With global markets officially in correction territory this week, February has very quickly become a month to forget for investors. But as the famous expression by Winston Churchill goes: “Never let a good crisis go to waste.” For patient investors who’ve been squirrelling away cash, the time appears nigh to unleash some dry powder. That’s exactly what Matt Haupt of Wilson Asset Management and Ben Clark from TMS Capital have been doing.

In this video, they reflect on earnings season and what the severity of coronavirus could mean for companies’ August results. They also discuss their cash weights pre- and post- this trading month, and call out the 9 company results that caught their attention. The returns for these stocks range from +10.52% to -37% over the last four weeks.

Notes: You can access the video or podcast for this Buy Hold Sell episode below. The transcript will be available shortly. This episode was filmed on 26 February 2020.

Edited Transcript

Vishal Teckchandani: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name is Vishal Teckchandani and today we're going to conduct a postmortem examination of the February 2020 earning season. Joining me on the panel is Ben Clark from TMS Capital and Matt Haupt from Wilson Asset Management. Matt, I might start with you. I know going into 2020 you were looking for signs of a recovery in the Australian economy. We've had February earnings season. Have you seen those signs of life come through in company results?

Matt's takeouts from earnings season

Matt Haupt: Yeah, I think the company results were relatively okay. They weren't fantastic, but I guess the real strength, which I was surprised at, was the banking sector. The Australian banks seem to be under pressure through regulatory costs and also slowing mortgage growth. But what we saw was a pickup in mortgage growth, and we saw better NIM outcomes than was expected, so that for me was a real surprise at the earnings result. And especially with CBA, you saw the market reaction there on the day, it continued with it too, a big pushup. For me, that was a big outcome of the reporting season.

Vishal Teckchandani: Okay, so you were impressed with CBA's results, you're happy with that company?

Matt Haupt: I'm very happy with the company, it's incredibly expensive. When you look at it on a global basis, it's one of the most expensive banks. They do have their DRP sterilisation going on at the moment, so that's about 10% of volume for the next month. The share price will have some support, but I'm cognisant of the valuation.

Ben's takeouts from earnings season

Vishal Teckchandani: Ben turning to you, what were your thoughts? Is there enough earnings coming through to carry this market to new highs going forward?

Ben Clark: Yeah, I was probably a bit underwhelmed on the earnings front. It felt to me like there wasn't a lot of top-line growth and companies are still cycling hard to try and take a bit more cost out of their businesses, so a bit better at the profit line. In terms of taking the market forward, we've had a really good 2019. Valuations got pretty full toward the end of the year and starting into this year, so you do sort of wonder whether we might see a year of consolidation on the bit of a wide range and we've already seen a pretty wide range. Another theme I took out of the earning season was for a number of past earnings, it's been the global growth companies that have really been the outperformers and this was different this time.

It felt like a lot more of the domestic businesses' share price-wise actually did better. And you know we've got the corona thing in there as well, which makes it a bit tougher. It still felt to me like there was a bit of rotation going on within the market.

Vishal Teckchandani: Are we going to see a changing of the guard more focused on domestic businesses and domestic growth?

Ben Clark: I don't think so. I think it's a shorter-lived thing, personally, because I just don't think the earnings growth is there to warrant the continued movement in those prices. There'll be pockets of the market that will keep going and the banks were definitely a surprise, but I'm not sure if we're starting to see, well, I don't think we're starting to see the change in a trend.

Forward-looking statements

Vishal Teckchandani: Okay. All right, so one of the most important things about reporting season, of course, is forward-looking statements. Ben, how confident did you feel CEOs were amid coronavirus about their outlook for earnings across fiscal year 2020?

Ben Clark: Yeah, it's sort of depended on which ones you listen to because there definitely was a level of, I think companies were much more wary about giving guidance. And I actually think it's better to be cautious and not give guidance because the way the market reacts is if you don't hit your guidance, then the share price gets hit. And I think there's not a lot of transparency for some businesses in terms of where earnings will land for this year, so you know, I think there was definitely some more guarded outlook statements.

Vishal Teckchandani: Would you agree with that Matt?

