Morning Report / Could the Telco’s be the surprise package of 2021? (WHC, AMZN US, TLS, VOC, TPG)

The ASX200 fought its way to a small 7-point gain yesterday while the sector story remained the same as Energy / Resources and Banks rallied while the yield sensitive stocks / sectors struggled. Many lucky market players are still enjoying an extended break which is reflected by the quiet roads, with school holidays running up until Australia Day I don’t really expect too many fireworks in the near future even with President Trump again being impeached. Yesterday’s extremely tight intra-day trading range says it all as does the markets 8-weeks of consolidation since late November, in our opinion the longer stocks can hold the 6700 area the greater chance that the next decent leg will again be higher.

Following on from yesterday’s report which focused on the Gold Sector the group followed our script on Wednesday delivering strong reversals to the upside while the underlying precious metals were very quiet. We like gold stocks on a risk / reward perspective although they are taking a while to listen to our rhetoric! Overnight we saw an improvement in the tech-based NASDAQ as US bond yields surrendered some of their recent gains, I would like to take this opportunity to reiterate that while we see the collective growth index underperforming in 2021 all companies should be judged on their individual merits and even while we may see investors reduce the premium they are prepared to pay for such businesses if the company’s deliver they should continue to perform admirably over time.

The local influential Banking Sector continues to advance with CBA now up a whopping +25% in just 3-months as investors look to position themselves for a combination of buybacks and increasing dividends. Australia’s largest bank is still forecast to pay ~5% fully franked to investors over the next 13-months hence although its rallied hard we are far keener to buy pullbacks as opposed to sell the current strength even if it’s now unfolding with diminishing momentum – a positive read through for the ASX.

MM remains bullish the ASX200 through 2021.

ASX200 Index Chart

As we said yesterday in just two trading days Bitcoin had corrected almost 30% to both confirm and reiterate MM’s view that 2021 will be a year characterised by elevated volatility, the subsequent 20% bounce this week looks bullish and maintains the escalated volatile environment. Most importantly the rally this week demonstrates why MM remains far more comfortable buying risk assets into pullbacks as opposed to picking tops as the Fed et al push investors up the risk curve with their zero-interest rate policy.

Here’s a brave and hopefully not stupid call considering the last week – MM believes Bitcoin is likely to rotate between 30,000 and 45,000 in the following months, another net bullish read through for stocks.

MM remains bullish Bitcoin.

Bitcoin $US Chart

Through Q4 of last year we often looked at the embattled Whitehaven Coal suggesting a break back above $2 looked a strong possibility i.e. basically doubling. After yesterday’s more than 9% rally in the stock its no longer a big call, it almost has that feeling of inevitability about it. For any aggressive subscribers who followed our thoughts from a technical perspective if we were long if / when the stock breaks above $1.80 we would raise stops to $1.65 and sit back and watch – remember this was always an aggressive / active call hence we continue to call it as such.

MM remains bullish Whitehaven (WHC) targeting over $2.

Whitehaven Coal (WHC) Chart

Overseas Indices & markets

Overnight we saw tech bounce back and a quick glance below shows that for all the doomsday merchants with regard to the sector its still less than 1% below its all-time high. To keep things in perspective when US equities can rally when Capitol Hill is being stormed, and the US President is set to be impeached we feel it’s too early to be picking tops i.e. “a market that can rally on bad news is a strong market”.

MM remains bullish US stocks / risk assets into 2021.

US NASDAQ Index Chart

A number of times in 2020 we turned to US goliath Amazon.com (AMZN US) for a technical read through on equities, the picture remains the same as we enter 2021:

1 – We regard the price consolidation unfolding since September as healthy after the stock more than doubled from its panic March COVID inspired low.

2 – Ideally, we anticipate fresh all-time highs this year before we will become concerned the stocks becoming too extended, another reason we currently prefer buying retracements as opposed to picking tops in stocks.

MM remains bullish Amazon.

Amazon.com (AMZN US) Chart

Could the Telcos be the surprise package of 2021?

Telstra caught our attention for all the correct reasons yesterday as it rallied almost 3% to fresh 6-week highs. Through 2020 MM we gave the sector a wide berth in our Growth Portfolio although TLS resides in our Income Portfolio which is not hard to comprehend as its forecast to yield well over 5% fully franked over the next 12-months, the main question we ask today is should it also reside in our Growth Portfolio to complement our existing position in Vocus?

On the sector level the ASX version is not a decent gauge because its dominated by TLS hence I’ve taken a quick look at the international equivalents in case the group appears to be in the firing line of either buyers or sellers, while the comparisons are limited, we believe it’s a read through still worth considering. The US Communications Sector is enjoying a great time surging to fresh post GFC highs – no concerns here.

MM sees no reason not to like US Telcos through 2021.

US S&P500 Communications Sector Chart

Similarly, on a global level the picture looks healthy and while the index is hovering around previous 2019 highs we believe it’s just a matter of time before the sector pushes to fresh post GFC highs.

MM is bullish the global Telco Sector.

MSCI World Telecom Services Industry Group Index Chart

Today I have looked at Australia’s leading 3 Telcos, having glanced at the NZ offerings on the ASX they didn’t look / feel as interesting.

1 Telstra (TLS) $3.09.

After weeks of consolidation TLS got the proverbial bit between its teeth yesterday rallying almost 3%. As we discussed in the afternoon report the stock looks good technically with our first target ~20% higher. At MM we believe Australia’s major Telco is in a major turnaround phase resulting in us being bullish on the inherent value that can be unlocked in a restructure. Read yesterday afternoons report for a re-hash of the rationale we put up when we bought the stock late last year in the income portfolio at $2.88, nothings really changed and while it takes a while to turn an oil tanker around this one appears to have some traction coming through.

MM is bullish TLS.

Telstra (TLS) Chart

2 Vocus Group (VOC) $4.14.

MM holds VOC in our Growth Portfolio, a position that’s looked after us since our purchase last August. We remain bullish looking for another ~10% upside but if we are long TLS at the time we are likely to consider taking our money if this move does unfold. The 2020 Financial Year was the 1st in the companies 3-year plan to turnaround the telco and the business delivered reoccurring revenues of $1.75bn with earnings expected to grow this year, the stock trades on a fair valuation considering its outlook and value of its underlying assets but above recent highs it won’t look compellingly cheap.

MM likes VOC for a test of $4.50.

Vocus (VOC) Chart

3 TPG Telecom Ltd (TPG) $6.98.

TPG has clearly been the ugly duckling of todays 3 continually making fresh lows through 2020. This merger between Vodafone and TPG was floated on the ASX in June last year since then the stock fell over 20% while the market as a whole rallied strongly. The companies first result as a combined business saw 1st half revenue come in below market expectations at $1.5bn, the markets clearly concerned that another major merger will take longer than hoped for beneficial synergies to surface.

I wouldn’t be surprised to see TPG bounce back towards $8 this year but we don’t find the risk / reward exciting.

MM is neutral TPG.

TPG Telecom (TPG) Chart

Conclusion

MM’s favourite local telco today is Telstra (TLS).

Have a great day,

James & the Market Matters Team

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