FYI | May 12 2020
By Peter Switzer, Switzer Report
5 stocks on a fast-paced V-shaped recovery
Two weeks ago I delivered three lists of companies that analysts tipped had plenty of upside and a huge proportion of those have delivered since April 27 when they were put on show. Some have been bought because the upside was so huge; others because their industries have been challenged from the virus or the shutdowns. Some were bought because they were simply unfairly sold off when the uncertainties of the Coronavirus spooked the stock market and rattled money markets.
Government stimulus packages have helped stocks recover and central bank actions have given greater stability to bond and related markets that were thrown into fear when defaults from over-borrowed companies raised questions about usually very secure-looking operations.
This chart shows the extent of the market comeback for our S&P/ASX 200 Index.
That’s a 20% rebound but we’re still in bear market territory, which entirely makes sense after a 36.5% sell off. We’re still down 23%, which says we’re still in a bear market.
The US on the other hand, looks a little crazy. The S&P 500 has rebounded 30%, despite a pretty ordinary track record against the Coronavirus, compared to us. The Yanks are only down 13% since the virus led to the steepest one-day fall since 2008 and the GFC.
And while I hope their optimism is unbelievably insightful, I have to worry that a second-wave outbreak in the US could again smash the stock market.
We all have to be aware of this possibility and the next two months as the US emerges out of lockdown. This will be a crucial test of this market optimism.
Clearly, if a second wave sell off happens, stocks such as Woolworths (WOW) and Coles (COL), which resisted heavy falls as we went long food and toilet paper, but which now have lost ground as optimism is forcing stock players to chase companies that will rebound if the worst is behind us.
Here are some companies that have had a nice rebound and have benefitted from either being in the tech space or have some qualities that make new age being in the health and wellness space and have gained interest in a Coronavirus-health-scared world.
A number of these I have mentioned in recent webinars so I’m glad that they have delivered.
Tyro Payments, EML Payments and ELMO Software are three such companies. And when you look at their respective charts, there is a distinct similarity. At first, the Coronavirus stock market sell off hit them aggressively but once the combined effects of the Government stimulus package met the RBA’s support for banks and the money market and then we saw Australia’s success in beating the virus, there has been a significant share price rebound for those companies that are not directly smashed by the virus and lockdowns, such as airlines, travel companies and so on.
Interestingly, both Flight Centre and Webjet had a good week last week, which was earlier than I expected, given I saw them as ‘buy and forget’ investments, as long as you had a two-three-year attitude to them.
Take a look at these six-months charts and note their similarity.
1. Tyro (TYR)
2. ELMO (ELO)
3. EML (EML)
4. McPherson’s (MCP)
5. ZipCo (Z1P)
All five have a V-shaped recovery. Tyro, ELMO and McPherson’s are positive (green) for the six months but Zip Co and EML are far out of the green territory.
All except McPherson’s are in the tech space but this company has tapped into the new age area of health and beauty.
As Michael Wayne of Medallion Financial noted, this company has “a plethora of different businesses” and some might be benefitting from people being locked down in their homes. They have baking and personal care products, which have done well as we’ve become more home bodies. However, their growth areas include “being a supplier of health, wellness and beauty products in Australasia and increasingly, China,” Wayne pointed out.
Zip Co, of course, is a rival to Afterpay and the Tencent play for that company has helped the market revalue Zip Co’s potential. Wayne doesn’t see this company’s numbers as convincing as Afterpay’s, which affects his view on their potential, especially with retail expected to be under post-Coronavirus pressure.
Wayne really likes ELMO and was tipping the company late last year at our microcap conference. He believes their HR and rostering software products are in big demand and while customers on average have two of their products, there’s potentially 13 that could be cross-sold.
On EML, Wayne thinks it has long run potential, but its gift card and casino-related products are affected by the restrictions linked to the Coronavirus. That said, this was a favourite company of Julia Lee of Burman Invest and performed exceptionally well after our November micro-cap conference. Julia still likes the company, though she accepts its share price potential will be boosted by the eventual eradication of Coronavirus obstacles to normalcy.
I think all five companies would be good buys, if the market has a sell off. Their significant bounce-backs tell us that the market consensus is saying these companies will be beneficiaries of increased normalcy.
Zip Co was a $4 company at the start of the year and is now $3.48. MCP was a $2.86 stock in January and is now $2.88.
EML was a $5.25 stock and is now $3.49, while ELMO was a $7 stock and is now $7.90 and is set for a capital raise at $7, which Wayne thinks looks good.
I think these companies have had their first leg gains but if we dodge a second wave sell off, they are likely to be good stocks for the future.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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