Matt Haupt: Yeah, 100%, obviously the coronavirus, very fluid situation, economic impacts and variables are unknown, so to give an outlook statement now, I agree with Ben, I think is almost silly given the outcomes are very much fluid. It has been said you'd get really hurt if you miss your guidance, so at this point in time, be conservative. Put out a statement around the uncertainty and some of the moving parts, but definitely not hang your head on guidance now because it's very much unknown.

ASX 200 - more or less bullish?

Vishal Teckchandani: Can I ask you guys to quantify - after February earning season, are you more or less bullish on the ASX 200?

Matt Haupt: Yeah, that's a very good question, given the volatility in the market. It's really around, again, put around coronavirus but it's really around the next few weeks, if this can be contained and the flow-on effects. Obviously China's ground to a halt and the flow-on effects are now happening globally, so if it doesn't get contained in the next few weeks, that first quarter of economic activity will be very poor. And then if it flows into second quarter, the rest of the year is going to be very tough, so for us it's very much a day by day analysis of the situation. We're very cautious around companies specifically linked to consumption or tourism or especially on the airlines, but we've got a constructive view around materials. I think China is going through their whatever it takes moment over the next few weeks and President Xi has got a real big test now to get things going and going, so I think they overstimulate and the resource companies for us look like a reasonable bet in this market.

Vishal Teckchandani: Ben, what are your thoughts there?

Ben Clark: Yeah, I mean from where we are now, because we have had a pretty nasty selloff, I'll probably be a bit more bullish about the outlook for the rest of the year. You've got to preface that by saying you hope that the coronavirus can be contained because if it's not, there will be, I think a second wave of earnings warnings into the end of this financial year and probably a pretty grim August reporting season, sort of looking back. There's a big swing factor there that none of us really can hang our hat on. I think if you're in the right businesses and you know they might go through a pretty rough six to twelve months, longer term, maybe longer than a year, I'd be pretty bullish from this point.

Cash weightings and where the opportunities are

Vishal Teckchandani: Let's move on to portfolio construction. At the start of February, Ben, I think you were at 9% cash and Matt you had doubled your cash waiting to 12.5%. What was your thinking there, increasing that cash?

Matt Haupt: It was really around valuations and the momentum in the market. It looked very much overbought; volatility which we look at all the time as around twelve which was abnormal. And then there was talk around the Fed, obviously they were doing the repurchase agreements and they were going to plan on tapering, so we just thought took a cautious approach. Mark was fully valued, the environment, the backdrop, which was supporting the market was going to be tapered away and there'd be dialogue around that. And then obviously coronavirus, throw that in there too, is a pretty volatile mix for us. And we thought time to realise some cash and take some of that volatility out of the portfolio.

Vishal Teckchandani: And what does that cash weighting look like for you now?

Matt Haupt: We're about 10% at the moment, so we deployed a little bit back into the market over the last few days, which is very measured approach. So we're just putting, 25-50 bps to work every day. Just becoming more fully invested over the next few weeks.

Vishal Teckchandani: Can you give me one to two stock names that you're liking, that you're putting that cash to work into?

Yeah, there's quite a few. So again, we've been fairly long, some of the resource names, so Fortescue Metals Group (ASX:FMG), we've bought some more Fortescue the last few days. Again we're thinking the stimulus, what China needs to do, is consumption which will take a while to kick in and fiscal policy will take a while to kick in. What kicks in immediately is fixed asset investment, so I think that's the lever that we're pulling. That's one we've bought, and then another one we've bought as well, same sort of thematic is Rio Tinto (ASX:RIO), so their results are out tonight. We'll see what that'll be like but they've got the ability to pay special dividends through the capital management, so we're quite positive on that sector still.

Vishal Teckchandani: So putting cash to work and buying resources. Ben, what's your cash weighting looking like now? '

Ben Clark: Yeah, it's around sort of 7% so we trimmed a bit more into January, and then we've been putting a bit of money into the market over the last few days as well. We don't tend to take a market, it's pretty stagnant sort of weighting, in that I take a view that it's extremely hard to predict what the next 6-12 months hold. Ultimately, the more fully invested you are, I think over the long-term you do better. It's more on a stock price, stock basis and we're happy, if we think a stocks run a bit too hard, to skim a bit of money out of it and to put a bit back in if we feel it's come off a bit too hard, so we more do it around that.

