Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Catapult Wealth portfolio manager Tim Haselum picks whether he would cut or keep three ASX shares that have plummeted in value this year.
Cut or keep?
The Motley Fool: Let's take a look at three fallen stars of the ASX. Firstly, would you keep or cut A2 Milk Company Ltd (ASX: A2M)?
Tim Haselum: For us it's a hold. I know it's continuing to get smashed, but for us it's not cheap particularly. When you look at other consumer staple stocks, its [price to earnings ratio] P/E's still relatively high.
I think we just have to ignore the China story. We know they've got supply chain issues and we know all the China bad side, but for us, one, it's consumer staples, and two, we will likely see some recovery as things reopen with supply-side issues dropping away.
But it's a growth opportunity outside of China we like. New Zealand, the US, Malaysia, Singapore, and Vietnam, they've launched new products, they've got a net cash position of around $800 million, they've got the firepower to wait this out.
And even though the A2 moniker, if you look at the science, is a bit dubious, the brand clearly has value. Clearly, the punters do like it.
Yes, there's competition and, yes, it's not going to go back up to previous highs, for sure, but we do think there's growth in it. For us, it's a hold and let's see what that can do.
MF: Another one heavily influenced by the Chinese market — would you cut or keep Treasury Wine Estates Ltd (ASX: TWE)?
TH: Treasury Wines, for us, I think it's too much of a struggle. For us, it's a cut.
Their last financials they said they expect zero sales into China. We saw Penfolds saying that they're going to try and bypass this by opening a winery in China. We just think that it's just too hard to replicate a Chinese market in the short term. Even though maybe in the long term they can claw it back, this is a pretty major shift for them in the wine industry.
Australian wine has got a good brand name, but it's very highly competitive. For us, because they have those issues where they had to dump out cheap wine because nobody wanted it, they've tried to shift to the more expensive market at the worst possible time.
When we think about wine versus milk, it's a very different story. Wine for us, when you have rates rising and you might see mortgage distress and inflation is destroying real wages, that's a bit of a tough one. For us, I think that wine is one where we're happy just to cut it out and maybe look at it later on.
Certainly could turn it around, but at this stage, we just put this one into the 'too hard' basket.
MF: Travel is back in a big way. So would you cut or keep Flight Centre Travel Group Ltd (ASX: FLT) shares?
TH: When you look at its market cap, it's about where it was pre-COVID. If you think the share price is going to go up from here because the other side seems to be priced in, you're expecting growth beyond pre-COVID. I just think that's one where that's a tough argument.
You've got to remember there's a petrol price story here and inflation is turning everyone.
The argument for corporate travel, for example, is that corporates are going to jump back onto planes and do meetings. Well, maybe. I don't think it's going to fully recover anytime soon.
There's going to be a level of both consumer and corporate that's going to be held back here. I think the whole interest rate rise story, there's a big psychological effect on that across the board.
For us, looking at the market cap and looking at what's priced in, I would say it's one where it's probably around about close to fair value normal times.
In a situation like this, I'd say the market's ignoring downside risk.
