FYI | Mar 14 2018
By Peter Switzer, Switzer Super Report
BHP and Gerry's HVN — screaming buys or sells?
In the past two weeks, I’ve interviewed two impressive characters that have a big bearing on a lot of our portfolios. One is the very unique Gerry Harvey and the other is the CFO of BHP, Peter Bevan.
Both were very remarkable and they have made me more supportive towards both of their companies. But you do have to be careful of letting your gut feelings determine how you buy or invest.
Simon Sinek, the author of Start With Why: How Great Leaders Inspire Everyone to Take Action, explained that the neocortex part of the brain is used for processing info, stats and all those relevant things for picking stocks. However, we often ignore these facts and go with our gut when it comes to buying stuff.
Have you ever said: “I know what the numbers say but it just doesn’t feel right.”? When that happens, the limbic part of the brain is taking over.
Those like Sinek who study us, say we are more driven by the limbic part of the brain. Personally, I love it when the neocortex-driven view marries nicely with my limbic or gut-feeling view on a stock.
The Harvey Norman story
And that’s where I ponder my view on Harvey Norman or HVN and Gerry’s influence. He has been tapping into people’s gut feeling for five decades being this country’s greatest retailer.
When I interviewed him after his result, which saw his profit tumble 19.3%, he said the result was good and that a lot of it was because the year before was so good. He dismissed Amazon’s current impact and boasted how he was ready to take them on as they get used to Australia.
He actually told my viewers “to sell your house, sell you car…even sell your wife” and buy Harvey Norman because the outlook is good and the market view on his company is madness!
Here’s a table of what the experts think about retail stocks. Have a look at what they’re thinking:
(Prices as at Monday’s open)
Generally, the view is positive, with Super Retail Group (or SUL) seen as having a potential 19% upside! Retail supplier Scentre Group is tipped to end up being 14.7% higher in the future!
According to the experts, HVN has 6% upside and these guys might be, as Billy Joel once sang, right or wrong or crazy!
Gerry doesn’t think they’re crazy but he would argue that they are too pessimistic on his company. My view is that HVN will benefit from the improving economy and the fact that Amazon will take a few years to have a notable impact on, say, capital city stores, and in some specific divisions of the stores, such as electronics, but I still think lounges, dining room tables and fridges will be the domain of places like Harvey Norman, The Good Guys and Domayne.
Both my gut and Gerry’s numbers say HVN can easily be in someone’s portfolio of 15-20 stocks and given the market reaction to the stock, it’s in the buying zone.
Last year JB Hi-Fi was trashed to $23 after a good report and the big fear was Amazon was coming. However, it looks like retail analysts have got more realistic about the US online retailer’s threat in the short- to medium-term.
If you want to hold a stock forever, maybe HVN has some future risks but even as Gerry pointed out, Best Buys (the huge US electronics store) was initially hurt by Amazon but has staged a comeback because it is, like HVN, the market leader. Since September 2015 to now, when Amazon was surging as a new retailer, Best Buy’s share price went from $US27 to its current price of US$73.82! And yes, the retail experts did not see that growth coming.
The BHP story
To BHP and Peter Bevan, whose Coffee with Switzer on our Switzer Daily website will show you what an impressive bloke this guy is. On the big issues of Trump, he said the President gave us an exemption that the tariff’s import would overwhelmingly be offset by the Trump tax cuts, so that’s good for the bottom line.
Meanwhile, he expects the sale of oil assets in the USA to help the company in many ways and did not disagree with me when I tipped it should help dividends or any other money the company wants to throw our way.
In December last year, Business Insider gave us this on the future of iron ore prices, which is critical for BHP’s share price.
“Iron ore markets look set to remain higher for longer as a combination of strong steel demand, higher margins and firm output levels in China acts to support prices well into 2018,” it reported.
“That’s the view of Matthew Hope, Research Analyst at Credit Suisse, who has upgraded his iron ore price forecasts not only for 2018 but also 2019 and 2020 this week.”
If he’s right, it’s a good prognostication for BHP’s share price.
“China’s steel demand in 2016 and 2017 was supported by infrastructure investment growth of around 20% per annum, and a property construction boom,” the well-named Hope said.
“In 2018, the outlook for these two sectors is perhaps less positive, but we believe steel demand for the next couple of years will be supported by the backlog of infrastructure and property projects already approved and funded.”
OK, the neocortex and limbic stories look good but what are the experts on FNArena seeing?
As I write, the price of BHP is $28.32 and the consensus target is $32.69, so that’s saying there might be a 15.5% upside for the stock!
I should add that a little bit of caution is required when it comes to interpreting broker target prices for resource companies, because they are very sensitive to the broker’s commodity price forecasts.
BHP might not be the screaming buy it was when it went down close to $14 but it still looks interesting at these levels.
HVN looks like a buy because the market is a little spooked about the short sellers on the stock, Gerry’s loss-making dairy-dabbling, which he says is small beer, franchisee issues, which he says are non-issues, and questions about his accounts.
That said, the business remains the country’s top retailer as the economy improves and it’s not excessively over-priced. While BHP is a buy on both neocortex and limbic grounds, I have to say HVN looks more a limbic play — and I know Gerry would argue with me on this point — but you underestimate Gerry Harvey and his CEO/wife Katie Page at your bank balance peril.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
