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

My tip on property affected stocks

Tuesday, January 22, 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.

 

My stock pick of the week

Thursday, November 29, 2018

Today I’ll look at the Utilities sector. With a distribution yield of 5.5% for the sector, it’s easy to see how the distributions can act as a buffer to market volatility.

Here are my answers to a number of questions:

What do investors need to know when investing in the utilities sector?

The utilities sector is a small one on the Australian market. There are only 5 companies that make up this sector. Utilities companies tend to have stable cash flows. Often, they are restricted in types of price rises they can enforce. We call this a regulated industry. Due to the stable cash flows and high depreciation costs of capital investment, they have huge amounts of debt, when measured against traditional measures, such as equity or earnings.

What is the outlook for this sector?

This sector is thought of as a bond proxy. It means as global interest rates rise, share prices can come under pressure. Higher longer-term interest rates would be a negative while lower long-term interest rates would be a positive.

While transmission and distribution of gas and electricity will continue to be important in Australia, emerging technologies will also pay a growing part. Battery storage, smart devices and home energy management systems are all emerging areas, with the potential to disrupt the industry. As other sectors have seen disruption take hold, utilities are expected to be changed substantially over the next decade.

What are the key risks?

There are a number of risks and I’ll go through them.

• Interest rate risk. As this sector is seen as a bond proxy due to the large amounts of debt required for investing into the infrastructure, higher longer-term interest rates are a negative for share prices.

• Regulatory risks. This sector is mostly a regulated sector, where the growth in revenues is restricted by government-imposed limits. Changes in energy policy also occur relatively frequently and can have a large impact on sentiment and share prices.

• Change in demand. Reduction in demand can impact on revenues

• Disruptive technologies. Like many industries, the utilities sector is also prone to disruption from battery storage solutions for households, home energy management systems and smart devices.

What’s your favourite stock in the sector?

My favourite is AGL. This is an integrated energy company and owner as well as an operator and developer of renewable energy generation in Australia. AGL has been sold off due to concerns around regulatory risk and the lower oil price. These concerns look overdone and AGL shares hold value at these levels. I would expect to see the share price move closer to the $22 level and look for an exit. With increased regulatory risk and disruption on the horizon, this has become a higher risk sector than has traditionally been the case

 

Gold! Gold! Gold!

Thursday, November 15, 2018

Unlike steel, for most of us, gold can’t be used for cars, to build office towers or for many other practical purposes. Yet for centuries, we’ve been obsessed with this largely useless metal. With talk that growth is rolling over, is now the ideal time to talk about gold? Julia Lee Equities Strategist at Bell Direct answers these questions on the glittery stuff.

Why do people invest in gold?

There’s 3 key reasons to look at gold:

1.     As a hedge.

2.     As a safe haven asset.

3.     As an investment.

Let’s go through each one of these in more detail:

• Hedge

When looking at gaining the benefits of diversification, it’s about choosing assets that don’t move together. Gold moves differently to equity and bond markets. Gold can be an important part of a portfolio because its price often moves in response to events that can see shares or bond prices decline.

• Safe Haven

When the stock market crashes, gold can see safe haven demand. If you think that markets will see increased volatility and wish to profit from that view, then gold is one way to take that view.

• Direct investment

Many investors buy gold to hedge against the US dollar. As a currency falls, it creates higher prices in imports and inflation. As a result, gold is a defence against inflation. Recently, with the US Federal Reserve raising interest rates, the US dollar has been moving upwards and therefore the gold price has come under pressure.

What’s the outlook for gold?

A stronger US dollar makes gold more expensive for overseas buyers. Rising interest rates also make gold less attractive. On the converse, looking out 18 to 24 months and if you think that we have seen the peak for company margins and earnings growth, then we may see a turbulent time for equities, which could be good for gold. A stronger dollar makes gold more expensive for overseas buyers, while higher Treasury yields make the metal less attractive.

Are there seasonal factors that affect the gold price?

Yes. During Indian wedding season, which runs October to December and again from mid January to end March, India can account for 20% of global demand for gold, according to the World Gold Council. Last year, these periods saw Indian gold imports increase by 67% to 855 tons. Hence physical buying can offer some support to the market.

How do you analyse gold companies?

Key things to look at include: cost of production, any hedging in place, mine life, new technology, water supply, power and currency.

Do you go for gold stocks or ETFs, gold coins, gold bars etc.?

If you are looking to gold because you think there will be a stock market crash, then physical gold would be better. That’s because when there’s a crash, all stocks tend to be sold off, including gold companies. If you’re using gold as a hedging tool, then a gold ETF or gold companies are popular. From an investment perspective, gold companies offer great potential upside and downside compared to physical gold coins or bars.

