Buy Hold Sell

Buy Hold Sell: 5 stocks for your naughty list in 2024

Fri 01 Dec 23, 9:00am (AEDT)
BUY HOLD SELL PrimaryYoutube (7)
Source: Livewire Markets

Key Points

  • Core Lithium: A sell due to challenges in lithium market dynamics and the company's high production costs
  • AMP: Simon suggests selling due to uncertainties with it's core business and competitive pressures
  • The analysts view Eagers Automotove and Premier Investments are potential turnaround names

He’s always watching. He knows who has been naughty and who has been nice. He makes his watchlists. He doesn’t need to check them twice.

No, I’m not talking about Santa – he’s far too forgiving. I’m talking about Mr Market.

With the end of the year fast approaching (my goodness, it’s already December) it’s time to look back at those stocks that have spent the bulk of the year in the naughty corner.

These stocks have been punished by Mr Market all year and will likely be receiving a lump of coal for their troubles.

Nothing cleanses like January 1, however, and the question begs: Will these stocks grow wings and rise like a phoenix from the ashes, or are their problems terminal, consigning them to another annus horribilis?

To answer those questions, Livewire’s Ally Selby is joined by Simon Conn from IML and Eleanor Swanson from Firetrail, who analyse three of the market's poorest-performing stocks from 2023. 

Plus, they also name one stock on their naughty lists for the year ahead, and what would need to happen for our experts to change their thesis and for the stock to become a buy. 

Note: This episode was recorded on Wednesday 29 November 2023. You can watch the video, or read the edited transcript below. 

Edited Transcript

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today, we're taking a look at some of the bad bunch. These companies have not been on their best behaviour in 2023. So to find out if you should be avoiding them in 2024, we're joined by Simon Conn from IML and Eleanor Swanson from Firetrail.

Star Entertainment (ASX: SGR)

Simon, I'm going to start with you today and we've got Star Entertainment Group. Its share price cascaded around 66% in 2023 alone, and if you bought the stock five years ago, you would've lost around 86% of your initial investment. Is it a buy, hold, or sell?

Simon Conn (SELL): Unfortunately, I think it's still a sell, Ally. It's rebuilt the management team and they're moving to address the issues with the government. But still overhanging is the AUSTRAC fine and the biggest concern to us is still the debt situation in the Queen's Wharf joint venture - it's still under construction. They're in dispute with Mirvac, which was disclosed in the last capital raising. So there's a lot of moving pieces, a lot of debt in that structure, so they could still need more equity - but moving in the right way. But I think at this stage, it's still too hard for us.

Ally Selby: Okay. What do you think could turn the ship around, Eleanor, and is it a buy, hold, or sell?

Eleanor Swanson (BUY): We think at these levels, Star is a buy. We think the capital raise was good in terms of taking a lot of the balance sheet risk away, and we do think they now have the capacity to pay back some of those AUSTRAC fines. We're hoping to hear a final outcome on AUSTRAC early next year and that'll remove a big overhang for the stock. In addition, in terms of the casino operations, they're currently being very closely monitored by the New South Wales government, the Queensland government. We're expecting by the end of next year those supervisory roles will be removed and that allows Star to return to normal operations and focus on returning those earnings back to normalised levels. So once you get through the next 12 months, it is a bit tough, you do have to be patient, but we think there's a lot of upside on the other side.

Core Lithium (ASX: CXO)

Ally Selby: Next up we have former market dialling Core Lithium, which has seen its share price fall around 71% in 2023. That said, you'd still be up if you bought the stock five years ago, about 380%. Eleanor, is it a buy, hold, or sell?

Eleanor Swanson (SELL): We think Core Lithium is a sell. Now, it's not surprising that the stock's down 71% - the lithium price is down around 80%. So that completely makes sense given that Core Lithium is a very high-cost producer, so it is very leveraged to the commodity price. So moving into next year, we think the supply/demand backdrop is looking still pretty challenged in lithium. We're seeing those EV penetration numbers getting pushed to the right, and as a result, we don't want to be anywhere near a high-cost producer. So we think Core Lithium's an avoid.

Ally Selby: Over to you, Simon. Would you also be avoiding Core Lithium? Is it a buy, hold, or sell?

Simon Conn (SELL): Absolutely. Core's an oxymoron. I don't think it should be a core of anyone's portfolio. It's a tough stock. There's a wall of supply coming, as Eleanor pointed out. Those high prices we saw last year have really incentivised a huge amount of supply. Places like Africa. China's a big producer. We've seen US and Australian mines coming on. And the South Americans who are restricting supply coming on as well. And then specifically Core, even though they're a producer, it's quite a fine pod-based deposit. Quite difficult to mine. We've seen they had $100 million in cash and they went and raised another $120 (million), which really surprised people. So they've had issues in terms of getting the mine up into production. The geology seems like it's quite difficult, it's got company-specific risk, there are headwinds in the commodity. We think it's a sell.

