The roll into the new year of 2022 has been one for the ages for global equities markets, with this January's performance firmly on the podium as the 8th worst on record, and the worst since 2008.
The benchmark S&P/ASX 200 Index (ASX: XJO) has fallen 500 points off its previous highs in January and is down 4% for the month, whereas the S&P/ASX Small Ordinaries Index (ASX: XSO) is down 7%.
ASX shares have been hit hard so far in 2022 as shifting yields on long dated bonds and the inflation narrative play havoc on stocks throughout the globe.
That's important seeing as there tends to be an inverse correlation in the benchmark index and the yields on long duration bonds, as seen in the chart below. The chart shows this relationship, by plotting the return on the benchmark ASX 200 index (left hand side) versus the yield on the Australian Commonwealth Government 10 year bond (right hand side) going back to 1985.
As can be seen, bar a few anomalies in the data (the global financial crisis in 2007-09' and the COVID-19 crash in 2020), long-term correlations have been negative for these two asset classes. In fact, this tends to be one of the many reasons portfolio managers include bonds into their allocations, to help smooth portfolio returns.
Over the past few months, these correlations have manifested heavily in the small cap domain of the market. Yields on longer bonds are rising, hurting the valuations on speculative assets as investors flock to more quality corners of the market. This activity has erased much of the gains that smaller ASX shares have earned in 2022. The same effect is observed on the chart below, although with the US Treasury 10 year yield.
Hence, any stock that offers long-term upside potential with additional features such as an attractive dividend yield to cover the downside is a key standout in this current market.
According to Investors Mutual Limited (IML) portfolio manager Simon Conn, wholesale distribution and marketing company Metcash Limited (ASX: MTS) might just fit that bill. Let's take a look.
Why's this ASX share a standout?
Conn is bullish on Metcash given his firm's concentration and focus on the Australian mid and small cap sector.
Speaking to an episode of "Buy Hold Sell" on Livewire Markets on Friday, Conn stated his posture on Metcash is that it is "an underappreciated franchise, and a business that's no doubt benefited from COVID, but [one] that's delivered enduring benefits to their food business".
"But also their liquor business has been growing and is a very resilient business. But really its the hardware business, where they position themselves as the second player in the hardware, retail and wholesale markets that we think is underappreciated by investors", he said.
"Their acquisition of Total Tools looks really well priced. They bought that prior to COVID, effectively on about three-and-a-half times EBITDA".
Conn also reckons that Metcash has grown exceptionally well after navigating its way throughout the COVID-19 landscape.
As such, the portfolio manager believes that local vendors and franchisees will continue reinvesting into their own stores with profits generated, leading local consumers to spend more in their local communities. This cycle looks set to play on repeat as well, according to the expert.
Not only that, but Conn is impressed by Metcash's current valuation, its balance sheet and the total return prospects it offers investors with its current dividend yield of over 5%.
These are imperative characteristics for chasing quality names within the current investing climate – especially with the pullback in small cap stocks, Conn argues.
"The thing about Metcash is it's really attractively priced on 13 times [earnings], and a yield of over 5%, with a really strong balance sheet. For us, it looks like a standout in the market, where a lot of stocks look pretty fully priced".
Metcash shares finished Friday less than 1% up at $4.16, marking an impressive gain on the week.
Metcash share price snapshot
In the last 12 months, the Metcash share price has gained 22% after a strong performance in 2021. This year to date it has pared gains and is now down 7%, just in behind the broad indices.
However, investors are showing support once more and shares have gained around 7% in the past week of trading.
