Livewire: Picking winners from the losers
The share market may be hovering around an all-time high but that doesn’t mean that every stock has been in winning form. While it’s always important to select stocks that are going to make you money, it’s just as crucial to know what you should do with the “strugglers”.
In this episode of Buy Hold Sell, we take a look at what the structural challenges facing the car industry mean for Automotive Holdings Group, the David and Goliath battle confronting Kogan as Amazon cuts a swathe across the Australian online retail space, Bellamy’s continued push into China, as well as a couple of “losers” with serious upside potential.
Join Matthew Kidman from Centennial Funds, Matthew Booker from Spheria Asset Management and Roger Montgomery from Montgomery Investment Management discuss what investors should do with those stocks whose performances have been far from stellar.
Matthew Kidman: Welcome to Buy Hold Sell. My name’s Matthew Kidman and the share market might be near an all-time high, but there are a lot of stocks struggling and to talk to me today about bad stocks at the moment, Matt Booker from Spheria and Roger Montgomery from Montgomery Investment Management.
Roger Montgomery: G’day again, Matt.
Matthew Kidman: G’day. Automotive Holdings, Rog, been down in the dumps for many, many years. Buy, hold or sell?
Roger Montgomery: Yeah, look, there’s a structural element and that is, you know, electric vehicles and the future of less servicing. There’s a cyclical element, which is big ticket items not being bought. Their acquisitions haven’t performed, so they’ve written down the value of those things, but the price is reflecting all of that. So, I think at the moment it’s a hold.
Matthew Kidman: Okay, car retailing, very tough at the moment, Matt, buy, hold or sell?
Matt Booker: Ah, look, we think it’s a sell. It’s triple leveraged in our view, so it’s got floor financing, it’s got leases, it’s got a lot of corporate debt. They need to sell assets. It’s in a very distressed state. We think it’s a very difficult outlook. Long term, EVs are going to take over. You won’t need a dealership service, so it’s going to change the market.
Matthew Kidman: Okay, let’s get a bit sexy, eh?
Matt Booker: Yeah.
Matthew Kidman: Stock that’s fallen on its knees, but modern economy, Kogan, online retailer – buy, hold or sell?
Matt Booker: Oh look, we think Kogan is a sell. The guys have done a great job in, you know, building that business, but there’s been an inventory build. The cash flows are quite weak, the earnings are quite low. Although the share price has come back a lot, we actually think it’s a sell.
Matthew Kidman: It’s gone up, it’s come down. Kogan, buy, hold or sell?
Roger Montgomery: I’ve written a lot about it in The Australian. I think it’s a sell as well. I think the business is structurally unsound. It’s going to be competing against a much stronger Amazon. They’ve just taken on another 500 people. They’re getting stronger and better. Every time Kogan announces a new channel, the key people sell stock. That’s telling you something.
Matthew Kidman: Okay, let’s get to milk, organic infant formula, Bellamy’s up, down, bouncing off the bottom. Buy, hold or sell?
Roger Montgomery: Yeah. Look, I think this one’s a hold simply because there’s been a lot of delays for their registration in China. I think there’ll continue to be delays and as a consequence, I just don’t see what the upside catalyst is going to be in the near term, so for me it’s a hold.
Matthew Kidman: Got a lot in front of it. New branding, licences: buy, hold or sell?
Matt Booker: Look, it’s a hold for us. We think there’s a great brand there. They’ve got a good proposition into China in terms of organic formula. We think they’ll be able to rebuild the business, but there’s going to be a weak second half, we think, for the group in terms of sales and profitability, but we think the first half of ’20 could improve, particularly if they get the registration, so it’s a hold at the moment.
Matthew Kidman: Okay. There must be something out there that’s struggling, worthwhile looking at, maybe even a buy?
Matt Booker: Just on that theme, we like Blackmores. It’s retraced a long way after a pretty poor result. We think it’s under earning, it’s cost inefficient. There’s going to be a change of leadership there. We think there’s a lot of costs to come out of the group and the margin upside is quite significant. We think the stock could rerate significantly under good management.
Matthew Kidman: Okay. Rog, something that’s struggling at the moment, but it’s got a great long-term future?
Roger Montgomery: Yeah, look, over the last sort of eight or nine months, a company that has come off quite a bit is Reliance Worldwide, not a very sexy business. They sell push-to-connect brass fittings and PVC connections for plumbers. Trends in the United States where they generate most of their revenue in terms of remodelling of kitchens and so on, very, very positive for the company so we actually think around the $4 mark’s actually pretty cheap.
Matthew Kidman: The message is clear, dump the dumps.