TOL - 8th Apr, 2024
Buy Hold Sell: 3 stocks ready for a rebound (and 2 due for a sell-off)
In this episode, Auscap's Will Mumford and Blackwattle's Tim Riordan analyse three stocks yet to participate in the market rally.
Unless you've been living under a rock, you've probably noticed it's been an incredibly strong six months for global markets.
The ASX 200, for instance, has rebounded 13% over the past six months, while the S&P 500 and NASDAQ 100 have soared 23% and 24% respectively over that same period.
Elsewhere in the world, the UK's FTSE 100 has lifted 6% in six months, Japan's Nikkei has skyrocketed 28%, and India's Nifty 50 has enjoyed a 15% bump. All in all, the MSCI World Index (USD) is now 21% higher than it was six months ago. And to think, we haven't even seen Fed rate cuts yet!
So, in this episode, Livewire's James Marlay was joined by Blackwattle Investment Partners' Tim Riordan and Auscap Asset Management's Will Mumford for their analysis of three stocks that are yet to participate in the market rally.
And just because you can't truly appreciate the highs without the lows (and the good without the bad), we also asked our fund managers to name one soaring darling that they believe will soon run out of steam.
Note: This episode was recorded on Wednesday 27 March 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's James Marlay, and today we're going to be talking about a few stocks that are down in the dumps, on their knees. We always hear that you guys like to hear about stocks before they run, so let's see if we can find a few today. With me today is Will Mumford from Auscap Asset Management and Tim Riordan from Blackwattle. Let's get started.
James Marlay: Tim, you know a stock's unloved when the crew at Allan Gray turn up on the register. They recently went substantial. They love picking up stocks that are unloved. Are you a buy, hold, or a sell on Orora?
Orora. Will, I'm going to start with you. It's down in the dumps, down 13% on the year. Packaging - it's not particularly exciting. Buy, hold, or sell?
Orora (ASX: ORA)
Will Mumford (SELL): It's a sell for me. It's been pretty beaten up following a recent acquisition, but there are a few longer-term questions that are keeping me at a sell. So firstly, I think it's got exposure to the decline in per capita alcohol consumption without the offsetting levers elsewhere in the liquor industry of premiumisation and mix. Now, I know that the Saverglass acquisition is exposed to spirits, which have outperformed, but they have lower packaging intensity because of the higher alcohol content. And, at the same time, spirits are already about a third of liquor demand in major markets, so I'm not sure how long that outperformance can last.
The second point is that glass production is quite emissions-intensive, and I think that creates risks in the long term. I also worry about what pursuing an unpopular acquisition implies for the core business. And even though it's sold off, it's still on a similar multiple to Amcor (ASX: AMC), which I'd argue, has more scale, more diversity, and doesn't have the same level of exposure to those issues.
Tim Riordan (BUY): We are going to go buy on Orora. Great argument from Will, so I'll try and counter some of those points. I think that the Aussie business is in a great position. It's really strong, particularly in beverage cans. A lot of capital has to go into the business, but it is quite strong returning. On Saverglass in France and Mexico - if you'd been in the stock before, I think you'd be pretty upset. Coming to it now, it feels like the balance is in our favour.
The key risk in the short term in our mind is the de-stocking thematic through liquor particularly, and we're taking on some risk with the thesis that could take a while to resolve. However, on a 12-month view, it looks like it is in a pretty special place to recover from that, and the protection here at the moment is that you're on 12 times versus 16-17 times usually. So it's a buy.
Endeavour Group (ASX: EDV)
James Marlay: A bit of disagreement. We don't mind that. The next stock is Endeavour Group, the operator and owner of Dan Murphy's and BWS. It's down 21% over the past 12 months. I've got a few mates doing dry months. Dry July seems to have taken over the whole year. Buy, hold, or sell on Endeavour Group?
James Marlay: Same stock for you. As I mentioned, a lot of people are on a health kick. You mentioned declining per capita consumption of alcohol. Buy, hold, or sell on Endeavour Group?
