Monday 12 August 2019 Should you buy these 8 stocks that ...

[Pages:13]Monday 12 August 2019

Should you buy these 8 stocks that defied China's currency fall?

When bad news hits, most stocks sink. But the smarties look to play defence before defence is needed and go fishing for stocks that fall into this category. In the Report today, I ask the question: Should you buy these 8 stocks that defied China's currency fall?

Sincerely,

Peter Switzer

Inside this Issue

Should you buy these 8 stocks that defied China's currency fall? by Peter Switzer

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02 Should you buy these 8 stocks that defied China's currency fall? TLS, AMC, AMP, CNI, JHX, WOW, NCM & RMD by Peter Switzer

05 JB Hi-Fi keeps delivering JB Hi-Fi meets the criteria of a great stock by Paul Rickard

07 Postcard from London: 6 stocks that could rebound if/when Brexit happens CYB, IRE, WEB, JHG, PDL & BVS by James Dunn

10 Buy, Hold, Sell: What the Brokers Say 9 upgrades, 5 downgrades by Rudi Filapek-Vandyck

13 My "HOT" stock ? I like Computershare (CPU) Computershare (CPU) by Maureen Jordan

Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 Level 4, 10 Spring Street, Sydney, NSW, 2000 T: 1300 794 893 F: (02) 9222 1456

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Should you buy these 8 stocks that defied China's currency fall?

by Peter Switzer

For those worried about the Trump versus China trade war and who want to make their portfolio of stocks more resilient to the fall out if a trade deal fails, let's look at stocks that didn't overreact to the bad market reactions to China's currency devaluation.

When bad news hits, most stocks sink. But the smarties look to play defence before defence is needed and go fishing for stocks that fall into this category.

Amcor (AMC) reacted in a similar way and, like Telstra, nearly ended higher. You might be thinking a recession would hurt a box-company like Amcor but most economists who think a US recession is on the horizon still argue it won't be a GFC-style dramatic one.

AMCOR (AMC)

What I'm saying is this: if we can imagine a rally following a trade deal, growth stocks would take off, so the courageous should be buying them now. However, defence stocks could be good value for an eventual sell off ahead of a recession, which could happen some time down the track. I'm being contrarian wanting to buy defensive stocks, not now, but when growth stocks react positively to a trade deal.

But what stocks might be resistant to negativity down the track?

Last week, Telstra (TLS) dropped but quickly recovered, showing that there are dip buyers when this stock gives into gravity. In any trade war-created economic slowdown (or recession), this stock would show resilience.

Source: Yahoo Finance

AMP rose on the new plan to change the business, along with the second shot at selling its insurance business. Also, the good showing by AMP Capital excited some players. The stock is still so low that it probably didn't have very far to fall but as I said in my Saturday Switzer Report article, "Morgan Stanley increased its price target on AMP and upgraded the stock from `underweight' to `equal-weight', saying the resurrected $3 billion sale of its life business paved the way for a new beginning." (SMH) But note its target price is up from $1.50 to $1.65, yet it's now $1.90!

Telstra (TLS)

AMP

Source: Yahoo Finance Monday 12 August 2019

Source: Yahoo Finance

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Centuria Capital Group (CNI) plays in the REIT space but, as you can see, the company had a trouble-free week last week. My company has had a bit to do with these guys and their individual buildings that have come to market as private funds have done well. Their listed business seems to be well-received by the pros at the moment.

Centuria Capital Group (CNI)

Source: Yahoo Finance

Not surprisingly, gold was a big winner and Newcrest is the quality play. Sure, it has been bid up because gold stocks are reacting to the bond market's sinking yields and the uncertainty created by Donald, China, North Korea and Iran. When it gets complicated and there's recession talk, gold becomes popular.

Source: Yahoo Finance

Newcrest (NCM)

James Hardie (JHX) had a great week, with the company pointing to its North American business as a winner. At home, the CEO Jack Truong thinks he'll win market share in a challenged housing sector.

