2 stocks fundies would bet the house on (and worst calls from the first half)

Boy oh boy, it has been a big first half. Interest rate expectations have whipped around, sticky inflation has confounded central banks, most commodities are surging - paticularly silver and gold - and AI has lit a fire under.... well, everything. 

Did we miss anything? That's right, the ASX 200, like many global markets, is trading at all time highs, at the same time many are calling for a recession in the next 12 months. 

By any stretch, that's a lot to unpack. To help untangle the market web, Grady Wulff sat down with Steve Johnson from Forager Funds Management, and Luke Laretive from Seneca Financial Solutions. 

In this episode, they work through what has and hasn't worked so far in 2024, share what they think will drive markets for the rest of the year, and highlight one thing investors could get wrong over the next six months. 

It wouldn't be an episode of Buy Hold Sell without talking stocks, so they each share their worst stock call so far in 2024, as well as one stock they would bet the house on (if they had to). 

Note: This episode was recorded on Wednesday 19 June 2024. You can watch the video, listen to the podcast, or read the edited transcript below.

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Edited Transcript 

Grady Wulff: Hello and welcome to Livewire's Buy Hold Sell. I'm Grady Wulff. And today we're looking back on what has been a surprisingly strong first half of 2024. Despite interest rates remaining elevated and the concept of higher for longer and inflationary pressures remaining sticky and stubborn, we've seen investors push global markets to record highs.

So today to discuss their insights and decide what the outlook is for the second half of the year, I'm joined by Steve Johnson from Forager Funds Management and Luke Laretive from Seneca Financial Solutions. Gentlemen, thank you for joining me today.

What’s worked, what hasn’t?

Grady Wulff: What a first half we've had. It's been a very strong first half. Steve, I'll start with you. What's worked, what hasn't? What's your outtake for the first half?

Steve Johnson: It hasn't been as good here in Australia as it has been globally, and that's probably indicative of what's working out there. You've had a small number of global mega-cap stocks really driving the overall market return. A really interesting statistic, there are more stocks last night hitting 52-week lows in the US than 52-week highs, yet the market itself is hitting an all-time high, and everyone knows the Nvidia story is driving things.

It's been a bit the same here in Australia. We've had large-cap stocks again doing better than small-cap stocks. We were all saying at the start of the year it's going to be a great year for small-cap stocks, but it has been getting better out there in small-cap land. There's some stuff that's working and some stocks that have done very, very well.

Grady Wulff: It is interesting because a lot of investors got it wrong, thinking it's a widespread rally, but it is the big names like Nvidia driving everything. So Luke, what do you think? What's gone right? What's gone wrong? Talk to me about the first half.

Luke Laretive: I think the resources sector has underperformed the industrials, and that's kind of the two ends of the barbell here in Australia. It's been about 17% under-performance. And so, the big miners, the iron ore stocks, they've been belted, and the banks are trading at record highs. That's really been the tale of the tape at the moment. And as Steve said, the smalls have been struggling relative to those large-cap companies.

Looking ahead

Grady Wulff: Now I'll stay with you. Looking into the next six months, with a crystal ball obviously, what do you think is going to work and what won't work?

Luke Laretive: Well, what won't work, I don't think the gold miners, some of the low quality gold miners that have been running are going to do as well in the second half. I think that trade will normalise to cost of labour and I suppose the quality of the assets more so than just people chasing gold stocks.

I think what will work is probably property and infrastructure. I think the interest rate story is going to be a tale of bond yields declining, interest rates getting cut or people drifting closer towards cutting rates. So, those stocks have been a bit disappointing in the first half of the year, and I think maybe they might come back in the second half.

Grady Wulff: It is a tale of industrial REITS right now, isn't it, with the AI movement, diversified exposure to AI. Steve, what major events are you expecting to shake up the markets in the second half?

Steve Johnson: I think we will see more of what we saw in the first half of the year at the small-cap end, and that is businesses that tick the right boxes. There's actually plenty of demand out there for them. I think a year ago, everything was just cheap in small-cap land, and you've had some pretty strong rallies. And we own a stock called Gentrack, which is up fourfold in the past couple of years. We both own RPMGlobal. That stock's done really well. They're cash generative, they're growing, and people are flocking to those types of businesses.

I think if you can find the stocks that can bridge that gap, i.e., the perception at the moment is that they're not in that category but they can prove themselves over that next six months, I think they'll do pretty well. And look, I think overall, the Aussie market, we started our Australian shares fund 14 years ago.The market's done 8% per annum since then. 4% of dividends, 4% of capital growth. That's exactly what you should expect from long-term equities, and you can probably expect it from here in Australia from now on. Because it's resources/commodities. Those stocks have not been hot globally and our market has not been hot, and it's, because of that, pretty sensibly priced.

Recent portfolio changes

Grady Wulff: Absolutely. Now, talking about changes to your portfolios and your client's portfolios and funds, what are the biggest changes you've made or one change you've made in your portfolio this year and why did you do that?

