Buy Hold Sell: 6 quality compounders for your back pocket

Note: You can watch, listen or read an edited transcript below. This episode was filmed on 14 April 2021. 

Edited Transcript

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we are talking about four quality compounders for your back pocket. I'm joined by Anthony Aboud from Perpetual and Sean Fenton from Sage Capital. Plus they'll also share one company that they think will be a winner over the long term. Thanks for joining me.

First up, we have Cochlear which, for those who may not know, is a global leader in implantable hearing devices. Its share price is up around 14% over the past year. Anthony, I'll start on you. Is it a buy, hold, or sell?

Cochlear (ASX:COH)

Anthony Aboud (HOLD): I'm going to be boring, it's a hold. Great business, great brand name. It's underperformed the market, even though it's been up 14%, but it's underperformed in the market almost 20% in the last year because obviously there's been a deferral of surgeries and they did quite a strange capital raising in the middle of COVID. It would usually be a buy, but at 60 times P/E this year and 47-48 times next year, I just can't get it to stack up.

Ally Selby: In its results, it announced net profit would be going up by 46 to 59% in 2021. Sean, is it a buy, hold, or sell?

Sean Fenton (BUY): I actually think Cochlear is a buy. The major reason being its major competitor, Advanced Bionics, has had some material issues and are having recalls, and the surgeons are starting to prefer Cochlear. So we see it taking share going forward. You've also got the reopening of new surgeries coming back as hospitals and elective surgery come back online. So that helps drive that profit growth. It is expensive, but the rest of the growth space has really caught up and gone beyond it. So it looks okay.

Qantas (ASX:QAN)

Ally Selby: Next up and we'll stay on you, we have the Spirit of Australia, Qantas. Its share price hasn't quite yet recovered from the lows of the crisis, but there's a trans-Tasman bubble starting the day this video is actually published. So, is it a buy, hold, or sell?

Sean Fenton (SELL): I generally like Qantas as a business, but I just can't hold it. It's probably even a sell here at the moment. There's just too much uncertainty in terms of travel and what happens, particularly business travel, the front end of the plane, higher-yielding passengers, where does that go moving forward? And I'm not just talking about reopening borders, I think how does corporate travel fundamentally change where we do more Zooms and these sort of webinars and the like? So that uncertainly just leaves it as a sell for me.

Ally Selby: Anthony, it reported more than a $1 billion loss during reporting season. Do you think they can close that gap? Is it a buy, hold, or sell?

Anthony Aboud (BUY): I'm actually going to say buy on Qantas, respectfully. I think that we don't know the timing, but at some point, things will bounce up, whether that's two or three years from now. And we feel that... through COVID, they're going to come out the other side much stronger for two reasons. One is the competitive environment is much better. I think private equity owning Virgin is a good thing for competitive dynamics and Tiger is no longer there. So we feel that the competitive environment is better. They've taken a billion dollars of the costs out structurally and so we think that will be able to be maintained. And so coming out the other side, we think that could earn 60 to 65 cents at some point in the next three or four years. At five bucks, we think it's pretty cheap.

Cleanaway Waste Management (ASX:CWY)

Ally Selby: Next up we have Cleanaway Waste Management, which is up around 34% over the past 12 months. Anthony, is it a buy, hold, or sell?

Anthony Aboud: I'm going to be boring, it's a hold.

Ally Selby: So much fence-sitting.

Anthony Aboud (HOLD): Yeah, look. I like the industry. I like the growth. I like the barriers to entry into the industry. This is not going to be disrupted by Amazon, this industry. And I think that there's M&A happening with Suez and Veolia merging and Bingo getting bid for. But my problem is twofold. One is the new CEO coming in and rebasing earnings, and the second thing is that it’s not screamingly cheap at 27 P/E.

Ally Selby: Do you agree? Is it a buy, hold, or sell?

Sean Fenton (BUY): I'm leaning towards hold, but to be different, I'll say buy. Mainly just that dynamic of recycling. They're picking up a few landfill assets off Suez with their merger, so they're pretty scarce. So between that, the dynamic of people looking for more investment in the recycling space, the growth there, money being recycled from Bingo on the like, I think it does okay in the short term.

Netwealth (ASX:NWL)

Ally Selby: Next up we have wealth management platform Netwealth, which has seen its share price lift around 80% over the last 12 months. Is it a buy, hold, or sell?

Sean Fenton (BUY): It's a buy, I think. Sky-high valuation, but just the underlying growth's very strong. So it continues to just do very well in that platform segment taking increasing share. So it's got a very strong growth pipeline ahead of it. It starts to fall through to the bottom line.

Ally Selby: Anthony, it is trading at a discount to its competitor, HUB24. Do you think this is an opportunity to buy? Is it a buy, hold, or sell?

Anthony Aboud (SELL): Respectfully, it's a sell. I think it's very well managed, great balance sheet, great flow coming and they've done a really good job taking market share and flows from the big four banks, AMP and IOOF post-Royal Commission. Their customers love them. And so obviously a lot of good things going for it. 

The three problems I've got: One is I think that 40% of their earnings comes straight from spread, I think that is not sustainable. The second problem I've got is that the investment platforms do come under pressure. Especially as a lot of these businesses shift from the big banks to private equity, they're going to get better, become better competitors. And thirdly at about 60-62 P/E, it's just above my threshold of valuation. And I generally think that we are now in a world where there are more companies generating EPS growth. So this whole argument of growth is scarce, I don't think growth is as scarce anymore. So paying 62 is too much for me.

Ally Selby: Well, last up we've got Warren Buffett who famously said investors should only buy something that they would be happy to hold if the market closed for 10 years. With that in mind, can you share a stock that you think investors can buy and hold comfortably?

Francaise Des Jeux (EPA:FDJ)

Anthony Aboud: I've chosen a global stock. It's called FDJ, it's a French lottery company. Just for Australian investors, they know Tabcorp's lottery business extremely well. It's very well regarded, it's regarded as an infrastructure style company, but the real growth driver for the company has been the shift from selling through newsagents to selling online. And there are two benefits from that. One is the cost, they're not paying 10% commission, and the second is a direct conversation with your end clients, so you can market more effectively.

FDJ was privatised by the French government in December 2019. What I liked about it is it had a twenty-five-year monopoly licence in France, which is one of the top lottery markets in the world. Only 3% of its business was through digital. We see no reason why that can't go to 30% like Tabcorp. It's had a good start, we invested in the IPO at just under €20; it's gone to €40. We actually think that the earnings from here could almost double as they get to 30% of their distribution through digital. So we like it. It's about 5% free cash flow of the yield even here. So a buyer could hold it for 10 years.

ResMed (ASX:RMD)

Ally Selby: Sean, over to you. What's a company that you think investors can hold over the long term?

Sean Fenton: I think ResMed over the long-term. So back in the healthcare space, it does sleep apnea devices and masks. It's a segment that's under-penetrated so there's good long-term growth there. It's been growing steadily for the last 10 or 20 years, so we see that track record continuing. Very strong balance sheet, good management. They're getting close to their customer, so they've bought something called Brightree which gives them the digital platform, closer to fulfilment of masks and keeping things going. They've worked through competitive bidding in the US which suppressed prices for a little while. So even through that period, they've managed to expand margins and deliver strong profit growth. It's a safe one to sleep at night.

Ally Selby: Well I'm convinced. We hope you enjoyed this episode of Buy Hold Sell. If you did, why not give it a like? Remember to subscribe to our YouTube channel so you never miss an update.