Australian Strategy: Sells, trims and non-preferred stocks

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
17 September 2019, 10:00 AM
Sectors Covered:
Resources, Metals

In our Reporting Season Review, published September 3, we noted that the increasingly challenging earnings environment leaves expensive stocks more vulnerable than usual to price shock on any disappointment, no matter how mild. Several large-caps felt this during August including Orora (ORA), Corporate Travel Management (CTD) and Boral (BLD).

Today, we are highlighting stocks 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).

Please see our High Conviction list, published September 6, for detail on our most compelling current Buy ideas.

August reporting season in a nutshell

Aussie Industrial companies (ASX200 ex-Resources) grew their profits by only 1.0% in FY19 reflecting the challenging economy and a remedial year by the major banks (EPS down ~6%). Important portfolio stocks reported robust results (Commonwealth Bank of Australia (CBA), Wesfarmers (WES), Woolworths (WOW), Telstra Corporation (TLS)), however more companies than usual delivered 'misses' on their FY20 outlooks.

We had flagged that expectations for FY20 looked far too heroic heading into August, so it wasn't surprising that forecast FY20 EPS growth (again ex-Resources) has eroded from 8.3% at the start, to 6.2% currently.

We're cautious about ongoing erosion in the context of dividend sustainability (supporting the 'equity yield arbitrage' trade) and upward pressure on stretched valuations which leave little room for error, if companies disappoint.

Other interesting themes from August

Global economic uncertainty continues to weigh on the ASX's offshore earners, where the prolonged trade war is denting their earnings outlook. Retailers enjoyed a good bounce on evidence of a consumer turnaround, helped by undemanding valuations.

Expensive Online stocks popped (Seek (SEK), REA Group (REA), Domain Holdings Australia (DHG)) despite EPS downgrades, driving PE expansion to ~33x which we're still struggling to rationalise.

Buybacks and Specials featured heavily (+$2bn in new buybacks from Qantas (QAN), AGL Energy (AGL), AMCOR (AMC), Link Administration Holdings (LNK)), but our growth starved market now prefers to reward those willing to invest, rather than return capital.

High Growth/PE saw some profit taking as several key names missed investors' lofty expectations (Appen (APX), Nearmap (NEA), Breville Group (BRG), A2 Milk Company (A2M), Bellamy's Australia (BAL), Blackmores (BKL)), perhaps a sign that the 'growth at any cost' trade may be nearing a reversal.

Areas to trim some profits 

We remain on alert for external macro-economic events to potentially be the trigger to unwind some of the equity premium built into local share prices. 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):

Sell

  • Costa Group 
  • Flight Centre 
  • Orica 
  • Magellan Financial 
  • IAG Group
  • Paradigm Biopharma

Expensive/trim

  • Spark Infrastructure
  • AGL Energy
  • ASX 
  • REA Group
  • Carsales
  • Domain Group
  • Fortescue Metals
  • Coca-Cola
  • Freedom Foods

No need to be there

  • Coles Group 
  • Newcrest 
  • Nufarm
  • Graincorp
  • Blackmores
  • Bega Cheese 

More information

To view further analysis, Morgans clients can view the full research note. Alternatively, please contact your Morgans adviser or 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.

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