Buy Hold Sell: 3 of the highest returning ASX200 stocks and 2 being overlooked

Companies with proven track records of delivering high returns on equity are sought after. And rightly so. Compounding gives exponential returns and is the holy grail of investing. 

However, the power of compounding is no secret and quality stocks are usually expensive. But these aren't 'normal' times, and there's a chance that these top-tier stocks are getting caught up in the maelstrom gripping markets. 

In this episode of Buy Hold Sell, we asked Anthony Aboud from Perpetual and Sean Fenton from Sage to give their views on three high ROE stocks in the ASX200 stocks. Our guests also nominate a stock that they think the market is overlooking. 

Click on the video player, listen to a podcast or read an edited transcript below.

Note: This episode was recorded on the 18th of June 2022.

Hello, and welcome to Buy Hold Sell. I'm your host, David Thornton. Today, we're going to look at some stocks that have high returns on equity and for that, we're joined by Anthony Aboud from Perpetual, and Sean Fenton from Sage Capital. Okay, first up, Anthony, ResMed, currently with a 26% ROE, buy, hold or sell?

RESMED (ASX:RMD) 

Anthony Aboud (SELL) I'm going to sell. I think it's a great business, but they've had quite a few tailwinds. Their competitor, Philips, has been out of the market with a product recall and they've been a COVID beneficiary. Those tailwinds will become headwinds, I feel, and it's just not cheap enough yet at 37 PE this year to 33 PE next year. So for me, it's still a sell.

David Thornton: Sean, what about yourself?

Sean Fenton (BUY). Finally, so I'm different from Anthony. It's a buy for me.  I think they've actually cycled a lot of the beneficiaries in terms of respiratory, and hospital respiratory equipment. They've actually had more headwinds from sleep labs being closed and diagnosis rates being down, but they've executed growth. 

Accidentally, they've got a good long-term market, but the big upside for them is their competitor, Philips, has had a massive recall. The insulation they're using on their machines has been breaking down and people have been breathing it in so that gives ResMed a massive opportunity to lift their market share. 

They've been held back from doing that by semiconductor chip availability. That's gradually easing, but there's an upside for them. 

So there's some really good growth momentum for that business, not cheap, but quality business executing. It's probably one of my preferred stocks in that growth area.

David Thornton: Okay. The next cab off the rank, JB Hi-Fi, consumer discretionary, not the hottest sector right now. 34% return on equity. Buy, hold or sell, Sean?

JB HI-FI (ASX: JBH)

Sean Fenton (SELL) I nominated it as one of my best management teams early on, but it's a sell.

At the end of the day, you can't fight the tide and the tide's going out in discretionary spending. So you got the RBA jacking out rates. You've got cost of living pressures like inflation, but importantly as well, you've got a big reversal in spending pattern. 

So borders shut down, all that travel spending and Australians are big spenders on international travel, and spending on the home, appliances, electronics, everything else. 

JB's looks cheap, but it's over earning. Its margins are too high. They're going into a cyclical downturn. There's downside earnings exposure there.

David Thornton: Okay. Anthony, JB, buy, hold, or sell?

Anthony Aboud (HOLD) I've got to hold. I agree with everything Sean said there. I think that there is a headwind to discretionary. 

I think their margin's going to have to rebase down as we get to a more normalised promotional pattern amongst retailers. So I agree with all that, but you know, you're getting it at a decent price with a good management team. So it almost feels like it's too late to sell. You just got to wear the cycle from here.

JAMES HARDIE (ASX:JHX)

David Thornton: Staying on you, Anthony, James Hardie, a 38% ROE. What's your read?

Anthony Aboud: (BUY) I've got a buy on James Hardie. Look, it's been slammed for a couple of reasons. One, obviously the 30-year mortgage rate in the US has gone up. And so, therefore, people are worried about housing stats in the US, which is understandable. 

Also, they had a change in management and so people are a bit worried that the previous manager was perceived to be maybe pushing them too hard, I guess. 

Yet the board's put in quite a punchy FY23 earnings guidance. So there's a bit of a question mark there.

