Buy Hold Sell: 2 cracking big caps for the year ahead

Large caps had a smashing year in FY21. The S&P/ASX 100 index returned more than 20% over the past 12 months - which is pretty incredible when you think that in the five years prior the index only returned around 5.5%. 

In fact, if you had invested in the benchmark at its COVID-low in March 2020, you would have enjoyed a nice 51% return (retrospect is a fickle thing, isn't it?). 

The top-performing stock of the financial year was Lynas Rare Earths, which managed to sail its way into the S&P/ASX 100 in April this year, rewarding shareholders with a return of more than 200% for betting on the world's second-largest rare earth material producer.

Meanwhile, the indices worst performing stock was AGL, which sunk around 53% (yikes!) and as outlined by our fund managers last fortnight, has plenty of challenges ahead of it. 

In this episode of Buy Hold Sell, Livewire's Ally Selby is joined by First Sentier's David Wilson and Firetrail's Blake Henricks for a look at some of the best and worst-performing large caps from the past financial year. They'll share whether or not the winners still present good value and if the losers' fortunes could improve over the months ahead. 

Plus, they'll share their #1 pick for the new financial year. What more could you want? 

Note: This episode was filmed using Zencastr on the 7th of July 2021. You can watch, listen or read an edited transcript below.

Edited Transcript

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we'll be looking at some of the best and worst-performing large-cap stocks from the past financial year. Plus, I'll be asking our fund managers to dust off their crystal ball and share a few stocks for the year ahead. I'm joined by David Wilson from First Sentier and Blake Henricks from Firetrail. Thanks for joining me, gents.

Talk about a good year, first up we have Lynas Rare Earth. Its share price lifted around 200% over the past financial year. But can this miner continue to unearth the goods? Is it a buy hold or sell? I'll start with you, David.

Lynas Rare Earths (ASX:LYC) 

David Wilson (HOLD): For us, Ally, Lynas is a hold. China's increased production in response to the price rises over the last 18 months. Lynas has also got some CapEx in front of it, which entails both cash flow risk and burden as it increases its processing capacity in Western Australia. So for us, it's a hold.

Ally Selby: Over to you, Blake. It was added to the ASX 100 in April this year. Is it all onwards and upwards for Lynas Rare Earths now? Is it a buy, hold or sell?

Blake Henricks (BUY): Lynas is a buy. It's done very, very well, but so too has the rare earth price. And the rare earth price has done well because rare earths are in demand. You think about electric vehicles, wind turbines, the rare earths go into permanent magnets which are used in those applications. And in fact, we see the market growing three times by 2030. So yes, China has increased production, but they're going to have to do a lot more if they're going to suppress the price. There's also a lot of latent value we believe in some assets, in particular Malaysia, which the market currently expects to close. So with that kind of optionality, really good demand profile, Lynas is a buy.

Reece (ASX:REH) 

Ally Selby: Next up we have Australia's largest plumbing and bathroom supplier Reece, which obviously had a fantastic year because everyone was renovating at home. Is there still upside ahead of it though? I'll stay on you Blake. Is it a buy hold or sell?

Blake Henricks (SELL): Reece is a sell. The Aussie business is fantastic. It's keeping up with Bunnings in the market and that's no mean feat. The US business is nascent. They've got a market share strategy there, but it is going to involve a fair bit of time and investment. When you look at the multiple though, 43 times, I had to double-check this wasn't a tech business. Reece is a sell.

Ally Selby: Its share price lifted around 157% over the past financial year. Over to you David, do you think it's a buy hold or sell?

David Wilson (SELL): No, we agree with Blake, Ally. We think the stock is a sell. The multiple is high, it is a well-managed business, we think there is substantial opportunity in what's available to them in the US, they've done extremely well in Australia. But really for the growth that you're getting paying that sort of multiple means it's a sell for us.

Northern Star Resources (ASX:NST)

Ally Selby: We've talked about two of the better-performing stocks. Let's look at some of the worst. We've got Northern Star Resources, which saw its share price fall around 29% as gold prices stagnated and mining costs rose. Staying on you David, do you think it's a buy, hold or sell?

David Wilson (BUY): For us, Northern Star is a buy. Yes, FY21 was a bit of a disappointment for us. Costs certainly came in higher than we thought, but they were unduly affected we think by COVID-19. We think it actually has production growth available to it, both in Kalgoorlie at the super pit, but also in Pogo in Alaska as well. So given that production growth going from something like 1.6 million ounces to around 2 million ounces. And as things open up, we think that production growth is quite attractive. And also it's always worth having some gold exposure in your portfolio as well. For us, it's a buy.

Ally Selby: Over to you Blake, it's got a new chairman. What do you think? Is it a buy, hold or sell?

Blake Henricks (HOLD): Northern Star's a hold. They've got this target out there, 2 million ounces by 2027. That's a bit of time to wait. On the other hand, buying assets off large companies who aren't focused on it is one of the greatest strategies I think you can do in investing and as a management team. So we like what's going on. We do think there are some short-term headwinds though particularly around COVID and labour availability in WA. So for us at the moment it's underperformed, it's looking pretty good value, but maybe some disappointment on the way. So it's a hold.

