TOL - 11th Sep, 2023
Buy Hold Sell: 3 shocking results (and 2 stocks flying under the radar)
In this episode, IML's Michael O'Neill and Auscap's Will Mumford analyse some of the market's most controversial stocks.
It's been a volatile month for markets. Despite the S&P/ASX 300 only sinking around 2.3% in August, the dispersion of returns within some of the market's favourite, and now, its most disappointing stocks has never been so clear.
According to FNArena, the worst-performing stock during the month was Mesoblast (ASX: MSB), followed soon after by Abacus Property Group (ASX: ABP), Chalice Mining (ASX: CHN), Iress (ASX: IRE) and Core Lithium (ASX: CXO) - all of which sunk more than 38% over the last month.
You can check out some of the best and worst performers from the month below:
But should investors look through these disappointing results and pick up these beaten-down names at a discount?
That's exactly the question this episode will attempt to answer. Centennial Asset Management's Matthew Kidman was joined by IML's Michael O'Neill and Auscap Asset Management's Will Mumford for their analysis of three of August's most disappointing results - including ResMed (ASX: RMD), Telstra (ASX: TLS) and Iress (ASX: IRE). Interestingly, only one of these stocks is now a resounding sell.
Plus, they also each name one stock they believe has flown under the market's radar so far.
Note: This episode was filmed on Wednesday 6 September 2023. You can watch the video, listen to a podcast, or read an edited transcript below.
Edited Transcript
Matthew Kidman: Hello and welcome to Livewire Markets' Buy Hold Sell. My name is Matthew Kidman. Reporting season is over, but unfortunately, some companies were terrible. There were absolute clangers, but the good thing is we're going to talk about them and see if they are a buy, hold, or sell. Joining me today is Will Mumford from Auscap and Michael O'Neill from IML. Welcome, gentlemen.
Let's start with probably the absolute worst one that I can remember in a long time, ResMed. We're losing a lot of sleep over ResMed at the moment. Buy, hold or sell?
ResMed (ASX: RMD)
Michael O'Neill (HOLD): Hold, anytime a stock that's a market darling is down 30% post-result, we give it a good look. The result wasn't great, but more importantly, there are drug trials for Type 2 diabetes drugs that might be reapplied to address sleep apnea that have been applied off-label for weight loss. I don't doubt that there's a correlation between weight loss and sleep apnea, but we see this as a complementary rather than a substitute for ResMed's product, and we don't think insurers will be willing to fund this across the broad base of ResMed customers. We only think it will be a subsegment.
Matthew Kidman: Obesity is going to disappear over the next few years, no sleep apnea. ResMed, buy, hold or sell?
Will Mumford (BUY): For us, it's a buy. As Michael said, it was sold off originally because of gross margin concerns, and that morphed into a concern around weight loss medication, but with a move of 30% or so, the stock is now down to 22 times PE or so, which for an ASX healthcare leader that has a strong market position, a long track record of earnings growth, and a high return on capital, we're watching the trends, but we've been buying.
Telstra (ASX: TLS)
Matthew Kidman: Investors are hung up on Telstra. The result was okay, but they didn't really like the fact that InfraCo is staying in-house rather than getting spun out. Buy, hold or sell?
Will Mumford (SELL): For us, it's a sell. We became positive on Telstra six months or so ago because it had NBN headwinds and competitive concerns and that looked like it had come to an end, and then we saw the catalyst of InfraCo. Now we're learning that InfraCo is off the table. And secondly, we're hearing that Optus is less willing to put through price rises, so we've exited the position.
Matthew Kidman: It was an interesting one. It's not down as much as ResMed, but it's down 7% or 8%, which for a big telco stock, is quite a bit. Buy, hold or sell?
Michael O'Neill (BUY): Buy. I agree that the NBN headwinds are behind them, and I agree that the InfraCo decision was disappointing to the market. It could well prove to be the right decision long-term to retain control. But for us, it was the quality of the result. The reason they grew earnings by 14% was because they showed that they could push prices with inflation and not have too much churn or down trading. And also, impressively, their Net Promoter Score went up.
Iress (ASX: IRE)
Matthew Kidman: Now, let's get to financial markets. Iress, not only was the dividend cut, but the screen went black. It was off 35%. Buy, hold or sell?
Michael O'Neill (SELL): Sell, there's not much to like here. We've had what looked like desperate actions from management around upsizing a cost-out programme, suspending their dividend, and trying to sell assets in a falling market. Credibility is really an issue here. This is not the business that it once was, and it's probably a lesson that when you've got a turnaround story, it's always deceptively easier on paper...
Matthew Kidman: Hard in practice... The market loved it, it was a great mid-cap stock. Now it's down a lot and it looks like everyone's just deserted the house. Buy, hold or sell?
Will Mumford (SELL): I agree. For me, it's a sell. I'm not a big fan of turnarounds in general. They always seem to take longer than you might think, and especially when there's a question around the balance sheet, I get pretty concerned. I was pretty unenthusiastic about their investor day. Firstly, management we're bringing in McKinsey, which is telling you they're looking at a pretty challenging outlook. And secondly, they mentioned that their core software offering has a negative Net Promoter Score, which is the business that they're keeping. So, this feels like it could take some time to turn around.
Matthew Kidman: Let's turn the dial a bit and get a bit positive. What was a result that flew under the radar for you this reporting season that's worthwhile talking about and possibly buying?
MotorCycle Holdings (ASX: MTO)
Will Mumford: For me, the answer is MotorCycle Holdings. It had a good August, but I think it's just not getting the credit from the market that it deserves. So since listing, MotorCycle Holdings has grown EPS at a double-digit rate. The last year has been really tough for them. New motorcycle sales are down 17% and there's been huge cost inflation, but they've managed to keep earnings flat and it trades on seven times earnings at the moment. I think they can grow earnings next year due to their Mojo acquisition. And on top of this, they've got leverage to any recovery in the market. So, we think the valuation for a sector leader is looking really attractive.
Matthew Kidman: Michael, something you've got under the radar? Under the Iress screen that didn't go blank during reporting season?
Suncorp Group (ASX: SUN)
Michael O'Neill: It's Suncorp for us. I think of insurers as a bit of a later cycle play on rising rates than banking because their investment earnings have been earning around 1.5% and they grew to 5% with this current result. The market's a bit disappointed with the timing of the earn-through of rising premiums, but they've set themselves up for another 18 to 24 months of top-line growth and margin expansion by repricing for higher claims inflation, higher weather, and higher reinsurance. And you could well have a catalyst for a capital return in 2024, should the bank sale go through.
Matthew Kidman: It felt like a nightmare at stages during reporting season, but among those nightmares, you can be rest assured there are some nice businesses to buy and you can sleep without any problems whatsoever. So, what you need to do now is go out and subscribe to the Livewire YouTube channel because it's got a lot of quality content, just like you've heard.
Which stock is flying under the market's radar?
Which stock are you backing that the rest of the market has missed? Let us know in the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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Livewire Markets
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Expertise
Livewire Markets
Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
Expertise
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