Will Mumford (BUY): It's actually a buy for us. Over the last six months, there's been a lot of noise around an AGM, around potential gaming regulation changes as well as the potential need for reinvestment within the pubs. And at the same time, there are some genuine ESG issues that you've got to get your head around with the company. But for me, the key is Dan Murphy's. So it's got price leadership, it's got more revenue than its next two competitors combined, and it's got double the EBIT margin of its next two competitors. So if you put Dan Murphy's on a premium multiple, then you're not paying much for the balance of the business. And after the AGM, I think I'd argue that management is very aligned and very focused on shareholder interests. There are probably some easy wins now within the pub business, so I think you've got a defensive business on a reasonable multiple with some asymmetric upside.Arcadium Lithium (ASX: LTM)
James Marlay: Okay. Very good. Now our next stock is called Arcadium Lithium. We might get you to give people a bit of an explainer on the stock because I had to look it up, I wasn't aware of it. But maybe give us a quick intro on that one. The stock's down 38% for the year. It's on its 52-week lows, but it has a market cap in excess of $9 billion. So buy, hold, or sell?
Will Mumford (HOLD): For us, it's a hold. It's the legacy of the merger between Galaxy, Orocobre, and now Livent, and it's a pretty diversified lithium player. I think the advantages are Lithium is pretty beaten up right now, and that's despite a really strong medium to long-term growth outlook. It's also got a reasonable production growth story, and it's got diversity in terms of lithium type and geography.But I think there are also some risks here. So the majority of the value of the business still sits in Argentina, which I think brings jurisdiction risk in terms of both political and economic uncertainty. And secondly, with brines, you have issues in terms of rainfall, weather and community water management. And ultimately, I just don't think you need to take on these risks given elsewhere on the ASX you've got the largest, highest-grade Australian hard rock lithium in the world.
Tim Riordan: I'd be a buy. That sort of optionality is pretty interesting. So with the merger between Allkem and Livent comes quite a substantial synergy opportunity. Trying to understand what these two businesses saw to go through the rigmarole they've faced to put them together - the key here is the ability to upgrade some of the brine to high battery-grade hydroxide.
So the advantage there is that you're basically selling the hydroxide into the OEMs, the likes of Ford and Tesla. You can do that on a price-protected long-term contract effectively with floors and ceilings. So it's a much more mature phase from a lithium perspective than we're used to here in Australia, where spodumene is sold at the market rate to the Chinese middleman, effectively. And so that opportunity is quite large. It will take some time for them to operationalise, but we think it's worth waiting for, so it's a buy.
James Marlay: Okay. Very good. Now to move from the unloved stocks to stocks where things could be getting a bit crowded, Tim, what's the stock that's out there at the moment where you think investors have got too exuberant?Reece (ASX: REH)
Tim Riordan (SELL): Reece. So we think this one is a great business. The Wilson family have done an incredible job, putting it in an amazing position, particularly in Australia, with their plumbing and bathroom distribution business. And now, they are looking to replicate that in the States and beginning to see some traction there as well, particularly with the last result in Feb. But it feels like positioning, expectations, and its valuation are just too rich. Its Aussie business is relatively mature. And its US business is in its infancy. But with the group on 40 times earnings, there's a lot baked into success in the US already, so that one's too crowded for us.
James Marlay: Will, same question for you, what's a stock out there that looks overloved, where there could be a bit of crowding, and high expectations?
Will Mumford (SELL): Well, interestingly it's a similar theme to Tim's, and mine is RWC or Reliance Worldwide. So it's a stock that we added to the portfolio in the late-2022 sell-off on a PE of about 11, and since then, we've gone on a few site visits, we've spent some time with management, and we've been really impressed. So they've added some great new products, they've made some changes to their manufacturing, and they've also made some accretive acquisitions. But since then, the stock is up about 60-70%, in a period when earnings have been steady. So that's really just reflected a PE rerate to about 18 times, and a lot of that move happened following their last result - and from our perspective, the result was largely within our expectations. And so for those reasons, we've reduced the position.
Reliance Worldwide (ASX: RWC)
James Marlay: Well, ladies and gentlemen, I hope you enjoyed that episode of Buy Hold Sell. If you did, hit subscribe on the YouTube channel, and give us a like. Remember, we're adding fresh content like this every week.
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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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