Buy Hold Sell: 3 defensive darlings for the next market pullback (and 2 to buy when it does)

Traditional long-only investors, who don't tinker with their cash levels much, typically participate in all of the market's upside when it is flying and all of its downside when it's not. Markets typically increase over time, so this is a perfectly acceptable way to invest. 

Long/short investors, however, can also profit when markets fall—but that's too simplistic an explanation. It suggests that long/short managers make money equally when markets go up and down, which is rarely the case. 

Because long/short managers are also active beta managers (i.e. they pick stocks to outperform a benchmark or achieve a specific objective), they typically capture most of a market's upside while significantly limiting losses on the downside. 

That means that much of their alpha (overall outperformance) is often generated by providing much better protection when things are bad versus smashing the market when it is flying. 

With all that in mind, what better time to ask two long/short managers for their top defensive picks than right now - when equity markets are at all-time highs and valuations are on the ritzy side? 

On this episode, Livewire's James Marlay is joined by Jun Bei Liu from Tribeca and David Moberley from ClearLIfe Capital for their analysis of five stocks that could weather a coming downturn - whenever that may be.

Note: This episode was recorded on Wednesday 6 November 2024. You can watch the video, listen to the podcast, or read an edited transcript below.

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EDITED TRANSCRIPT

James Marlay: Hi there, folks, and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is James Marlay and today we're looking for stocks with resilient earnings after what's been an absolutely cracking year on the ASX. Here to help me find some stayers, some resilient stocks, I've got Jun Bei Liu from Tribeca and David Moberley from ClearLife. Now let's get into it.

The Lottery Corp (ASX: TLC)

David, I'm going to start with you. Lottery Corp share price up around 10% over the past 12 months. Strong buy from many brokers. Is it a buy, hold, or sell?

David Moberley (SELL): Yeah, well be controversial and say it a sell from us. Last year, TLC had some great jackpots, which really boosted earnings and if you look at it over the medium term, they tend to normalise out. So this year, earnings growth is pretty minimal, and if anything, we see some downside risk to earnings estimates. So that's sell from us.

James Marlay: It's a sell from David. Jun Bei, scratchies? In at the newsagent, pick them up, part of a habit for people. Is it a resilient one? Is it a buy, hold, or sell?

Jun Bei Liu (SELL): That's how long-short managers think alike... I actually think it's a sell too. They had a great round with lotteries, but it’s going to be very, very difficult to cycle. As we know, those lottery runs, they will normalise, they will reverse what it was last year compared to a strong year. So it's going to be tough earnings, they will probably have downside this year, and it's not cheap. Whilst it's defensive, the next 12 months’ earnings are going to be tough.

Wesfarmers (ASX: WES)

James Marlay: Okay, staying with you. What could be more defensive than Bunnings? Australians love renovating. They love a sausage sizzle on the weekend. Buy, hold, or sell on Wesfarmers?

Jun Bei Liu (SELL): Wesfarmers is a sell, because there are far more interesting ideas within the consumer discretionary space, the consumer space, such as JB Hi-Fi (ASX: JBH). I think Wesfarmers is very expensive for very, very limited earnings growth this year. If anything, there's earnings downside, because Kmart is doing it a little bit tougher, because of the tougher consumer. You've got Bunnings slowing down somewhat. It’s somewhere between 24-25 times earnings. Just very, very expensive.

James Marlay: Okay. David, shares are up 25-26% so far this year. Diversified business. They've got a finger in a lot of pies. A buy, hold, or a sell?

David Moberley (SELL): I agree with Jun Bei, sell for me. It's probably a good funder, to be honest. Very expensive, minimal earnings growth, headwinds across most of the business, despite being great on a medium term view. Sell for me.

ResMed (ASX: RMD)

James Marlay: Okay. Our next stock is ResMed, which has had an absolutely cracking year, up 55% over the past 12 months. A lot of buys from the broking community. Do you agree? Is it a buy, hold, or a sell?

David Moberley (BUY): Yeah, buy from us as well. A lot of that 55% return was actually just a recovery when the market was very concerned around the impact of GLP-1 drugs. If you look at it on an 18-month view, it's hardly moved, despite delivering a lot of earnings growth. And if you look out over the next 12 to 18, that's unlikely to change. They're still benefiting from Philips being out the market, getting most of the industry growth, operating leverage coming through the bottom line, looks very reasonable valuation for some very strong growth over the next few years.

James Marlay: That's a buy. There seems to be a lot of love for this stock. Jun Bei, is it a buy, hold, or a sell for ResMed from you?

Jun Bei Liu (BUY): Look, there is love for this stock as well from me. It's a buy. So I think this company will grow double digits for the next 12 months and it's trading on low 20s in terms of multiple, and it's a very high quality healthcare business. Yes, you've got the potential GLP-1 drug impact, but that's probably even 10 years down the track. So I think it presents good growth and a lot of tailwind going for a very strong cash flow. It's a buy.

James Marlay: Okay, so the stocks we've discussed so far have been the ones that we thought could be resilient in the case of a downturn, but let's put ourselves in the scenario where the market sells off. Jun Bei, what's the stock that's at the top of your shopping list in a big sell-off?

Guest picks

Life360 (ASX: 360)

Jun Bei Liu: So there's many of them, but this one I'll put out there. So, Life360. If it craters tomorrow, I'll be going out and loading up as much as I could. Look, this company has a huge runway in terms of growth, accelerating subscriber base, particularly in the U.S. market, and at the moment only 15% of a subscriber base is paid. They're actually converting more people to paid and that's growing really fast as well. At the same time, they're looking at their advertising revenue. Compared to Uber, I think Uber makes about $6.60 or something per subscriber in terms of revenue and people only use Uber, the app, once a day. Whereas this company has got 70 million users and monthly users, and then people use it three, four times a day. And then if you times what they can make, if they make similar as Uber, the earning EBITDA will double. So at the moment, consensus has got almost nothing in there, so there's a lot of opportunity for this company. That's the one I'll be buying.

James Marlay: Okay, great thesis. Thanks, Jun Bei. All right, David, over to you. What's the stock that you'd love to buy if it sold off and got a lot cheaper?

REA Group (ASX: REA)

David Moberley: Yeah, it'd be great to see a pullback so we could buy a lot of things. But yeah, I think in a big drawdown like that, you want to find the highest quality franchises you can find. And I think for me, REA is probably that, on the ASX. It's the closest thing to an unregulated monopoly on the market. Amazing market position in the Australian residential listings business. And it's also got some emerging exposures like India, which could have some very big upside in the medium term.

James Marlay: You might be a bit of a cue to buy shares in REA in a sell-off, I reckon.

David Moberley: Yeah, I would say so.

James Marlay: All right, folks. That's where we're going to wrap it up today. I hope you enjoyed that show featuring David and Jun Bei. Remember, if you do enjoy Buy Hold Sell, subscribe to our YouTube channel. We've got fresh content like this coming every week.