TPG Telecom (ASX:TPG)

Ally Selby: Staying on you Blake, we'll go with TPG Telecom, its share price fell around 26% over the past financial year. But could that turn around? Do you think it's a buy, hold or sell?

Blake Henricks (HOLD): This was a tough one. It's a hold. TPG has been this great growth business led by David Teoh, but now TPG has merged with Vodafone. He has left the building and that is a major concern for us. The reason it could potentially be a buy is because you've got a mobile business which is going to be improving from the tailwinds with Telstra, Vodafone and Optus raising prices. So you've got some nice tailwinds there. And at the same time, mobile towers has some value too. So for me, it's a hold.

Ally Selby: It actually recently fell from the ASX 100 list, but could its future look a little bit rosier? I'll go over to you David, is it a buy, hold or sell?

David Wilson (HOLD): No, for us Ally the stock is a hold. It was sort of unfairly delayed in terms of integration with Vodafone because of the time and the delay in the ACCC process. So that also worked against the company as well. And it is a very capital intensive business where you've got to compete with two very large competitors being Optus and Telstra.

Fundies' market outlook for the year ahead

Ally Selby: Okay. We talked a lot about the past financial year, but let's get out our crystal balls and talk about the future. David, I'll stay on you. Are you feeling bullish or bearish on large caps for the next 12 months?

David Wilson: We sort of take a fairly sort of relaxed view. We think the economy will be accommodative. We think monetary policy will be accommodative, we think the exchange rate will be reasonably supportive as well. So yeah, we have a fairly sort of relaxed view in terms of how the large caps will perform over the next year.

Ally Selby: Blake, large caps returned around 21% over the past financial year. What do you think investors should expect for the year ahead?

Blake Henricks: Yeah, I think at the moment we've probably got a preference for some of the mid-cap stocks, which would be more economically sensitive. Some large-cap stocks, particularly in the staples, and some of the defensives just look pretty well priced for us. Woolworths is trading on 30 times. So for us, we think probably a preference for the mid-cap space, rather than the large-cap space.

Ally Selby: You mentioned there that you prefer mid-caps over large caps. What are some of the characteristics of those mid-cap stocks that you think will be successful over the coming 12 months?

Blake Henricks: Yeah, I mean the story of the last financial year was really a massive spring back in economic activity. And as we sit here today, in our view, the market's starting to say well, the economic growth is done. Our view is there's been an enormous fire lit through monetary and fiscal policy. And it's not just going to be a six to nine-month recovery. We see some pretty strong momentum out there. And as a result, some of these stocks that are exposed to those tailwinds are the place to be rather than expensive defensives.

Ally Selby: The same question to you David, what are some of the characteristics of stocks that you think will outperform over the coming 12 months?

David Wilson: We tend to take a sort of a blended approach in terms of looking at stocks and I think you've got to drill down to each stock's specific. Have they got the ability to grow their earnings? Is their balance sheet in the right place? Do they have some pricing power? Because Blake mentioned before that you've got some labour cost pressures coming through the economy and so therefore you need to be able to push prices through. So I think it's just sort of asking is it a strong business? Is it a quality business? That's the sort of characteristic that we're looking for.

James Hardie (ASX:JHX)

Ally Selby: Okay, David. We asked you to bring along one stock that you think will outperform over the coming 12 months. What's your stock for us?

David Wilson: So our stock is James Hardie. We think it's a company that's attractively valued. You've got a very robust housing market in the US at the moment. Its main product, fibre cement, continues to gain market share in the US. It's taking share in the South and the Southeast. And we think they've also got a substantial opportunity also in the Northeast. And on top of that, you've now got the European acquisition that they made a couple of years back, which is now going to start to earn through for them as well. So we think it's an attractive price with plenty of earnings growth. So for us, that's a stock that we prefer for the next year.

Lendlease (ASX:LLC)

Ally Selby: Okay Blake, over to you, your time in the hot seat. What's your stock for the next 12 months and why?

Blake Henricks: I think from these prices it's Lendlease. Another property stock, but a little bit different to Hardie's. The reason we like Lendlease is because they have enormously changed the business over the last few years. They've exited engineering and just in the last three or four years, they're now up to a pipeline of over a hundred billion dollars of development work. COVID has definitely thrown a spanner in the works and it's made it harder to complete some of these projects, but the market is turning. To give you an example, just two weeks ago in the Lendlease update they announced they sold 100% of Melbourne Quarter. Now Melbourne Quarter is an office project in Melbourne and they sold 100% of it to a Korean pension fund. So it's got all the hallmarks of a really great growth business with some near term headwinds which are out of their control. The performance of the stock has been horrific. And as a result, it's the best pick for the next year.

What large-cap are you backing for FY22? 

Ally Selby: Well, David picked James Hardie and Blake picked Lendlease, but we'd love to know what you think. Let us know what large-cap you think will outperform in the comments section below. If you enjoyed this episode of Buy Hold Sell, give it a like and remember to subscribe to our YouTube channel. We're adding content every week.

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