Morning Report / Can the “re-open up” trade come back into vogue? (CGC, A2M, RHC, AAPL US, CTD, FLT, QAN)

The ASX200 gave back some recent hard fought gains yesterday under the weight of broad based selling with over 65% of the index finally closing down on the day. MM enjoyed the strong gains by the heavyweight miners but it wasn’t enough to offset losses elsewhere with the index not helped by both CSL Ltd (CSL) and Commonwealth Bank (CBA) falling by over 1.5%, conversely all 3 of BHP Group (BHP), RIO Tinto (RIO) and OZ Minerals (OZL) soared by more than +3% to fresh 2021 highs.

The action under the hood was dominated by reporting season but as we pointed out yesterday afternoon there’s a clear trend emerging with analysts revising future earnings higher which by definition starts to address concerns around valuation i.e. there are a number of key metrics fund managers use to value a stock but if we keep it very simple and just look at the P/E ratio (Price / Earnings) the following transpires:

1 – If a sector / market is trading on an average/E ratio of 15x and analysts increase their estimates of future earning the price of the stock should by definition rally to maintain the ratio.

2 – the wild card is the risk free cash rate, higher “safe” bond yields diminish the attraction of risk assets including stocks which often lowers this average P/E being applied by the market.

Overnight was another mixed night in the US with Energy & Financial Sectors strong but IT stocks struggled led by Apple (AAPL US) which slipped almost 2%, the SPI futures are calling the ASX200 to open down around 20-points this morning, however index heavyweight CSL which has just reported could turn the dial.

Reporting today we have: (stocks we hold in yellow): CSL, ANZ Trading Update, CWN, CCL, IRE, STO, OZL, ABP, SHL, WES, PPT. Plus see a full list on the Market Matters reporting calendar here. * Some of these dates / companies can change*

No First Reactions this morning – some internet issues with Optus in the office this AM.

MM remains bullish the ASX200 through 2021 albeit in a volatile manner.

ASX200 Index Chart

We mentioned bond yields earlier and the US 10-years have made fresh 12-month highs this week but while we are bullish longer dated yields a period of consolidation wouldn’t surprise. However so far the rise in yields has seen polarisation in performance towards Banks & Resources but the underlying index has remained strong.

MM is bullish 10-year bond yields medium-term.

US 10-year Bond Yield Chart

Yesterday MM switched from our Costa Group (CGC) position to the battered a2 Milk (A2M) a move we have been flagging over the last few weeks. We are looking for some performance reversion to the last 6-months during which time CGC has rallied over 30% while A2M has fallen by 50%, obviously things can always become more stretched but this is the area where we believe the risk / reward and respective valuations favour A2M. Buying ahead of A2’s result on the 25th February is a risk given the underlying trends in the business, however with more than 40m shares short sold on the stocks, a twinkle of positivity and the stock could bounce hard.

MM is bullish A2M from the $10 area.

Costa Group (CGC) v a2 Milk (A2M) Chart

RHC is one holding MM has become a little uncomfortable around as its struggled to make any headway in 2021 leading us to consider allocating the funds elsewhere to benefit from a new post COVID world. Goldman Sachs recently upgraded the stock with a $70 target but the markets not listening so far – GS believe the stock is cheap compared to its average 5-year valuation as it fails to embrace the improving back drop for private hospitals and elective surgeries in the new post-COVID environment. Our original thesis on RHC revolved around the view that a backlog of elective surgeries would underpin a sharp rebound in earnings, but that’s yet to materialise.

 MM is swinging towards a neutral stance on RHC.

Ramsay Healthcare (RHC) Chart

Overseas Indices & markets

US stocks were again fairly quiet overnight as the tech space took a rest whereas the Dow still rallied 90-points / 0.3% - no major leads for the ASX.

MM remains bullish stocks / risk assets through 2021.

US NASDAQ Index Chart

Overnight Apple Inc (AAPL US) fell 1.75 % as we heard that Warren Buffett has reduced his holding in the tech goliath by 6% but it remains Berkshires largest holding by market value.

Short-term AAPL looks neutral technically.

Apple Inc (AAPL US) Chart

Can the “re-open up” trade come back into vogue?

Markets regularly get ahead of themselves bringing to mind the old trading floor saying – “buy on rumour & sell the fact”. The chart below illustrates that the Australian Energy Sector roared higher in January before falling even as the oil price rallied, its actually failed to scale last months top even after the underlying commodity has rallied ~20%.

In this specific case MM remains bullish both the reflation play and crude oil.

Crude Oil v ASX200 Index Chart

The COVID pandemic appears to be under control, the UK only registered 10,000 cases overnight compared to numerous days of well over 50,000 in January. Obviously there will be more inconvenient blips as we saw last week in Victoria but a return to some degree of normality should flow through in later 2021 / 22 although the exact form of that normality remains a fascinating point of discussion e.g. I cant imaging holidays in Europe / the US will be on the menu for at least 12-18 months’ time.

MM feels the market is assuming the COVID vaccines will prove successful.

Confirmed cases of COVID in the UK Chart

We touched on RHC earlier today, below MM has looked at 3 obvious “reopening” plays which have gone cold recently, as we pose the question is their time about to return and would they make a better vehicle than RHC for such exposure.

1 Corporate Travel Mgt. (CTD) $18.90.

Yesterday CTD popped almost 5% following an update which we felt was ok considering the obvious challenging conditions and moving forward we believe things look good as they continue to win new customers plus they acquired US Business Travel & Transport last September for $US200m – we love the concept of buying at the probable bottom of the cycle, even if they had to raise capital to do so. We believe this is one company which will exit COVID larger and stronger and already FY21 is encouraging.

MM is bullish CTD initially looking for 20% upside.

Corporate Travel Mgt. (CTD) Chart

2 Flight Centre (FLT) $15.04.

FLT has really struggled since COVID and the business was forced to raise $700m of cash at $7.20 last April in the depths of the global outbreak, a bitter pill to swallow and one that greatly increased the number of shares on issue. However following this dilution and no clear signs of a meaningful recovery either fundamentally or technically MM is happy to remain an observer.

MM thinks there are better places to be in the travel space

Flight Centre (FLT) Chart

3 QANTAS (QAN) $4.73.

It’s easy to comprehend the struggles QAN has endured over the last 12-months but under $5 we must question if too much bad news is priced into the iconic airline. The exciting factor for QAN is the pandemic allowing the company to totally rebase their costs putting them in a position to emerge strongly  from COVID. The other positive aspect is around competition. Virgin is now in the hands of private equity who are very much aligned with the QAN way of thinking i.e. all about profits making them a very rationale competitor whereas the virgin of old was not, and we know where that got them!

Domestic travel is already forecast to increase to almost 70% by Christmas with leisure demand leading the way – many people I know are itching for a holiday! Domestic is the main driver of QAN earnings, international is nice to have but nowhere near as important.

The risk / reward into current weakness is attractive, we can see $6 being tested this year as the trading backdrop improves as the vaccine is rolled out both at home and overseas.

MM likes QAN around current levels.



Of the 3 stocks looked at today MM likes CTD and QAN.

Have a great day,

James & the Market Matters Team


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