What’s your favourite stock/s?

I’ll give you two stocks.

1. Saracen (SAR) is an Australia-focused gold explorer. In terms of growth, it has outlined a plan to increase production to 350koz/pa, however with crushers, this could be pushed to 400koz/pa. The cost of production in the September quarter was AISC $993/oz.  It has a strong balance sheet with around $131m net cash.

2. Northern Star (NST) is another gold stock, with ambitious growth plans. The acquisition of Pogo means three tier 1 assets. Adding Pogo means that it’s hard to compare metrics with past quarters. The last quarter saw production costs at ASISC $1122/oz. There is upside from increasing its production profile and margins.

 

My gambling stock tip

Thursday, November 08, 2018

Australia is the world’s most lucrative gambling market. Australians spend over $23 billion a year on gambling. Per adult, that’s biggest in the world – around $1,250! 

Electronic gambling makes up around half, at $12 billion. Casino gambling accounts for $5 billion, racing $3.3 billion and other sports $1 billion. 

The opening of online markets for gambling is bringing about change e.g. Ireland and Finland are moving up in the spending stakes. As other markets open, together with the high smartphone penetration in developed economies, this is likely to be the big area of growth.

Gambling related companies

Electronic: AGI, ALL, AQS

Casino: CWN, SGR, DNA, RCT, SKC, SVH

Lotteries, sports betting: JIN, TAH, TBH

The best performer over the past 52 weeks is Jumbo Interactive (JIN), up 157%, while the worst has been The Betmakers (TBH), down 83%.

What to look for

Structural issues: a shift and an opening of markets in online gambling is seeing a shift of growth from traditional bookies to new entrants. 

Regulatory: changes in licensing requirements. Costs are always a risk in this area.

Scaleability: the higher the scaleability of the business, the easier it is to grow into new markets.

My pick: RCT

Reef Casino Trust owns the Cairns Casino in North Queensland. The trust’s main source of revenue is rent from the Reef Hotel Casino. The trust saw half year revenue up 14%, net profit up 32% and a dividend yield of 8%. With subdued activity, related to the arrest of marketing staff from Crown now subsiding, Reef Casino Trust should benefit from a slow return to normalised flights and activity from China. In terms of risks, the trust holds significant single property ownership risk and increased competition from clubs and hotels in the area of electronic gaming. Its major shareholder, Casinos Austria, owns 42%.

 

My tip in the consumer discretionary sector

Thursday, November 01, 2018

Consumer discretionary includes retailing, media, gaming, services and automobiles. While the market is now down 3% for the last 52 weeks, consumer discretionary has had a flat performance.  

In this time, there have been some wild swings. G8 education is down 56% in the last 52 weeks, while IDP Education is up 64%.

What drives valuations in this space?

Consumer confidence, the wealth effect, organic growth, store rollouts and competition are the key areas to analyse when looking at this sector. The sector is cyclical in nature and highly tied to the economic cycle. Once business is mature, usually significant risk is undertaken to try and ensure growth. This is usually in the form of expanding to other overseas markets.

What investors should keep an eye out for

Structural change has beset this sector for the past decade. We’ve seen a move from “bricks to clicks”. Still, niche players have enjoyed strong sales, usually driven by a strong internet presence and in-house brands that offer higher margins.

Warning signs

This sector is cyclical and there have been several soft trading updates in recent weeks, including from MHJ, TRS, SUL, NCK, FLT, WPP, MEA, BAL, KGN & BWX. 

Favourite stock in this sector?

All Baby Bunting’s four largest competitors have gone bust. Generally, in the immediate period after a competitor goes out of business, there is irrational pricing as inventory is cleared. While in the short term, this is a negative for competitors, in the medium term, this is a positive for existing players. Market share due to this should improve over the next 12-18 months for Baby Bunting despite Amazon building out its range. Further, many big ticketed baby related products, such as prams and cots are items buyers want to try and research in person before a purchase, which gives Baby Bunting an advantage compared to internet-based offerings.

Currently, key brands such as Bugaboo and Britax, are not stocked by Amazon, which gives Baby Bunting a competitive edge. When analysing retail concepts, a combination of strong organic growth together, with a rollout of stores, is a winning combination. Baby Bunting has seen strong organic growth with the first six weeks FY19 seeing same-store-sales up 9.8%. With a rollout target of 80 stores, this should underpin improving growth in profitability. The company currently has 47 stores and has historically guided 4-8 new stores per year.

My tip?

BBN: all major competitors have gone bust. Last one standing. Buy

 

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