FYI | Aug 26 2020
By Peter Switzer, Switzer Report
This is a tale of four stocks that reported last week and how I intend to play them. All four would not be out of place in any quality portfolio. On my TV show, I asked three CEOs and one CFO of these four companies this question: what’s the case for believing your company is heading in the right direction? I asked this question because these leaders won’t comment on their share price but that’s what I want to know.
By this time next year (post August reporting season 2021), I think the share prices of all four companies will be higher. Each of these four stories has a different subplot and (depending on whether you hold these stocks or would like to) the critical difference is the timing of any purchase any investor might want to make.
The four stocks in question reported last week.
The stocks I’m referring to can be classified as two blue chips and two stocks for the new age. And yep, because of that, they have potential. I hold two of these stocks but will pounce on the other two if a buying opportunity arises.
1. BHP ((BHP)) – the Big Australian
The first stock is BHP, of which I have a biggish holding.
The Coronavirus crash was a perfect buy-in opportunity when its share price fell to around $28. Since March 23 there’s been around a 35% gain! My interview with CFO Peter Beaven indicates he thinks Brazil will eventually start adding to supply, which could affect the iron ore price. This would then affect the share price. But if it fell to the low $30s, I’d be a buyer because I think the company will benefit from the eventual post-virus global recovery.
The analysts surveyed by FNArena think a $39.49 target is on the cards. This means it would be 3% higher from its current level of $38.36. So if you saw a price of $35 or lower and you didn’t hold BHP, I’d call it a buy because a $5 gain on a $35 buy-in price is a return of 14%, before a grossed up franked dividend of about 5%. At $35, this quality stock is a bargain.
Peter Beaven’s take on the company also adds to the case to being programmed to be a dip-buyer of BHP.
2. COLES – the new home of great value!
Paul (Rickard) and I told you that Coles around $11 or $12 was a decent buy. Now it’s an $18 stock but after listening to my interview with the CEO of this supermarket giant, I suspect it falls into the same class as BHP — great to buy on a dip, if one shows up. But you could buy this company now and maybe still see a nice gain over the next 12 months. Here’s the chart that shows how the Coronavirus, the lockdowns, home-cooking and the escalation of buying online has turbo-charged Coles’ share price.
Coles ((COL)) 1-year chart
The pandemic has given Coles a 40% boost, which I thought would have to be pared back when we get back to normal (whenever that may be). But what CEO Steve Cain has in store for his stores makes me think that these guys could go higher on the likelihood that, for most of the reporting season (which ends at the end of December), businesses like Coles will remain in the box seat. Big office block businesses aren’t in any hurry to go back to the CBDs and workers from home (who have helped Coles) will still be home-based, especially in Victoria!
Steve Cain also has a number of innovations in place, including something called Ocado, which is a UK-based centralized fulfilment solution company. Back in October last year, the AFR reported on the deal between Coles and Ocado. “Mr Cain said he expected the partnership, which includes a new website and two automated centralised fulfilment centres, would boost online sales by about $1 billion, double its home-delivery capacity, reduce cost-to-serve and lead to improved profit margins for Coles Online,” wrote the AFR’s Sue Mitchell.
And this was before the damn virus increased Cain’s online and hone delivery customers.
Coles is a definite buy on a dip but given the innovation plans, it could be a decent investment now. I don’t hold Coles these days but with a decent pullback, I’d be happy to be a shareholder again.
3. DOMINO’s – zero contact pick-up and delivery!
Domino’s is another share I don’t hold (and I’m kicking myself because I’ve always admired its CEO Don Meij). I’ve always noted that Domino’s is a company that the market falls in love with, then finds reasons to fall out of love with it. The Coronavirus has given the company and the share price a boost but the uptrend was there before the virus and home-working helped online takeaway food businesses.
Domino’s ((DMP)) 5-year chart
See how in August 2016 the market gave up on Domino’s, then forgave it partially in 2018, and rejected it again during Donald Trump’s trade war period when stocks fell. But when the bounce-back started in early 2019, DMP was slow to be loved. However by mid-2019, the market started to rethink DMP’s problems and the Coronavirus hardly hit the company at all and has grown because of it.
But it’s not just a ‘workers at home pigging out on pizza’ story. My interview with Don suggests reasons to believe that these guys are definitely a buy-on-the-dip play. One intriguing aspect of the market’s set against DMP was a belief that the likes of Uber and Deliveroo were going to eat Domino’s ‘lunch’, as they were the leaders in online ordering and delivery.
That hasn’t been the case. The parallels with the market that expected Amazon was going to kill JB Hi-Fi and Harvey Norman were vastly exaggerated. DMP has surged despite their rivals and Don explains why. This is definitely a ‘buy on the dip’ stock but note the analysts think a 19.2% is needed before it’s a buy.
4. TYRO ((TYR)) – new kid on the block
My final stock is a buy anytime company and analysts see Tyro going 11.3% higher. Yep, I hold this one and it’s a part of my ZEET tech stocks collection — Zip, ELMO Software, EML Payments and Tyro. And my interview with the CEO Robbie Cook made me remain a believer in this company and its potential.
The key points CEO Robbie Cook made were:
- The company has 10% share of the SMEs in the health, hospitality and retail sectors.
- Cook thinks 20% is a realisable target.
- Victoria is 23% of its total business. After lockdown, there should be a business spike.
- The whole COVID-19 experience will reduce the use of cash and escalate the use of cards, which is good for Tyro.
- Cook thinks Tyro’s investment in the hospitality food ordering and payments app menu, which means people at pubs can basically sit at their table and order via their app, will be another favoured activity in a COVID-19 affected world.
By the way, in case you’re wondering what the analysts think of the other ZEETs, here are the latest ‘guesses’ from the experts:
- ELO – +54.1%.
- EML – no guesses but Julia Lee and Shaw Partner’s Adam Dawes like it a lot.
- Z1P (a competitor of Afterpay) – 5.9% but has had a nice run, as the chart below shows.
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.
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