"It just got too damn cheap": Henry Jennings on CSL’s 70% rally and one stock he's backing to go higher

Please note, this interview was recorded on the morning of Friday, 21 August.

What a difference a few months can make.

CSL has gone from one of the ASX’s most unloved blue chips to one of reporting season’s biggest winners, with its shares now up around 70% from their lows.

And it wasn't alone in delivering some extraordinary moves during the third week of reporting season. Zip surged after its result before giving back some of those gains the following day, while former growth darling Temple & Webster was hammered.

As Henry Jennings from Marcus Today puts it:

“We have seen extraordinary volatility, and that is going to continue… we just have to get used to it and strap in and hold tight for a fast ride.”

In this week’s reporting season wrap, Jennings joins me to unpack six closely watched results, including whether CSL’s extraordinary rebound has gone too far, why BHP deserves its premium to Rio Tinto, and why the struggles of the US consumer could actually be good news for Zip.

Stocks covered

• CSL (ASX: CSL)
• BHP (ASX: BHP)
• Zip (ASX: ZIP)
• Evolution Mining (ASX: EVN)
• Judo Capital (ASX: JDO)
• Temple & Webster (ASX: TPW)

SUMMARY

The third week of reporting season delivered another reminder that investors need to be prepared for some extreme moves.

Jennings says what has surprised him most is that the volatility is no longer confined to less liquid small and mid-caps. Some of the market’s biggest companies, including CSL and Cochlear, have experienced enormous moves, while crowded short positions are being punished.

“We have gamified the market, and with all games, there’s winners and losers.”

Here’s his take on six of the week’s most interesting results.

CSL: “It just got too damn cheap”

CSL was the story of the week. Its shares have now rallied around 70% from their lows, including an extraordinary post-result surge.

Jennings believes the rebound reflects both improving sentiment towards global healthcare and a stock that had simply become far too cheap.

“CSL just got to the point where it was just too damn cheap ... [the market] really was pricing in the worst-case scenario by a long shot.”

The result itself wasn't spectacular, and Jennings believes CSL still has problems with Vifor following significant writedowns. But investors are now looking forward to a stabilising business rather than backwards at its mistakes.

After such a dramatic recovery, however, Jennings believes investors who bought around the lows could consider taking some money off the table.

“Maybe now is the time to take at least some profits off the table because it could go sideways from here for a little while as it consolidates.”

BHP: “It probably deserves that premium over Rio”

BHP continues to earn Jennings’ support, particularly as its growing copper exposure differentiates it from Rio Tinto.

With BHP substantially outperforming Rio this year, Jennings believes the premium can persist. He points to its relatively simple business, strong numbers and financial flexibility, including the billions unlocked through its recent silver royalty deal.

"I think the copper premium in BHP is going to continue. It really has pivoted quite well, and it's a simple business."

Jennings is also comfortable with the upcoming CEO transition, describing it as a relatively straightforward handover given the incoming boss has already been around the business for a long time.

Zip: “I’m expecting this one to go higher”

Zip produced plenty of green arrows in its earnings, and Jennings thinks there could be more upside ahead.

Importantly, bad debts remain under control despite rapid growth in the US - a key consideration given credit concerns contributed to the stock being punished following previous results.

But there is an interesting wrinkle to the growth story. Americans are increasingly using buy now, pay later for everyday expenses such as groceries and bills.

Jennings sees that as evidence of strain among households on the lower end of the US’s “K-shaped” economy. That might not be particularly encouraging for the American consumer, but it is creating an opportunity for Zip.

“That’s good for Zip. It’s not necessarily good for the US economy, but it is good for Zip and they are making the most of it.”

Evolution Mining: “I continue to like Evolution”

Evolution delivered records across earnings, cash flow and dividends, and Jennings remains a fan.

Its margins remain highly attractive with the gold price well above its all-in sustaining costs, while its copper exposure provides another important source of earnings.

"As you say, record profits, margins, cashflow, higher returns to shareholders, all in sustaining costs (AISC) of$ 1,795 to $1,995 an ounce where the gold price is significantly higher than that."

“It is one of the great copper plays, I guess, on the ASX combined with gold - two metals that are doing very well.”

Judo Capital: “Hopefully it will continue to stabilise”

Judo Capital has been punished after credit problems involving a handful of large borrowers raised concerns about concentration risk.

Jennings says the latest result provided something the market desperately wanted: greater transparency around its exposures.

“The market likes transparency. We like to see what we’re getting and we like to know what the risks are.”

Those risks haven't disappeared. Judo still needs to balance its growth ambitions against credit quality and bad debts, particularly given the higher-risk business lending segment in which it operates.

But Jennings believes the stock may have reset around $1 and sees scope for a recovery as investors become more comfortable with those risks.

Temple & Webster: “There’s no reason really to be there”

Finally, Jennings remains wary of former growth darling Temple & Webster.

The company is contending with a slowing economy and housing market, while its previously lofty valuation left little room for disappointment. Jennings says he had already been sceptical when its market capitalisation ran well ahead of the profits the business was generating.

With weaker housing activity potentially weighing on demand for furniture and homewares, he sees little reason to rush back into the stock despite its substantial fall.

“It’s certainly one that I’m keeping an eye on, but there’s no reason really to be there at the moment, I have to say.”

What's on next week?

For a calendar of companies reporting next week, plus key profit and dividend forecasts, be sure to check out this great article from my colleague Carl Capolingua.

Carl, Kerry Sun and Joseph Lyons are also running a daily live blog, where you can follow results as they happen, along with the key takeaways from earnings calls and their analysis.