The Experts

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Julia Lee
Expert
+ About Julia Lee

Julia Lee is an Equities Analyst with Bell Direct. She is also the Head Media Presenter at Desktop Broker, providing financial commentary to SKY News, SKY Business Channel, Bloomberg, ABC radio and on the internet.   

Julia has over 10 years of experience in financial markets and previously was Head of Fundamental Analysis for a leading sharemarket educator as well as running investor education for an Australian bank.

You can see Julia hosting the Tuesday shares session of 'Your Money, Your Call' on the SKY Business Channel every Tuesday from 8pm-9pm where she takes live calls from traders and investors.

She is also a regular contributor to industry publications and is a frequent speaker at the ASX Investor Hours, Australian Technical Analysts Association and CPA Australia conference

Winners + losers in the retail space

Thursday, March 14, 2019

In retail, the winning combination is increasing comparable sales together with the opening of new stores. This combination increases total sales and the valuation of the stock. This is more typical of a newer business that’s growing strongly than a mature business that has saturated its market. When it comes to a mature business with little growth prospects, the strategic options can be risky and usually involve a move offshore to find growth. This has been a hit or miss for Australian companies. Companies such as Domino’s Pizza Enterprises Ltd (DMP), Premier Investments Limited and (PMV) have done it well. Companies such as Wesfarmers Ltd (WES)/Bunnings have seen failure when it comes to overseas expansion.

One stock that’s on a win

The move for shoppers away from bricks and mortar retailers to online platforms has introduced competitive pressures, margin compression and the need to innovate and adjust. This means that shopping centres have tried to evolve utilising the smaller footprint that many retailers are now moving towards.

Click here to take a free 30-day trial to the Switzer Report and read the full article.

 

Check out a company’s culture before you invest

Friday, March 01, 2019

Q. The Royal Commission has highlighted how bad culture can KO a company’s share price. How do you bring culture into your stock picking?

Environment, Social and Governance or ESG is part of the investment process rather than an asset class. We’ve recently seen through the Royal Commission into financial services the wealth destruction that can come when strong ESG principles are lacking. There is an increasing body of evidence that high ESG scores perform better than low ESG scores. Not only is about screening for ESG about managing risk and avoiding catastrophes in portfolios but it also provides better performing, more stable investments over time.

Data providers are increasing issuing ESG scores making it easier for investors to include ESG into the investment process. Here is a breakdown of Thomson Reuters ESG Score model.

Source: Thompson Reuters ESG scores methodology

Q. We know how culture can detract from performance. Give us an example of how culture can help performance.

Culture impacts on a number of areas including staff turnover, productivity and performance. IAG recently has started to encourage customers to the early lodgement of claims, following a disaster event. After the recent Sydney hailstorms at the end of 2018, the company sent text messages. Some of the benefits of doing this (beside helping the customer) were:

• Reduced fraud with early claims lodgement.

• Lock down supply labour and hence labour costs.

• Staff turnover (voluntary) improved from 15.2% in FY17 to 12.9% in FY18.

Managing staff turnover can provide a competitive advantage compared to peers and high staff turnover is an extra financial burden on the business. In addition, Human Capital Management (HCM) scores can be allocated to stocks. Positive HCM has outperformed lower scores over the past 10 years.

Q. Investors have known for a long time that there can be a correlation between what management does and the performance of a stock. Tell us more.

Investors have known for a while that insider buying or selling can be a harbinger of good or bad times for the business. While one director selling a substantial chunk of shares may be a slight negative for sentiment, two or more directors selling substantial shares can be a red flag for a period of underperformance.  Over the last few years, there have been many examples of where insider selling has impacted negatively on share price. Bellamy’s saw its then CEO and chairperson sell shares in August 2016, only to record a net loss for that particular calendar year.

Q. So where have we seen insiders recently buying or selling stock?

1.     Tassal Group Limited (TGR): Tassal chief Mark Ryan DUMPED half his stake. He had 360,378 shares before 18 February and then SOLD 200,000.

