Buy Hold Sell

6 stocks to back in FY24

Mon 11 Sep 23, 10:16am (AEST)
BUY HOLD SELL PrimaryYoutube (91)
Source: Livewire Markets

Key Points

  • Quality companies outperformed: Companies with strong fundamentals, such as pricing power and low debt, were able to weather the storm and deliver strong results
  • The focus is now on the outlook: Investors are more concerned about the future earnings potential of companies than their past performance
  • Some stocks were sold off despite beating expectations: This is because investors were concerned about the outlook for these companies, or they were simply taking profits after a strong run-up in the share price

While September may historically be the market's worst month, there's still plenty to look forward to. 

Reporting season is now done and dusted, for one. And there are only 24 days to go until another public holiday. In case you needed a reminder of how quickly this year is passing, Christmas is now only 108 days away. 

For those who snapped up tickets early, Livewire Live is also fast approaching. We'll see those lucky people on Tuesday.  

But back to reporting season... Of the fund managers this lowly anonymous writer has spoken to, most seem to have had a surprisingly positive month. For others, particularly the holders of the month's portfolio bombs, it probably wasn't so soothing. 

So in this episode, Centennial Asset Management's Matthew Kidman was joined by Auscap Asset Management's Will Mumford and IML's Michael O'Neill for a deep dive into the August reporting season. 

They explain why some companies were sold off despite beating expectations, name four of the best results from the month (and whether these results can be sustained going forward), as well as two of the worst.

Plus, they also name one stock they believe investors can comfortably hold until the next August reporting season in 2024. 

Now that's something you can look forward to. 

Note: This episode was filmed on Wednesday 6 September 2023. You can watch the video, listen to a podcast, or read an edited transcript below. 

Edited Transcript 

Matthew Kidman: Hello and welcome to the Livewire Markets' Buy Hold Sell. My name is Matthew Kidman and the final siren for company profit reporting season has just sounded and it was a pretty difficult period, even though the wins were probably equal with the misses. Stock prices jetted around like a pinball for the whole month of the profit reporting season. But to dissect it a bit further, I've got two of the best in the business. I've got Will Mumford from Auscap and Michael O'Neill from IML. Welcome gentlemen. Will, I'll start with you. We're going to give you one word to describe the whole profit reporting season, what's that word?

Will's word for reporting season: Quality 

Will Mumford: Quality. I thought this reporting season was all about the quality companies outperforming. We've had some really big headwinds in the half from interest rates to cost inflation and the quality companies were able to navigate the storm better than the rest, and generally come out the other side in a better position.

Matthew Kidman: My portfolio didn't feel like it was full of quality because my stocks moved around a lot. Michael, what's the one word you're going to use to give us today?

Michael's word for reporting season: Caution 

Michael O'Neill: The word is caution. It's a tired word, but I think a lot of the impacts around rising rates, inflation, and the COVID hangover are affecting different industries differently. So it really depends and that's why the outlook is so much stronger for companies that do have scale, pricing power, and lower debt.

The focus is now on the outlook

Matthew Kidman: I thought we got rid of that word, COVID, but it still seems to come up. Now let's get into some companies. Some of the companies did all right and maybe even beat or met expectations, but felt the wrath of investors and got sold off. Why was that? Why do you think that we went through that period? There seemed to be a number of reasons.

Michael O'Neill: It was pretty mixed in terms of misses and beats, but the focus is very much on outlook now. I think there are several companies with some big leadership changes, Qantas (ASX: QAN) and Fortescue (ASX: FMGin particular. There are also companies where there was anticipation and short-term disappointment. I think Telstra (ASX: TLS) was a standout there. Shareholders basically passed over the result and it was really overshadowed by the fact that they decided that they weren't going to sell down further in their InfraCo business. Really took away from what was quite an exciting result.

Matthew Kidman: Well, you don't want to give investors too much expectations, do you? If they get a bit disappointed, it gets sold off. So the same question for you. There were a number of companies that I can think of, a company like AGL (ASX: AGL) hit their numbers, reiterated, but all of a sudden stock down 10, 15%, like I said, like a pinball. Have you got some logic as to why that was happening this time?

Will Mumford: Well, As Druckenmiller said, it's really dangerous to focus on the now. You've got to think 18 months ahead. And so whether a company beat or missed, it wasn't important by itself. I thought what the market was rewarding was companies where they think earnings might've bottomed and that tended to be in the consumer discretionary space as well. Whereas companies where they might've beat, but the outlook out 18 months or so is still a bit cloudy, there was less interest.

Stocks with cracking results (and positive outlooks)

Matthew Kidman: One day we'll get this outlook clear. It never seems to be clear, does it? So let's get onto the good side of the ledger. What were a couple of stocks that surprised on the upside, and actually went on with it in terms of share price? And of course, is that sustainable? Can we now, a few weeks on, buy those stocks?

Will Mumford: Sure. So two for me. The first is Nick Scali (ASX: NCK). So Nick Scali has really been in the eye of the storm in terms of interest rate headwinds and the 20-year lows in housing turnover. Yet, it's still punched out a result that was well ahead of consensus and if you annualize their second-half number, you get to a number that's ahead of consensus again for next year. And I think that's pretty conservative given they're not expecting any real cost inflation, and management also has a whole bunch of organic and inorganic growth opportunities in front of them.

