Buy Hold Sell: Your most-tipped large caps
Welcome back to Buy Hold Sell for 2022. Our first episode of the year takes a look at your top-tipped stocks for the year ahead.
Livewire's James Marlay joins Prime Value's S.T. Wong and Airlie Funds' Matt Williams to assess your favourite stocks for the year ahead and outline a few big picture ideas to help you navigate the volatile market environment in 2022.
Big names are discussed, like Macquarie Group and Westpac, as well as resources and mining giants BHP, Fortescue Metals Group, Mineral Resources, Pilbara Minerals, and Woodside.
Plus, a fun question: Will Bitcoin or the Aussie housing market outperform over the 12 months ahead? You won't want to miss this one.
Note: This episode of Buy Hold Sell was shot on Wednesday 19th January 2022. You can watch the video, listen to the podcast or read an edited transcript below.
James Marlay: Hello, and welcome to Livewire's Buy Hold Sell. My name's James Marley and on behalf of the team here at Livewire, I'd like to wish all our viewers and readers all the best for a sensational 2022. I hope you're all safe.
And I hope you had a great Christmas and New Year period. In this episode, I'll be asking our two guests to share their views on the 10 Aussie large-caps stocks that received the most votes in our recent investor survey. It should be a great episode. And my guests today are ST Wong from Prime Value, who is making his Buy Hold Sell debut - ST, welcome to the show. And we're also joined by Matt Williams from Airlie Funds Management, a familiar face, Matt happy new year. I hope you had a great break.
Before we get stuck into Buy Hold Sell, we're going to take a look at a couple of the interesting responses that came out from our annual reader survey. We had over 4,000 people participate in this survey, and we're going to pick out a few of the interesting tidbits from that and ask Matt and ST for their views on that.
For a bit of fun, we're also going to give them one of the topical questions we put in the survey - we're going to ask them if they believe that Aussie house prices or Bitcoin will be the better performing asset class in 2022, but we'll save that for the end. Matt and ST, get your Bitcoin projections on.
But let's start with the survey. A couple of the topical views that came out were on interest rates and inflation. And I'm seeing this across the market; people talking about this being a really big issue.
Whether it is or isn't, we'll find out: 60% of readers said they expect the RBA to hike rates this year, which is against the narrative coming from the RBA and 65% believe that the US 10 Year Bond, which is a really important number to keep an eye on, will be higher in 12 months time.
So, Matt, I'm gonna start it with you. What's your view on these issues and how are you thinking about them?
Matt Williams: I'm surprised it's only 65%, such is the dominance of this narrative that interest rates will be higher, at least in US official rates in particular and probably here at some time. Look, I don't know.
But it does make sense. Inflation is definitely here. And so what we do at Airlie is look at our portfolio and go, we don't really know what's going to happen exactly, but if the dominant narrative is interest rates are going to rise and inflation's going up - if this really does occur, what's the worst that can happen to us in terms of the stocks in our portfolio. Then on the other side, we look at well, if this narrative is not true, but the market is starting to price it in, where are the opportunities in the market, from that angle.
James Marlay: ST have you got anything to add to Matt's comments around thinking about higher interest rates and inflation and some of those reader expectations that we've alluded to?
ST Wong: Thanks, James and Matt for your insights. I think the key to point out in all of this is that the narrative is also evolving, right? In the last couple of weeks, the supply side of things has come into the picture much more significantly. But I think, as Matt said, it is hard to project out 12 months, 24 months, and what it does, the companies that we actually own. So for us really, this year, in particular, is really about sussing out or seeking out companies that are truly well managed.
We want to back companies that can navigate the tough environment, the changing environment, and the ever-evolving environment. Because as an investor, we can't actually do too much with the external environment, but certainly the companies that we invest in can see what's happening with their supply chain, with their companies. And therefore they should be able to navigate the scenario; if we back a good measure team.
James Marlay: This is a broad question ST, but we often hear that inflation equals bad for equities, and can result in higher rates, reducing the multiple on stocks. How much of a headwind do you think rising inflation and rates would be, specifically for Australian large-cap stocks?
ST Wong: Two points to raise, James. One is that we think that liquidity in the market is still pretty high. So I think from that perspective, that's a general positive for the market environment, despite the accelerating narrative on interest rates. I think a second point to raise is, the market really thrives on earnings. And if earnings are still growing on the back of the economy growing, then there should be some growth in the Australian large-cap space, in any case.