2.     Evolution Mining Ltd (EVN): Jake Klein SOLD $9.45million shares late last year.

3.     Computer Share Limited (CPU): Christopher Morris SOLD $8.1million shares

4.     Link (LNK) John McMurtrie BOUGHT another $1 million shares.

5.     Nine Entertainment Co Holdings Ltd (NEC): Birkrtu (Bruce Gordon) 8.9% to 14.1% in January.

6.     Adairs Ltd (ADH) Brett Blendy 12.3% to 15.3%.

Q. So what stocks should investors consider or avoid from an ESG perspective?

Given insider buying at NEC and LNK, both of those stocks should be on the radar of investors as well as IAG, which is seeing an improvement in staff turnover and some other initiatives to improve culture. As always, an ESG overlay should be included with other performance measures and incorporating future expectations.

This article was first published in The Switzer Report. Click here to take a free 21-day trial.

 

Stocks that have impressed + my favourite

Thursday, February 14, 2019

Why is reporting season important?

Reporting season is important because it can highlight continuing positive and negative trends. Outperformers tend to continue to outperform and underperformers continue to underperform. Take the 3 best and worst performers in August 2018 in the ASX 200.

Top in August 2018: Appen (APX) up 41%, Altium (ALU) up 37%, Bravura Solutions (BVS) up 31%

Bottom in August 2018: Speedcast International (SDA) down 32%, Sims Metal Management (SGM) down 27%, Pact Group Holdings (PGH) down 24%

The top 3 performers have managed to gain another 8% on average since the end of August, whereas the bottom performers have lost another 16% in that timeframe.

Most things in life are cyclical and when it comes to stocks, the same usually applies. Cycles makepredicting the growth or contraction cycles of companies easier to forecast. This means that companies that are accelerating earnings growth are likely to continue to grow. Conversely, companies stuck in a downgrade cycle are also likely to continue to see decelerating earnings growth.

Click here to take a free 21-day trial to the Switzer Report and find out which stocks have impressed so far, as well as Julia's favourite.

 

My 4 tips

Thursday, February 07, 2019

Last year, CSL returned 32% and BHP managed a gain 21%. Both of these companies are in the top 20 largest companies on the ASX. If you are looking for a blue chip with double digit gains, you are looking for a company which is increasing its revenues and profits.

Here are my 4 tips:

1. My top 20 pick:  Insurance Australia Group (IAG)

The strength of IAG’s Australia and New Zealand businesses, together with better-than-industry insurance margin and capital efficiency, should underpin IAG’s share price performance. The kicker will come from capital management with a 19.5 cent capital return approved at the AGM and the potential for more, if AIG divests its remaining Asian interests.

To read the rest of Julia Lee's tips, click here to take a free 21-day trial to the Switzer Report.

 

My tip on property affected stocks

Thursday, January 24, 2019

While there’s abundant negativity on the Australian housing market, activity levels look OK. Building approvals are at 205,000 vs peak 250,000 vs the long-term average 160,000 and importantly, unemployment is exceptionally low.

Here are the variables:

1. Banking Royal Commission – slowdown in lending.

2. Labor policy on capital gains and negative gearing.

3. Wet weather impact on housing-related stocks.

The key question for share price performance in this space is whether earnings revisions are likely to be positive or negative over the next 12 to 18 months.

To find out what stocks are impacted plus Julia Lee's tip, click here to take a free 21-day trial to the Switzer Report.

 

My top pick

Thursday, January 17, 2019

The Inquiry started on 17 October 2018, and the hearing was on 12 December 2018 with a final report due on 22 Feb 2019.

Stocks that may be affected are: Afterpay (APT), Zip Co (Z1P), Credit Corp (CCP), Cash Converters (CCV), FlexiGroup (FXL), Money3 (MNY) 

To what extent are these companies affected?

In the past three months, most of these shares have been under pressure, with FlexiGroup the worst, down 27%, Money3 down 18%, Cash Converters down 13% and Afterpay down 12%.

Cash Converters, FlexiGroup and Money3 are most likely to be impacted through the Senate Inquiry, due to exposure to either payday lending, short-term loans or consumer leases. These companies also tend to be impacted by the economic cycle and a slowdown in housing would be expected to impact negatively on growth.

