Buy Hold Sell: 5 stocks with cyclical tailwinds

Value investors are hailing the beginning of a new era, with many throwing their hard-earned cash at cyclical stocks, such as industrials and retailers, as pandemic conditions recede. 

True - we're not out of the COVID-woods yet (we send our best wishes to Brisbane and Byron). But the rest of Australia is beginning to believe that Easter might indeed signal the beginning of a much-vaunted economic boom.

So, in this episode of Buy Hold Sell, Centennial Asset Management's Matthew Kidman sits down with Airlie Funds Management's Emma Fisher and Alphinity Investment Management's Stuart Welch to get their thoughts on five carefully selected stocks outside of the top 20 with cyclical tailwinds in their favour. 

Our fundies share their views on building materials company James Hardie (ASX: JHX); electronics retailer Harvey Norman (ASX: HVN); Supercheap Auto and Rebel parent company Super Retail Group (ASX: SUL); iron ore, lithium and manganese miner Mineral Resources (ASX: MIN); and fertiliser manufacturer Incitec Pivot (ASX: IPL). 

So, is it bargains galore for these cyclical stocks? Watch, read or listen to the discussion below to find out. 

Note: This episode was filmed on 30 March 2021.

Edited Transcript

Matthew Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name's Matthew Kidman. Today I'm joined by Emma Fisher from Airlie Funds Management and Stuart Welch from Alphinity Investment Management and we are talking about companies outside the top 20 that have got big tailwinds at their back coming out of the Coronavirus recession.

James Hardie Industries PLC (ASX:JHX)

I'll start with you, Stuart. The housing market in the US has been booming. James Hardie, is a big beneficiary of that, buy, hold, or sell?

Stuart Welch (BUY): I think it's a buy here. Low-interest rates have stimulated so much activity. They've been underbilled for several years so it's likely that that continues, irrespective of mortgage rates potentially creeping up. On top of that, some of their key competitors have had supply constraints so they've been able to take share more than they ordinarily would have.

Matthew Kidman: It's been a go-to, a market darling. Emma, buy, hold, or sell at these levels?

Emma Fisher (BUY): I agree, I think it's a buy. I think with James Hardie, there's a structural story and a cyclical story. The structural story is going very well. They're taking share in their core market of fibre cement. The cyclical story looks still attractive. They've obviously been big beneficiaries of people spending more money on their homes as they're stuck inside their homes. We think that's a bit of a structural shift that could continue. Meanwhile, it has an attractive valuation, a good balance sheet, and a good management team. We think it looks good here.

Harvey Norman (ASX:HVN)

Matthew Kidman: Who would have thought retail would be so strong over the last 12 months? And as Jerry tells us, bring your trailer, bring your truck, Harvey Norman, buy, hold or sell?

Emma Fisher (SELL): I'm going to say sell. Only because I think the standout in the space is JB Hi-Fi. It's got the leading brand. When you think of consumer electronics, you think JB Hi-Fi. Actually, when you look at them from an EV/EBIT multiple, they're pretty similar valuations. I think if you want to own one in the space, that will be the one that I would own.

Matthew Kidman: Harvey Norman, everyone thought maybe the best was behind them, but the months roll out and the powerful earnings continue. Buy, hold or sell, Stuart?

Stuart Welch (SELL): I'd be a sell too on that one. I think in their past, they've actually gone off and invested in some non-core assets, like dairy farms and combination camps for mining communities. We'd prefer a business to stick to its knitting and stay close to the core, so I think we'd say sell on that.

Super Retail Group (ASX:SUL)

Matthew Kidman: Okay. So everyone's going boating, camping, fishing, Super Retail, also in the retail area. Buy, hold or sell?

Stuart Welch (BUY): I think that one's a buy. The retail consumer is in a very strong position right now. It's unlikely that this sort of redirection of spending away from overseas travel to domestic trips is going to change in the immediate future. Whilst the market is anticipating a big drop-off back to pre-COVID levels, we think that there's probably a bit more to go in that story and the earnings upside coming.

Matthew Kidman: I know you like retail, Emma, so maybe you can be a Rebel and maybe tell us why Super Retail might be a buy, hold or sell.

Emma Fisher (HOLD): I think it's a hold. I echo a lot of Stuart's comments. I just sort of struggle with seeing what the next leg of upside for the stock is. I think with the retail sector as a whole there are a lot of really interesting opportunities. But I think looking at the categories Super Retail are in, on a normalised level of earnings, the stock just doesn't really have much of a valuation story here.

Mineral Resources Ltd (ASX:MIN)

Matthew Kidman: Okay, let's go west, let's go iron ore, Mineral Resources. Buy, hold, or sell?

Emma Fisher (BUY): I'm going to say MIN is a buy here. There's a lot of focus on iron ore prices, which clearly look toppy, but for Mineral Resources, they've also got a volume production story. They're increasing volumes. If you forward two to three years, yes, we may have a lower iron ore price, but they're going to be producing more of it.

They're also earning nothing from their lithium mining today. And again, in two to three years, that could be a big chunk of earnings. Additionally, they've got a great balance sheet, great management team. It's trading at five times EBITDA, it's very, very cheap. I think it's a buy.

Matthew Kidman: It's been the best performing mid-cap we've seen just about. Buy, hold or sell, Stuart?

Stuart Welch (HOLD): I think this one's probably a hold. Mineral Resources has both a mining contract services business and they also take primary stakes in mines. Most of the earnings growth in recent times has been from the iron ore side. That's been the real story and they're reasonably high-cost mines. They've been quite profitable in a very high iron ore price environment and whilst we're constructive on the iron ore market, it does feel like expectations for the company are reasonably lofty and have caught up to where we are today. So from our perspective, it's hard to sort of see the upside case, and so we would be a hold here.

Incitec Pivot (ASX:IPL)

Matthew Kidman: Okay, there's been a bit of a tailwind for agriculture and the resources sector. Fertiliser producer, Incitec Pivot, buy, hold, or sell?

Stuart Welch (HOLD): Incitec Pivot's an interesting one, it's had a series of downgrades over the last three years, driven by a multitude of different things, mostly operational manufacturing production issues. At the moment, there is real strength in fertiliser prices which are supporting earnings, and we can see some earnings upside left. The key question for us is really the durability of those fertiliser prices. There are too many moving pieces in there for us to get a great deal of conviction around that. So at this point, I'd say it's a hold.

Matthew Kidman: Fertiliser prices have been on a tear, but it hasn't really been reflected in the share price, Incitec Pivot, buy, hold or sell?

Emma Fisher (HOLD): Yeah. I'm going to say hold, as well. I think you're right, the backdrop is supported from a fertiliser price perspective, and thank God they didn't sell that business as they were looking to do through their demerger. But at the end of the day, the quality is just not there in this business for us. It's got a pretty patchy track record of generating value through the cycle. For us, it's a hold.

Matthew Kidman: So be careful when you're sprinkling that fertiliser because the winds are changing and changing fast. I really enjoyed that show and if you liked it as much as I did, why don't you give it a like. And subscribe to the Livewire Markets channel on YouTube.

What stock do YOU think will benefit from cyclical tailwinds? 

Let us know ASX-listed company you think is a winner in the economic recovery. Share your pick in the comments section below.

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