For months now several of Livewire’s contributors have consistently warned about increasingly stretched valuations across growth and technology stocks. And it looks like investors are finally paying attention.
During September, momentum-driven names including BNPL and e-commerce stocks largely kept out of the limelight insofar as the most-traded stocks on share trading platform Bell Direct go. Instead, investors rotated into beaten-down and defensive names.
Here, Jessica Amir from Bell Direct shares what some of the most popular ASX stocks were during the month, and gets Michael O’Neill from Investors Mutual and Neil Margolis of Merlon Capital to opine whether these companies offer attractive right now. The companies discussed range from a critical infrastructure asset, to a major bank, and an industrial business proving resilient amid the pandemic.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 23 September 2020.
Jessica Amir: Welcome to Buy, Hold, Sell, brought to you by Livewire Markets. My name is Jessica Amir. Today we’re talking about the most traded stocks on Bell Direct in September, and if value managers find them attractive. I’m joined by Neil Margolis from Merlon Capital and Michael O’Neill from Investors Mutual.
Sydney Airport (ASX:SYD)
Jessica Amir: Michael, let’s start with you. Sydney Airport, buy, hold, or sell?
Michael O’Neill (Hold): Sydney Airport is a hold for us, it’s a very high-quality monopoly infrastructure asset, and certainly was earning very high returns ahead of COVID travel bans. They’ve raised $2 billion to shore up their balance sheet. Their outlook is uncertain but they’ll benefit very quickly when we get a snapback in domestic and ultimately international travel.
Jessica Amir: Very good point. What do you think, Neil? Buy, hold, or sell Sydney Airport?
Neil Margolis (Sell): It’s a sell for us. I mean, it’s a fantastic company. Every time I park there, I want to own shares in the business. But, I mean, it’s got $8 billion of debt. We always count debt. We always assume debt has to be repaid because we’re conservative in our valuations, and on this basis, when things return to normal and they will, it’s on a 4% to 5% free cash flow yield on the debt plus equity. It’s got a $23 billion value still. So, I mean, while that’s attractive for such a high-quality asset, we think there are much better opportunities out there at the moment.
Jessica Amir: Speaking about opportunities, is it in Woollies, Neil? Buy, hold, or sell Woolworths?
Neil Margolis (Sell): Woollies is a sell for us as well. I mean, it didn’t feel like this when the stock was at $20 not so long ago and people thought Aldi was taking over the world. But everything’s going right for it at the moment and we recently exited the position. It’s been a beneficiary of COVID. Even Big W is turning around. Dan Murphy’s is doing very well, but the stock’s on about 30 times earnings, and while it’s a fantastic company, I think it doesn’t have many problems at the moment, which means it’s probably not underpriced.
Jessica Amir: All right. Not underpriced. What do you think, Michael? Woolworths, buy, hold, or sell?
Michael O’Neill (Hold): It’s a hold for us. It is approaching our valuation. As the largest supermarket operator in Australia, the premium it appears has come in. It’s actually trading below pre-COVID levels, despite the divisions doing well, despite them continuing to gain share in online shopping. And also we’re going to see the de-merger of their alcohol and pubs, JV, in the coming year.
Jessica Amir: All right, changing pace to Brickworks, buy, hold, or sell?
Michael O’Neill (Sell): Brickworks is a sell for us. Soul Pattinson, as the leading building construction company in Australia, has had solid growth in dividends over time and growth through the U.S. and industrial properties businesses. However, our concern is exposure to the highly cyclical industry of building construction, also some of the valuations in that sole Patterson’s cross-holding, we see better opportunities for less cyclical and also more transparent earnings in other industrial stocks.
Jessica Amir: Indeed. But Brickworks is a very, very good dividend payer and has been for some time. Buy, hold, or sell, Neil?
Neil Margolis (Sell): Look, it’s a sell for us as well. It’s a complex company. Actually, only about 20% of Brickworks is actually bricks. Then about 20% is industrial property, as people like to call it, logistics thinking it’s e-commerce, but really we think that’s quite a bubble in industrial property at the moment. And then the other 60% is a cross-holding with Soul Pattinson.
The biggest driver in there is actually the valuation…