Given the climate of the economy, pessimism is in the air. It’s hard to predict when the market will hit rock bottom, and nothing but bad news is being broadcasted. The upside – this may be a sign of recovery.
Last week, the Pengana Emerging Companies Fund, run by Ed Prendergast and Steve Black, hosted their investors’ webinar which showed their outlook for the remainder of 2020, amongst the chaos that has kicked the year off. They compared the economy today to the GFC, and informed investors of their investment strategy heading into a recession.
In my summary of the Pengana webinar, I’m pulling out the key takeaways, including why the Portfolio Managers are positive that recovery is coming, and their top stock picks in this time of volatility.
How to manage risk
Despite being positive about a recovery coming, Ed Prendergast stressed the importance of managing risk during this volatile period. His tips to investors revolve around balance sheets. Everyone’s talking about them, and Ed thinks they need to be interrogated.
So why are balance sheets so important during this period? The only companies that will recover from a recession are those with a strong balance sheet. The Emerging Companies Fund had Flight Centre as a holding but sold it immediately. The reason was not necessarily concerned with the current climate and travel bans, because travel bans will eventually be lifted. It was the weakness of the balance sheet. Ed noted that if Flight Centre, and similarly Webjet had stronger balance sheets, they may have been able to survive a recession, but it does not look likely now.
Other keyways to manage risk is to take note of a company’s progress. Noted in the GFC, Ed says that forced capital raisings are something that investors should not shy away from. These capital raisings are usually a sign that the company will perform.
Finally, ignore false signals. They’re hard to pick but you learn from experience, according to Ed. During the volatility that is consuming global economies, companies can see a great result, doubling in a short period of time. Only to hit zero within a few weeks. Trust your judgement, know the company, and look at the balance sheet!
Is a recovery in sight?
It’s the question every investor wants the answer to. When will the market hit rock bottom? When should you start buying again? The reality is, not even an expert can give you the answer. For Pengana, the best way of knowing when the recovery is looking back at the GFC.
During the GFC, long-term investors were the winners. The market hit rock bottom whilst the news was still bad, and the economy looked to be going down even further. However, if you increased cash during this period, you would have missed out on over 60% growth for small caps over twelve months. Ed’s advice is to hang in there. When the news is only cynicism, the economy looks like it will keep falling and the attitude around you is pessimistic, that’s the time to buy. It may not be just yet, but it’s definitely coming.
Stock picks for an inevitable recovery
Ed Prendergast has three stocks that he believes will outperform when the market chooses to recover.
1. Cleanaway Waste Management (ASX:CWY)
This is an industry that won’t feel an impact from the wrath of COVID-19. All residential properties will still collect rubbish, regardless of a pandemic. The positive of Cleanaway is their lack of exposure when it comes to restaurants. The impact of the virus has hit the hospitality industry hard, and any exposure to this could affect Cleanaway – luckily this isn’t case. The stock has fallen 20-25% over the last two weeks – an opportunity for Pengana to increase their holding to 4% of their portfolio.
2. IPH Limited (ASX:IPH)
IPH is the biggest provider of trademark and patents in Australia. The stock is down 31% as of late, yet this is another opportunity to increase your holding, says Ed. Similar to Cleanaway, IPH accounts for 3-4% of Pengana’s Emerging Companies Fund.
3. Clover Corporation (ASX:CLV)
Clover is an international leader in omega 3 supplements. Mostly targeting infants, the stock has fallen 54% from recent highs. Every parent wants to ensure that their children are healthy, particularly during this pandemic, therefore Ed sees the stock soaring during the market’s recovery. The drop in price meant an increase to 1.5% of holdings for Pengana.
It’s not all doom and gloom, there will be a recovery. Only time will tell when that recovery comes, but for the meantime, interrogate those balance sheets!
You can watch a full replay of the webinar here