Buy Hold Sell: 5 sturdy stocks for volatile markets

Well, I think we can all agree it's been a strange week. Masks are once again mandatory in New South Wales, borders are shuttered, and travel plans, devastatingly, have been put on ice. 

The past few weeks in bond markets have been equally volatile. In fact, despite all this talk of inflation, US 10 Year Treasuries have been heading south, earlier this week dropping to their lowest level since February 24. So what does this all mean for Livewire reader's favourite asset class, equities? 

Well, Watermark Funds Management's Justin Braitling and TMS Capital's Ben Clark believe it may be time to cycle into defensives, with a possible correction in reflationary names on the horizon. 

But what defensives are worth a look? Well, in this COVID-safe episode of Buy Hold Sell Centennial Asset Management's Matthew Kidman joins Ben and Justin to crack this very conundrum. 

Watch the video below to discover their positions on Ramsay Healthcare, Telstra, AGL, Sydney Airport, and Atlas Arteria. 

Note: You can watch, listen, or read an edited transcript below. This episode was filmed on 23 June 2021. 

Edited Transcript

Matthew Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Matthew Kidman and we're talking about a possible correction in the market and how we play it. Since we've bounced from the COVID-19 crisis, it's all been about the cyclical plays, all those companies that have done well over the year, rebounding from the great recession that we had. And to discuss whether we should get defensive and how we play it, I've got Ben Clark from TMS Capital and Justin Braitling from Watermark. 

And first up, I'll go with you, Ben. Ramsay Health Care, hospitals all around the world. They thought the hospital sector was so good they doubled up and made a big acquisition recently. Buy, hold or sell?

Ramsay Health Care (ASX:RHC)

Ben Clark (HOLD): I'll go hold, Matthew. This is one that should benefit from the world reopening. Hospital space should free up and I think the timing of that acquisition actually made sense, the Spire acquisition. They're doubling down on Europe. Ultimately though, I don't think Ramsay's going to go back to those glory days that we saw a decade ago. I just think the private health insurers are a lot better managed these days and the arm wrestle that occurs with the hospitals is an even battle. So stick with the hold.

Matthew Kidman: Justin, Ramsay's been struggling. It hasn't really gone with the market. Buy, hold or sell?

Justin Braitling (HOLD): Well, I think it's a hold, Matthew. I'd have to agree with most of what Ben said. Margins have been under pressure for some time. I don't think that's going to change. That's a function of greater scrutiny from the health insurers. Their business will recover as hospital capacity frees up and waiting lists are addressed, but we've already seen the best part of that. And it's back to normal trading conditions now. There may be a bit of upside if the states start to push more volume into the private sector to address waiting lists. But I think that'll be quite small. I also like the Spire acquisition. I think it was prudent, but that'll be a long time in paying that off over a number of years.

Telstra (ASX:TLS)

Matthew Kidman: Okay. Justin, sticking with you. Is it time to pick up the telephone because it's been ringing for a long time. Telstra, buy, hold, or sell?

Justin Braitling (BUY): Well, Telstra has been a difficult investment for decades, but I think it's a buy for the first time for many, many years. Typically, when you get a seminal change in the network like we're getting with 5G, you get a nice uptick in usage that drives RPUs and revenues and growth in their mobile business. You're starting to see that come through already. There's less competition. Each of the operators are pushing their pricing plans up. So the mobile business will deliver good growth in the years ahead. They're restructuring the balance sheet, selling off the infrastructure business. I think they'll get a nice price for that. And so that fixes the balance sheet. So you've got a business on a reasonable multiple and it's defensive. The roaming revenues will come back. So it was hit by COVID-19 last year. As people start to travel again, those revenues will come back. So you've got a defensive business delivering nice growth in the medium term.

Matthew Kidman: Ben, it's been a value death trap. Surely you can't agree with Justin. Telstra, buy, hold, or sell?

Ben Clark (HOLD): I'll slightly disagree. I'll go a hold. But yeah, it's definitely been a business that's caused a lot of headaches for investors. I agree with everything Justin's just said there. The rollout of 5G is going to see a lot of us upgrade our handsets. I think it's a much better competitive environment post the TPG-Vodafone acquisition. There doesn't look like there's a lot of moves. David Teoh has moved away from TPG, who would have potentially been the cat amongst the pigeons, but 25 times for business that still is not going to have a lot of growth, albeit defensive. I'll go hold. 

AGL Energy (ASX:AGL)

Matthew Kidman: Let's move to the retail energy market. AGL has had anything but energy in the last few years, down about 60%. Ben, AGL, buy, hold, or sell?

