASX:CTD). So it's a hold for us.
James Marlay: Emma, relative to its peer, it seems relatively unscathed. Is it a buy, a hold or a sell for Star?
Emma Fisher (HOLD): I'm going to go with Kelli on this one and say hold. You could see in a few years' time, reopening plus they bring online their new Brisbane project and then you throw in the fact that it looks as though they may be getting more slot machines out of the New South Wales government at their Sydney casino. So all of that story seems quite positive. The reason it's a hold for me is the balance sheet. I don't think they have any breathing room. They need everything to go right. It's a capital intensive business. I wouldn't always be betting on everything going right.
James Marlay: Staying with you, Emma, Bapcor. In 2020, the automotive industry was really a bright spot in the economy. Is Bapcor a buy, hold or sell?
Emma Fisher (BUY): I'll say buy. Full disclosure, we don't own it, but out of those ratings, I think it's a buy right now. Really solid core business. As we know painfully, when we take our cars to get serviced, you are a price taker. So that underpins a lot of pricing power for that core business. It has an undemanding multiple, good balance sheet, solid execution. I'd say buy.
James Marlay: Kelli, it's effectively an essential service getting your car fixed. Are you buy, a hold or a sell on Bapcor?
Kelli Meagher (BUY): I'm going to agree with Emma on this one and say it's a buy, and particularly after today where it actually sold down 5% after delivering a very solid result. It's a good defensive, robust core business, great management team, good balance sheet, store rollout growth. So I'm going to say buy.
James Hardie (ASX:JHX)
James Marlay: We got consensus views here. Now, if there's anything we love more than cars in Australia, we love houses. James Hardie, building products. They delivered a really strong result. Its share price has been on a tear. Buy, hold, or sell?
Kelli Meagher (BUY): It's a buy from us. Actually, it's a strong buy. We really like James Hardie. I think on a valuation basis, it's looking really attractive. And fundamentally it's got a lot of strong growth ahead of it - not only just from the strong US housing market, but they've actually instigated a really good new marketing strategy of advertising directly to the end consumer, the homeowner. Would you believe they've never actually done that before? They've always targeted builders and architects and relied on them to recommend their product to the end-user. And in terms of their multiple compared to the market - really undemanding, lots of growth ahead of it. Plus, it has a great balance sheet and great management.
James Marlay: It's a strong buy from Kelli. Emma, are you a buy, hold or sell on James Hardie?
Emma Fisher (BUY): I'm clearly liking the way that Kelli thinks today. So I'm also going to say buy. I echo all of her comments. The only thing I'd add is on the margin side, right now they're making very healthy group margins of around 23% and they're facing a lot of cost headwinds. And those costs headwinds this year are about 4% of sales. You're seeing their main costs, pulp and freight, rollover. So if that continues, there's potentially quite a lot of upside very quickly for group margins. So execution, balance sheet, everything going swimmingly with some potential upside on margins as well.
James Marlay: Ansell came out of the blocks in 2020. It really bounced hard. It's been going sideways thus far in 2021, but it has got a good record of paying dividends. Is it a buy, hold or sell?
Emma Fisher (HOLD): I will say hold. It is tantalisingly cheap and it's got a good balance sheet. The reason I would say hold is pricing's coming down. Gloves, they're a bit of a commodity. There's capacity now coming online. So that combination of your costs going up, your pricing coming down, you could see margins get squeezed, which is what I'd be concerned about.
James Marlay: Kelli, have you got a buy, a hold or a sell on Ansell?
Kelli Meagher (BUY): It's a buy for me. I do agree with Emma - in a certain part of the glove market capacity is coming on and supply could be an issue, in exam gloves. But they also sell surgical gloves and gloves to the manufacturing industry and the automotive industry. And so in a way, Ansell's been a COVID winner with the exam gloves, but it's also a reopening trade with the economy growing strongly, manufacturing and surgery coming back online. And they actually do have some pricing power in those glove markets, because there's more IP involved in developing those gloves versus the single-use exam gloves. Great track record, strong balance sheet, always willing to give money back to shareholders if need be, so good returns on capital. So it's a buy from us.
James Marlay: The last stock for today is Metcash. And I must say I nearly fell off my chair when I saw the share price chart for Metcash. It's been in the doldrums for a while. It's had an absolutely stellar run over the past 18 months or so. Is it a buy, hold or sell, Kelli?
Kelli Meagher (BUY): It's a buy from us, James. It's really benefiting from the work from home thematic, people doing more of a local shop rather than schlepping to the larger shopping centres to Coles and Woolies. They're really doing some differentiation with their new store formats that are very attractive and offering a different range of products for the customers that are getting bored with Coles and Woolies. And they also have moved into the hardware segment. They bought Total Tools recently. So with Mitre 10 and Total Tools, they're now the number two player in hardware, which is growing really strongly with the strong housing market. Also, on a valuation basis, it's quite cheap on about 16 times and it's trailing at a bigger discount to the market than it usually does. And arguably, it's looking better than it has done in a long time. So for us, it's a buy.
James Marlay: Emma, I know you're a fan of Bunnings, Total Tools, Mitre 10. Are you a buy, hold or sell on Metcash?
Emma Fisher (SELL): I'll say sell. Full disclosure, we did own it and we sold out in the mid threes. So take my recommendation with a grain of salt, because I'm a bitter former owner who didn't hold it all the way into the $4. But at current valuations, I would say sell. As you said, we're big fans of Bunnings. And there is daylight between Bunnings and Mitre 10, despite as Kelli saying it is the number two. And I think the reason I'd say it's a sell today is you're getting their food and hardware business on sort of cyclical highs for both of those businesses plus this sizeable re-rate. So I think on valuation grounds, it's a sell.
Well, the brokers reckon all five of these stocks are a buy, but for our fundie guests today, we've had a buy, hold, Ansell. I hope you enjoy this show as much as I did. Give it a like. And leave your comments on your thoughts on the stocks we've discussed today.
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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.