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This article was originally published on LivewireMarkets.com on February 4th, 2022
2022 has started off with a bang, and not in the way investors would have hoped. The S&P/ASX 200 has fallen around 7% since the beginning of the year, while the Small Ordinaries has dropped more than 9%.
But these averages fail to convey the true levels of pain being felt in some parts of the market. Some popular stocks – particularly those on high PE ratios or with negative earnings – have fallen far further than the index. For example, Netwealth is down 14.8%, Altium is down 23.9%, and Megaport is down a massive 29.9%.
So in this episode, Livewire’s Ally Selby was joined by IML’s Simon Conn and Elston’s Bruce Williams for their analysis of three all-star Aussie companies that could help investors navigate the volatility ahead, including Cochlear, Nine Entertainment and Seek.
And for an added bonus, we asked them to select one stock that they each believe can help investors sail through the stormy seas of 2022.
Note: This episode of Buy Hold Sell was shot on Wednesday 2nd February 2022. You can watch the video, listen to the podcast or read an edited transcript below.
Edited Transcript
Ally Selby: Hey, how are you doing? And welcome to Livewire’s Buy Hold Sell. I’m Ally Selby. And as many of you know, markets have been off to a rough start in 2022, with the S&P/ASX 200 down around 7%. So, which companies can help you sleep at night and weather the volatility ahead? Glad you asked. Today we’re joined by Bruce Williams from Elston and Simon Conn from IML.
First up we have Cochlear, which is a global leader in implantable hearing devices and a favourite in many long-term investors’ portfolios. Bruce, I might start on you. Is it a buy, hold or sell?
Cochlear (ASX: COH)
Bruce Williams (BUY): It’s a buy for us Ally. We like it. It’s an under-penetrated market. It’s got proven benefits for its recipients. The valuation is what we would consider reasonably high, but given its runway, the quality of what it does, its market position, we think it’s a terrific stock.
Ally Selby: Over to you, Simon. It obviously suffered during lockdowns, with elective surgeries on ice. But in October, Cochlear provided a net profit guidance up 12% to 20% for FY22. So is it a buy, hold or sell?
Simon Conn (SELL): For us, it’s a great business, but it’s trading at a great price. So it’s clearly a sell for us. I think a lot of the good news is already embedded in the price, and I think it fits in that basket of stocks that have benefited artificially from ultra-low interest rates, where investors have attributed a multiple to future earnings. So 40 times, going towards 30 times next year’s earnings, we just think there’s a lot of good news already in the price and so it’s a sell for us.
Nine Entertainment Co. (ASX: NEC)
Ally Selby: Next up we have Nine Entertainment, which is seen its share price drop around 7% since the beginning of the year. Simon, staying on you, is it a buy, hold or sell?
Simon Conn (BUY): It’s a buy. We still like Channel Nine. It’s a good business. It’s diversified, with its ownership of Domain, and its ownership and organic growth they have generated in Stan. Increasingly their earnings are coming from their digital platforms, they’ve been very successful at growing their BVoD earnings. And ad markets fundamentally remain very robust. Metropolitan TV, or more TV broadly, remains the only form, really, of building brands in this country, and they’re off to a great season with their ratings with the Australian Open and MAFS. So a good management team, strong balance sheet, trades on a PE of less than 15 times and a yield of 4.5%, we think it’s a clear buy here.
Ally Selby: Bruce, are you a fan of MAFS? Is Nine a buy, hold or sell?
Bruce Williams (HOLD): Not a fan of MAFS, Ally. I don’t think I’ve ever watched it. But for us, Nine is a hold. We think the long-term structural decline in publishing, and free-to-air TV is a little bit problematic for them. They are doing a terrific job flexing their cost base, and also, as Simon mentioned, with their streaming services. But the streaming services are also a little bit uncertain for us, because whether domestic content plus sport is enough to offset your Paramounts, your Disneys, and the other goliaths of streaming, whether they’ll hold that niche is a question mark for us.
Seek (ASX: SEK)
Ally Selby: Next up we have Seek. Everyone’s talking about this great resignation but could Seek benefit as people start looking for new jobs. Bruce, staying on you, is it a buy, hold or sell?
Bruce Williams (HOLD): It’s a hold for us, Ally. Seek is a terrific domestic franchise. Their offshore businesses are a little more variable in terms of their performance. But we think the valuation’s just a little too high for us at these levels.
Ally Selby: Simon, over to you. Seek recently spun out its investment business, run by Andrew Bassett. Is Seek a buy, hold or sell?
Simon Conn (SELL): It’s a sell for us, Ally. Again, a good business, but at 40 times this year’s earnings, going to 30 times next year, just again a lot of good news priced in. I think it’s susceptible to a price correction, given what’s happening with long bonds. And we’ve got question marks around the valuations of that growth fund, which is about 10% of their enterprise value. Given what’s happening with these more growthy-type, cash-burning businesses, you’ve got to question the valuations around that portfolio. Look, it’s a good business, and we prefer the classifieds to the pure software businesses, but again, at those multiples, it’s very full.
Simon and Bruce’s picks for stormy markets
Ally Selby: We asked our fundies to bring along one all-star Aussie company that they think can weather the volatility ahead this year. Simon, I might start on you. What have you brought for us today?
Simon Conn: Our focus is on the mid and small-cap sector, so I’ve picked Metcash (ASX: MTS) today. We think it’s an underappreciated franchise, and a business that’s no doubt benefited from COVID, but I think that’s delivered enduring benefits to their food business. But also their liquor business has been growing and is a very resilient business. But really its the hardware business, where they position themselves as the second player in the hardware, retail and wholesale markets that we think is underappreciated by investors.
Their acquisition of Total Tools looks really well priced. They bought that prior to COVID, effectively on about three-and-a-half times EBITDA. A business that’s grown very well through COVID. But we think as the franchisees and the operators in those networks reinvest in their stores with the increased profitability they’ve generated, the local consumers are spending more in their local communities, and we think that will continue to a large extent, going forward. And all of those stores have been refurbished. And again, the hardware business, I think can continue to do well going forward. And the thing about Metcash is it’s really attractively priced on 13 times, and a yield of over 5%, with a really strong balance sheet. For us, it looks like a standout in the market, where a lot of stocks look pretty fully priced.
Ally Selby: Okay. Over to you now, Bruce. Is there a sturdy and stable player that you think investors can put in the bottom drawer for 2022?
Bruce Williams: The one we’re bringing to the table today is Amcor (ASX: AMC). Different to Simon, in terms of its in the large end of the market – it is a multinational. The basis of its business is consumer staples, so things like healthcare, food, those sorts of things. It’s a packaging business that is dominant in what it does, in each of the markets in which it participates. It generates excellent cash flow. It’s building into its technology around sustainable and recyclable packaging. We think it’s just a terrific defensive position that, through a combination of capital growth, dividends and buybacks, will generate consistent returns for investors for the foreseeable future.
Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We’re adding new content every week.
What stock do you think can navigate volatile markets?
Bruce picked Amcor and Simon picked Metcash, but we would love to know what you think. Let us know what stocks you think can help other investors navigate the volatility ahead in the comments section below.
If you would like more information please call 1300 ELSTON or contact us.