Ben Clark (SELL): I'll go sell on AGL. There is a huge wave of disruption that is just starting to hit electricity generators, marketers, resellers, etc. It's only really just beginning. AGL is the massive incumbent. It's the dinosaur that is going to be picked off. It looks cheap. It's trading on 16 times. It could easily have a short-term re-rate at some stage, but I just don't think it's a reason to be in it. I think the long-term earnings are in decline. Sell.

Matthew Kidman: Justin. Dinosaur or darling, AGL?

Justin Braitling (SELL): I agree with Ben. It's a sell, even though it's fallen a long way, it's where Telstra was 15-20 years ago, as it ceded share in the telecommunications business. The energy markets are changing profoundly. There's going to be an excess supply of power in the system as all these renewable projects are built, that puts ongoing pressure on the pool price. They're incredibly exposed to pool prices. So think, as pool prices continue under pressure, their profits continue under pressure. The split, there's probably not a lot they could do. It's probably the right decision, but whether the two businesses can stand on their own feet without having to inject additional capital, that's still to be addressed. So only time will tell, but I think as a combined company, it's got a lot of challenges ahead of it.

Sydney Airport (ASX:SYD)

Matthew Kidman: Justin, let's go from a dinosaur to a possible white elephant. Sydney Airport. Not being used much at the moment. Buy, hold, or sell?

Justin Braitling (BUY): Well, there's a lot of potential value there, isn't there? It's interesting. If you look at the European airports, many of them are not far off their all-time highs. Obviously, they had a much worse experience in Europe than we have here in Australia in terms of travel. International travel will come back. It's an incredibly valuable asset. In three to five years time, we'll look back and volumes will have recovered completely. And there's no reason why that asset shouldn't trade where it was before the health crisis. So that's a buy.

Matthew Kidman: Ben, if our Prime Minister and premiers get their way, we may never travel overseas again. Sydney Airport, buy, hold, or sell?

Ben Clark (BUY): I think it's a cracking buy, Matthew. Whether it's 2022 or 2023, it will recover, and I think actually travel will overshoot on the upside to where the passenger numbers would have been if not for COVID. And then the other thing I think is that we're all probably going to need to spend a bit more time in airports as travel ramps back up. There's probably some new revenue streams; maybe doing testing before we get on flights, etc. So it's kind of the uncertainty of when this all kicks off that I think is creating a great price opportunity. And once you know that travel's going to really start to go, this will be trading quite a bit higher, I think. So you need to buy it while the uncertainty reigns.

Atlas Arteria (ASX:ALX)

Matthew Kidman: Okay. So we're flying there. Let's hit the road. Atlas Arteria. European roads, Europe's opening up again. Buy, hold or sell, Ben?

Ben Clark (BUY): Yeah, this is a buy as well. So the major asset these guys own is the highway that connects Paris to Lyon. Traffic's been quite resilient, sort of 75% of pre-COVID levels, but France is opening up. Tourism is really starting to kick off again in Europe, albeit in fits and spurts. The vaccination rollout in France does look pretty slow and problematic, different reasons to Australia. But again, I just think it's inevitable that the traffic numbers will get back to where they were and it's still trading at a big discount to where it was. The balance sheet's in good shape. And also a lot of the debt is now fixed, whereas the tolls are linked to inflation. So this is probably one of those players that actually could do okay in an inflationary environment.

Matthew Kidman: Justin, is it like Talking Heads told us, you're on the "road to nowhere"? Or is it a buy? 

Justin Braitling (BUY): No, it's definitely a buy. The same story. These European infrastructure assets have recovered nicely. Traffic flyers will normalise. It's on a 6% yield and unlike a lot of other infrastructure plays, the dividend should increase nicely in the years ahead. They've restructured the management agreement, internalised it. They can restructure the way the balance sheet's funded. That'll allow them to stream more cash through to shareholders. So you've got a nice dividend growth story there. And the recovery that will happen in the next couple of years. So I think it's a strong buy as well.

Matthew Kidman: It's hard to play defensive, but it might be just time to hit the road, Jack. That was a great show of Buy Hold Sell. If you want to see more like this, why don't you subscribe to the Livewire YouTube channel?

What defensive stock are you backing? 

The jury is unanimous on this one, Sydney Airport and Atlas Arteria are the stocks to buy as bond yields continue on their volatile ride south. But what do you think? Let us know what defensive stocks you are considering in the comments section below. 

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