James Marlay: Matt, just on this idea of rising inflation and rising rates being a headwind for equities, specifically for Aussie large caps. Do you agree with that narrative or have you got a counterview?
Matt Williams: Inflation is definitely a headwind and it's a two-pronged thing. First up, the operational effects for companies. There's been a good study that shows there's a certain amount of inflation where the market does really well.
Zero to 3% is like Goldilocks inflation. And generally during that time, over the last hundred years, the market goes well. When inflation hits 6% and plus, markets don't like that.
So, currently, we're in that sort of spike of 6% in the US. A lot of that will be transitory, I'm sure. But definitely, the markets do not like inflation.
The other effect is on valuation. A lot of companies have been bid up as interest rates have gone down - some long-duration companies, infrastructure-type companies, very high growth kinds of businesses, quality businesses - because the discount rate used in valuation has gone down, which means the value has gone up in those companies. So as this unwinds, this could lead to a lot of volatility this year.
James Marlay: Well, let's get into the stocks. We're going to go through the 10 most-tipped large-caps as voted by the Livewire readers. Matt, I'm gonna start with you on CSL, but before I do, when you first saw the list of stocks, what passed through your head? Does it seem like a sensible selection?
Matt Williams: I think a very solid group of companies. And some of the names that we own in the portfolio. So, I thought it was a very sensible group of companies.
CSL (ASX: CSL)
James Marlay: Well, let's get into it CSL. It was the number one most-tipped stock - $270 a share today. It's almost exactly where it was 12 months ago. Is it a buy, hold or sell?
Matt Williams (HOLD): I think it's a hold, James and it's one of those stocks that I talked about in terms of valuation. The discount rate used in the valuation is quite important. It's a high-quality business. It's going to be good over the long term, but it's a hold at these prices.
James Marlay: Okay, ST. CSL, is it a buy, hold or sell?
ST Wong (HOLD): CSL is a hold for us at 35 times. It has a strong excellent management track record, the proposed acquisition of Vifor will be positive over the long term. In the short term though, plasma collection remains an issue, and it faces increased costs. We are still uncertain of the impact for FY23. So it's a hold, at 35 times.
Macquarie Group (ASX: MQG)
James Marlay: Staying with you, ST. Macquarie Group, it's making us redefine the term "Australia's Big Four". It recently surpassed the market cap of Westpac. Is it a buy, hold or sell?
ST Wong (BUY): Macquarie is a buy for us. We believe that the growth is really about backing value creators at Macquarie. It is one of our largest and longest-standing positions. So we are really backing the value creators at Macquarie. It has an outstanding track record, developing leadership in a number of structural growth segments, including infrastructure, renewables, and the digitization of financial services. So we like their ability to identify growth options.
James Marlay: ST likes Macquarie. Matt, are you a buy, hold or sell on the silver doughnut?
Matt Williams (BUY): Yes. Ditto for me. What he said. They're firing on all cylinders, it's a buy.
Pilbara Minerals (ASX: PLS)
James Marlay: Staying with you, Matt. Pilbara Minerals - it was the best performing stock in the ASX 200 in 2021, riding the lithium coattails. Buy, hold or sell?
Matt Williams (SELL): It's a sell. Lithium has just gone vertical in the last three to four months. The fundamentals look pretty strong for lithium. But it's just run very hard. It's a sell for me.
James Marlay: Pilbara Minerals. It was on a one-way train in 2021. Buy, hold or sell?
ST Wong (HOLD): Pilbara is a hold. Great asset next to where Mineral Resources has its lithium assets as well. Strong positions with its partnerships. But clearly, lithium prices are probably at the top end of the range. So we are rather comfortable with that. So it is a hold for us.
BHP Group (ASX: BHP)
James Marlay: BHP, they put a line in the sand and are really embracing that move towards decarbonisation. ST, is it a buy, hold or sell on BHP?
ST Wong (BUY): BHP is a buy. Valuation appeal is attractive, as is the balance of commodity exposure plus quality assets. It looks attractively priced given it is trading on four times EBITDA. Free cash flow yield of 11-12%, and that's attractive to us.
James Marlay: Matt. BHP, what are your views? Are your buy, hold or sell?
