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Friday 17

August, 2018 7:25 PM



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Hidden gems in market movers

Hidden gems in market movers

By Bob Kohut 09.04.2018


Newcomers to the sometimes “wonderful world of share market investing” – with the notable exception of the current climate – may wonder about the impact US markets have on the ASX.  The following chart of a week in the life of the three major ASX indices is a brutal example.


At the close of trading in New York on 23 March, the most followed index in the world – the Dow Jones Industrial Average (DJIA) – had fallen more than 1,000 points in two days.  In response, the ASX collapsed in the first day of local trading, followed by a rebound fueled by a more than 600-point rise in the DJIA on the first trading day of the week.  The pattern repeated as the Dow fell again on the 27th.

 

While volatile swings like these send many investors rushing to exit the market, others justifiably see volatility as a door to buying opportunities.  Volatility is an indication of strong sentiment, both positive and negative.  Sentiment leads to high volume and that means substantial swings in stock prices.

Regardless of your investment philosophy, times such as those we are in now can be a beneficial period to look for investments, now or in the near future.  Tracking daily market movers found on financial websites is a place to begin searching.  Stocks making big moves, up or down, have the advantage of market sentiment behind them since it is trading volume driving the price.  Bargain hunting investors can look for the “losers” and growth investors look for the “winners.”

In early trading during the ASX rebound of the 27th, four of the five top gainers yielded some surprising potential targets, from a “hidden gem” value stock to three stocks exemplifying growth at a reasonable price (GARP) characteristics.

GARP investing is a strategy popularised by US investing guru Peter Lynch.  The strategy lies in the middle between value investors and growth investors.  Value investors typically look for low Price to Earnings (P/E) ratios and other measures of valuation indicating an undervalued stock.  Growth investors go for stocks with above average growth rates regardless of valuation measures.  GARP investors look for stocks with solid but reasonable growth rates, acknowledging that failure to meet overly enthusiastic analyst growth expectations can lead to dramatic drops in stock price.  However, GARP investors also focus on stocks reasonably priced, using the Price to Earnings Growth (P/EG) measure as a guide.

The P/E measures a stock’s value based on historical earnings while the P/EG factors in future earnings growth.  Stocks with P/EGs under 1.0 are good prospects for GARP investors, with a P/EG of 0.5 the sweet spot.
The following table lists the four stocks from the top gainers list on the morning of the 27th that might merit a place on your watch list, in order of percentage gain from +5.98% to +3.81%.

Trading Volume is an indicator of investor interest.  New Zealand based Summerset Group Holdings (SNZ) is flying well below the radar of the ASX investing community, even though the company listed on ASX in 2013 and is now a member of the NZX50, listing there in 2011.

The ASX price movement chart for the company reinforces the supposition this is an under the radar stock.  The company’s business model and financial performance to date suggests this may be a hidden gem.


The low trading volume for SNZ dates back to its inception on the ASX.  The company offers retirement living options for virtually all stages of the senior live cycle.  With 29 retirement villages across New Zealand -- 23 operating centres and six under development -- Summerset offers a variety of living arrangements and services appropriate to the care needs of its residents.  

Residential arrangements include villas, townhouses, and apartments with care centres providing nursing and hospital care, eliminating the need for residents to leave the retirement community of their choice as they age.  Summerset was honored with the Aged Care Association Built Environment Award for its Levin memory care centre, the first centre in New Zealand to offer apartment living for seniors suffering from dementia.

Summerset has grown revenue and profit in each of the last four years, with FY 2017 results showing a 28.4% revenue increase along with a 54% rise in net profit after tax (NPAT).  Although the company has no Australian analyst coverage, a New Zealand analyst recently upgraded the company to OUTPERFORM.

The a2 Milk Company (A2M) has earned the reputation of market darling and its affiliation with Synlait Milk (SM1) is boosting that stock as well.  

A2M listed on the ASX in March of 2015, with the share price up close to 2000% over that time.  Synlait listed in November of 2016 and has seen its share price rise about 150%.   Both companies are riding high on the demand for quality dairy products both here and in New Zealand and China, most notably infant formula.   Synlait supplies milk to A2M, with that company holding an 8.9% stake in Synlait.  The two companies have a five-year supply agreement, commencing in August of 2016.  Synlait set investors hearts afire when it became the first company to get CFDA (China Food and Drug Administration) approval to allow export of a2 Milk’s China label infant formula to continue, following the imposition of stricter import regulations in that market, where demand for safe infant formula is exploding.

However, the competition is back and growing.  Both A2M and SM1 received a jolt on 28 March when the world’s largest food and beverage company, Swiss based Nestle’s, announced the launch of its Illuma infant formula product into the Chinese market. To add to investor concerns, the Nestle product uses the A2 beta-casein protein popularised by A2M, eliminating the competitive advantage of exclusive use of the reportedly healthier and safer A2 beta-casein protein.

This did not come as a surprise to the a2Milk Company management, having announced in February it expected “broader interest” in the use of the A2 beta-casein protein over time.  In response to the Nestle announcement, A2M released the following statement:

“Given its pioneering heritage, its comprehensive suite of intellectual property and a business model focused solely on products free of the A1 protein type, the company is well positioned to respond.”

Synlait is aggressively developing it infant formula offerings, now awaiting FDA (Food and Drug Administration) approval for entry into the US market, the second largest in the world behind China.  The company’s Half Year 2018 results showed a 283% profit increase and a 66% decrease in debt.  A2M reported a 150% profit increase along with a 70% rise in revenue.

Smartgroup Corporation (SIQ) offers a variety of management services to government and corporate clients.  The company is organized in three operating divisions:

•    Outsourced administration;
•    Vehicle services; and
•    Software, distribution and group services (SDGS).

Outsourcing services include salary packaging and novated leasing along with salary packaging debit cards. Fleet management services for the entire life cycle are provided by the Vehicle Services Division.The SDGS Division offers software and IT solutions, along with vehicle insurance.The company listed on the ASX in 2014 and early investors have been wildly rewarded.


Over the past three years, the average annual rate of total shareholder return is 99.1%.  The company pays a fully franked dividend with a current yield of 3.5%. Financial results have been outstanding with FY 2015 revenues of $91.4 million more than doubling by FY 2017 to $204.6 million.  Over the same period profit also more than doubled, rising from $20.2 million to $41.3 million.

IOOF Holdings (IFL) has been in business here in Australia for 170 years, providing financial advice, products, and services.  The company maintains a network of financial advisors to serve retail investors with brokerage services and a range of investment products.  IOOF offers corporate clients super-annuation platforms as well as trust and estate services.  

The company pays a fully franked dividend, with an attractive current yield of 5.2%.  The company’s Half Year 2018 results disappointed investors with a 39% decline in statutory net profit, but the analyst community remains positive about the company’s future.  Analyst consensus remains at OUTPERFORM, with three analysts with a BUY rating; six at OUTPERFORM; and one at SELL.  

Investors have been concerned about IOOF’s decision to acquire the wealth management business from Australia and New Zealand Banking Group’s (ANZ) wealth business, despite projections of a 20% earnings per share increase because of the acquisition.  In a just released research note from UBS, an analyst upgraded the stock to a BUY rating, with a price target of $11.50.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

 



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