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Blog

Equity Strategy: Sells, trims and non-preferred stocks

Tom Sartor

Key Points

  • In our Reporting season review we noted that continuation of the market's V-shaped recovery through February looked misplaced against the erosion in corporate earnings expectations, warranting some caution.
  • In this note we flag stocks under our coverage that are either: 1) outright sells; 2) looking expensive (trim profits or switch); or are 3) least preferred in their sector (no need to be there).
  • Despite short term caution, we do identify 25 preferred stock ideas across our Research coverage (per our review). Our latest High conviction stocks publication provides more detail on our most compelling current Buy ideas.

Reporting season Déjà vu warrants caution

February results were broadly robust despite ongoing systemic risks (housing, the consumer, political risks), and the lack of any significant 'new issues' for corporates certainly added fuel to the market's relief rally.

However, expectations for FY19 corporate profits eroded further and sees the market tracking toward a very tepid looking 4.1% compound annual growth in profits over the next three years.

This contrasted a sharp lift in valuations, with the ASX200 Industrials 12-month forward PE recovering to pre-selloff levels at ~16.1x.

We're in familiar territory. Only six months ago the market was riding a wave of positive sentiment against stretched valuations, heading into a period directed by macro-economic noise rather than underlying fundamentals.

Short sellers are also unconvinced

Short sellers were rewarded for their patience in February. Disappointing results from Inghams Group Limited (ING), Domino's Pizza Enterprises (DMP), Nufarm Limited (NUF), Nextdc Limited (NXT), Blackmores Limited (BKL) and WiseTech Global Limited (WTC) led to some covering in these highly shorted names.

However, while there was some evidence of profit taking, short sellers continue to hold firm on their positions and therefore expect further weakness.

Aggregate short positions in the market remain elevated at over A$34.5bn and about A$7.5bn more than at the end of the August reporting season though they continue to be concentrated in high PE (A2 Milk Company (A2M), Domino's Pizza Enterprises Limited (DMP), Ramsay Health Care Limited (RHC), Seek Limited (SEK)) and Resources (BHP Group (BHP), Fortescue Metals Group Limited (FMG)) stocks.

Areas to trim some profits

We remain on alert for recent trading momentum to potentially unwind, particularly with several macro-economic unknowns in the mix. 

Sells

  • ASX (ASX)
  • Technology One (TNE)
  • Fortescue Metals (FMG)
  • Newcrest Mining (NCM)
  • AGL Energy (AGL)

Looking expensive (trim profits or switch)

  • Brambles (BXB)
  • Medibank (MPL)
  • Insurance Australia (IAG)
  • APA Group (APA)
  • Aurizon (AZJ)
  • Atlas Arteria (ALX)
  • Transurban Group (TCL)
  • Cleanaway (CWY)
  • Centuria Industrial REIT (CIP)
  • National Storage REIT (NSR)
  • Ramsay Health Care (RHC)
  • Ansell (ANN)
  • New Hope Corp (NHC)

Least preferred in their sector

  • Coles Group (COL)
  • Pendal Group (PTL)
  • JB Hi-Fi (JBH)
  • Accent Group (AX1)
  • Coca-Cola Amatil (CCL)
  • Vocus Group (VOC)
  • Freedom Foods (FNP)
  • Sandfire Resources (SFR)

More information

Morgans clients can access further analysis in our full report – Sells, Trims and Non-preferred stocks. Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.