Given the level of volatility in the market in recent weeks, it would be unrealistic to assume we’re now in a totally ‘risk-off’ environment. But with forced selling having left the S&P/ASX 200 Index (ASX: XJO) down 20% since the start of 2020, it’s starting to look like bottom is now behind us.
Did you miss the bottom? Don’t panic, so did the most of the chief investment officers, who are paid a lot more than you to get it right.
That’s not to say heightened volatility isn’t here to stay for a while. However, while we’ll still see spreads of 2–3% on a given day’s trading, the expectation of the market moving another major leg down – which most institutional buyers are still praying for – now looks less bankable.
But if you’ve been brave enough to take positions in stocks over last few weeks, congratulations. Three years from now your entry point will (with the wisdom of hindsight) look compelling.
Did fund managers drink too much of their own Kool-Aid?
Ironically, it is fund managers, many of whom still refuse to admit how much they were zigging when the markets were zagging, who’ve been the last to heed their own advice. Namely, start accumulating oversold stocks. Assuming they reluctantly admit that the bottom has now passed, institutional buying over the coming weeks should provide a much needed kicker to the stocks you recently bought.
With COVID-19 affecting fundamental assumptions on blue-chip stocks we previously thought were bankable, like Flight Centre Travel Group Ltd (ASX: FLT), only the truly brave want to shout about the market bleeding value. After all, COVID-19 has delivered an existential shift to the earnings of many stocks.
However, the COVID-19 impact appears to have been overstated. Many stocks have been forced to re-emerge from the ashes with better, leaner and more profitable business models.
Swing back to value
With market dynamics being more impacted by central bank policy than fundamentals, it’s been hard for investors to draw a meaningful bead on value. However, with stocks in the value bucket now looking (at face value anyway) decidedly cheap, it could be time for active value-based fund managers to finally shine.
The resurfacing of value plays should offer strong clues as to where institutional money will find a home over the next few weeks. Riding the coat-tails of this buying strategy may not be such a silly idea, especially with the phased easing of COVID-19 lockdowns acting as an inflection point for a full economic recovery.
Assuming the likelihood of a second wave of COVID-19 is alleviated, Australia should – courtesy of the government’s $214 billion fiscal response – emerge strongly from our low-point of economy activity in April.
Here are 3 ASX 200 shares that make good value plays in the current environment, in my opinion.
Crown Resorts Ltd (ASX: CWN)
The late April decision by private equity firm Blackstone Group Inc to take a 9.99% stake in Crown Entertainment at $8.15 a share, provides some insight into what sectors are attracting the attention of institutional investors. While the stock has bounced up to $9.11, it’s still trading at a 32% discount to its 52 week high of $13.40.
Despite the coronavirus, Crown is still on track for the progressive completion of its new jewel, Crown Sydney, from late 2020.
The company recently secured $1 billion in fresh debt to weather the coronavirus shutdown. After paying its half-year 30 cents a share dividend, and $203 million to 95% of employees who were stood down, the company still has around $500 million in cash on hand.
Star Entertainment Group Ltd (ASX: SGR)
Crown’s rival Star Entertainment also benefitted from a vote of confidence in both the wagering sector at large, and its mid-April COVID-19 response. While the share price is now up around 62% after dipping as low as $1.62 in late March, it’s still trading at a 46% discount to its 52-week high of $4.93.
It’s too early to put definitive numbers around Star’s future earnings, but the market is clearly excited over its $3.6 billion Queens Wharf joint venture, which it plans to open late in 2022. While the Brisbane River development is being marketed as an ‘integrated resort’, it is expected to hold up to 2,500 poker machines.
Within its COVID-19 response, Star revealed that it stood down over 90% of its workforce in response to the shutdown of its activities in Sydney, the Gold Coast and Brisbane. In the meantime, after recently raising $200 million in fresh debt, the company has available cash and undrawn debt facilities of around $700 million.
The company is also advancing a business interruption claim through its insurer. The outcome of this claim hasn’t been factored into its cost and cash flow expectations. Based on a commitment not to pay a cash dividend until gearing is below 2.5 times, its lender has agreed to waiver debt covenants for the next testing date of 30 June.
Aristocrat Leisure Limited (ASX: ALL)
Unsurprisingly, slot machine group Aristocrat has witnessed similar share price falls to gaming stocks since early March. But after tumbling as low as $15.44, Aristocrat shares have now bounced back up to $25.58.
Aristocrat stood down 1,000 staff until the end of June, following the decision by virtually all its land-based customers globally to suspend operations. It also cut 200 roles permanently from the business, and moved another 200 full-time roles to part-time.
Aristocrat has a conservatively geared balance sheet with $1 billion in liquidity and no near-time refinancing requirements. This should allow it to rebound quickly once customers start to ramp up their patronage.
Given the speed with which Australia (and the world) want to return to normalcy, Star, Crown and Aristocrat should be early beneficiaries once COVID-19 restrictions begin to lift. This also bodes well for the resumption of regular dividends.