Peter Switzer: Hello, and welcome to Switzer Investing Insights brought to you by nabtrade. And today we want to talk about the kinds of stocks that should be in the core of your portfolio. Paul, how have you gone about selecting those stocks?
Paul Rickard: Yeah, we have labelled them cornerstone stocks, Peter. I think the guests arguably thought of the best of the best in terms of what I would want to have as the bottom line in my portfolio. We've gone looked at each of the eight major sectors, Peter. We've taken one from each just to make sure we get a diversification. We get spread across the sectors. No energy telco utility, but we've got the eight major sectors.
Paul Rickard: And I'd say in most of these cases, in all these cases, the market would say, these are blue chip and that's in terms of things like liquidity, in terms of market expectations, in terms of how the market are stock as well, in terms of putting it a premium to its peers.
Peter Switzer: Yeah. Okay. Let's go to the first one is financials and you've gone to CBA.
Paul Rickard: I have gone for Commonwealth Bank. It is traded as a premium to its other three major bank peers. I think it has the best technology, Peter. It's number one or number two in each of its major markets, which is really important. Also the leadership team is rated pretty highly. It has performed better over the last decade than the other major banks. So I think it is Commonwealth Bank, that's really the cornerstone stock.
Peter Switzer: Yeah. And remember this is like the core stock that you might hold. I personally hold the other banks because I think there's more upside in terms of share price because they've been beaten up. They've had improved leadership. They're like Macquarie is another one that's not there but why didn't you select Macquarie?
Paul Rickard: We thought about Macquarie. It's probably a bit more on the investment banking category and probably just a little more volatile. So that's why Commonwealth Bank is there. It's not to say there's anything wrong with Macquarie. I know all of us have Macquarie in our portfolio.
Peter Switzer: It's just not the core, is it? Let's go to the next one, materials.
Paul Rickard: Yeah, in material sector, which is I've gone for BHP. And it's also the largest company in the material sector. Look, it really has the best assets in terms of iron ore, copper and petroleum. It's diversified. That's one of the reasons I like BHP. Had a few missteps around 2015, 16 with the Samarco issue in Brazil. Seems to have got over that. Benefit also from commodity prices, it's more diversified than the Rios or Fortescue. And I think it's been pretty well led in the last decade or so.
Peter Switzer: Yeah, best of breed. Let's go to the healthcare sector, Paul.
Paul Rickard: Don't think you're going to get too many arguments about CSL. Particularly as that share price, if I kept on going even longer, Peter, would be less than a dollar in sort of a lifetime analysis.
Peter Switzer: I'm aware of which are.
Paul Rickard: Up over $300. No arguments in the market about CSL. It's the number one stock in healthcare. I think it's got to be a cornerstone in any portfolio.
Peter Switzer: Industrial Transurban.
Paul Rickard: Yeah. This might surprise some people because it's not actually an industrial, it doesn't make anything. Of course, this is toll road operator, Transurban, which rightly or wrongly, because it's sort of a transport company gets classified as the industrials company. Just snuck into the top 10 companies in Australia by market capitalization, which just shows you how powerful the business of being a toll road operator is. They own about 80% of the toll roads in Sydney, Melbourne and Brisbane. And that stock just keeps on going up. Had a bit of a blip with the virus, but people have come back to toll roads, Peter.
Peter Switzer: Yeah, exactly right. Let's go to the next one. Consumer discretionary.
Paul Rickard: Yeah. Wesfarmers, really due to the powerhouse of the Bunnings franchise, also Officeworks and Kmart, has been right up there. Wesfarmers also has had a little bit of a misstep. It tried to Bunning-ize the UK and that didn't work. Lost a lot of money on that venture. It has got out of its coal resources, which is probably a smart move. Got some other things in the industrials and safety area. It is still a conglomerate, but it's really Bunnings that really drives the Wesfarmer.
Peter Switzer: But they're also cashed up, Paul.
Paul Rickard: Yep.
Peter Switzer: And they are looking for opportunity.
Paul Rickard: Disposed of it's Coles business and it is cashed up. So what may be priced a little bit to perfection, but I think you've got to say it has a pretty good track record as that 10 year chart shows you.
Peter Switzer: Okay, real estate. And this surprise you in many ways, didn't it?
Paul Rickard: Well, not so much Goodman Group, but when I look back at the chart of Goodman Group over 10 years, I was pretty blown away, Peter, to see what had happened. They've obviously made a pretty smart move into provision of logistics or property to support the industrial logistic and logistical side of the business, haven't they?
Peter Switzer: Yeah, without a doubt. They're linked to companies like Amazon. All the online businesses are using their warehouses because fulfillment has become particularly important since the coronavirus. I think this is a company that's really leveraged to the future of where retail is going and a lot of it's going to be online.
Paul Rickard: And a lot of the other real estate trusts, particularly those exposed to the office sector, they're pretty challenged at the moment. So I think Goodman Group deserves to be up there and that chart says everything.
Peter Switzer: Okay, let's go to the consumer staples now.
Paul Rickard: Yeah. You could argue Woolworths, it had a misstep, particularly when it had Masters and the Masters investment didn't work. It did change CEO's. It also had the supermarket wars. And it has shot back under the new CEO and done pretty well over the last two or three years. So, I think Woolworths is still a better supermarket business than Coles. It's divesting is liquor business which might be a good move for shareholders. So I think Woolworths is pretty well your benchmark consumer staples company.
Peter Switzer: Yeah. German rival, Kaufland, was here then went back home. So that makes me think the future is pretty good for Woolworth's. Information technology, Paul.
Paul Rickard: I guess we could've had a look at a company like Xero, Afterpay.
Peter Switzer: Afterpay.
Paul Rickard: On the share price looked phenomenal. I actually prefer the Xero business, Peter. A, because it's been there longer, but also because I think the business is stickier. Right. So Xero, of course, is the accounting software. Once you get it, very hard to get off it. You pay by subscription. Came out of New Zealand, now in Australia. Done well in the UK and also in the US to some extent. So, I think it's very good software and of any of Australia's IT stocks, Xero is the one I'd have.
Peter Switzer: It fulfills the idea of a solid company with less risk. Afterpay could one day have a consumer credit challenge who knows, but this one I think is, you're right. Absolutely.
Paul Rickard: So, to summarize, Peter, financials, CBA. Materials, BHP. Healthcare, CSL. Industrials, Transurban. Wesfarmers from consumer discretionary. Goodman Group from the real estate and property sector. Woolworths from consumer staples and information technology we've gone for Xero.
Peter Switzer: Yeah, and they are what we would call solid cornerstone stocks. But also, Paul, what I like about this list is if we do see a coronavirus second wave infection sell off of the stock market, these are the sort of companies I want to buy at lower prices for the future going forward. That's Switzer Investing Insights brought to you by nabtrade. Thanks for joining us.