Best ASX Stocks, Best ASX Stocks for 2019 Plus Get ahead in 2020
You won’t want to miss our first issue for 2020 because it covers the best ASX stocks and how to Geat Ahead in 2020. We cover the ASX Stocks wins, the ASX stock losses, the buying the selling, the thoughts and ideas on the big picture, the small picture and everything in between, of seven of Australia’s best performing fund managers.
Best ASX Stocks of 2019: The Top ASX Stocks by Performance
If the ASX Stock portfolio managers who spoke at last year’s round table had known it was one of the best buying opportunities they could have had, maybe they wouldn’t have been speaking. They would have been too busy buying stocks!
Best ASX Stocks of 2019: Double Your Money
As it was, subscribers would have more than doubled their money buying one of Under the Radar’s recommendations, the ship builder Austal (ASB), which was also recommended by Geoff Wilson.
Other ASX stocks that performed well over 2019 that were mentioned this time last year, included Seven Group (SVW) also by Wilson; Australian Ethical’s Andy Gracey put us onto a good thing with the software group Rhipe (RHP). We actually looked at that one and thought we had missed it, but it went much further.
Then there was City Chic (CCX), which has been championed by QVG’s Chris Prunty. His fund still holds the stock as one of its biggest positions. His fund also held on to Afterpay, which I’ll get to in a moment, but one of the more Under the Radar stocks his fund owns Jumbo Interactive (JIN) the internet lotto business. This ASX stock has gone ballistic, climbing from $5 this time last year to approaching $30. In this round table Prunty talks about taking risk off the table after it went “cray cray”. That kind of return can cover up a lot of mistakes.
You couldn’t talk about 2019 without mentioning Afterpay Touch (APT). Cyan Investment’s Graeme Carson has been one of the early investors in this stock and talked it up this time last year. Long-term subscribers would be pleased if they consistently followed Karl Siegling’s advice to buy Macquarie Group (MQG), which has delivered over almost any time frame over the past decade. You’ll find out what he thinks on Macquarie at current prices just below.
An unsung hero as usual was Andrew Brown, who invested in Lend Lease (LLC) after it had its blow ups and has emerged a hero, as it turns out. We’re proud that the Blue Chip Value Portfolio has been in on that one.
Under the Radar’s Fund Managers’ Round Table 2020
Some of Australia’s top investors deliver their opinion on the big picture, the small picture and all that lies in between. A must read for anyone looking to profit in 2020 and beyond.
1. The All Ordinaries Index is up about 20% over 2019 year to date, having sold off aggressively at the end of last year. Where are have you been taking profits lately?
OSCAR OBERG: We have consistently been taking profits in high-growth sectors, such as technology, that have significantly outperformed over the last 12-18 months. The most expensive companies in the ASX are now trading at valuations that are higher than the most expensive companies at the time of the tech bubble in the early 2000s. We think current valuations in these sectors are unsustainable. Given global growth could pick up in 2020, we see opportunities in cheaper sectors of the market that will benefit from the transition from growth to value.
KARL SIEGLING: The 20% rise in the All Ords is probably a bit misleading given how much the market fell in the final quarter of 2018. Another way of thinking about the All Ords is that it is up around 5% to 6% per annum for the last two years. There is nothing particularly unusual or spectacular about this rate of return over a two-year period. Probably the fall coming into 2019 and then the big recovery is what was more noteworthy. We have not been taking profits in any of our bigger positions except for reducing exposure in MQG. We first started buying Macquarie Group (MQG) after the GFC at around $25- and three-times earnings and now MQG trades on around 14 to 15 times earnings at $140. Our process lets us hang onto our winners until they ‘roll over’ which has not been happening.
JACK COLLOPY: The market has been on a tear since the US Federal Reserve’s now famous “pivot” earlier this year. These are tough markets for value investors to outperform though thankfully our bottom-up process has helped us to stay ahead of the market over the past year. We’ve taken profits in some of our better performing positions such as Alliance Aviation (AQZ) and NIB Holdings (NHF) but continue to see significant embedded value in the portfolio.
CHRIS PRUNTY: Rather than profit-taking the selling we’ve been doing lately is more in the ‘shooting the wounded’ category. In October we went to the hall of mirrors and had a good look at ourselves and our mistakes and decided there was as much chance that the stocks at the bottom of our portfolio were value traps as much as true value. We shot some stocks in the media, retail and resources spaces. The lesson here might be that cyclicals are hard and we’re not good at them.
ANDY GRACEY: We have divested some of our industrial names like dentistry company Pacific Smiles (PSQ) after the stock rallied strongly from a deeply oversold position. Other companies recently divested included Sealink Travel (SLK), which appreciated significantly after announcing the acquisition of leading bus operator Transit Systems. Another name we divested was software billing company Gentrack (GTK), which has experienced tougher retail energy markets in Australia and the UK.
