Blake Henriques (HOLD): It’s a comment too. So it’s a great defense company, but everybody knows that. This stock has been trading at a 20 percent discount to the market for the past four years. It’s now reclassified to a market multiple, so it’s trading at about 13.5 to 14 times earnings potential. Defensiveness is well understood. Contractual passing is now out of discussion.
There was some concern that they might not be able to pass on the costs of the resin. They did. So as a defense, I think it really fits the law. But I also share some of Marcus’ concerns that if there’s a shortage of inventory in some of its segments or any kind of slowdown, you’ll see some operational reductions. And so for me, it’s a comment.
Grady Wolf: It’s a contract for both gentlemen here today. Now, let’s turn to Wesfarmers, which is an Australian conglomerate, and parent company to Bunnings and Kmart, two of my favorite stores. Buy, hold or sell, Blake?
Blake Henriques (Sale): It’s a sale. Everyone loves Wesfarmers, and everyone knows it, but two-thirds of the value is in Bunnings. Now, Bunnings has done a great job during this massive boom. From 2019 to 2022, their sales grew about 35 percent and their profits grew the same. What that tells me is that they put a lot of cost into the store.
So when we see a slowdown in the real estate market, they’ll be able to better retain earnings. My concern is that if I’m looking for a defensive stock, I don’t invest in a housing-related stock and I don’t invest in one with Kmart, Target, and Lithium either. So 20 times PE, that’s not too bad, but I think there’s a downside risk to earnings, and so as a defense, it’s a selloff.
Grady Wolf: Shares in Wesfarmers are down 19 percent year-to-date. Is Marcus a buy, hold, or sell?
Marcus Bogdan (HOLD): I think it’s a comment. I think the diversified model has really worked for Wesfarmers. It has done well in its energy, fertilizer and chemical businesses. Kmart is recovering. And for the Bunnings, it held up remarkably well during the global financial crisis, which was also about housing. Yeah, there are more high costs there, and they’re pushing into the trade, but I still think it’s a pretty cool franchise. So we’ve got it as a pending element.
Grady Wolf: Now let’s jump to Healius, it’s a healthcare company. Marcus, buy, hold or sell Healius?
Marcus Bogdan (buy): It’s a buy. Inventory has been downgraded. He’s been darling through COVID-19 for his pathology and PCR testing, but the core business has suffered greatly. Now, as PCR testing approaches, we’re seeing that the underlying business is getting better over time. It has a strong balance sheet that leads to returns on capital, the price-to-book ratio is very attractive, and the PE over normal operating rate is also attractive. So it is a buy.
Grady Wolf: Buy for Marcus. Blake, are you on the buying train? Shares are down 37 percent so far for Healius.
Marcus Bogdan (Sale): down 37 per cent. It’s a sale. PCR test is one time. They made twice their normal earnings in 2022. That’s paying off, the market now understands that. It’s disappointing, but I wouldn’t worry too much about that.
When we actually look at the core business, what we’re seeing is increasing amounts of telehealth. In-person visits to GPs are down 25 per cent, and we’re just as concerned about referrals. Many things are back to the way they were post-COVID-19, but one thing that doesn’t seem to be telehealth. And on that basis, the industry has a higher line of defense, but the industry has never achieved the returns that from our point of view it should. So for us, it’s a sell-out.
Grady Wolf: There are conflicting opinions. Now, I’ve asked both of you to bring in a defensive stock that remains resilient in the face of future volatility in the markets. What did you get me, Blake?
Blake Henriques (buy): I brought up an arrow, some of you may know, it’s CSL. It’s big, it’s liquid, it’s healthcare. So for me, this is ticking all the defensive boxes. It’s in the defensive growth category. But I think what’s really important is that the tighter the economics, the lower the principal cost. This is the plasma array. This is where they pay donors to donate blood and turn that into plasma.
The higher the unemployment rates, the more people want to give plasma and the lower the costs. And on that basis, it’s really attractive as a defensive method. Now, people today are saying, “Oh, it’s 40 times PE. How can you buy that?” 2023 is already written. In 2024, earnings look very strong from our perspective, and you’re seeing it in the mid to high 20s for the company. They spend all their R&D. It is a well run business. And on defense, I can’t get over it.
ramsay health careASX: RHC)
Grady Wolf: you have there. CSL for Blake. Marcus, what did you bring us?
Marcus Bogdan (buy): I’ll stay with Medicare and go with Ramsay Healthcare. It’s disappointed the market over the course of several years, but I think the private hospital business really has three things going for it. The first is the significant backlog that we’re seeing in each of the major markets, where surgeries have been delayed. Now they will come back over time. Secondly, the persistent emergence of chronic diseases. And third, demographics. As we age, we need more healthcare. They have a very strong real estate book, which I think, at some point, they’re going to try to monetize. Based on this, it is a purchase.
Grady Wolf: So CSL and Ramsey Health Care are the defensive stocks of choice from our experts today. That’s all we have time for today on this episode of Livewire’s Buy Hold Sale.
Buy Hold Sell is a weekly video series produced by Livewire Markets. This article was first published on Livewire Markets.
Disclaimer: The information in this offer is general in nature and should not be relied upon. Before making any investment or financial planning decisions, you should consult with a licensed professional who can advise you on whether or not the decision is right for you. Contributors to this offer may have commercial or financial interests in the companies mentioned.