The papers are having a field day with stocks making headlines for all sorts of reasons. The high-flying Corporate Travel Management has been in the sights of short sellers, BHP is showering investors with cash, while AMP... well the headlines have gone from bad to worse.
However, sentiment can often disguise value and in this episode we’ve got two fundies that know how to sniff out a bargain. Roger Montgomery from The Montgomery Fund and Ben Rundle from NAOS share candid views on these three stocks. We also asked them to nominate a stock that they believe is flying under the radar.
Roger thinks he may have found the highest quality business on the ASX, and Ben got his hands dirty to uncover what he reckons is a tidy little investment.
Panel: Matthew Kidman from Centennial Funds is joined by Ben Rundle from NAOS, and Roger Montgomery from The Montgomery Fund.
Matthew Kidman: Welcome to Buy, Hold, Sell. My name's Matthew Kidman and today I'm joined by Roger Montgomery from Montgomery Funds, and Ben Rundle from NAOS, and we're talking headlines. Bad, good, whatever, how they're affecting stocks.
Roger, I'll go with you first. Corporate Travel, the sharks are after it at VGI, it's plummeted, buy, hold or sell at this point?
Roger Montgomery: Some of what they've thrown at the company has stuck, admittedly they over exaggerated their footprint. Arguably they could have been a little bit more transparent with their revenue recognition, but I don't think the company is damaged. I do think that this is a temporary setback for them. The problem is that 70% of their earnings comes from overseas acquisitions, and they've got to show some organic growth. Having said all of that, they're really expensive. I value them at about 1.2 billion dollars and they're trading at 2.4.
Matthew Kidman: So, sell?
Roger Montgomery: So it's a sell.
Matthew Kidman: Ben, it's been an interesting couple of weeks. They're back in suspension. We'll see what happens tomorrow. Buy, hold, or sell?
Ben Rundle: I'm going to hold on Corporate Travel. I agree with Roger. I don't think the company's in terminal decline off the back of this. There's been a few things uncovered, which maybe raise a few alarm bells, which the company needs to tidy up. But for me, it's a hold for the time being.
Matthew Kidman: Okay, let's go to the end of town, the big end of town, BHP, all good headlines. They're giving us lots of money, lots of franking. Buy, hold, or sell?
Ben Rundle: I'm going to have to sit on the fence of BHP because we don't do anything in resources. So, I couldn't say anything particularly insightful on the stocks.
Matthew Kidman: Come on, say it. Hold.
Ben Rundle: It's going to have to be a hold for me.
Matthew Kidman: Rog, you're all over resources, you know all about them.
Roger Montgomery: Yeah, well I know-
Matthew Kidman: BHP is spewing cash and franking credits. Buy, hold or sell?
Roger Montgomery: Look the issue is the companies got twice the debt that it had in 2010, it's got 50% more equity than it had in 2010. It's earning 14% less than it was earning in 2010. Over the last four years it's lost up to 70%, it's earned 70% less than it was earning in 2010. So in order to profit from this company you need to be very, very successful at predicting the iron ore price. We're not, most analysts aren't, that's why there's a range for 2020 earnings of between a $1.06 and $3.16, that's a wide range.
Matthew Kidman: I'm starting to feel like it's a sell?
Roger Montgomery: Look if you own it already you probably hold it because there's a transition of money moving from financial assets to commodities. For that reason you probably hang onto it. But otherwise I wouldn't have owned it in the first place. So I'd just say hold.
Matthew Kidman: Okay. Let's talk about former market darling, AMP. Got rid of their life business, getting rid of New Zealand, not much left to it, being smashed. Buy, hold or sell?
Roger Montgomery: Couple of times a year I give a lecture on investing at Sydney University, and I talk about quality. AMP is one of the companies that I talk about that isn't quality, it's a case study that I use. We've had a valuation on this business of about $2.70 since 1998.
Matthew Kidman: And it’s there.
Roger Montgomery: It's finally there. I think the business has two choices, it either sticks with the AMP brand but it becomes a much smaller business before it gets bigger again. Or it changes brand and it has to do the same thing anyway. So for me it's probably a sell. But-
Matthew Kidman: I thought I was going to get a buy. Sell it is.
Roger Montgomery: I don't think it's a high-quality business.
Matthew Kidman: Okay. Ben, AMP? We've talked about it for 20 years.
Ben Rundle: Yeah, I don't disagree that I don't think it's a high-quality business. But I do think they're making the right moves in terms of getting out of that life insurance business, which has been absolutely terrible for them. The reason that I think it's a buy, which is obviously completely against Roger, I might regret that. But I think that the balance sheet is going to be much stronger, they'll return some cash to shareholders. I don't think it'll be listed in 12 months’ time, I think someone will knock it off and see the value inside the business. So I'll go against consensus and say buy.
Matthew Kidman: Okay, lets stay bullish, we're on a roll now. What's the stock that maybe it's been under the radar that has had some good headlines, that the markets not giving full value to?
Ben Rundle: I think Cleanaway is one that you can own, I mean it's not incredibly cheap, but I think the management team has done an exceptional job with the core Cleanaway business. They recently acquired Tox as well, in that liquids, particularly post collection waste removal the competitive pricing between Tox and Cleanaway had been exactly that, very competitive. So I think that now those two business together we're going to see some pricing power in the business. The management is first class and I think they'll be able to deliver value on that acquisition. So I think you can buy it.
Matthew Kidman: Okay, Rog, under the radar, somethings going well and hasn't got the credit?
Roger Montgomery: Well it's probably under the foundations of the house, Reece Plumbing I think is probably the highest quality business listed in Australia. They've managed to increase their profits without ever raising a dollar of capital from shareholders. There is a cyclical element to it but they've bolted on, or they've added a US business, which I think the market is under appreciating. Management don't make very frequent acquisitions, and they're incredible allocators of capital. I think they know something that the rest of the market doesn't. The recent 20%, circa 20% sell off in the share price represents an opportunity.
Matthew Kidman: Don't worry about the headlines, ask these two gentleman, take the long view.
You can access more great market insights from Ben Rundle as his discusses Three Aussie stocks that pass the Buffet Process and What makes a great business.
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