This article was originally published on LivewireMarkets.com on February 11th, 2022

It was 18th-century British banker and politician Baron Rothschild who famously said investors should “buy when there’s blood in the streets, even if the blood is your own.”

In plain English, when everyone is selling – and much of the Index is in the red – it can be a great time to be buying shares at a bargain.

And while the laws of behavioural economics, particularly herd mentality, suggest this may be easier said than done, purchasing stocks at a lower price is well documented to increase the potential for future returns.

So in this episode, Livewire’s Ally Selby was joined by Elston Asset Management’s Bruce Williams and Investors Mutual Limited’s Simon Conn for their analysis of four of the S&P/ASX 200’s most beaten-down stocks in 2022.

Plus, our fundies also share two stocks that have been caught up in the recent sell-off that they believe are poised for a rebound over the year ahead.

Note: This episode of Buy Hold Sell was shot on Wednesday 2nd February 2022. You can watch the video, listen to the podcast or read an edited transcript below.

Edited Transcript

Ally Selby: Hello, and welcome to Livewire’s Buy Hold Sell. I’m Ally Selby. They say you should buy when there’s blood in the streets and there’s certainly a lot of that going on at the moment. So today we thought we’d take a look at some of the ASX’s most beaten-down stocks to see which ones, if any, could be poised for a turnaround in 2022. Today, we are joined by Simon Conn from IML and Bruce Williams from Elston.

First up, we have accounting software provider, Xero, which has seen its share price fall around 21% since the beginning of the year. Simon, I might start with you. Is it a buy, hold, or sell?

Xero (ASX: XRO)

Simon Conn (SELL): We think Xero is a sell, just on valuation grounds. It’s trading 134 times PE. It’s very, very fully priced and we think it’s a stock that, if you see the price appreciation in its share price, has been fueled by low-interest rates and people paying a lot for earnings way out in the future. It’s a business that whilst has a strong market position in Australia and Zealand and increasing in the UK, it’s pursuing this big strategy of trying to conquer the US and the US market is really difficult. They’ve been spending a lot of money over there in sales and marketing. It hasn’t really shown a lot of traction. And they seem to be managing the business to invest all the cash flow in chasing that market, which we’ve got a lot of caution around.

Ally Selby: Speaking of Xero’s plans for global domination, they recently acquired a tax preparation software company in Canada. Bruce, over to you, is it a buy, hold or sell?

Bruce Williams (SELL): It’s a sell for us, Ally. I agree entirely with a lot of what Simon said there. I think the core product is very, very good. They’re building out their platform business, which is growing strongly as well. But on valuation grounds, we find it too much for us. We also think that competitive intensity is increasing and the growth rate they’d have to sustain to justify the current valuation is greater than 20% for the foreseeable future and that would lead them to hold a very large part of the market. We just don’t think that’s achievable.

Charter Hall Group (ASX: CHC)

Ally Selby: Next up, we have property powerhouse, Charter Hall, which has seen its share price fall around 18% year to date. Bruce, staying with you, is it a buy, hold or sell?

Bruce Williams (HOLD): It’s a hold for us, Ally. We think that they have benefited, certainly, their cap rates have, from reducing interest rates. We think that might turn into a headwind. Also, we think the property cycle is reasonably mature and going forward, they’ll have to depend on more development work for their profitability. We think the persistency of earnings, for want of a better term, will decrease. Also, the Paradice Investment Management acquisition was a bit odd from our perspective. So we’d rather sit back and watch for the time being.

Ally Selby: Over to you, Simon. Charter Hall has an annual dividend yield of around 2.32%. Can that give investors comfort? Is it a buy, hold or sell?

Simon Conn (SELL): I think for our money, it’s a sell. It’s been a real big beneficiary of lower rates and declining interest rates over the last few years. That’s boosted asset values. It’s allowed them to increase the gearing in their vehicles as those asset values have increased. That’s boosted fees and it’s also driven investors to the REIT market, in institutional and retail, and allowed them to grow their FUM. But with acquisition and performance fees being over a third of their earnings, we are just quite cautious on the ability for them to sustain that level of earnings. Like Bruce said, the Paradice acquisition, moving into institutional equity management at this time in the cycle, I think speaks to the business looking for extra growth avenues, which we are pretty cautious on. I think you’ve got to question the sustainability of earnings in their core business. It’s very late in the cycle. It’s a sell for us.

Sonic Healthcare (ASX: SHL)

Ally Selby: Next up, we have Sonic Healthcare, which has seen its share price plummet around 17% since the beginning of the year. Simon, I’ll stay with you. Is it a buy, hold or sell?

