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I’ve learned a few things about contrarian investing over the years, sometimes the hard way:
Using that framework, I have identified three contrarian sell and buy themes for the new financial year. The goal: to provide ideas on sectors and stocks to take profits on, and those that are out of favour, undervalued and worth buying.
Here are three contrarian sell themes:
I’ve been a big fan of travel-related stocks over the past three years, principally because of growth in inbound tourism and the propensity of millennials to travel. Sydney Airport (SYD:ASX), highly leveraged to Chinese travel, was among my favourite ideas.
Australian tourism has fabulous long-term prospects as the boom in middle-class consumption in emerging markets unfolds and millions of people travel overseas for the first time. Short-term, tourism headwinds are growing and several tourism-related stocks look fully priced.
Chinese outbound tourism is slowing as the US/China trade war unfolds, the latter’s economy struggles to maintain high growth and as middle-class Chinese consumers battle high household debt. There are signs that Chinese tourists are spending less than before.
Domestically-focused tourism stocks such as travel agents ran too far, too fast. Flight Centre (FLT:ASX), Helloworld Travel (HLO:ASX) and Corporate Travel Management (CTD:ASX) are fully valued. Webjet (WEB:ASX) is a great stock, but some profit taking is in order after soaring gains this year.
Sydney Airport looks like a hold and beware casino stocks and other tourism companies that will rely on ever-increasing numbers of Chinese tourists in the next few years.
Webjet – five-year performance chart
I thought Afterpay Touch Group (APT:ASX) looked overvalued this time last year and nominated it as a contrarian sell idea. The fintech star duly fell but quickly recovered those losses and soared to new heights. Afterpay has fabulously rewarded its true believers.
Wistech Group (WTC:ASX), Afterpay, Altium (ALU:ASX), Appen (APX:ASX) and Xero (XRO:ASX) (the last-named among the ‘WAAAX’ group of stocks has been a long-term favourite) are terrific companies. I just can’t stomach their valuations at current prices. Accounting software giant Xero, for example, has more than tripled since the start of 2017.
Appen has doubled this year alone and Altium is up 50%. The WAAAX stocks will be among the first to be sold when global equity markets inevitably correct. As strong as these companies are, I don’t want to hold stocks with sky-high valuations in the late stages of a bull market.
Xero – five-year performance chart
Nor do I want to own global asset managers in the eighth or ninth innings of the longest equities bull market in history. After 10 years of gains (following the Global Financial Crisis), the bull market is much closer to the end than the start and could end abruptly.
Surveys show institutional investors are reducing their exposure to equities and increasing their cash allocation. Simply put, the smart money is becoming more defensive. A long-overdue correction in global equities means slower fund inflows and declining assets under management, fees, earnings and valuations for global equities managers.
Australia has some terrific global equities managers: Magellan Financial Group (MFG:ASX), Platinum Asset Management (PTM:ASX) and Pendal Group (PDL:ASX), for example. Platinum and Pendal are well down from their highs but Magellan – one of the market’s great companies – has soared this year.
It’s time to take profits on Magellan with a view to buying back in at lower prices.
Magellan Financial Group (MFG)
And here are 3 contrarian buy ideas:
Even hardened contrarians have struggled to buy fallen residential property developers, given the housing downturn and credit restrictions from banks. It’s too soon to call the bottom in housing, but some bigger players with residential exposure are looking interesting.
There’s a lot of ammunition coming to boost housing. If Westpac is right, interest rates will be cut three times this year. The Australian Prudential Regulation Authority is easing some borrowing restrictions. And income tax cuts, if the Senate passes them, will provide more stimulus for the economy.
I doubt that will put a rocket under house prices again, but that magnitude of stimulus should slow the decline and put foundations in place for a recovery. Property-developer valuations look like they are still factoring in too much bad news about the housing market.
Given these risks, I favour larger players such as Stockland (SGP:ASX) and Mirvac Group (MGR:ASX). Both have a mix of property asset classes in addition to residential, so are more diversified. Stockland in particular looks undervalued if the housing decline starts to ease.
Beware chasing small residential-only developers. That’s too contrarian, for now.
Stockland – five year performance chart
I’ve avoided bank stocks over the past three years, except for the UK-focused CYBG Plc (CYB), which was included mostly because I like backing quality spin-offs after demergers.
I lost interest in the banks when the Commonwealth Bank (CBA:ASX) hurtled towards $100 in mid-2015 and some commentators described them as data/tech companies, to justify valuations.
It was obvious that Australia’s overvalued housing market was primed to fall and that recurring bank scandals would eventually lead to greater regulation or, as it turned out, a Financial Services Royal Commission. High household debt was another factor.
The banks look interesting after the Coalition’s surprise election win. Bank stocks rallied after the victory but there are more foundations needed than that for a sustained recovery.
As mentioned earlier, the housing decline should slow as all the likely stimulus hits the economy. Consumer sentiment should lift with rate cuts, tax cuts and government stability. Business investment should pick up a little with the Coalition in charge.
That does not mean Australia’s slowing economy will be back in rude health in 12 months. I’m betting on a modest recovery of the economy in that period, notwithstanding another global shock, and better gains in 2020-21. On that basis, the banks look a touch undervalued.
For clarity, the banks are not screaming buys; but there’s enough to reward portfolio investors with a three to five-year outlook.
There’s a growing list of mid-caps that have stumbled in the past year after rapidly building their global footprint. Reliance Worldwide Corporation (RWC:ASX), Domino’s Pizza Enterprises (DMP:ASX), cosmetics group BWX (BWX:ASX) and China-focused Bellamy’s Group (BAL:ASX) stand out.
Reliance and Domino’s are my favoured mid-cap recovery plays. There is too much bad news factored into Reliance, one of the market’s better-quality mid-caps.
Domino’s is an interesting contrarian idea. The former market darling has almost halved from its 2016 high amid slower-than-expected earnings growth, wage-payment issues and growing competition from online food-ordering platforms. Domino’s was hammered this week after house broker Morgan Stanley slashed its rating on the stock.
For all its recent problems, Domino’s has good long-term international growth prospects and a valuable technology advantage over its rivals. Morningstar’s fair value of $53 suggests Domino’s is materially undervalued at $38.66 at the time of writing.
On a charting analysis, Domino’s needs to form a base around $40. If it can hold those levels and consolidate, a share-price recovery is a reasonable bet, although it will take a long time for Domino’s to get back to previous highs, when it was badly overvalued.
All bets are off if Domino’s has a sustained break below $40.
Domino’s Pizza Enterprises – five-year performance chart