That said, a solid performance from its much larger North American business, where profits and margins increased in the June quarter, sparked a 14% rise in the James Hardie share price, by noon on Friday to $21.68.

James Hardie (JHX)

Source: Yahoo Finance

And what about Resmed? It had a week that pretty well ignored the currency threat!

Resmed (RMD)

Source: Yahoo Finance

Woolworths looks like the classic stock that pros will buy after a fall in share price because of a trade war panic. It went close to losing nothing last week, which indicates that it's the kind of stock that will be in demand if Donald puts the trade cat amongst the pigeons.

Woolworths (WOW)

Source: Yahoo Finance

Clearly, the sleep sufferers of the world will not be deterred by Donald, China or anything trade scary!

These are the stocks you might not want to collect if there's a trade deal because they are likely to lose friends. But they could well be some friends when market fears eventually return.

AMP looks to be a special one that's hardly defensive but because it has been beaten up so

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much, there could be value for those who like to buy and hold, if the market sells off on trade concerns.

The other selections above do look like sturdy types that might help preserve more capital than others when stock markets get well and truly spooked.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Monday 12 August 2019

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JB Hi-Fi keeps delivering

by Paul Rickard

I like companies that have a track record of:

Growing top line sales or revenue growth. Improving their operating margin. Growing profits. Growing earnings per share. Increasing dividends. Strong cash flow, conservative gearing and prudent financial management. Delivering a high return on invested capital. Market/category leadership.

Throw in a first class management team, and a share price that is trading on a respectable multiple below the ASX average.

Retailer JB Hi-Fi fits this to a tee.

The problem is that JB-Hi Fi is in retailing and confronts the sector "headwinds" including anaemic sales growth, price deflation, disruption as sales move on-line and the threat of category killers such as Amazon. That's why JB-Hi Fi remains one of the most shorted stocks on the ASX. According to the latest figures from ASIC, 16.4m JB Hi-Fi shares (worth around $490m) are short sold. This is equivalent to 14.3% of JB Hi-Fi's total shares on issue.

This has come down from a high of about 19%, but it still makes JB Hi-Fi the seventh most shorted stock on the ASX. Fellow retailers Metcash and Harvey Norman rank sixteenth and seventeenth respectively.

This morning, JB Hi-Fi met expectations again and delivered a very credible set of results. Here are the highlights:

Net profit up 7.1% to $249.8m. This exceeded JB-Hi Fi's prior guidance of NPAT to be in the

range of $237m to $245m (up 1.6% to 5.1%); Sales up 3.5% to $7.095m (guidance was $7.1bn); Earnings per share up 7.1% to 217.4 cents per share Dividends for the full year up 10c to 142c per share (fully franked), with a final dividend of 51c per share (up from 46c); Cost of doing business (salaries, rent, advertising) up very marginally from 14.82% of sales to 14.89% of sales; Net debt down to $319.9m; and Return on invested capital up from 26.1% to 27.3%.

The following graphs show the company's track record over the last 5 years.

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JB Hi-Fi Australia (the traditional technology and consumer electronics business) grew overall sales by 4.1% and thanks to a strong performance in the final quarter, comparable store sales by 2.8%. EBIT of $301.7m was up 3.2% for the year, representing 81% of the Group's total. The other main division, the Good Guys home appliances business which JB Hi-Fi purchased a few years' back, delivered an improved performance. Sales growth resumed (up 2.2% for the year), and following gross margin improvement, EBIT jumped by 19.8% to $72.9m.

Looking ahead, JB Hi-Fi provided guidance for group sales in FY20 of $7.25bn (2.4% growth for JB Hi-Fi Australia and 1.5% for The Good Guys). "Whilst we continue to see variability in the sales environment, we enter FY20 confident in our ability to execute and grow market share". They also reported that July had started well for JB Hi-Fi Australia (up 4.1% in total, with comparable store sales up 3.2%), however The Good Guys had started less strongly with sales down 2.1%.

What do the brokers say?

franked.

