Strong Stocks for Your Watchlist

The much talked about month May, ‘Sell in May and go away’

Following on from our short term stocks to look at, we have selected some thoroughbreds for your stable.

another-boat-sailing

 

Traditionally speaking, the broader index has the lowest 6 month return in May through to October. And so goes the saying, 'Sell in May and go away.' At the last day of April the index was trying to touch 5500 (ASX200), and the first two days of May was in control by the theorists, Friday the 1st of May was sharply down and on Monday the ASX200 bottomed at the 5170 level.

What is interesting, is the US index hasn’t been lower when a President is up for re-election since 1950. The Don might need to pull a rabbit out of his hat, as the macroeconomic climate isn’t in his favour. Then again, he saw through last year’s theme (buy the dip, any dip!). Missiles, yield inversion, trade wars.. The market was teflon, as nothing stuck.

Time to look to 2020. Short term, we are coming off a very strong month, and that was coming from a solid low at the end of March. Statistically, a +10% month has seen strong 6 and 12month returns (82% of the time the market has been positive to an average of +13%). 

COVID19 is still the theme though and there have been many ripple effects, Oil prices being one that I have spoken about. 


So what are are we looking at if we see a sell off?

 

Wesfarmers

Retail has undoubtedly taken a beaten in this climate; what we like the most about Wesfarmers is;

  1. Strong Balance Sheet. The company enjoys a large pool of surplus cash, thanks to its divestments in Coles. Based on announcements and earnings, the company has a strong cash position, healthy debt and unused finance facilities. 
  2. Demand among ‘unprecedented times’. Whilst we all attempt to work from home, Wesfarmers has enjoyed enhanced demand from its Officeworks stores, and seen Bunnings adopt a drive and collect model. Kmart also converted three of its stores to ‘dark sites’, servicing online demand.

The retail sector faces strong headwinds, and if we had to own a share in the sector, it would be WES. The strong balance sheet will see it through this period and provide plenty of opportunity when the headwinds clear.

Fortescue Metals Group

We have a sustained positive outlook among the pandemic market outlook; 95% of FMG’s workforce is domestically based in Western Australia.  The Iron Ore price has remained resilient and we believe their balance sheet has not updated the current spot price.  The company has strong exposure to its operations over the long term with solid margins built in.

Further, potential stimulus for economic growth is often sought through infrastructure - specifically China could introduce a building intensive program to stimulate their economy. 

The stock has overperformed during the negative market. As this is a longer term outlook, we would be more patient and wait for a move lower to enter.

BHP

First and foremost (to investors) the dividend is crucial to a yield deprived market. Two regulars in the Austrian market have dropped off, being NAB and WBC, and that is a sign of more to come. 

Following on from our other mining pick, Iron Ore posted a strong performance for this sector of the business. Demand is continuing and there is hope for a surge tied to infrastructure stimulus. 

Reviewing valuation metrics across the Australian mining sector, Hills trades at a good discount (in absolute terms and vs. RIO). Highlights are;

  • Strong Balance Sheet
  • Strong yield (4.3%)
  • Well diversified assets across the global 
  • Iron Ore sector least affected 
  • Exposed to Chinese GDP recovery

Macquarie

Australia’s stalwart bank that has always championed its revenue diversity is why we have selected this exposure to the financial sector. The trading opportunity present is that it is cheaper than it was 2 months ago. MQG report this Friday, 8th of May, and we will provide an update.

In the meantime, some negatives we see for Macquarie;

  • Economic shock to many areas of the business has been experienced. This has resulted in a deferred dividend. Street guidance has gone on to suggest its guidance will be missed. 
  • The stock more than halved from highs in February through to March.

Goodman Group

Goodman’s model is a time tested strategy, often replicated by smaller land holders and developers. Buying fringe property to cater for Industrial sector needs gives GMG two immediate strengths; often the land cannot be rezoned worse, and the overheads are a lot less. Strata fees are a lot less for a warehouse than an apartment on Macquarie Street with car lifts, saunas and gymnasiums! Amazon being a long term tenant, willing to sign multi-year dated leases has further reaffirmed GMG’s strong position. We view GMG as the strongest positioned REIT in the market.  

Appen

We are all online, and looking to the next thing in markets. Whilst artificial intelligence is no new term, Appen has been at the forefront of the Australian technology sector. Further, its resilience in the March sell off (trading to $26.50 today, a level pre sell-off) shows the market's positive view of APX. Whilst this stock is high volatility, we enjoy the opportunities it presents to trade more frequently. To speak to an advisor about adopting a strategy like this, click here. 

Ansell 

Ansell have a strong record of buying back shares, a strength for investors to sit alongside. 

Almost 50% of the company’s product line is exposed (positively) to the coronavirus and the company saw a surge in demand in its protective equipment during the pandemic and its Industrial facility was busy re-purposing chemical safety equipment.
Increased consumption demand in protective products continues to expand production and we don’t seem a near term drop; surgical gloves and health equipment will continue to be in high demand as coronavirus plays out, and importantly as we take our first steps back towards normality.

     

Gold

A global recession looks more likely, and the world’s ‘safe asset’ has been a strong focus. Recently Barclay Pearce sent it’s clients a special Gold Sector Report, and previously talked about some forecasts for Gold. Our view is the divergence in the stock market and the economy has now occurred, due to excessive stimulus. Typically the bad news that traders look at each week are being overlooked, as the wave of stimulus is too powerful. We don't see a drop in volatility in 2020, as there are too many macroeconomic events to occur.

Gold was unable to stay unscathed in the recent volatility; a flight to cash saw correlation occur between this precious commodity and the stock market; normally the two are inversely correlated. If this holds true, we will start to see the gold price increase alongside the VIX (the volatility index).

 

 

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