Buy Hold Sell: 7 stocks for offence and defence
It goes without saying that the outlook for markets and the global economy is highly uncertain due to COVID-19. The bulls believe we're in for a V-shaped recovery in 2021 if 'Operation Warp Speed' delivers a vaccine by year-end. On the other hand, there could be no cure. Or one which is ineffective or refused by a large segment of the population.
In an investing context, one strategy to play an uncertain outcome is to build a portfolio comprising quality companies whose earnings can re-rate materially in an optimistic scenario, whilst holding defensive stocks if the vaccine thesis doesn't pan out.
In this episode, Sean Fenton of Sage Capital and Matt Williams of Airlie Funds Management discuss seven companies that can set you up for offence and defence. They kick-off by discussing Qantas, Coles and Cochlear, and then each bring their best growth idea and their top defensive stock.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 7 October 2020.
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Vishal Teckchandani: Welcome to Buy, Hold, Sell, brought to you by Livewire Markets. My name is Vishal Teckchandani. In this episode, we're going to get your portfolio in tip-top shape. We've got seven stocks for offence and defence. Joining me on the show today is Sean Fenton from Sage Capital and Matt Williams from Airlie Funds Management. Welcome, gents. Matt, starting with you, Qantas, buy, hold, sell?
Matt Williams (Buy): It's a buy. Domestic tourism is going to take off, pardon that pun. And Qantas is the best place for it. They have not wasted this crisis. They are getting their business in shipshape condition.
Vishal Teckchandani: Speaking of not wasting a crisis, if Qantas was a bear, is Rex Airlines poking the bear? Because it's trying to take away market share from Qantas with that Sydney to Melbourne route. Buy, hold, sell on Qantas?
Sean Fenton (Buy): Qantas is a buy. Rex is a bit of a sideshow. It just doesn't have the scale to really impact things. You've got a stable duopoly structure there. Virgin went broke. You've got Bain in there trying to earn a return, and that can be a very profitable domestic business. Ultimately, international will come back, and Qantas has got a really valuable loyalty franchise that continues to grow well.
Vishal Teckchandani: Okay, Sean, staying with you, and switching gears to a defensive stock. Coles, on a price/earnings ratio of 24, dividend yield of 3.4% fully franked. It's a fortress. It's got lots of toilet paper. Buy, hold, sell?
Sean Fenton (Hold): It's a hold. It's a bit of a snooze. It’s done really well, food demands up, people are eating more at home. That's very good. Some extra costs going through the business, stable earnings, but you're paying for it.
Vishal Teckchandani: You snooze, you lose though. Buy, hold, sell on Coles.
Matt Williams (Buy): Oh, I'm a bit boring. Vishal, I'd say buy. I don't mind sleeping and you know, Coles has more business improvement in it than potentially Woolworths does. And so, I think for that reason on a medium-term, they can grow profits, maybe ahead of Woolworths, hopefully. So, for that reason, it's a buy.
Vishal Teckchandani: More of a midfielder – Cochlear. It's in an otherwise growing industry, but it's the case because of COVID, governments have commandeered hospitals. Buy, hold, sell?
Matt Williams (Hold): For me, it's a hold. Look, this is a high-quality company. There's no doubt about it. But the market is expecting it to have the same high profit in '22 than in '19. I'm not sure that's going to happen. And at plus 40 times P/E, I think that's just a bit rich. So, hold.
Vishal Teckchandani: Plus 40 times P/E, it's also had a terrible year with that patent infringement, the judgement that it's paid out. It had to raise a lot of capital. Buy, hold, sell, Cochlear?
Sean Fenton (Buy): I'm going to go buy. I agree the PE ratio’s eye-watering, but it's not the most offensive valuation out there in the market. Probably the thing for me is that their major competitor, Advanced Bionics – now owned by Sonava – has had some product recalls. And there's a reasonable amount of displeasure in the audiology community with that. They're going to continue taking market share as a hospital's re-open and the pent up demand there. They'll come back to strongly.
Vishal Teckchandani: Now we did ask our guests to bring a bonanza of stock ideas. So, they're going to give me their top defensive and top growth idea. Sean hit me. What do you have?
Star Entertainment Group (ASX:SGR)
Sean Fenton (Buy): My defensive idea is Star Entertainment Group. It has pretty defensive gambling exposures, but has been impacted by lockdowns. But we've really seen through to the strength of their underlying client base, the desire to continue to visit the casino is quite strong. The cashflow is pretty positive. As we reopen, that'll come back. It’s on a pretty attractive valuation multiple.
Sean Fenton (Buy): And in terms of growth, we quite like Resmed as a longer-term growth story. It just continues to deliver. It's invested heavily in informatics, growing its broad penetration into the US. Sleep apnea’s is not going away at all. It has been interrupted a little bit in terms of sleep labs and referrals. As that comes back, we expect to see growth to continue to fire through there. So we quite like that.
Vishal Teckchandani: Matt, Sean is gambling on sleep apnea. Can you beat him? What have you got for me?
Matt Williams (Buy): For defence, I think I've got nearly the best business in Australia, and people are sick of me talking about it. But Bunnings, owned by Wesfarmers; now Wesfarmers has other businesses, but Bunnings is 65% of the profit and Wesfarmers, huge company, $3 billion in EBIT. The company has nearly no net debt. So, it is just so perfectly placed to do either capital management or an acquisition, something to add value. And it yields 3.5% fully franked.
Aristocrat Leisure (ASX:ALL)
Matt Williams (Buy): For growth, look, Aristocrat's had a really good quarter. I'm sort of hoping that that can continue on, as the US reopens up. Casinos, the pent-up demand, we've seen very strong performance from casinos as they reopened. That's good for Aristocrat. Its digital business is going along okay. So, I'm hoping it can continue to have a good 12 months ahead of it.
Vishal Teckchandani: With the stock ideas from these fundies, your portfolio is going to be kicking goals in any economy.
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7 stocks mentioned
2 contributors mentioned
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.