Simon Conn (HOLD): We like Sonic. It’s a great business and I think it’s reasonably priced. It’s okay on 25 times. COVID-19 has obviously been a huge benefit for them as the world has tested more for COVID and that’s generated huge cash for the business. Sonic will be almost debt-free this year. Whilst the PE looks elevated 25 times, if you allowed for their strong balance sheet, it’s probably on 10 to 11 times EBITDA on a more sustainable level of earnings, which I think is reasonable. I think COVID19, going forward, will generate a new level of testing for pathology labs. So there’s a new earnings stream for Sonic going forward. It has a really good management team and I think the balance sheet positions the company well to continue, as they’ve done for many years, their astute acquisitions. Given they’re the market leader in Australia, the UK, Germany, and the number three player in the US. That creates a great portfolio where they can add on acquisitions at appropriate multiples and the management team has done that for many years. We think it’s okay at these prices. It’s a hold.

Ally Selby: Bruce, over to you. Is Sonic Healthcare a buy, hold or sell?

Bruce Williams (HOLD): It’s a hold, but I don’t have too much to add because Simon just took every single thing that I was going to say. We think it’s obviously a very good business, massive COVID beneficiary, and how that rolls off we don’t know, but the lasting benefit, as Simon mentioned, is in the balance sheet. It’s incredibly strong. We’d like to think they deploy that through acquisitions and the like, but it’s benefited all their competitors as well. So we think the acquisition side of things would be very competitive for them. Their core diagnostics and radiology businesses are very, very good – they’ve got sustainable growth. So it’s a hold for us at the moment. We’d like to see how they come out the other side of this.

REA Group (ASX: REA)

Ally Selby: Okay. Last, but certainly not least we have REA Group. It’s seen its share price fall around 15% year to date. Is it a buy, hold or sell, Bruce?

Bruce Williams (HOLD): It’s just a hold for us at the moment, verging on a sell. It is a very good business. The platform business is very strong domestically, and it’s had a great property market. We just struggle to see how they maintain the growth they have achieved because they’ve done a lot on pricing, premium pricing penetration, as they call it. The property market’s been extremely good and it’s likely not to roll off, but become a little more steady, which will promote less activity, which is what this company thrives on. So for us on a valuation basis, it’s hanging on to a hold.

Ally Selby: REA was actually named by several of our fund managers in our Outlook Series as the stock they would buy at a cheaper price. It’s obviously sold off a little bit. Is it cheap enough yet, Simon? Is it a buy, hold or sell?

Simon Conn (SELL): No, not yet. It’s still very full at 41 times going to maybe 35 times next year. There’s a lot of good news in the price and as Bruce alluded to, there’ll be headwinds going forward over the year in the housing market. Look, it’s a great business. It has a great network effect. So they’ve got some pricing power. There’s just a lot of good news baked into the price. We think Domain is a more attractively priced opportunity in that sector and we’re playing that by owning Channel Nine (ASX: NEC) which has a 60% holding in Domain, which is quite a bit cheaper than REA.

Fundies’ beaten-down picks for 2022

Ally Selby: Okay. We asked Simon and Bruce to bring along one beaten-down stock that they think could be in for a rebound in 2022. Simon, I might start with you. What stock have you brought for us today?

Simon Conn: A stock that’s probably not well known by investors is Codan (ASX: CDA). This is a $1.5 billion business, it has a great management team, a good board and it dominates a niche. It’s a pretty niche product, handheld metal detectors, but they have a clear market leadership position globally and they’ve been outselling their competitors for some time. The business generates high margins and generates good cash for the business.

They’ve just reaffirmed their first-half guidance last week, which saw the stock recover somewhat. But it’s been caught up in this technology selldown. It is in the tech sector. But again, a good management team, trades on 15 times, it’s debt-free, which positions them for further acquisitions. And it’s a business that we think can continue to grow.

Their other division is in the radio communications sector. They made some recent acquisitions in that area and they highlighted in their update last week that those businesses have tracked well and there’s further acquisition opportunity for them to build out that portfolio in time. We think it looks pretty attractively priced at these levels.

Ally Selby: Over to you, Bruce, is there a stock that you’ve been buying in the recent sell-off that you think could possibly rebound in 2022?

Bruce Williams: We think WiseTech Global (ASX: WTC) is a good opportunity at these levels. It has started to bounce. We’ve owned it for a little while so we’ve readjusted our waiting there. It provides software services to logistics, and now more than ever, logistics needs to operate well, it’s stressed enough as it is. WiseTech is growing very, very strongly. They’ve got a lot of the sector as clients and it’s a five-year integration program or up to five years. They continually build revenue, not only from new client wins but from existing clients as well.

The price does worry us. It is something a little outside what we usually pay for assets, but we think they are creating a real moat around what it is they do. We think there are high barriers to entry. We think they have a strong network effect, they are becoming the system to use for any logistics players. We very much like its long term prospects and are happy to buy it at these levels.

Ally Selby: Well, that’s all we have time for today. Thank you to Bruce and Simon for your analysis. It was an absolute pleasure to have you both on Buy Hold Sell. If you haven’t already subscribed to our YouTube channel, we’re adding new content every week.

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