STEVEN MCCARTHY: During late 2018 and early 2019 we purchased a number of what we considered to be very over-sold nano-cap companies (market caps below $20m). Many of these positions have subsequently rebounded quite strongly, and we have been taking profits in some of these names, including TinyBeans Group (TNY), Vault Intelligence (VLT) and CV Check (CV1).
In addition, in recent months we have had a number of portfolio companies receive private equity led takeover bids: Legend Corp (LGD), Dreamscape (DN8), Konekt (KKT). We have been exiting those holdings as well.
ANDREW BROWN: Companies which are leveraged to financial asset prices, gold, stocks up on mere P/E expansion from fair value to overpriced. We haven’t been that long for much of the last six months.
THE IDLE SPECULATOR: A number of our stronger performers have been offering an opportunity for profit-taking. In the Under the Radar Report portfolio, we have taken some profits on Austal (ASB) and Ingenia Communities (INA). The portfolio performed well at the end of 2018 and that has continued, although for most positions we have been holding on. We are in it for the long-term!
2. Where are you finding value? What buying opportunities have you found in the past few months?
OSCAR OBERG: We see sectors exposed to the Australian economy such as building materials, retail and property developers that offer value at present. Despite constant negativity in the press, we believe that the Australian economy is in good shape with robust employment and house prices starting to increase. Brickworks (BKW) is an example of a company that should benefit from an improving domestic housing market in the next 12 months. The company’s recent expansion into the United States also provides a multi-year consolidation opportunity.
KARL SIEGLING: Interestingly in the last few months mining and energy stocks are tracking higher and the bigger names have done well. Rio Tinto (RIO), BHP (BHP), Santos (STO), Fortescue Metals (FMG) and the like are all tracking higher. We own and have been adding to most of these names as they are compelling on a fundamental and technical basis.
JACK COLLOPY: Where most investors are fighting over the hottest new concept stock, it’s fascinating how many “old economy” businesses are available at attractive prices. We’re finding great opportunities across an assortment of industries from insurance to retail, agriculture and even funds management.
Investors have become incredibly short-term in their thinking and unable (or unwilling) to look beyond the next few months. It will rain again. Consumers will spend again. Businesses will advertise again. For those willing to look beyond the noise, and maintain a little bit of patience, there are some great investment opportunities out there.
CHRIS PRUNTY: Ideas haven’t been that forthcoming of late. Payments is a space we’ve added to. We like its capital-light defensive growth nature, the high incremental margins and the strong cash conversion.
ANDY GRACEY: Overall high market levels make value harder to find however we continue to identify individually attractive bottom up opportunities, particularly in small and microcaps where we spend a lot of our time. We see value in strata management and facilities management software-as-a-service company micro-cap Urbanise (UBN) although loss making trades at relatively attractive sales multiples when viewed in the context of its revenue growth. Other more traditional value opportunities include Shriro Holdings (SHM) which we have been adding to on share price weakness. Shriro distributes its own and third party branded products and is trading on 8.5 times current year earnings while offering an ~8% plus dividend yield.
STEVEN MCCARTHY: We are of the view that if you keep turning over enough rocks then there is always value to be found. We have recently bought into airline maintenance provider, PTB Group (PTB) which trades on an 8% yield, participated in a placement for well-regarded property fund manager Elanor Investors (ENN), which also trades on an 8% yield, and bought fast growing software as a service (SaaS) company Urbanise (UBN) when it was trading on less than 3 times FY19 average recurring revenues.
ANDREW BROWN: The ridiculously low price of volatility and hence protection from very high share prices. Volatility is one of the biggest bargains around. We have stuck by our position in Virtu Financial (NASDAQ:VIRT) a US listed market maker which benefits from increased volumes and volatility, despite it being down around 33% this year.
THE IDLE SPECULATOR: At the small end of town, there are always new opportunities appearing every few weeks or so. We are looking at some strong performers which have come back in recent weeks with a view to topping up our portfolio positions, as well as situations where we think the underlying assets are undervalued, and we have recently added to both MNF (MNF) and Superloop (SLC). The potential operating leverage of fixed infrastructure in telecommunications keeps us interested.
3. What were your best performers in 2019 and why? Do you still own them?
OSCAR OBERG: Austal (ASB) and ServiceStream (SSM) were our best performers in 2019. We currently hold both companies as we believe their future earnings growth are under appreciated by the market. Both companies have strong balance sheets, so we see the potential for accretive acquisitions or capital management.