What about Zip Co?

Zipmoney is the company’s flagship product that offers interest-free credit for a minimum interest free period of three months. Revenues are generated through interest, merchant fees, establishment fees and late fees. ZipPay & Pocketbook are the other key products. Key is continued large merchant signings, such as Bunnings and Target at the end of last year. Interestingly, Westpac has 17% stake, while financing is through NAB and FIIG. Key risks are around the regulatory environment for some unsecured personal loans. Being consumer related, the company could be impacted by the economic cycle or any shocks to the economic outlook.

Understanding collection agencies, such as Credit Corp

Credit Corp is subject to economic cycles. During soft economic conditions, while there would be a bigger supply of PDLs and impaired loans, the flipside is that it would be harder to collect on the impaired debt. For example, during the GFC, Credit Corp had big falls in profit due to the difficulty in collecting on bought debt. Conversely, the relatively stable economic environment post GFC has been supportive for the debt collection business that Credit Corp runs.

My top pick

While there may be an opportunity to enter the stocks at low levels, there is downside risk from the findings of the Senate Inquiry result in February. Of higher risk are Cash Converters, FlexiGroup and Money3. For companies such as Zip Co and Afterpay, which are lower risk, both consumer spending as well as signing on new merchants are a key driver of growth. My top pick would be Afterpay due to the strong rates of growth from the US in the first six months of operations and the size of the retail market in the US.

 

My 7 favourite stocks

Friday, January 11, 2019

Firstly, 2018 was a difficult one for investors with a fall 6.9% (in price) for the ASX 200.

With the first three and last four months of the year seeing negative monthly performances, it was a tough year. It was also a year that highlighted the difference timing could make. If you take out the negative months and focus on April to August 2018, the ASX 200 was up 10%.

The bigger question is whether the sell off is over or does it spill over into 2019?

On a macro level, global growth looks to be slowing and domestic risks are rising

When looking at a slowdown in growth, the general rule of thumb is to sell before a recession and buy six months into a recession or a slow down. Looking at recent slow downs in 2015 and 2011, the correction in the market lasted two quarters. Given past experience, investors should start to re-evaluate and look for opportunities after the 1st quarter of 2019.

Key events and risks

Domestic conditions are deteriorating. In Australia we’ve seen seven months’ decline in new vehicle sales, residential property weakness and money supply growth at a 26 year low. For the time being, stay away from domestic exposure especially residential housing and retail and remain cautious long term on banks.

What sectors are likely to outperform?

The time to look at buying agricultural stocks is when bad times, such as a drought, hit. Early 2019 is the time to take another look at being overweight agricultural stocks such as NUF and as evidenced by takeover activity and interest in GNC. At the start of the year, continue to focus on defensive sectors such as utilities and property. In property tend towards trusts exposed to Sydney office property.

My 7 favourite stocks

  1. Counter-cyclical: NUF (Nufarm), BSL (Bluescope)
  2. Income: CGF (Challenger)
  3. Defensive: AGL, DXS (Dexus)
  4. Growth: CSL, APT (Afterpay)

 

My 4 stock tips for your Christmas stocking

Tuesday, December 18, 2018

For the income investors: Paragon Care (PGC)

This company distributes specialist equipment such as beds, mattresses, stainless steel equipment to hospitals and aged care centres. While growth outlook from capital sales is now limited due to less brownfield development in the private hospital sector, the demand for hospital and aged care beds is relatively stable. Their last update to 31 October 2018 says 7% organic growth and 40% gross margin, with a major cost out program commencing in the 2HFY19. A combination of organic growth and a cost out program on the back of recent acquisitions should support revenue growth and a dividend yield of 6.3%.

For the shoppers: Baby Bunting (BBN)

Baby Bunting is Australia’s largest nursery product seller. This company is in an upgrade cycle. The recently upgraded profit expectations and this upgrade cycle is likely to continue, given all major competitors have gone bust and it is the last one standing. We’ve seen Baby Bunting’s four largest competitors shut up shop. While like-for-like sales are strong at ~ 9.5%, this is likely to accelerate on the back of weaker competition. The company is planning to open 85 stores by FY24.

For the growth investors: Aristocrat (ALL)

Aristocrat is a gaming company with dominant market positions in Americas, Australia & New Zealand. Acquisition of Big Fish follows Plarium as the second big acquisition in the growing social gaming space. Two thirds of revenue is now recurring, which helps to stabilise earnings. Outlook for the sector is subdued, so market gains are likely to come at the expense of competitors. As always, regulatory risk is a key risk as is research and development from stronger, cashed up players. 

For the naughty speculative stock chasers: LiveTiles (LVT)

Livetiles develops tools to help companies develop internal intranets easily. It has a strong partnership with Microsoft, which is a key strength as well as a key risk. Livetiles received the Modern Workplace Transformation award at Microsoft’s annual global Inspire conference. Livetiles Bots helps automate mundane and repetitive tasks. Livetiles and Microsoft have launched a new program to help companies with artificial intelligence capabilities. The program has launched in Australia and will go global to the US and then Europe.

 

My stock pick of the week

Thursday, December 13, 2018

Staples is a defensive sector. It often outperforms at times of market stress because staples is seen as essential spending, which isn’t swayed too much by good or bad economic times. While in 2018, the sector is flat, the Australian share market (ASX 200) has lost more than 7%.

The sector includes the supermarket giants such as Coles and Woolworths, as well as growth names like A2M, TWE and BKL. All in all, this is a small sector with just 14 stocks.

What to look for in this sector

While this sector has traditionally been dominated by mature businesses, such as Coles and Woolworths, there’s a large number of smaller growth-oriented names such as A2M, SGC, TWE and BKL. The biggest companies in this sector are the supermarkets, which have already saturated the market and are facing increasing competition from offshore players. The intensifying competition is usually bad news for share price growth. In the area of growth, much of that growth is dependant on China, which is in the process of changing its e-commerce regulations.

Macro investing

Outside of the sector and company fundamentals, consumer staples tends to perform well late in the cycle and 2018 is no exception, with global consumer staples outperforming in the midst of increasing market volatility.

Favourite stock: ING

ING is the largest poultry producer in Australia and New Zealand and hence is in a good position to benefit from rising poultry consumption. About 50-60% of volumes come from supermarkets, which is a key risk for the company both due to ING seeing a strong portion of sales from supermarkets, as well as traditionally seeing strong growth through that channel. The recent drought has impacted on feed prices and it’s yet to be seen if price strength has been enough to offset the rising cost of feed. Margin improvement is coming from its cost efficiency program.

 

My stock pick of the week

Thursday, December 06, 2018

November was the third consecutive month of losses for the Australian share market. All sectors saw a loss except for the property sector. With a dividend yield of 4.7%, it’s seen as a defensive sector. More importantly, the outlook for office property remains strong.

I prefer to stay away from retail exposure, given the number of soft updates coming through from retailers this Annual General Meeting (AGM) season. Soft updates from MHJ, TRS, SUL, NCK, FLT. Industrial and office property are seeing positive earnings revision and this is likely to continue. This should help the likes of DXS and GMG.

What do you look for?

When analysing property companies, the type of property (office, industrial, retail or residential), geography of property is important. In addition, the growth from property companies predominately comes from the development component of the business rather than from just the collection of rents.

In regard to rental income, lease agreements tend to be multi year so if rents are going up, the gradual re-setting of leases should reflect higher market rents. So watch rents, vacancy and major tenant risk. Risks comes from the outlook for property, negative gearing and taxation changes.

Property companies tend to have higher levels of gearing and are sensitive to interest rate changes.

My tip: DXS

Dexus owns, develops and manages mainly office and industrial property. The surge in Sydney rents bodes well for increasing rental revenue for the next couple years. The company has the greatest exposure to the Sydney office market amongst listed property companies. Dexus is also diversifying into logistics through an unlisted vehicle; Dexus Australian Logistics Trust. With gearing expected to drop to 20% by FY20, it’s growth profile and lower levels of gearing are an attractive proposition at this point in the economic cycle. The company is guiding to 5% DPS growth in FY19.

 

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