Rudi’s View: Quality At Home, Value Abroad

Rudi's View | 5:04 PM

Strategy adjustments and portfolio inclusions suggested by Bell Potter, Morgan Stanley, Morningstar and Ellerston Capital.

In this week's edition:

• Too Early To Call The Bottom
• Quality At Home, Value Abroad
• Conviction Calls & Best Buys

By Rudi Filapek-Vandyck, Editor

Too early to call the bottom

The severity of furniture retailer Nick Scali's ((NCK)) profit warning, released after hours on Wednesday, would have taken some investors by surprise.

After all, it wasn't that long ago that the retailer reported flat sales, without any hint of an impending Wile E. Coyote experience for the remainder of the year.

But, as Wednesday's market update showed, sales have contracted rapidly and dramatically in recent times. There was also a cybersecurity incident in August, though its impact remains unclear.

Management's downgraded guidance for the first half points to an A&NZ sales decline of between -11% and -14%.

On Thursday, shocked sellers pushed the share price down by -14.5%. Year-to-date, the share price has more than halved.

Less surprised were local strategists at Morgan Stanley. They have long warned investors against assuming beaten-down share prices among housing-related companies and retailers exposed to consumer spending automatically represent great 'value'.

Morgan Stanley remains convinced the effects of higher interest rates are still spreading through the local economy, leaving earnings forecasts and valuations too optimistic across banks, housing and consumer stocks.

The central concern revolves around cash flow. This week's strategy update highlights a 26% year-on-year increase in trade defaults in September, a growing number of overdue invoices and tax debt defaults more than 15% above January levels.

The warning is that businesses taking longer to pay suppliers can spread financial pressure through the economy well before formal insolvencies rise.

The implications differ by sector: