6 stocks for a full portfolio reset (and 2 duds to avoid)

At some stages, many of us have suffered from some serious portfolio blues, confounded by a persistent sea of red. Meanwhile, the professionals have similarly had a rough time of it. As the benefits of the post-Global Financial Crisis bull market fade, many have posted negative returns for the first time in more than a decade.  

So if you could, would you start from scratch? 

If the answer to that question is yes - you're in luck. In this thematic episode of Buy Hold Sell, Livewire's Ally Selby was joined by TMS Capital's Ben Clark and Marcus Today's Henry Jennings for a full portfolio reset. 

They share whether they would turn a fresh page if given the chance, the top three stocks they would want in each of these hypothetical portfolios, as well as the duds that are currently giving them grief that would be on their way out. 

Plus, they share the macro headwinds that are still creasing their brows, as well as the sectors (and stocks) that they believe are still providing investors with compelling opportunities today. 

Note: This episode of Buy Hold Sell was filmed on Wednesday 17th August 2022. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript  

Ally Selby: I've said it before and I'll say it again, this year has been extremely tough on investors. So, if you could start from scratch, would you? Hi, I'm Ally Selby. And today on Buy Hold Sell, I'm joined by Ben Clark from TMS capital and Henry Jennings from Marcus Today for a full portfolio reset. We're going to find out what these fundies want in their hypothetical portfolios, as well as the stocks they would be avoiding.

Thank you so much for joining me today, gents. Such a pleasure to have you on as always. First up, let's talk about some of the volatility we've seen this year. Obviously, there's been some really clear winners and losers. We've kind of seen that reverse now, tech and consumer discretionaries are starting to lift again and materials and energy are being sold off. Could now be a good time to reset your portfolio? I might start with you, Ben.

Is now the time for a portfolio overhaul? Fundies think so

Ben Clark: I think so. Our approach is not to try and bet the house on one trend happening in the market against another trend, because I think it's just almost impossible to predict, and I could make a really good case for why in the second half of the year, materials and energy could bounce back again, or tech could get sold off again. But no one really knows, because there are a lot of different outliers that will control it. To me, it's about having a good balance in your portfolio where you're exposed to different parts of the market. 

The thing I've learned, which is the most important, is having the highest quality exposure to those different themes. Not to bet the house on which way the market is going to move or which trends are going to happen, but betting on the best companies and letting it play out.

Ally Selby: Henry, do you think now is a good time for a portfolio overhaul?

Henry Jennings: I think it probably is. I mean, we've gone through a period of serious volatility. And usually, when we talk about volatility, it's negative. Let's face it. We don't talk about positive volatility. It's not, "Ah, it's been really volatile, we've done really well." It's usually, "We've done really badly."

We have gone through this volatile period and I think we're going to go through another six months of this. Although we've hit this calm spot at the moment. It feels a bit like the eye of the storm to some extent. 

I think as the European winter starts to take its toll on energy prices, and we're already seeing this in Europe at the moment with gas prices and coal prices. I think we're going to start to see volatility come back into play. So, it's probably not a bad time to reset portfolios. However, what has worked in the past or in the last six months or a year, may not work in the next six months or a year.

The main macro headwinds to keep on your radar

Ally Selby: You touched on it a little bit there. Are there any other macro headwinds that you think are still perpetuating in the market?

Henry Jennings: There's so many. I don't think I've ever known a climate where we have had so many macro headwinds. I mean the biggest one, of course, is inflation. 

There is a whole generation of fund managers, and Ben is young enough to be a part of that, that have never really seen inflation. They haven't really seen interest rates go up. I'm old enough. I had a mortgage when they hit 17% in the UK. That hurt. 

I remember doing my homework by candlelight in the '70s when inflation was rampant. And in those days, when Maggie Thatcher first came in, we all concentrated on M2 - money supply. How much money was in the system, because that was a leading indicator of how much inflation there was, but we've forgotten that. We're not interested in that anymore.

I think that is the biggest headwind - inflation and whether we can kill it off. With the oil price coming down, of course, that really does help, but there's so many headwinds at the moment. Geopolitical, Taiwan, Ukraine, there's a shopping list.

Ally Selby: Ben, are there any other headwinds you'd want to mention there?

Ben Clark: There are. 

I think what's going on in the property market in China - if I was picking one thing that people aren't talking about that they could be talking about in the next six to 12 months, that to me is something that looks worrying. 

But there's so much going on that no one is really paying any attention to it. But the second half of the year, I mean we're in this weird period, Ally, where we've had one inflation print that was a bit milder than expected, and it feels like there's just been this huge sigh of relief. The money has all gone back to the stuff that got beaten up when we were worrying about inflation.

There are real signs that this could be the start of a downward trend, but it could also go the other way. Inflation can become psychological, and it can continue to persist even though there's actually no reason it is persisting. And that's what I think central banks are really worried about. 

Where Henry and Ben are finding opportunities 

Ally Selby: Okay. We started off a little bit sombre, but let's lighten the mood a tiny bit. Ben, where are you finding opportunities right now? 

Ben Clark: Because I do think the jury is still out for now as to whether we have seen the peak of inflation, I hope that is right, but it needs to be strangled out. For me, it's businesses that are more mature growth stocks. So, they're a little bit more defensive. They're growing, but it's not that hyperscale growth that some companies are seeing, and they're much more reasonably priced.

