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Macquarie’s tips on picking ASX consumer stocks amid the COVID-19 crisis

Consumer-facing stocks on the ASX are arguably one of the toughest places for investors to hunt for bargains.

While the mood on the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) improved considerably with the federal government’s bazooka-sized $130 billion job-keeper package, picking retail stocks that are deep in value territory remains tricky.

This is because some ASX stocks are a value-trap and may require a big capital raise to keep the lights on given the mass shutdowns of stores and ever-increasing social restrictions to contain the COVID-19 pandemic.  

Retailers on the nose

But the analysts at Macquarie Group Ltd (ASX: MQG) have a couple of tips for value buyers. Their analysis doesn’t take into account the government’s job-keeper stimulus but it’s still useful for those wanting to avoid stepping on a landmine while bargain hunting in the beaten down sector.

“Discretionary has been hit hard, with the sector down -39% since 20 Feb compared to the market -30% and Staples -12%,” said the broker.

“With a shutdown implemented in NZ [New Zealand] and risk of the same in Australia, investors are asking how long balance sheets can last in this environment.”

Survival of the fittest

Macquarie looked at the monthly cash burn for a range of consumer-exposed stocks and conducted a scenario analysis that covers a one-, two- and three-month shutdown.

Further, the broker assumes that revenue falls between 60% and 90% for the period and between 5% and 15% for the rest of calendar 2020, depending on the severity of the economic downturn.

“Overall, a shutdown sees all the companies move into loss making for the impacted months, but we believe on a rolling 12-month basis the groups can stay profitable,” added Macquarie.

“We believe this reduces the immediate risk to balance sheet under these assumptions”

Retailers more resilient than expected

All the consumer discretionary companies that the broker analysed can still generate a positive cashflow if shuttered for a month. But this changes in month two with Flight Centre Travel Group Ltd (ASX: FLT) turning cash flow negative.

This is why Macquarie favours retail conglomerate Wesfarmers Ltd (ASX: WES) and electronic chains JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) in the discretionary space.

Safer buying opportunities

In the more stable consumer staples category, the broker is recommending investors buy supermarkets Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) over Metcash Limited (ASX: MTS).

Finally, in the food and beverage sub-sector, investors should pick Domino’s Pizza Enterprises Ltd. (ASX: DMP) and Coca-Cola Amatil Ltd (ASX: CCL) over Treasury Wine Estates Ltd (ASX: TWE).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.