Vishal Teckchandani: Sure, and can you give me one to two names that you put money back into?

Ben Clark: Yeah. Okay. It's actually a couple of the stocks that have been "coronad" in the last few days, I don't know if that's a verb yet. But one would be Sydney Airport (ASX:SYD), which we sort of think will definitely take an earnings hit as a result of what's happening. But going in its favour, is bond yields have continued to decline. And once we get through this period, we think that becomes a much more attractive investment again. 

Another one's WiseTech Global (ASX:WTC), and look, I'd preface that by saying there could be a second downgrade, this would be one of those ones that if this continues on longer than expected. The company sort of said they're hoping by April, that we're sort of basing our guidance on. I do think it's going to be bumpy over the next 12 months, but I'm taking a longer term view. I think they built out a really phenomenal platform and you know the logistics industry will come back online.

2 results that the market overlooked or got wrong

Vishal Teckchandani: It's an interesting mix of stocks that you guys have put money into. Let's move on to some other stock-specific stories. What's one result that you think the market overlooked or got wrong?

Ben Clark: Yeah, I pick IMF Bentham (ASX:IFM) for this one. It's a company we've been following for a number of years, and it's almost impossible to estimate what six months of cash flows or earnings will look like for this business because it's so lumpy in terms of settlements and wins in court cases. But I think the next few years looks really good for them because they had this major win with Wivenhoe, they're morphing into almost like a fund manager, which is turning their business much more capital-light, so they're not having to fund a lot of the litigation. They're taking a lower cut of the potential winnings, but they're taking risk out of their book. The pipeline continue to grow and we think they've got really good management, so I think the market's just got a bit too short term focused on a six month period and is not looking at the bigger picture.

Matt Haupt: The one I thought the market really got wrong was Amcor (ASX:AMC). So Amcor, very stable business, very defensive, and it's not a high growth business. And what happened is they upgraded their low end of their guidance, which was through a combination of interest savings and synergies. And the interpretation from the market was that this was a very low quality upgrade, the core business isn't growing as fast as expected. But talking to management, there was very conservative guidance given and the reason why they pulled the bottom end up was synergies and interest rate costs savings are 100% guaranteed, and they still have the second half to play out, which was tracking ahead of the expectations. But the market interpreted it as a low quality upgrade and the stock then sold off, so I think that was read wrong by the market.

2 results that the exceeded expectations

Vishal Teckchandani: And lastly was there one stock or which one stock completely exceeded your expectations?

Matt Haupt: That would have been Challenger Financial Group (ASX:CGF), so Challenger, we made a fair bit of money out that one, buying it sub $7. Unfortunately, we sold out before the latest result and the stock was up around 13% on the day. That totally exceeded expectations on most areas of the business in particular, the Japanese fund flows, so for us that was a total surprise and we got that wrong unfortunately.

Vishal Teckchandani: Did you buy in after the results?

Matt Haupt: No, no. Still waiting but this pullback is a potential opportunity.

Vishal Teckchandani: Ben, what about you?

Ben Clark: I'll go for Invocare (ASX:IVC) which has actually only just come out, but I think there's a lot of scepticism amongst fund managers looking at this business because we've seen some margin declines. The management responded to that by aggressively investing into their centres. I think the bear argument here was that they're doing this just to protect their margins, protect their market share, and they weren't going to get a good return on capital of what they put in. But the numbers are really starting to come through now as the centres are reopening and they've reported sort of about a 5% increase on volumes in the renovated centres versus the unrenovated centres, and about an 8.5% improvement enabled. So it looks like those returns really are coming through and in fact, I think they're coming through ahead of where management was expecting them to. I think that's got good momentum now and it's probably a buy, I suspect that the business could keep moving ahead.

Vishal Teckchandani: It certainly was a very interesting reporting season. There's lots to think about, but hopefully you've got some great insights and stock ideas from the experts.

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