I think for now, to me, that's kind of the safer area of the market. Businesses like an REA Group (ASX:REA), or CSL (ASX:CSL), or a SEEK (ASX:SEK) - those companies where if you open your eyes in another few years, I think the earnings will be a fair bit higher, and the valuations aren't crazy. They're going to be less sensitive to movements in bond yields. That feels like a good place to me to be.

Ally Selby: Okay. Over to you, Henry. Ben is backing more defensive growth stocks. How about you? Which sectors are you finding opportunities in right now?

Henry Jennings: Well, at the moment, there's been a massive push into stocks that have been shorted. I mean, there's been a short squeeze like you've never seen before. Lake Resources (ASX:LKE), Zip Co (ASX:Z1P) and all these companies, you just have to look down the list of shorts and those are the ones that are performing really well apart from maybe Flight Centre (ASX:FLT), which is up there. That's been some serious opportunity, momentum trades. 

But as far as looking for the longer term, I think some of the really dull, boring stocks. I mean, Brambles (ASX:BXB), that was a good number from them today. Brambles was always seen as a kind of a dull, boring logistics provider, wooden pallets. Now, timber prices have come down. That's helping them. Plastic pallets, they're not doing that in the US either, that's helping them.

The one that I love, which I think is the ultimate technology stock, and I've talked about this before is Transurban (ASX:TCL) and everyone looks at me as if I'm completely barmy. They've built this fantastic platform. They run toll roads, but it's still a platform. Every time a car goes past and goes boop, it goes straight down to the platform. They don't have to upgrade the platform. There's no Transurban 2.0. It's a fantastic stock. And not only that, but the tolls are mandated against inflation. It's brilliant. They've got a complete monopoly.

The stocks Ben and Henry would own if they could start from scratch...

Ally Selby: Okay, Henry, I'm going to pose a hypothetical question to you today. If you could start from scratch, would you?

Henry Jennings: From scratch, zero stocks? Yes, I would.

Ally Selby: And what would be your top three holdings?

Henry Jennings: My top three holdings... Well, I'm an old Macquarie banker, so I'd have to put Macquarie (ASX:MQG) in there. It does give you market exposure. I'd have to put a lithium stock in there as well. I'm a big lithium bull and have been for a long time.

Ally Selby: What would be your lithium stock?

Henry Jennings: I think you have to go with a producer. You have to go with one that is actually taking advantage of high prices at the moment. And I think Pilbara Minerals (ASX:PLS) fits that criteria. And then you'd probably want to go with something maybe a little more out there. Maybe even a coal stock. I know coal is terrible. People hate coal, but at the end of the day, Terracom (ASX:TER), or even Bowen Coal (ASX:BCB), stick that in there. Because I think in the next few years, there's no money going into coal.

We saw that with BHP (ASX:BHP) yesterday when they came out and talked about what's happened in Queensland with the royalty stream that they're now thinking about, "Oh, are we going to invest in Queensland Coal? Because we're getting absolutely rogered on the royalties." Maybe a coal stock in there as a kind of weird outlier, but I still like the resource story, I've got to say, and Macquarie gives you great market exposure as well.

Ally Selby: Okay. Over to you, Ben. If you could start from scratch, would you?

Ben Clark: There's always some thing in your portfolio that you think, "I wish I could start again from scratch." But I think the core holdings I would still buy back tomorrow if I was restarting. The three I'd sort of pick out would be CSL, I know it's boring and it's talked about frequently, but its earnings will be significantly higher.

I want to buy businesses where I don't have to worry if there's going to be a recession in the next year or two. And where I know that the earnings are almost certainly going to be significantly higher in a few years than they are today. Businesses with great balance sheets. Whatever is thrown at us, they can survive. CSL, Aristocrat Leisure (ASX:ALL) would be another one for me, which I think is just going gangbusters and is trading on 19 times. It looks cheap. And ResMed (ASX:RMD) is my other one.

Henry Jennings: See I disagree with all of those.

Ben Clark: Well, that's what makes a market. 

...And two duds they wish they never bought

Ally Selby: Okay. You talked a little bit before about duds in our portfolios. Everyone has them, myself included. Which stock do you wish you never bought that's in your portfolio right now?

Ben Clark: I was trying to narrow it down, because there's a lot. Appen (ASX:APX) would be the standout for me, which I've just underestimated how quickly their customers turned off their spend. You always got to try and learn lessons from when things go wrong, I probably put a bit too much faith in the management's commentary to the market and justification for what was going on. And in hindsight, they just called it terribly. You can focus on that too much and not try and think about it from a different level. So, that would be the one that stuck out for me.

Ally Selby: Over to you, Henry. What dud is in your portfolio that's giving you a lot of pain at the moment?

Henry Jennings: I've got so many that I've forgotten the names of them and what they do. Some have changed from mining to internet, back to mining. But the one that really annoys me is Carnarvon (ASX:CVN), which came out today. It's a joint venture partner with Santos (ASX:STO). And unfortunately, Santos has got 80% and Carnarvon has got 20% of a thing called Dorado up on the North West Shelf. And Santos has just delayed their final investment decision.

It's just been a long road, hoping that one day they're going to proceed with this. And with 20% of the project, you've got no say. You're being led around by the dog collar by Santos. And whatever they say, that's it. That has been annoying, especially because it's an oil and gas stock. And Dorado is big, so it should be doing well, and it's just been really frustrating that it's not a lot higher. 

Ally Selby: Okay. Well, that's all we have time for today. 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 every week.

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