Having said that, we sort of put through mid-cycle margins and sort of come around about adding PE, and for us, that's pretty cheap for James Hardie, which is a quality company. 

So we think, we're not probably not catching a falling knife a little bit here probably a little bit early, but we think it's a buy at this level.

David Thornton: Buy for you, Sean?

Sean Fenton (BUY): Yeah, it actually is. I agree with what Anthony said too. At the end of the day, it's a quality business, which is growing its share of the siding market. They're doing a few extra things in terms of value-added products. They're moving to stucco, which is obviously big in California. They're getting closer to the consumer with direct-selling strategies, so some good long-term strategies to lift things.

Yes, the US housing cycle's clearly going to roll over. Everyone knows that. It's a mechanical reaction to the higher interest rates and mortgage rates moving up. But they do have broad exposure to renovations and remodelling and houses in the US aren't like houses in Australia. 

They're basically timber frames with some siding whacked on and they've got to change that much more regularly. Only Hardie plank lasts longer, but there's a lot of old vinyl stuff out there that needs to be continually re-skinned. 

So there's a good underlying level of demand there as well and it's fallen far enough now that particularly in that growth part of the market for a business of that quality, it looks good value.

David Thornton: We also asked our Fundies to bring along a stock that's been overlooked by the market. Anthony, what are you putting on the table?

Event Hospitality (ASX: EVT)

Anthony Aboud: Event Hospitality is the company I'm putting on the table. Look, from a management team perspective, we like it. It is a founder-led business and if you could get three worse industries to be hit by COVID: it is cinemas, hotel and ski lodges, and they've got the trifecta there. So they've been hit really badly.

We feel that they went into the COVID though with a very strong balance sheet and have managed to take costs out of their business structurally. They've actually started some new revenue streams, but also reinvest in all of their systems and I believe that they're going to make more money on the other side of COVID, materially, more money on the other side of COVID than they did going in.

We think that looking over the next couple of years, I think you've got the hotels business, you're seeing the lead indicators i.e. bookings, yeah, looking very good. I think just in Sydney with the light show on at the moment, Vivid, I think Sydney hotels are above 80% occupancy at the moment. Just for some lights, you know? And so, yeah, we're starting to see those lead indicators come through. You've also got, this will be probably the most profitable snow season they'll probably ever have and don't forget Top Gun.

So we feel that they're going to really have to bounce back in earnings and you look for the next couple years in '23, the analysts still have earnings sort of 30 odd percent below that were pre-COVID and don't even have in coming back in 24. We think they'll beat those earnings. We think the market's overlooking it. 

We think it's a quality management team with quality assets, a good balance sheet, and with some great tailwinds for headwinds in the last couple of years.

David Thornton: Sean, what's an overlooked stock you're backing?

Nufarm (ASX: NUF)

Sean Fenton: Something we look for that's overlooked is going to a period of economic downturn, something that's just unrelated and resilient to that. So - the agricultural sector, we've got a global energy crisis, feeds through to fertilisers, it's driving soft commodity prices higher. Nufarm's a global crop protection business so it does all the herbicides, fungicides, pesticides. With increasing value of crops, you want to protect those as a farmer. That's a good base business.

I think there's a good opportunity to enter it at the moment. So Sumitomo, who's a long term shareholder there just sold down their stakes that crunched the price down a little bit, but we also see a growth opportunity there. 

They've got some R and D. They've got a broader seeds business, but within that, some omega-3 canola IP, and that's been approved to go into fish food, but also into human consumption. So the FDA's just approved that. So over the next few years, there's a real opportunity for them to grow that business, good IP, high margin business, and that's one that's being overlooked a bit by the market.

David Thornton: Well, that's it for today's episode, some great stock picks there. If you enjoyed the episode, be sure to subscribe to YouTube where we're adding new content every day.

Investment Theme

10 blue chip management teams in the ASX200

View

Can't get enough of Buy Hold Sell?

Give this wire a like if you've enjoyed the discussion and hit follow to be notified when new episodes are released.

If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.

---

Equities

Four quality companies to keep an eye on

View

Equities

13 stock picks to own for the next five years

View