Notwithstanding the challenging outlook for retail, these numbers don't make the stock look that expensive ? in fact, you could make a case that it looks quite attractive. That all said, I think it is unlikely that the shorters will give up on the stock and will probably look to reset their shorts at higher levels.

JB Hi-Fi meets the criteria of a great stock for an investor's portfolio. But concerns about sector headwinds aren't going to abate, nor are concerns that JB Hi-Fi's growth profile might be maturing. So it is a stock to consider adding to your portfolio when the market (or the shorters) are keen to sell. I wouldn't chase it at these prices, but I would certainly have it on my watchlist. Wait to buy.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Going into the result, the brokers were largely neutral on the stock. While all acknowledge the strength of the management team and their ability to execute, concerns over the retail environment and the maturity of the company's growth profile, plus the risk of further online disruption, lead in the main to a cautious assessment. According to FNArena, of the 7 major brokers, there was 1 buy recommendation, 4 neutral recommendations and 2 sell recommendations. The following table shows the recommendations and target prices.

Here's my view

The market's initial reaction to the profit report was to send the shares 7% higher to around $30. This places the stock on a multiple 13.8 times FY19 earnings and assuming a 3% increase in FY20, 13.4 times FY20 earnings. The dividend yield is 4.7% fully

Monday 12 August 2019

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Postcard from London: 6 stocks that could rebound if/when Brexit happens

by James Dunn

Here we go again ? another deadline for Brexit. New British Prime Minister Boris Johnson has vowed to take the United Kingdom out of the European Union (EU) by 31 October, without a "deal" if necessary.

This is after the last deadline, 30 March, was missed; which contributed to former Prime Minister Theresa May's ditching. It is history that May's negotiated "Withdrawal Agreement" will not be the deal that the UK eventually accepts.

In keeping with the incredibly fractious debate that has characterised Brexit since the initial vote in June 2016, the fear-and-loathing over the 31 October deadline is intensifying. The Johnson government may not get what it wants, but the markets now know that the British government is prepared for a complete break from the EU ? the so-called "no deal" outcome, with the subsequent opportunity to negotiate a free-trade arrangement with it as a fully sovereign non-member.

The stock market will again fixate on the Brexit effect, especially if the UK leaves on 31 October without a deal ? in particular, there are concerns for the UK's world-leading financial services sector. Under the `passporting' arrangement within the EU, UK-based financial businesses hold the reciprocal right to provide financial services in other member states under EU law.

It is uncertain what will happen with this arrangement ? so the advent of Brexit could end the ability of London-headquartered financial services companies to operate across the EU, unless they set up subsidiary operations in the EU. Then again, the financial services heavyweights will still do a ton of work out of London for non-EU clients.

The financial services sector has been a prime

candidate for concern from Australian investors about the potential impact of Brexit ? stocks such as ASX-listed UK bank holding company CYBG (which owns Clydesdale Bank, Yorkshire Bank, Virgin Money UK and the app-based bank B in the United Kingdom, investment bank Macquarie Group, funds managers Pendal Group and Janus Henderson, property group Unibail-Rodamco-Westfield and financial markets and wealth management software and systems provider IRESS have all been marked down from time to time on Brexit fears.

So have companies with growing businesses in the UK, for example small-business accounting software provider Xero, buy-now-pay-later service provider Afterpay Touch, retail group Premier Investments (which is expanding its Smiggle stationery chain in the UK), private hospital operator Ramsay Health Care, travel group Webjet and wine company Treasury Wine Estates. In these cases, much of the worry surrounds the effect on the British economy and Britons' spending habits.

In reality, many of these companies have plenty of other factors ? both good and bad ? that are far more relevant to the stock price than Brexit.

Here are six stocks that have had a fair bit of Brexit uncertainty priced-in to the stock valuation ? but which could rebound if and when Brexit happens, and fails to produce an economic cataclysm.

