Considering 5 stocks that are moving post their reports

James Gerrish

Market Matters

Market volatility in the US has dipped under 20% for the first time in almost a year but as the chart below illustrates its way above the complacent levels of 2018-19, as we’ve said previously while we do expect some major spikes in volatility this year a few months at these subdued levels are almost the norm before the fireworks commence. Hence at this stage, we feel the likely major moves will be beneath the hood (on the stock levels) as investors switch between both stocks and sectors in search of alpha (outperformance) e.g. so far in 2021 the Banks and Resources have rallied strongly while the “yield play” stocks like Utilities and Real Estate have fallen.

With the action focused on the stock level, reporting season looks like the ideal place to search to add value at least short-term.

MM believes we will see another decent spike in volatility in 2021, but not yet.

The US VIX (volatility) Index Chart

Today we have briefly looked at five ASX200 stocks who have recently reported including some that we covered in yesterday’s note after we’ve fully digested their numbers and hence crystallised our thoughts.

1. Bendigo & Adelaide Bank (BEN) $10.56.

BEN delivered an excellent result which saw the bank catapult over 11% higher, a huge move for the sector. The headline profit was a 27% beat on consensus expectations plus the board announced an interim dividend of 23.5c (versus 15c expected) plus they expanded margins. This was a really strong result relative to downbeat expectations plus it’s another sign of a resurgent Banking Sector.

We recently made one tweak around our banking exposure going up the risk curve buying Virgin UK (VUK) however looking at the relative performers in the space recently with CBA underperforming the cheaper / lower quality banks, it will be interesting to see if this continues after CBA trades ex-dividend today, if so we might join in the party! A close to 5% short position could help BEN’s upside momentum be maintained.

Depending on how CBA trades ex-dividend, we are considering a switch into Westpac (WBC), although are bullish BEN in the regionals.

MM is bullish BEN although prefer WBC on valuation

Bendigo & Adelaide Bank (BEN) Chart

2. Altium Ltd (ALU) $29.19.

Altium (ALU) fell almost 5% after its 1H21 numbers yesterday showed a top-line decline of 4% hampered by weaker margins although they did promise the second half would be better, simply not what you want to hear from a growth stock. We have no interest in ALU until we see some clear performance from this growth tech business which enjoys close ties with Microsoft (MSFT US). Technically another initial 5-10% downside feels almost inevitable

MM is net bearish ALU.

Altium Ltd (ALU) Chart

3. Aurizon Holdings (AZJ) $4.00.

Rail freight business AZJ rallied almost 4% yesterday after delivering a solid first half result with EBIT a slight beat of 3% at $454 million being the focal point. Coal volumes have been weak to start the year, tracking around 10% below last forcing AZJ to downgrade haulage expectations for the full year by around 5% to 200-210mt before a rebound in FY22. The bulk side of the business continues to do well with revenues up 8%. There remains around $50m in the buy-back kitty (out of the $300 million buyback), which could also be topped up with the sale of its Acacia Ridge Terminal on track for completion in March.

The risk/reward actually looks great for the yield-hungry local investor with a forecast yield of around 7%, especially given dividends are around 70% franked.

MM is now considering AZJ for income.

Aurizon Holdings (AZJ) Chart

4. Telstra (TLS) $3.32.

TLS recently delivered a good update with pretty much everything in-line with expectations including the 8 cents a share dividend for the half, with the companies free cash flow expectations increased from between $2.8 billion and $3.3 billion to the $3.3 billion - $3.7 billion range. This almost ensures the annual dividend of 16 cents a share is very sustainable with some potential upside in that number – something that is not being factored in by the market. In today's market, a 4.5% fully franked dividend is extremely compelling.

We see little downside in the stock and a very plausible path for TLS to trade back up towards $4.

MM is bullish Telstra (TLS) for income and some price appreciation.

Telstra (TLS) Chart

5. Beach Petroleum (BPT) $1.68.

BPT fell over 4% yesterday after delivering weak 1H21 results, unfortunately as holders a few things concerned us:

1 - Underlying earnings lifting around 5% on this time last year, thanks to a lower realised oil price – and it was a miss to expectations by around 3%.

2 - Earnings flowed through to lower operating cash flows which fed into higher net debt, one of the reasons we liked BPT over and above others was their net cash position and the optionality into a depressed energy market this afforded them. This reasoning took somewhat of a hit today.

Our initial inclination was to move away from BPT given the soft underbelly of this result, however, the stock has seen shorts increase to 3.25% of late plus the stocks down ~7% in 2021 compared to Santos (STO) which is up 10% leading me to question how much is already built into the price…..at this stage I will give BPT a little time especially as we remain bullish the sector. We are not married in any way to this position and if in doubt it will probably be cut. Today will be key to see if it embraces strength in the Oil price overnight.

MM is cautious BPT following 1H21 result.

Beach Petroleum (BPT) Chart

Conclusion

Of the five stocks discussed above, MM likes BEN, AZJ and TLS.

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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