With the great rotation underway, value investors are once again enjoying their time in the sun. So for this week’s Buy Hold Sell, we have Vince Pezzullo from Perpetual Equity Investment Company joining industry heavyweight John Murray from Perennial Value Management. Tune in as these two dyed-in-the-wool value investors take us back to basics and discuss six ASX100 ‘value’ stocks from the materials sector. As Host Matthew Kidman tells us: “Boxes, Bricks, and Steel, we're giving you enough materials to build a house - and possibly a stock portfolio”. The companies discussed include Boral, Amcor, Bluescope and James Hardie. We also ask our two guests to share a stock they think looks attractive today. Vince picks ‘one of the last resource stocks that hasn’t run yet’, and John calls out a top ten stock set to start increasing its dividend. Access the video and an edited transcript below.
Below is an edited transcript of the Buy Hold Sell video.
Vince: Sell. I think the best of its years are in it's past. I think they're very acquisition driven and the balance sheet I'm too sure about.
John: Hold, Matt. Good management team, solid defensive type business. It's a hold.
Bluescope Steel (ASX:BSL)
John: Very well run. Share price has run a long, long way. I think it's a sell at these levels.
Vince: I'm a hold on Blue Scope. I still own it. I think there's still a lot more I can get out of that business, particularly in Australia, out of that Port Kembla asset and they're very leveraged to a US infrastructure cycle in North America.
James Hardie (ASX:JHX)
Vince: I'm a sell. I find it's ... I struggle with what you're paying to get a dollar of earnings out of James Hardie.
John: I think it's a sell as well. It's just too expensive. Well run and very good exposure to the US housing cycle, which I think can continue to run over the next few years, but it's very expensive and also part of the cash flow, still goes to pay out the asbestos claims, which is something that's often forgotten. I think it's a sell.
John: Well, tricky one. Compared to a couple of weeks ago, they've just bought Headwaters out. We're trying to get our heads around that. Look, I think what's happening here is they're switching from predominantly Australia to predominantly US. If you believe in the US housing cycle kicking up, if that even half happens, it's a buy.
Vince: Buy. Now that it's derated about 15%, I think it's in the price the acquisition and really what it looks like to us is he's playing in the US housing cycle, so it's a asset-light business, so it’s a lot lower fixed cost leverage. It allows him to manage his cycle a bit better. We're a buy.
Vince: Buy. If you look at the spot Alumina price where it is right now, it's gapped up quite significantly to over $310. It's a high quality business with no debt, has good yield, and it's one of the last resource stocks that hasn't run, really, at this point.
BHP Billiton (ASX:BHP)
John: Buy. The free cash flow generation coming out of the big mining companies of which BHP is the largest is massive. So spot prices in the key commodities have picked up significantly compared to earlier this calendar year, so if spot prices stay anywhere near where they now, then the free cash flow generation will be huge over the next couple of years. Kind of ironic that you can make money out of resource cycle stocks at the bottom of the cycle as opposed to the top of the cycle, but that's the way it is with resource stocks sometimes. The free cash flow generation big pickup there, Matt, and therefore, big pickup in dividends as well, which is good. And the share price with follow as well. It's BHP for me.
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Episode Recorded on 7/12/2016
Disclaimer: The information contained in this presentation is general in nature and should not be relied upon. Before making any investment of financial planning decisions, you should consult a licensed professional who can advise you whether the decision is appropriate for you. Contributors to this show may have commercial or financial interests in the companies mentioned.