Matt Williams (BUY): BHP is a buy. It's gonna be a bit dislocated in the next few weeks as it leaves London and becomes a bigger stock here in Australia. But it's a buy for those reasons ST said, and just the balance sheet optionality, you can't go past it.
Mineral Resources (ASX: MIN)
James Marlay: Next stock, Mineral Resources. One smart fund manager described it as the cheapest lithium stock on the ASX in 2021. Matt, no idea who that might have been. Buy, hold or sell?
Matt Williams (BUY): That was my colleague Emma Fisher. And she called it, nailed it absolutely brilliantly. It's almost doubled since she wrote that piece for Livewire. It's a buy. However, it's a medium-term buy. It's had a massive run with the lithium price. In fact, Airlie has reduced our substantial position in the stock. So look, it's still one of our biggest holdings, but it's more of a buy over the medium term now.
James Marlay: ST, Mineral Resources, is it a buy, hold or sell?
ST Wong (HOLD): MIN is a hold. We like the growth and undervalued options that the company has. Strong balance sheet as well, has had a great run of its share price over the last six months, possibly fronting a soft quarterly ahead. Looking for a better entry price. So for now, it's a hold.
Fortescue Metals Group (ASX: FMG)
James Marlay: Okay. ST, staying with you. Fortescue Metals Group, enjoying a bit of a recovery in the iron or price after a challenging year. Buy, hold or sell?
ST Wong (SELL): Fortescue is a sell. Peak valuation, trading at a large EBITDA premium to its peers in the form of BHP and Rio Tinto. Possibly CapEx and execution risk in WA. So back solving for the implied long-term iron ore price, Fortescue seems to be trading on the long-term price of about $80 per tonne. And that seems expensive to us.
James Marlay: It's a sell for ST. Matt, is Fortescue a buy, hold or sell?
Matt Williams (SELL): I agree with ST. It's a sell for me. It's back at a share price where the iron ore price was a lot higher than this on the way up. So I think it's had two hard a bounce. And the fundamentals just don't support it over $20, we think at the moment.
Woodside Petroleum (ASX: WPL)
James Marlay: We're onto number seven, which is Woodside Petroleum. BlackRock CEO Larry Fink recently expressed views that the oil and gas industries have a role to play in this energy transition. It sounds un-sexy being in that fossil fuel space. Is it a buy, hold or sell on Woodside, Matt?
Matt Williams (BUY): Ah, Larry Fink - he wants to have his cake and eat it too. Doesn't he? I'm not sure which way he's going from day to day.
But look, Woodside to us is a buy - even though we've got our oil exposure somewhere else. But we think the Aussie oil companies have really underperformed the oil price itself and a lot of global competitors. Really not sure why exactly that is the case. It seems maybe company-specific, but we think there's a bit of catch up to do. So Woodside is a buy.
James Marlay: ST. Woodside Petroleum? Is it a buy, hold or sell?
ST Wong (BUY): Like Matt, Woodside is a buy for us. There is a robust global gas demand thematic rolling through the market at this juncture. As Matt said, the sector is yet to benefit from recovering oil prices. Perhaps some uncertainty in regards to the potential flow back of Woodside shares from BHP shareholders. That could be holding back the share price in the short term. But the valuation seems attractive. And that makes it a buy for us.
Westpac (ASX: WBC)
James Marlay: Staying with you, Westpac. It's the only one of the traditional Aussie banks that investors have had such a love affair with that made our top 10. Is it a buy, hold or sell?
ST Wong (SELL): Westpac is a sell, James. We think its operating trends have been weak and the outlook looks challenging. And the key question for us is whether the bank's aggressive cost-cutting programme is an enabler of franchise growth or a disruptor. That question we're finding hard to answer. The risk we find is that expectations for Westpac are actually quite low. And it is trading at the low end of its trading history. Our major bank exposure is through NAB, so Westpac is a sell for us.
James Marlay: Okay, Matt. Westpac, one of the traditional Aussie banks, is it a buy, hold or sell for you?
Matt Williams (BUY): I'm going to be contrarian, James. I'm saying it's a buy, like your viewers and readers. It's hated, but NAB was once hated. NAB is now loved. It can take a while for these things to turn around though. ST's right. They've got a big operational and governance reset to get themselves through. But look, Westpac is a franchise. It's not going out of business. They're about to have a $3 billion buyback hit the market. So, I think it's been a bit oversold, but it may take a while to get themselves out of the hole that ST has described, but it's a buy for the medium term.