KARL SIEGLING: Resimac (RMC), Eclipx (ECX), Bingo Industries (BIN) and Macquarie Group (MQG) have been good performers in 2019. We still own all of these positions but have been reducing MQG and BIN. These stocks are all trading on relatively low valuations compared to earnings growth and continue to meet our valuation versus growth criteria. Qualcomm listed in the US also performed well.
JACK COLLOPY: Our biggest contributors over the past year have been Enero Group (EGG), Alacer Gold (AQG), NIB Holdings (NHF) and Kina Securities (KSL). We still own all of them. In each case, we made our investment when the companies were out of favour for one reason or another, which set us up for healthy returns as investor fears dissipated.
The market had been worried about the sustainability of Enero’s earnings growth, the ramp-up risk at Alacer’s Turkish mine site, the potential for a Labor government to impact health insurance margins and a general degree of scepticism around Kina operating in Papua New Guinea.
CHRIS PRUNTY: Jumbo Interactive (JIN), City Chic (CCX) and Afterpay Touch (APT) have been the big three winners of us this year. We own them all but have reduced Jumbo the most as it overshot after the quants sent it to cray-cray levels after its inclusion into the S&P/ASX 200 Index.
ANDY GRACEY: Our biggest contributor to portfolio performance was wealth management and stock broking software GBST (GBT) which appreciated over 150% after being acquired following a bidding war. We were very happy with pharmaceutical drug developer Opthea (OPT) which appreciated more than 400% after announcing their drug in combination with a drug called Lucentis statistically improved visual acuity in wet age-related macular degeneration patients. We have added to our position in this name.
STEVEN MCCARTHY: In April this year we were fortunate enough to acquire a line of stock in Tiny Beans (TNY) at 35 cents, when it was valued at $10m. The business was growing revenues in excess of 100% a year, had a world leading platform, passionate and aligned management, but was horribly unloved and illiquid – the type of opportunity that we really like. Today, on the back of continued good execution and increased market recognition, TNY is trading north of $3.00 and has a $100m plus market cap. We retain a small position.
ANDREW BROWN: Westgold Resources (WGX) was a strong performer off the back of the gold price and because it fixed its cash flow issues. Dreamscape Networks was acquired In October at three times the price it was trading at last year end. We had some good winning shorts like Intelsat (NYSE: I) which collapsed by 75% and PagerDuty (NASDAQ: PD) which halved in three months.
THE IDLE SPECULATOR: Our best performers in 2019 included Austal (ASB), and Ingenia Communities (INA), as well as Village Roadshow (VRL), which has just received a takeover offer. We’re glad we kept holding on. All were the larger positions at the beginning of the year, as it is always important for a portfolio that the positions to which you have greatest conviction and commitment are able to deliver on some of your expectations. We still own all these three stocks and though we have sold some, they remain among our biggest positions, being the some of the better quality stocks in our universe.
4. What were your biggest mistakes in 2019 and what are you doing to correct them?
OSCAR OBERG: Our biggest mistake over 2019 was holding too much cash within the portfolio when market sentiment turned positive from January. Given our reservations about technology company valuations we have been underweight in our exposure to this sector.
KARL SIEGLING: Our biggest mistake was not managing our liquidity risk in ARQ Group (ARQ). We have materially improved the liquidity of the portfolio since and this remains a focus. Also, in hindsight increasing cash levels coming into 2019 with the market falling so sharply was a mistake although our process leads us to increase cash levels in falling markets. Ideally, we would have started adding back to positions a month sooner than we did in 2019. The benefit of reducing exposure in a falling market is that your problems become smaller if the market continues to fall. Of course, at the time all commentary was around GFC number 2 and the end of the stock market as we knew it……it always is at times of maximum pessimism.
JACK COLLOPY: Our biggest mistake over the year was a small position in RCR Tomlinson (RCR). We had been familiar with the company and management for some time but clearly underestimated the extent to which their problems weren’t visible to investors.
CHRIS PRUNTY: We copped the Costa (CGC) downgrade in early January which cost us close to 1% of the fund. We sought revenge by getting short later in the year and that’s worked nicely. Smart Group (SIQ) also cost us almost 1% in November after its CEO left. After blowing up on Smart Parking you’d think we’d have learnt out lesson not to own stocks with ‘smart’ in their name…
ANDY GRACEY: Our investment in education technology company 3PL Learning (3PL) detracted from investment performance after the company reported a decline in the number of students using its flagship Mathletics internet product. Other laggards included Bank of Queensland (BOQ) which has disappointed in execution against banking peers. Other portfolio holdings to disappoint included vitamin company Blackmores (BKL) which has not met the markets expectations around China sales. In general we have maintained or increased our position in these companies that continue to trade below our fundamental valuation.
