Buy Hold Sell: 5 stocks in a hot sector

After underperforming the benchmark for more than a decade, Financials are back - buoyed by a sudden switch to cyclical and economically sensitive stocks and an all-encompassing fear of impending inflation. 

Since Pfizer and BioNTech's vaccine announcement in early November last year, the S&P/ASX 200 Financials index has risen nearly 30%, far outpacing the S&P/ASX 200's still impressive 11% return. 

Meantime, Tech and Healthcare indices - two of the best performing sectors of the past decade - have fallen 7.5% (ASX:XTX) and 7.7% (ASX:XHJ) respectively. 

So, what are the biggest growth plays in the sector? Buckle up my friends, because in this episode of Buy Hold Sell, Livewire Markets' James Marlay sits down with local large-cap legends Matthew Haupt from Wilson Asset Management and Scott Olsson from Firetrail Investments to answer this very question. 

Plus, they also share one COVID-bashed stock they believe is ready for a rebound. 

Note: You can watch, read or listen to the discussion below. This episode was filmed on 12 May 2021.

Edited Transcript

James Marlay: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay and today we're going looking for that thing that you all love, a little bit of growth. It's hard to find in the low growth world, but to help me find some in the ASX market, I'm joined by Matthew Haupt from Wilson Asset Management and Scott Olsson from Firetrail. 

Scott, let's start with you. QBE Insurance. Hasn't been a great time for insurers, but maybe a bit of bad news in the past and growth opportunities ahead? Buy, hold, or sell?

QBE Insurance (ASX:QBE)

Scott Olsson (BUY): Yeah, it's a buy for us. Really like insurance as a space at the moment. I think it's been a bit forgotten with the bank rally, but what we've been seeing for the last couple of years is pricing increases globally. QBE's participated in that and, at the same time, they've improved their business quite markedly on an underlying basis, we just haven't seen it in the reported numbers. So I think over the next year or two, you are going to start to see that emerge and drive some really strong earnings upside. So I think it's a good buy.

James Marlay: Pricing power is the kind of thing you want to have in a reflationary environment. Buy, hold, or sell on QBE?

Matthew Haupt (STRONG BUY): I'm going to have a strong buy. I think the rates are going to go up, you've got premiums going up. I mean everything's a tailwind at the moment. So for me, they've gone through the business interruption insurance disaster, which was last year. Everything's moving in their favour at the moment, so strong buy.

Latitude Group Holdings (ASX:LFS)

James Marlay: Okay. We're being told to load up on the credit. Latitude Financial, it's one group that has tried to make its way onto the ASX a few times, finally got there. Probably wish they didn't now, stock's been a bit off. Buy, hold, or sell on Latitude?

Matthew Haupt (SELL): I'm going to go with sell. I don't know it that well, but you just don't want to play in that space at this stage. The economic recovery may come through stronger, so they may be okay for longer. But for me, we like to invest in strong franchises with accessible funding and cheap funding. So for me, it's not a buy at all.

James Marlay: Okay. New IPO, Latitude. Buy, hold, or sell, Scott?

Scott Olsson (HOLD): Hold, for me. It's not expensive, so I think that's in its favour. When we look at the business over the past year, I think COVID had some positive impacts in the business and some negative impacts, but that makes it really hard to know what the underlying growth trajectory is. So I just struggle to figure out where that goes. But yeah, given the valuation, I wouldn't be selling it, but it's just a hold.

Zip Co (ASX:Z1P)

James Marlay: One sector that's been full of growth is BNPL. It's been hard to keep up. Even after the recent pullback, over a couple of years, it's been a standout sector. Let's talk about Zip, the second player in the market. Buy, hold, or sell?

Scott Olsson (HOLD): Hold as well, for me, given the pullback. I guess I was probably a bit wrong on that one on the way up, but my views are still the same. I think regulation and competition are real risks in that sector and they are doing a good job at expanding overseas, but I just think I can't justify the valuation at the moment. We'll wait, and watch, and see if it gets cheaper.

James Marlay: Matt, I know in the past you've not been super keen on BNPL. Zip, bit cheaper than it was at the start of the year. Buy, hold, or sell?

Matthew Haupt (SELL): Sell. Still not interested. I just look at the space; capital's flooding in, the share counts of these companies are going up, and I just see margins at risk here. So all these bullish forecasts of growth, I think you've got to trim your margins by 50 odd per cent, so I just can't see a case for these companies.

Macquarie Group (ASX:MQG)

James Marlay: Let's talk about Macquarie Bank. Other end of the scale, it's been bulletproof, it's been a stellar performer, and quite dynamic with how they're looking to get ahead of some of the growth opportunities coming through. Buy, hold, or sell?

Matthew Haupt (HOLD): I hate to say it, but hold. I am waiting for a cheaper entry. I think Macquarie has an incredible habit of just getting earnings upon earnings. We had the big freeze event, which upgraded earnings, but then they have these new realisations next year, so the underlying earnings trajectory is still positive and they are great at doing this. But for me, it's just a little bit expensive and just trying to wait for a better entry point.

James Marlay: Same question for you, Scott. Macquarie, buy, hold, or sell?

Scott Olsson (HOLD): Yeah, hate to have another one, but that's a hold as well. I mean it's a great business, they're very good at being exposed to the right thematics, and I think thematically, they are in a great place, just valuation has always been tough for us. So yeah, keep an eye on it, but I think at the moment that's still a hold.

James Marlay: Well listen, let's move away from some of the growth ideas into something a little bit beaten down. It's been a tough period, a bit of a shakeup. You got a stock out there that has been beaten up that you think is a candidate for a turnaround?

COVID-bashed stock ready for a turnaround: Insurance Australia Group (ASX:IAG)

Scott Olsson (BUY): Yeah, it's another insurance stock, it's IAG. That one was, I guess, market darlings a bit of a strong term for an insurer, but it was thought of as the quality insurance play, it traded at a premium to the market. It's now at quite a hefty discount for a range of reasons. But the most important thing for us is that underlying margins improve, and what we're seeing in terms of pricing suggests that that can happen over the next few years. The market doesn't have that in numbers at the moment. And on top of that, the COVID provisions they raised are very conservative. I think they come back to shareholders over time as well.

James Marlay: Matt, same question for you. Something that's beaten down due for a turnaround?

Matthew Haupt (BUY): Yeah, I hate to say the same thing, but IAG as well looks incredibly attractive at these levels. If they can survive to the 30th of June without another catastrophe event, they're pretty well safe for this year. So the insurers are like the Aussie banks maybe six to nine months ago; they haven't had the rerating yet. So once we clear business interruption, insurance pricing is favourable. They will be in an incredibly better position going forward over the next 12-18 months. So you will get the rerate, but it's just going to take a little bit of time.

James Marlay: Well folks, if there's one thing I've taken from my guests today it's that the insurance sector is back on their radar. Pricing power is something that you're going to want to have, and these two both like QBE and IAG. And just remember, if you're enjoying Buy Hold Sell, why not hit subscribe on the YouTube channel? We're putting up fresh content every week and we'd love to see you there.

What stock do you think is ready for a rebound?

Both our fundies agree that IAG is looking attractive at these levels. But what do you think? Let us know what stock you think is ready for a turnaround in the comments section below. 

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