Steve Johnson: I'd say we've been doing more recycling than usual because of what I just spoke about. We've had a really good year in both of our funds and some of those stocks are now reaching fair value, or in the case of a Gentrack, I'd say even fairly optimistic evaluations.

And at the other end of the spectrum, there's a lot of stocks out there that have halved. We're seeing a lot of portfolio transitions going on in small-cap land. People are winding up funds. Stocks are halving and more on the back of any sort of downgrade or bad news. So there's plenty of opportunity to recycle.

Lots of similar types of businesses. I wouldn't say we've made a dramatic change to the types of businesses that we're investing in, but we're still pretty excited about the opportunities we're finding.

Grady Wulff: It's a very news-reactive market right now, isn't it?

Steve Johnson: Yeah.

Grady Wulff: Now, Luke, I'll talk to you about that. Exactly the same question. Any changes to the portfolios or funds and what you're looking at and why you did that?

Luke Laretive: In our large-cap, the biggest change we've made is we've cut our ResMed position in half. A bit more than half, actually. Just taking some profits there. That stock's had a pretty good run. Still think there's probably maybe 15% or 20% more upside. It's not that that stock's a bad choice or wouldn't fit in a portfolio at the moment, but for us, just managing, like Steve said, there's opportunities out there. There are other things we want to pursue which maybe have a little bit more upside in this market. And certainly in the smaller end of the market there's been idiosyncratic opportunities across small-caps, and it really is the question of just taking advantage of those as they pop up.

Grady Wulff: And with ResMed, we'll stick with that for a second, did you think the Ozempic sell-off, fear-driven sell-off, was an oversell or did you see that it was kind of how the news and noise affecting markets right now?

Luke Laretive: I think you've got to take sometimes the reaction the market has with a bit of a grain of salt, and certainly whilst it probably was a little bit scary for a lot of shareholders, we weren't really there then. And that kind of threw up the opportunity for us, I suppose, to have a deeper look at it, think about where ResMed might be over the next five years, and certainly from our perspective, that was an opportunity to buy a great business at a really reasonable price.

Grady Wulff: Yeah, absolutely. I don't think sleep apnea is going anywhere anytime soon.

Now, opportunities over the next six months is what we just spoke about, but what could investors get wrong in your opinion?

What could investors get wrong?

Luke Laretive: Being too bearish. I think we've got to start asking ourselves what can go right rather than what can go wrong all the time. It's our natural risk aversion, I suppose, coming through. But from our perspective, there's opportunity in the market. Valuations might seem a little bit rich if you look at things on a raw earnings basis as they are today, but certainly a lot of these businesses are coming off of cyclical lows in earnings and the cycle is starting to improve for a lot of businesses. So from our perspective, you've just got to ask yourself what can go right.

Grady Wulff: And Steve, what potential mistakes do you see could be unfolding right now in an investor's point of view?

Steve Johnson: I actually agree with that point. It's been a massive mistake over the past 12 to 18 months. I think as interest rates went up, we had a lot of clients going, "I can make 5% in the bank here. I can sit out this equities market and wait until I'm confident where inflation and interest rates are going to go, and then I'll come back and put my money into equities," and all of a sudden, the market's 25- 30% higher. And like I said, when you can expect 8% a year of returns, you can't afford to miss 25%. You've just missed three years of returns. I think just getting your portfolio allocation right and sticking to it is far more important than trying to predict where the market's going to go.

And then, I've never seen a more momentum, fad-driven environment than we're in. It's a casino out there. It's been driven by social media. Everyone's just piling onto one theme after another. And I think for the average investor, that's really, really dangerous. There's a lot of people out there that are intentionally trying to steal your money off you. They're running quite sophisticated schemes to pump up the prices of some of these stocks, and just don't get stuck in it.

Which stocks have kept you up at night?

Grady Wulff: A lot of investors, there are positions that people take in some stocks and keeps you up at night. What's cost you sleep in the past six months and what have you regretted not getting into or regretted buying into?

Steve Johnson: I like talking about errors of commission rather than... It's a really fond fund manager thing to say, "I've never got anything wrong."

Grady Wulff: "I did nothing wrong."

Steve Johnson: "I only missed the great opportunities here."

Tourism has been the one for us that's been costly. We own both Experience Co and Tourism Holdings. Both of those stocks have performed quite poorly over the past 12 months. I was pretty optimistic that the improving international tourism arrivals was going to be good for both of those businesses. And if you look at it, they both actually traded at their highs the day borders opened, and as tourism has recovered, the share price has gone down. So there's some stock-specific issues there at Tourism Holdings. They actually sell their camper vans. As we've seen with the car dealerships, nobody wants to spend money on big ticket items, so that's hurt their short-term profitability. But I do still think the story is intact there for more international tourism, particularly Chinese tourism. I think we'll have a summer that's pretty close to 2019 this year in summer 2024, and that's going to be good for both of those businesses. So you might need to be patient, but it's been a very costly investment for us over the past 12 months.