My second choice is Carsales (ASX: CAR), which also had a good month. And the key thing for Carsales is that now half of their earnings are coming from their international businesses. And these international businesses have a really long growth runway because the features that Carsales has added to its Australian market and monetized, are just starting to roll out internationally now. And Carsales earnings per share growth is now on a through-the-cycle basis pretty similar to REA (ASX: REA), but its PE is at a 30% discount and I think there's room for this gap to close. 

Matthew Kidman: So we can keep holding those two stocks?

Will Mumford: Yep, that's it.

Matthew Kidman: Okay, Michael, that's going to be hard to beat. I can't think of two better than that. Give it your best shot.

Michael O'Neill: I'll give you two exciting ones from my perspective, Brambles (ASX: BXB) and Medibank (ASX: MPL). Brambles - it was a great end to the reporting season on a high, with the stock up 7%, and 20% earnings growth. Now they're not immune from de-stocking from the retailers. Their volumes were down 2%, but they achieved a whopping 16% price growth and you have confidence that that is sustainable into the next year and that their guidance of double-digit earnings growth is possible because their net promoter scores show strong underlying momentum in the business. 

In Medibank's case, you've seen a very good recovery from the cyber event. In fact, both their brands grew in the fourth quarter. Their outlook is very strong. For the first time in their listed history, we're actually seeing insurance premiums for health insurance growing at a slower rate than underlying CPI inflation as well as wage inflation. Plus they've got a $2.5 billion investment book, which until recently was earning close to 1% and now should be earning about 5%.

Companies that disappointed 

Matthew Kidman: Nothing like a good cyber attack to get a company focused. So let's go to the other part of the ledger, companies that disappointed and probably have a pretty bleak future because we've seen some things we didn't like. You got one for us?

Michael O'Neill: I think Ramsay Health Care (ASX: RHC) was a bit of a shocker, down 12% on the day. Not much in the way of pricing power. They had trouble pushing their costs through to their customers, particularly in their French business where their margins were absolutely crunched. They also carry a lot of debt and they're facing high debt costs into the next year. You'd rather own a health insurer that has no debt, plenty of excess capital that they're investing and is also actively taking costs out of the industry and disrupting some of the practices such as rehabilitation.

Matthew Kidman: Go figure, Will, healthcare is supposed to be defensive and resilient. And there we go. The healthcare stocks weren't so good. Have you got one that disappointed you and you think, "Well, I don't need to go there for a while?"

Will Mumford: Well there was one that we do hold and that's ARB Corporation (ASX: ARB) and that's been a market darling for quite a while, and it was down 15% or so on a result that did beat the markets estimates. But it was interesting that the company did manage to recover from that and ended up higher for the month. And for me, it's just a reminder that growth companies that are founder-led with a long runway are really scarce on the ASX. So you've got to be careful about getting too negative about a short-term headwind because ultimately the market's going to redirect its focus to the long-term opportunity, and these companies can re-rate faster than you might think.

Matthew Kidman: Okay, that sounds positive. But let's now take on a bit of risk. Was there one company, one result, one stock that you're happy to buy and hold right through to this time next year when we are having the same conversation in '24?

Will's BUY: Eagers Automotive (ASX: APE)

Will Mumford: So to be honest, I think we'd like to hold most of our portfolio out to '24, but my pick for earnings resilience is going to be Eagers Automotive. So if you take Eagers' order book, their electric vehicle initiatives, their domestic M&A opportunities, and their international opportunities, you get to a revenue number that's already ahead of consensus for CY24 revenue. And they've got a particularly active management team and I'd be very surprised if they don't come up with more initiatives between now and then to create more value. And so you add on their really great balance sheet as well as their below-market multiple. And that's one that I'm happy to hold.

Matthew Kidman: You've got a car that can move quicker than what Eagers can sell you?

Michael's BUY: Charter Hall Retail REIT (ASX: CQR)

Michael O'Neill: Well, I believe we've got a very safe opportunity that I'd be happy to sit on for the next year. It's Charter Hall Retail REIT. Now that might seem a bit out of character for us. We've been very negative on the property.

Matthew Kidman: No, I'm excited. REITs are exciting. 

Michael O'Neill: We virtually hold nothing in the way of REITs outside of CQR. It's a real gem in what has been a beaten-up sector, it has a $4 billion portfolio in neighbourhood retail and petrol stations, with anchor tenants like your Woolworths and BPs. It has over a decade in terms of weighted average lease expiry. And you've got some rent growth in there both from turnover and CPI. So you put all that together and the non-discretionary aspect and the fact that vacancies aren't particularly cyclical. It has a 7.5% yield and is a company that has relatively low debt.

Matthew Kidman: That sounds nice... While you can lose money in the share market as we know, 7.5% is good. So we've got to be cautious. But if you can go and find some quality in the market, it looks like the next 12 months could be quite profitable for you. Thanks for watching. That was a terrific show. And what I would do if I was you and what I've already done is go and subscribe to the Livewire YouTube channel and get some terrific content.

Written By

Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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