The old saying about 'all boats rising on an incoming tide', applies equally when it comes to listed shares. Even 'not so good stocks' get a leg up when the bulls are running, and the opposite also tends to be true.
The fundamentals have been thrown out the window in response to the COVID-19 crisis. As a result, we've seen that many ASX shares have become beneficiaries of JobKeeper, Jobseeker, plus central bank policies, and other government stimulus measures.
Depending on sector, some ASX shares are more directly riding the coattails of the measures to prop up our ailing economy. Revelations of further stimulus measures, including the continuation of JobKeeper well into next year, represents more 'pennies from heaven' for some ASX shares.
Australians are spending more on the basics
Recent Australian Banking Association figures show that 429,900 mortgages had been deferred, totalling $153.5 billion, since mid-May. But during this time, a number of measures have also turbocharged household spending. These measures include JobKeeper and JobSeeker payments. Adding further stimulus to spending, 1.4 million people have tapped into $10,000 of super, while a selected cohort of Australians have also received a $750 lump sum payment from the federal government.
As a result, during the pandemic we've seen food delivery, hardware, and online electronics retailers receive the strongest kickers of all the ASX sectors, aside from healthcare. For example, based on data gathered by AlphaBeta Australia, spending on food delivery was 230% higher than normal in the week of 11 to 17 May. It has also been 200% above normal for 3 consecutive weeks. With people spending so much more time at home, spending on DIY jobs is up to 40% above normal.
I've identified 2 ASX shares that I believe will continue reaping the benefits of these stimulus measures.
Reject Shop Ltd (ASX: TRS)
The Reject Shop share price has bounced from a low of $2.40 on 27 March to its current price of $6.10, after soaring as high as $8.28 per share in early July. Sales during the height of coronavirus pandemic (nationally), between 24 February and 15 March were up 15.1% compared to the same period in 2019. Cleaning, groceries, toiletries and pet care proved to be the strongest categories.
The $64,000 question is whether the discount variety retailer can continue to sustain this growth over the longer-term. All eyes will be on the 2021 guidance that accompanies its full year result.
While Reject's 351 stores across Australia have combined annual sales of $900 million, a slide in earnings over the last 3 years can be attributed to the overstocking of too many low-margin items that simply haven't been moving off the shelves fast enough. New CEO Andre Reich plans to staunch this slide in earnings by shrinking the product range by as much as 75%, and cutting inventories by a third.
The share's recent upgrade by Morgan Stanley to overweight is encouraging, and based on Morningstar's analysis the Reject Shop share price is undervalued, with fair value set at $8.28.
Wesfarmers Ltd (ASX: WES)
Unlike a lot of stores, Wesfarmers kept its 4 retailers Kmart, Bunnings, Target and Officeworks open for trading during the coronavirus pandemic. That didn't stop the Wesfarmers share price from tumbling from $47.25 on 20 February to a COVID-19-induced low of around $31.02 per share on 23 March.
But it has since regained virtually all its lost ground to trade at $46.23.
In testimony to its resilience during the worst of the pandemic, the iconic Australian retail group's Bunnings and Officeworks stores experienced significant sales growth. They recorded 19.2% and 27.8% jumps, respectively, in the quarter ended June 2020. Equally important, Kmart and online marketplace Catch, also recorded growth in the second quarter.
Only Target registered a (minor) drop in sales. Management expects nearly half of its Target stores to close or be converted into the more successful Kmart model. It's also using the COVID-19 opportunity to renegotiate lease terms around Australia.
Wesfarmers has already tipped the market to expect its full financial year report on online sales across all of its brands – on a fiscal year-to-date basis – to be up 60% to $1.9 billion. Confirmation of this result when it reports its full year result on 20 August, plus any supporting commentary outlining future plans for Kmart and Catch could push the share even higher.
Trading at a price-to-earnings ratio of around 24x, Wesfarmers shares aren't cheap. Yet there I think there are some drivers of future share price appreciation. These include: a) additional upside from a continued improvement of its existing businesses; and b) the launch of Bunnings' full digital offering in 2020, which is likely to significantly boost margins and sales.
