Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Alphinity Investment Management portfolio manager Elfreda Jonker shows us her strategy for buying three devastated ASX shares.
Cut or keep?
The Motley Fool: We'll now examine three ASX shares that have plunged recently, to get your thoughts on whether they're a bargain or if you'd stay well away.
The first one is Goodman Group (ASX: GMG), which has fallen about 40% year to date. What do you reckon?
Elfreda Jonker: Well, it's a stock that we currently own. We do still have an overweight position in it currently, but it is a stock that we've also owned for 10 years. So it's probably one of those that, in our view, is a stock that is going to be a long-term winner.
Modern logistics is a theme of the future — fantastic business, fantastic management team, and it's a very strong capital position. But there are certain times in the cycle — and we're currently in one of them — when yields continue to rise, any real estate company will, generally speaking, be under pressure because they're seen as bond proxies. So what you've seen in this 40% [fall in share price] that you're referring to is really very much driven by the fact that yields have continued to increase. For example, in the US, the bond yield that's gone from 1.5% at the start of the year when it reached the peak to almost 4% currently.
So that has really been the key issue with Goodmans. Underlying business fundamentals are still very, very strong in our view. We think there's been a lot of fear around [major customer] Amazon.com Inc (NASDAQ: AMZN) slowing and that's going to spill over into Goodman. Amazon has only really given up [a] marginal amount of space and the demand from other customers has still remained really strong. We still see good earnings growth coming through and a strong balance sheet… We think this is a business that you can hold for the long term.
That being said, we do think that it's a bit early to add more at this point in time until you get to the point where you feel that the interest rate hikes have run their course. The market's priced in that higher yield, the market's always forward-looking, but we think there are more interest rate hikes coming. The Fed's been very obvious about it and here at the RBA probably as well, just to a lesser extent. In that environment, you need to be careful to really bolster your real estate's exposure too much. So we'll wait, but we definitely will be adding once we're in a better interest rate cycle.
MF: The next one is semi-related as it plays in the housing sector. James Hardie Industries plc (ASX: JHX) has also fallen about 40% this year?
EJ: James Hardie is a company that we used to own, but we actually sold out on the back of all the pressures that are currently happening in the US housing markets.
As you know, they manufacture building products for new home construction as well as remodelling of existing homes, and that's a 35/65 split. Currently what we've seen is that we still see ongoing pressure in that space.
The stock is quite cheap, but we are concerned around what's going to happen to the earnings into 2023, 2024. So at the moment, if you look at it, the US housing starts — the new builds — that's continuing to reduce, mortgage rates are still going up. It's now 7.2% versus 3% a year ago. And there's still a lot of evidence in the leading indicators that that market continues to soften.
The recent update in the US — our portfolio manager was actually there just after their results — was in August. They talked a pretty good story from a medium-term target's perspective, but shorter term they continued to downgrade revenue targets as well as margins on the back of increased costs. Then, also obviously, the overall demand has continued to decline.
So for us, we think it's too early to buy. We think it's good to just wait a little bit longer until you see some indicators on the mortgage rates or the housing starts need to improve — and we need to see signs of that staying there and improving for a while before we would be willing to get in.
As I've mentioned at the start, we invest in companies in an earnings upgrade cycle and currently James Hardie is still in an earnings downgrade cycle. So a bit too early for us, but overall another fantastic business that we wouldn't mind owning again in the future.
MF: The last ASX share pays a pretty decent 7.4% dividend yield, but it's in the retail space with some clouds over the economy. What are your thoughts on Super Retail Group Ltd (ASX: SUL), down about a quarter year to date?
EJ: Super Retail, we currently do have a small overweight position. Our view at the moment is that Super Retail is probably a little bit more shielded to a very big consumer meltdown.
We don't expect that, but we certainly are in an environment where the economy is softening and consumer spend has remained strong despite rates going up. You haven't really seen the impact of higher mortgages and high inflation really hitting the consumer massively in Australia just yet. So we are definitely a bit concerned that you can still see that coming through.
That being said, we think a business, particularly Supercheap Auto on the auto side, Macpac, Rebel, BCF, these are all businesses where we think from an inventory point of view, it's easier to manage these inventories that you can buy and hold in a warehouse, it's not necessarily super high fashion that you have to churn consistently.
In the past, one of the things that really stood out for us in Super Retail Group is the fact that they manage their inventory incredibly well. Even at the last update we had from them is that they have increased their inventory, but they're not too concerned. They wanted to do that given the supply chain constraints.
At this point in time for us, we would probably hold our position currently and wait to see how the consumer really plays out. From our perspective, we'd rather hold Super Retail Group and many of its peers just given that we think it's definitely on the more defensive side of the consumer space. But we think it's also a bit early to add too much at this point in time until we see what the real impact is.
We'll keep an eye on it, happy to hold it and could potentially add later on when we get more clarity.