AMP Limited (ASX: AMP)

Ally Selby: Okay, last up today we have embattled financial services giant, AMP. It's been incredibly volatile lately. Simon, last one for you. Is it a buy, hold, or sell?

Simon Conn (SELL): It's making lots of changes to the business, good management team now, but I think it's still a long way to go with that business and really trying to work out what the core business is. The platform there in north we think is reasonable but not nearly generating the growth that you should expect. Financial planning is still a journey there. And then their bank, they've just called out margin pressure like a lot of the second-tier banks, it's quite competitive. It's become very competitive, actually, in the mortgage market. The oligopoly looks like it's breaking down to a large extent and that pressures their bank margins as well. So, look, it just looks too hard for us at the moment, but keep an eye on it. At this stage, it's still a sell.

Ally Selby: Okay. Its share price has fallen around 28% in 2023, and over the past five years, it's down around 62%, which has to hurt for AMP shareholders. Eleanor, is it a buy, hold, or sell?

Eleanor Swanson (HOLD): AMP's a hold, it's getting close to a buy. If we look at the share price, it's currently trading at about a 40% discount to NTA and we're expecting the company at their AGM in March will likely announce a buyback potentially up to $350 million. They've got about $1 billion of excess capital on their balance sheet and that would be very accretive given that large discount to NTA. However, on the flip side, we are seeing that management's making some poor decisions in terms of capital allocation. They're wanting to tip more capital into the bank, which is currently returning below its cost of capital. So to turn into a buy, we really need to see better discipline around capital management. So it's a hold.

What would you be selling today? And what would need to change for the stock to be a buy? 

Ally Selby: We asked our guests to bring along one stock they'd be selling today, but they think the thesis could change and it could be a buy. We want both sides of the story. Eleanor, what have you brought for us?

Eagers Automotive (ASX: APE)

Eleanor Swanson (SELL): So we've bought Eagers Automotive. We believe, moving into next year, there are a lot of things not to like about the industry, very much softening demand. We're hearing increased cancellation in terms of new orders. Also, if we move over to the US and look at some of the comparable stocks in that market, we're seeing that gross margins for new car sales are starting to revert to pre-COVID levels. Now, that's a pretty frightening lead indicator for what's likely to happen in Australia. It's frightening because these businesses operate at very skinny profit-before-tax (PBT) margins at around 3 to 5%.

So they're very leveraged to the top line and to gross margins. So you could really see some very negative operating leverage in the business. For us to get more positive on the stock it would need to get cheaper. It's currently trading at about 12 times P/E relative to US peers is on 6 times P/E. But really, we'd probably need to see a turnaround in terms of consumer sentiment. The housing market. Cars are very much linked to the housing market and maybe a little bit more comfort that those gross margins are properly factored into consensus.

Ally Selby: Okay. Over to you, Simon. What stock would you be selling today and what would have to happen for the thesis to change on that stock?

Premier Investments (ASX: PMV)

Simon Conn (SELL): There's one sector that's really boosted through COVID that we haven't really seen margins normalise and the automotive retailing is one sector, but generally, consumer discretionary stocks have been another sector to benefit and we really haven't seen EBIT margins rebase. So Premier's a great example of that. Their EBIT margins were 13% back in 2019. They're over 20% now. So they've been able to push in more volumes through the existing store footprint. But you're getting costs going up. You've got a slowing consumer environment.

We think there are further risks to the upside for the interest rates. So those two moves that you can get negative earnings momentum or jaws and that could lead to EPS downgrade. So 16 times on the current sort of consensus looks expensive when you look underneath the hood and think about the brands and their ability to sustain those margins. So we think Jay Jays and Dottis and Portmans aren't great brands, Peter Alexander and Smiggle, yes, but these are real big differentiators in terms of the margins they generate, I don't think so. So it just looks like it's really over-earning like a lot of the discretionary retailers, so we're very cautious on that one.

Ally Selby: What would have to happen for you to change your view on Premier Investments?

Simon Conn: We'll have to get a CEO to start with, get some clarity on the strategic direction of the business and really you just want to see margins rebase. Solly (Solomon Lew) is obviously a great retailer, but we think the margins look pretty full at the moment, so you want to get some confidence around where the consumer is at. So interest rates are obviously a key ingredient to that.

Ally Selby: Well I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.

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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