Wesfarmers (ASX: WES)
James Marlay: Wesfarmers is the ninth stock on the list. We're nearly through the top 10. Wesfarmers has a good suite of businesses. They provided an update just recently - some of their businesses are going well, others are feeling the impact of COVID. Matt, buy, hold or sell on Wesfarmers?
Matt Williams (BUY): Wesfarmers is a buy. We've owned it for a long time. Bunnings is, if not the top business in Australia, it's one of the top three. What more can you ask for? A division that earns 70% return on invested capital, almost a monopoly, Australian housing, it's here forever. It's a forever kind of company. So it's a buy.
James Marlay: Yep, absolutely. That Bunnings story has been incredible to watch, it just seems like it's everywhere. ST, buy, hold or sell on Wesfarmers?
ST Wong (HOLD): Wesfarmers is a hold. Bunnings is truly central to the investment case for Wesfarmers, and that's been really positive. I struggle with coming to a valuation of the company. So I am on the sidelines for Wesfarmers for now.
Aristocrat Leisure (ASX: ALL)James Marlay: The final stock rounding out our top 10 is Aristocrat Leisure. It had a good year from a share price perspective in 2021, a little bit soft of late. Buy, hold or sell?
ST Wong: James, I don't actually invest in gaming stocks or gaming-related companies such as Aristocrat or Crown for the matter. But I'll give you my view on the fundamentals of the company. So despite not having a recommendation, its shares have clearly underperformed due to acquisition Playtech, but operationally it seems to be doing really well. It's gaining momentum in market share in the US and also in digital. That seems really positive. And the valuation doesn't seem to be overly demanding. So, from that perspective, it looks somewhat positive, but I don't actually have a recommendation on Aristocrat.
James Marlay: Matt, Aristocrat. Is it one that you look at, at Airlie?
Matt Williams (BUY): Yes, it is James. We've owned it for a number of years and I think it is a buy. As ST says, the shares have sort of gone into a bit of a holding pattern by this Playtech acquisition meanders through. Operationally, they are absolutely killing it in their gaming ops business. And that is a real long-duration business now. That's like an annuity-style income, that's good. You could bank that for a number of years now. The digital business is still one that the market is trying to wrap its heads around. At the moment it's firing. It can go through ups and downs, but, it is still one we are not a hundred per cent certain of. But, for us, at $43, the fundamentals look pretty good for Aristocrat. So it is a buy.
James Marlay: Awesome. Thanks very much for giving us that view. Alrighty, folks, as I promised at the start of the episode, we're gonna bring one of the questions that we put to our readers in our survey to Matt and ST.
It's a bit of fun. We asked if you had to choose between Bitcoin and Aussie real estate, which do you think will outperform in 2022. Which one you would pick? ST, I'll start with you.
Bitcoin versus Aussie real estate
ST Wong: Wow, James, that's a really tough one. I'm going to go with property, only because I like things I can feel and touch, and see. So real estate, that's a no brainer for us.
James Marlay: Matt, same question for you, Bitcoin or Aussie houses in 2022?
Matt Williams: I know what you're doing here, James, you're going to replay this at the year-end, when Bitcoin has probably doubled from its lows. It's off 40% from its highs. So I don't know, the probability is it probably goes up this year. But like ST, I'm not going to pick something that I can't even value. It's really just guessing. And look, my money is in shares and property. It's not in Bitcoin. So I'm going to stick with where my money is.
James Marlay: Well, thanks for giving us those views. I can't remember what I voted, but I think I may have done a bit of research on Bitcoin at some stage, a bit of FOMO striking in, but I haven't bought any yet. So I guess I'm with housing as well.
But gents, as you can hear, the kids are coming back from the beach, which means our time is just about up. To all our readers out there, I want to say thanks very much for tuning in. As I said, I hope you have a great 2022, and you're all safe and healthy.
Matt and ST, thanks for going through the top 10 marathon today. I really appreciate it. Hope you guys have a great year. And to all those viewers out there, if you're not a subscriber of our YouTube channel, make sure you hit subscribe. We've got lots of great content coming up for you in 2022.
Note: An earlier version of this video included incorrect charts. We have re-uploaded a new version. We are sorry for any inconvenience this may have caused.
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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.