1. CYBG plc (CYB, $2.83) Analysts' consensus target price: FN Arena $3.63, Thomson Reuters $3.51 FY20 estimated yield: 5.6% (at current exchange rates)

As the only British retail banking group listed on the ASX, CYBG (Clydesdale and Yorkshire Bank Group)

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? which operates the Clydesdale Bank brand, which was established in Glasgow in 1838, and its sister brand Yorkshire Bank, which was founded in Halifax in 1859 ? has been a lightning rod for Brexit concerns. In 2017, CYBG took over Virgin Money to create the UK's sixth-largest bank, with 6 million personal and small business customers, and total lending of ?70 billion ($116 billion). This year, CYBG has announced plans to re-brand to Virgin Money to take advantage of the wider recognition of the name, and also leverage the fact that the Virgin brand attracts a more affluent customer. The combined entity will have the scale to compete nationally, and attract the kind of market multiple that the larger UK banks command. Virgin Money will be looking to change its business mix, in particular by boosting business loans and unsecured personal lending: at present these represent just 10% and 6% of the loan portfolio respectively, dwarfed by the mortgage book, at 84%.

CYBG is mainly affected by the outlook for its key lending markets, UK homeowners and SMEs, is more subdued than in recent years. UK economic conditions are challenging. It operates in a heavily competitive mortgage market, and is affected by negative sentiment on house prices and higher costs from a changing regulatory landscape. Like all British businesses, it would like to know for certain what is going on with Brexit ? and it has not boosted business lending growth by as much as it had hoped ? but analysts view the stock as over-discounted for Brexit risk.

arrived at a consensus that no-deal would see the pound tumble to its lowest level since 1985.

However, IRESS has major businesses in Australia, Asia-Pacific, South Africa and Canada that would not be greatly affected by Brexit. The company's UK operation is also exposed to the advice/wealth software market, for which analysts feel the outlook is broadly positive. On consensus price target grounds, IRE looks under-valued.

3. Webjet (WEB, $13.28) Analysts' consensus target price: FN Arena $17.07, Thomson Reuters $16.50 FY20 estimated yield: 2.7%, fully franked

Online travel agency Webjet has encountered Brexit jitters because of its 2016 deal with British travel group Thomas Cook under which WEB manages the bookings for Thomas Cook's hotel rooms, through its business Sunhotels. Thomas Cook blamed Brexit (and hot weather) in the UK last summer for recent weak performance, and that flowed through to WEB: after a strong start to the year, the Webjet share price has recently been at the mercy of Brexit uncertainty ? as well as the "wealth effect" of weaker house prices on consumer confidence and spending at home. But the company's hotel comparison service, WebBeds, is now the market leader in the Middle East and Africa, and Webjet says there is room for the service to grow in the Asia-Pacific market. Ultimately, that will be a bigger impact on WEB than Brexit. This is another under-valued Brexit victim.

2. IRESS (IRE, $12.69) Analysts' consensus target price: FN Arena $13.80, Thomson Reuters $13.60 FY20 estimated yield: 4.1%, 60% franked

The financial markets and wealth management software and systems provider is a big player in the London market ? it counts many of the biggest asset managers in the world as its clients. If there were to be a downturn in the activity of the London financial market post-Brexit, IRESS could suffer. IRESS generates about one-quarter of its revenue in sterling, so the value of the British currency also affects its profitability ? a no-deal Brexit would be likely to send sterling lower, and cut into IRESS's profit. This month, a survey of analysts conducted by Bloomberg

4. & 5. Janus Henderson (JHG, $28.50) Analysts' consensus target price: FN Arena $31.16, Thomson Reuters $31.70 FY20 estimated yield: 7.7% (at current exchange rates), unfranked Pendal (PDL, $7.14) Analysts' consensus target price: FN Arena $8.44, Thomson Reuters $7.99 FY20 estimated yield: 6.8% fully franked

Virtually every piece of commentary about this pair of fund managers talks about Brexit uncertainty ? but the metrics that really drive these businesses is funds under management (FUM) growth, and that's what is really behind recent share price difficulties; particularly in the case of JHG.

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