Sean Fenton (BUY): Finally, I am therefore different from Anthony. It’s a purchase for me. I think they actually circulated a lot of beneficiaries in terms of breathing apparatus and hospital breathing equipment. They’ve actually had more headwinds from sleep lab closures and lower diagnostic rates, but they’ve achieved growth.
Accidentally, they have a good long-term market, but the big advantage for them is that their competitor, Philips, had a massive recall. The insulation they use on their machines has crumbled and people have breathed it in, giving ResMed a huge opportunity to increase market share.
They were prevented from doing so by the availability of semiconductor chips. It gradually fades, but there is a benefit for them.
So there is very good growth momentum for this company, not cheap, but quality business execution. This is probably one of my favorite stocks in this growth area.
David Thorton: OK. The next cab in line, JB Hi-Fi, consumer discretionary, not the hottest sector at the moment. Thirty-four percent return on equity. Buy, hold or sell, Sean?
Sean Fenton (SELL): I named it one of my best management teams early on, but it’s a sellout.
In the end, you can’t fight the tide and the tide is going down in discretionary spending. So you have the RBA jacking rates. You have cost of living pressures like inflation, but more importantly, you have a big reversal in spending habits.
So the borders have been closed, all that travel spending, and Australians are big spenders on international travel, and spending on home, appliances, electronics, everything else.
JB looks cheap, but it’s more profitable. Its margins are too high. They enter a cyclical downturn. There is exposure to downside earnings here.
David Thorton: OK. Anthony, JB – buy, hold or sell?
Anthony Aboud (HOLD): I have to hold on. I agree with everything Sean said there. I think there is a headwind to discretionary.
I think their margin is going to have to rebase as we get to a more standardized promotional model among retailers. So I’m fine with all of that, but you know, you get it for a decent price with a good management team. So it almost feels like it’s too late to sell. You just have to carry the bike from here.
David Thorton: Sticking with you, Anthony, James Hardie, 38% ROE. What is your reading?
Anthony Aboud (BUY): I have a buy on James Hardie. Listen, it was criticized for several reasons. First, obviously the 30-year mortgage rate in the United States has gone up. And so, therefore, people are concerned about housing statistics in the United States, which is understandable.
Also, they have changed management and people are a bit concerned that the former manager is seen as pushing them maybe too hard I guess. Still, the board has put together a pretty punchy earnings forecast for FY23. So there’s a small question mark.
That said, we kind of made some mid-cycle margins and kind of decided to add some PE, and for us that’s pretty cheap for James Hardie, which is a quality business.
So we think we’re probably not catching a bit of a knife drop here probably a little early, but we think it’s a buy at this level.
David Thorton: Buy for you, Sean?
Sean Fenton (BUY): Yeah, it actually is. I also agree with what Anthony said. Ultimately, it’s a quality company, growing its share of the coating market. They do a few extra things in terms of value-added products. They turn to stucco, which is obviously important in California. They are reaching out to the consumer with direct selling strategies, so good long term strategies to get things done.
Yes, the US real estate cycle is clearly going to reverse. Everyone knows that. It is a mechanical reaction to rising interest rates and rising mortgage rates. But they are widely exposed to renovations and renovations and homes in the US are not like homes in Australia.
They are basically wooden frames with siding, and they have to change that much more regularly. Only the Hardie deck lasts longer, but there’s a lot of old vinyl stuff that needs to be continually repainted.
So there’s a good level of underlying demand there too, and it’s come down enough now that, especially in this part of the growing market for a company of this quality, it seems like good value for money.
David Thorton: We have also asked our backers to contribute a stock that has been overlooked by the market. Anthony, what are you putting on the table?
Event reception (ASX: EVT)
Antoine Aboud: Event Hospitality is the company I put on the table. Look, from the management team’s perspective, we like that. It’s a founder-led company and if you could make it three worst industries to be hit by COVID: it’s movie theaters, hotels, and ski lodges, and they’ve got the trifecta there. So they were hit very hard.
We believe they entered COVID with a very strong balance sheet and were successful in structurally reducing their business costs.
They actually launched new revenue streams but also reinvested in all of their systems and I think they’re going to make more money on the other side of COVID materially more money on the other side of COVID than they brought in.
We think over the next two years, I think you have the hotel business, you see the main metrics, which is bookings, yeah, that’s looking pretty good.
I think in Sydney with the light show right now, Vivid, I think hotels in Sydney are over 80% occupancy right now. Just for some lights, you know? And so, yeah, we’re starting to see those lead indicators come through. You also, it’s probably going to be the most profitable snow season they’ll ever have and don’t forget Top Gun.
So we think they’re really going to have to bounce back in terms of revenue and you’re looking at for the next two years in 23 analysts still have revenue sort of 30% odd below what was pre-COVID and didn’t have not even coming back in 24. We think they will beat those gains. We think the market ignores it.
We believe this is a quality management team with quality assets, a strong balance sheet and strong headwinds for headwinds over the past two years.
David Thorton: Sean, what sloppy action do you support?
Sean Fenton: Something we look for that is overlooked is an economic downturn, something that is just unrelated and resilient to that. So – the agricultural sector, we have a global energy crisis, which is affecting fertilizers, which is driving up commodity prices. Nufarm is a global crop protection company, so they manufacture all herbicides, fungicides, pesticides. As the value of crops increases, you want to protect them as a farmer. It’s a good business base.
I think there’s a good opportunity to get into it right now. So Sumitomo, which is a long-term shareholder there, just sold its shares, which brought the price down a bit, but we also see an opportunity for growth there.
They have a bit of R and D. They have a bigger seed company, but inside of that is an omega-3 canola IP, and that’s been approved for use in fish feed, but also in human consumption. So the FDA just approved that. So over the next few years, there’s a real opportunity for them to grow this business, good IP, high-margin business, and it’s an opportunity that’s kind of overlooked by the market.
David Thorton: Well, that’s it for today’s episode, some great stock picks there. If you liked the episode, be sure to subscribe to YouTube where we add new content every day.
Buy Hold Sell is a weekly video series produced by Livewire Markets.
Disclaimer: The information contained in this presentation is general in nature and should not be relied upon. Before investing in any financial planning decisions, you should consult with a licensed professional who can tell you if the decision is right for you. Contributors to this program may have business or financial interests in the companies mentioned.
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