The market has overlooked the hidden value in these well-known stocks
Markets price stocks based on the amount buyers are willing to offer and sellers are willing to accept.
But market pricing isn't always fair pricing, and it's here where Wilsons plies its trade.
"Often a hidden value situation might be a sort of a sum of all parts type concept," says David Cassidy, head of investment strategy at WILSONS.
"There might be something in the business we really like, maybe there's some parts of the business that we don't like or the market doesn't like, that's holding back the company. So often it might be some sort of corporate strategy or corporate action that releases that value, maybe a demerger or a takeover bid."
To find out which stocks fit these profiles, read or watch below.
Note: This interview was filmed on Thursday 12 May, 2022. You can watch the video or read an edited transcript below.
- Reposition towards resources
- Gambling stocks are a defensive play with strong cashflow
- News Corp is a 2 for 1 deal with REA
- CSL offering structural growth
Where are you putting your capital to work?
David Cassidy: I think if you look at the focus list, it's a little bit different to how it was set up back end of last year. So a little bit less tech, a bit more on the resources side in summary. But we are starting to see some good value and what I'd call quality growth. So we've certainly got a number of names on the radar screen at the moment, probably a little bit more defensive with the margin than it was six months ago, but not a massive change from where we were sitting last year.
Can long-duration assets perform?
I think we need some shift in the macro conditions. We probably need some sort of stabilisation in that long bond yield, but we think we're getting pretty close to a peak in long bonds, particularly in respect of where the Australian tenure is now. We're in that sort of 3.4, 3.5 level. It's probably going to come down to what happens with inflation and expectations for central banks.
But I think if we get some stabilisation in the long bond over the next few weeks or few months, I think some interest can come back to the growth names because they've been pretty hard hit in the last six months or so.
Why have you still maintained positions in big tech?
Yeah, well, that's one of the sorts of approaches we take within the focus list or the model portfolio. So often a hidden value situation might be a sort of a sum of all parts type concept. There might be something in the business we really like, maybe there's some parts of the business that we don't like or the market doesn't like, that's holding back the company. So often it might be some sort of corporate strategy or corporate action that releases that value, maybe a demerger or a takeover bid.
To give you an example, a stock we put into the focus list earlier in the year wasTabcorp
, so we've obviously got the demerger vote coming up quite rapidly, in middle of May.
We really like the lotteries business. is a very defensive infrastructure-like business with a very strong cash flow generation.
Then you've also got the wagering business, which is a reasonable business, but not as high quality as lotteries. So we think when you do get the demerger, if that vote goes through, as we think it probably will, the market will focus on just that high quality lotteries business. There's potential for maybe a bid from someone at some point and that pure infrastructure-like asset.
The wagering business itself has probably got some COVID recovery to come through over the next year or two, so we can get a valuation well in excess of $6 for Tabcorp versus a current share price closer to five. So we do think on a sum of parts basis, that looks interesting. It's quite defensive, which we thought was not a bad thing in the current market.
Another situation that hasn't gone as well but we still think there is hidden value and even more so now is News Corp. We've always had a view there that you're getting an REA for quite a cheap price. We think it's even more the case now, given the weakness in News Corp over the last week or so.
We think at current levels, let's call it $24, $25, News Corp is undervalued, particularly because of that REA piece, which has been under pressure, but we do think either you're getting REA cheaply or you're getting the rest of News Corp and there are some good assets outside of REA for quite a cheap price at the moment.
So that's another sort of hidden value situation. If we've got an REA demerger, I'm not sure if we're going to get it, but if we did, that'll be a potential catalyst to release that value out of News Corp.
Does volatility lift the number of mispriced stocks?
I think so. I think volatility and a bit of market stress always releases some potential value. You do tend to get the baby thrown out with the bathwater in these sorts of situations. So with the index now, talking to you now, under 7,000, we think a lot of stocks are starting to look quite interesting, particularly if, as I said, we do get that bond yield peaking out fairly shortly. And markets, if they do relax a little bit about this thematic of central bank tightening, I think the market might go back and do the work on a number of stocks that have been pretty hard hit over the last three to six months.
Do growth stocks still have a place in the portfolio?
We do tend to have a core of the portfolio in what I'd call either structural growth or quality growth. We don't tend to look like a deep growth manager, but we do tend to like stocks that have got the market positioning or the thematics around them that will enable them to grow above the market or above GDP over the medium to longer term. So sometimes those stocks could be what I'd call defensive growth, something like a CSL Limited (ASX: CSL), which is a core holding for us, but we are getting more positive on CSL because they've had a bit of a COVID downswing. We think the growth coming out of COVID will be much stronger. It's a very high quality business.
Sometimes the name might be more of a cyclical growth situation, like with Macquarie Bank (ASX: MQG), which we tend to hold as a core holding. With James Hardie (ASX: JHX), which is pretty beaten up now because of the concern around rising rates in the US and the impact on US housing. We think it's a very high-quality business trading back at around 16 times earnings now. We think it looks, against the thematics, it actually looks quite interesting on a price for growth basis here on a medium to long term view. So they're the sorts of core names we tend to hold in the portfolio. Maybe we hold a few high growth companies. We hold Xero (ASX: XRO), a little small-cap called Telix (ASX: TLX), but typically it's more that sort of moderate to highish P/E type of stock that we tend to like to hold as a core position.
WILSONS think differently and delve deeper to uncover a broad range of interesting investment opportunities for their clients. To read David Cassidy’s latest research, visit their Research and Insights.
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David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half our podcast where he sits down with leading experts across equities, fixed income and macro.