STEVEN MCCARTHY: In previous years, we have found that the stocks in our portfolio that caused us the most problems were cheap looking value stocks that turned out to be cheap for a reason. During 2019, we have focused on identifying higher quality companies with highly valuable revenue growth profiles and asymmetric upside potential. We are pleased to end the year with what we consider to be a broader, higher quality portfolio than what we started the year with.
ANDREW BROWN: Three areas: (a) reduced equities exposure too early in retrospect; (b) AMP (AMP) – far too early (c) short positions in a number of high-flyers. In (a) and (c) – we continue to maintain shorts in securities which are ridiculously overblown and trade at unjustifiable prices. We are short a basket of US SaaS stocks, three Australian mid-caps, and some fast food franchises in US. We have continued to add to short index positions in Australian and US.
THE IDLE SPECULATOR: Mayne Pharma (MYX) and Superloop (SLC). Both good companies that suffered from temporal factors. The common theme seems to be the deep value opportunity that we think that we have identified is exacerbated and made worse and delayed by other events. It is worth reminding ourselves that is quite rare for turnarounds to proceed at the pace that stock pickers would like to see, or without hiccups and new wrinkles emerging frequently. We are often too early, but overall we find it more rewarding than being late.
5. What are the key themes for 2020 that investors should take note of?
OSCAR OBERG: Despite heightened valuations across the ASX, several sectors exposed to the Australian economy offer compelling value. In our view rising house prices will be a major theme over 2020 and this will have a positive impact on consumer sentiment and cyclical sectors like retail. With the RBA signalling the potential for more cuts to the cash rate, we may see house prices extend beyond their previous peak in 2017 in the next few years. We also expect that the Federal Government may consider fiscal stimulatory measures in the May 2020 Budget.
KARL SIEGLING: The key themes will likely remain around interest rates, economic growth, and inflation. The ongoing conflict is between the equities market in general which is expensive and interest rates which are at all time lows. The trend of falling interest rates (particularly in Australia) has been in place for 30 years now and RBA interest rates have halved over the past six months again. Of course, we are all worried that interest rates may once again start to rise after falling for 30 years. This could be driven by a sustained increase in inflation. The other concern is that interest rates continue to fall in which case asset prices will generally go higher. These two conflicting worries continue to dominate the financial press and investors thinking.
Overall, low interest rates, relatively full employment, a willingness by governments around the world to stimulate economies should be good for business in general.
JACK COLLOPY: We are living in interesting times. Negative interest rates, trade wars, Brexit, the list goes on.
People forget that, just over 12 months ago, we were all talking about “global synchronised growth” and predicting just how quickly central banks would be raising interest rates.
Now, everyone is talking about just how far into negative territory central banks will be cutting interest rates. Things can change very quickly.
More than ever, this is the time to be prudent with investment decisions. Focus on a company’s balance sheet, cash generation and track record of profitability.
CHRIS PRUNTY: Payments, eCommerce and offshore earners are three themes well represented in our portfolio. Having said this, we stock-pick first and then build the themes around the stock picks for marketing purposes. We’re very bottom-up in the way we approach things.
ANDY GRACEY: We like investments which benefit from aging demographics, like healthcare, medical devices and pharmaceutical companies. The market will continue its search for yield in a low interest rate environment. Banks are a double-edged sword as they offer generous yields however their earnings and dividend pressures are real. Technology investments will continue to be important investments for us on the grounds of the efficiencies good technology bring to consumers and businesses. We are cautious of the multiples being applied to some market ‘darlings’ that look elevated relative to history and peers.
STEVEN MCCARTHY: In no particular order: Accelerated disruption of traditional business models due to technology.
Understanding how businesses can leverage their data to gain competitive advantage or monetise. We have seen this playing out already with our positions in Chant West (CWL) and Aeris (AER).
Accelerating demand for natural and sustainable consumer products.
Heightening regulations around the world will further boost Envirotech stocks.
ANDREW BROWN: Liquidity and earnings. The last few months have been characterised by “non-QE, QE” – the US Federal Reserve adding reserves to stabilise liquidity but also adding about 8% to its own balance sheet in 10 weeks. That has coincided with a lift in equity prices, further adding to the key theme of 2019: increased equity prices against a backdrop of significantly reduced earnings expectations. The key to 2020 is how these factors resolve themselves. Further interest rate falls inflating valuations, earnings disappointment or on the bullish side, reaffirmation.
THE IDLE SPECULATOR: There could easily be a further escalation of trade conflicts, and the impact will feed through in one or more unexpected ways. Recent news is that a deal is imminent, but we have seen this movie before. Whatever happens on this front, it’s highly probable that interest rates will remain low for the foreseeable future, which keeps asset prices at elevated levels. We’ll also keep seeing increasing volatility due to these two factors (trade tensions and low interest rates). What this boils down to is that the environment suits stock pickers rather than purchases of index funds or momentum traders.