Grady Wulff: Lost a bit of sleep, have you?

Steve Johnson: I don't tend to lose a lot of sleep, personally. I've been through a lot of these cycles.

Grady Wulff: As fund managers, you do need a lot of sleep to keep going. So Luke, what have you got wrong? Tell us about your worst call over the last six months.

Luke Laretive: I think lithium has been my worst call from the last six months. I mean, lithium price is down 20%. And Pilbara Minerals in our portfolio, whilst I don't lose a lot of sleep over it, it's a pretty solid business with a decent balance sheet, certainly is down and it has been a drag on portfolio performance for us. Look, medium term, probably a bit like Steve, I've got some faith there and I think the supply-demand dynamic will kind of play out in our favour over the longer run. But in the short term, there's certainly some bearish, some weak sentiment in China, and weak sentiment around EVs more broadly at the moment. So while that's around, these stocks are going to continue to trade at discount evaluations.

Grady Wulff: Yeah, Pilbara is down 20% year-to-date. What are your thoughts on this? Where is it going to go in the next six months?

Luke Laretive: I think it might trade sideways for the next little while. Expecting lithium price to maybe pick up towards the end of the year. And certainly I think Pilbara is going to continue to trade in line with that in short term. I think over the longer term though, if the stock does get a lot lower, it does have a lot of strategic value there for a potential buyer, either overseas or someone consolidating from the US, so I certainly don't see Pilbara being a problematic shareholding for us long term, but it might be a continued drag on performance, particularly if the markets keep ripping but the lithium price doesn't.

Which stock would you bet the house on?

Grady Wulff: Now, this is meant to be a little bit of fun. We know you both run diversified portfolios and it's just a bit of a fun question. If you could put your house on one stock over the next six months to outperform, what would it be and why?

Webjet (ASX: WEB)

Luke Laretive: This is exactly what I tell people not to do, but we'll do it anyway. I think for me, Webjet would be my pick. Just saw a company, TBO Tek, list overseas on 37 times EV to EBITDA, which does pretty much the same thing as WebBeds. Despite the fact it does half the transaction volume of WebBeds and trades on half the margins. Webjet's trading on 13 times. So it's a much cheaper business. Equally as good. I think management realised that. They're seeing the value of Booking.com or in Expedia and Airbnb overseas and going, "Well, we've got one of these inside our business and no one's paying any value to it." So, from my perspective, I think the strategic breakup's going to unlock a lot of shareholder value, create two really viable takeover targets, different sort of acquirer potential, but certainly two takeover targets. And I think there's significant value to be unlocked for shareholders there.

Grady Wulff: Tourism for Luke. Steve, what would you bet the house on and why?

Catapult Group International (ASX: CAT)

Steve Johnson: I think to add to the caveat, our whole strategy is actually to look through the next six months. I think people who get caught up trying to work out what's going to happen in the next six months miss some great opportunities. So looking out further than that, for me, it may happen in the next six months, but it's probably more likely a bit later, I think Catapult is going to get a lot of market attention. It is a business that has disappointed people for a long time, and I think it's in a lot of people's dog boxes still. "I don't like what the management team did here. I don't want to invest in that company, and therefore I don't look at it as closely as I probably should."

I'm guilty of that myself across quite a few stocks. I think EML is a good example of a stock that we have invested in recently because my co-portfolio manager said to me, "You actually really need to look at what's changed here. Forget about what you thought two years ago. This business has changed substantially and you need to take another look at it."

And I think Catapult's in that category, and it's on the cusp of, I think it can be a business that a lot of people love. It's got a huge runway of growth ahead of it. They're in almost every professional sporting competition in the world. At the moment, they're only 17% penetration, but nobody else is anywhere near them. And that market is growing. There's women's sport. There's younger grades.

There's other sports that weren't professional, becoming professional. So I think it just gets bigger and bigger, and it's trading at a pretty sensible multiple today of what I think it could make if they stopped investing in the growth. And now you're seeing that growth come through in growing cashflow. Within a couple of years here, it's going to be a fairly low multiple of earnings and growing at 20-30% per annum.

Grady Wulff: It is up 33% year-to-date though. Does that sway in your opinion?

Steve Johnson: Not at all. I actually think some of the best opportunities... I think both down and up, often some of the best opportunities are when you get some really important news, and you've had it here at Catapult over 18 months, a consistent set of results, the share price goes up 20%, and people like me go, "I don't want to invest in that stock because it's up 20%," and sometimes they should be up 50%, they should be up 100%. And yeah, sometimes buying a stock that's already gone up is a better idea than buying one that's gone down. Although we look at both ends of that spectrum.

Grady Wulff: Just look at Nvidia. The story tells itself, doesn't it?

Steve Johnson: Yeah.

Grady Wulff: Well, that's all we have time for today in this episode of Livewire's Buy Hold Sell. I'm Grady Wulff. If you enjoyed that educational episode, don't forget to like it. And if you do enjoy everything we put out, why not subscribe to our YouTube channel? We're adding so much great content every single week.