Experts Recommend Stocks
Amidst the intensifying trade war between Washington and Beijing, fund managers have a tough job in deciding what shares to invest in. The two stocks General Motors Company (NYSE:GM) and Myer Holdings Limited (ASX: MYR) have been singled out by experts on the Future Generation Investment Forum as the top picks for this week.
General Motors Company (GM) is an American multinational firm based in Detroit that designs, produces and distributes cars and car parts, while also providing financing services. GM boasts a broad product range of cars, trucks, SUVs and electric vehicles. GM stands as one the largest vehicle manufacturer in the world, having expanded operations to countries all over the world.
Adrian Warner is the Chief Investment Officer of Avenir Capital, having held the position for more than 8 years. He has extensive experience from his time with different private equity funds. Avenir Capital specialises in fundamental and value based investments, and has pinpointed GM as undervalued. The current price range sits at around $USD 35 – 40/share, while Warner has previously valued the share to be worth as much as $USD 60/share. The fund manager said that the firm was trading at a price-to-earnings ratio of 5.5 times, which was “way too cheap”. Indeed, other comparable firms such as Blue Bird (BLBD) or Fox Factory Holdings (FOXF) are trading at PE multiples above 10 times, which supports Warner’s assessment.
The current price possibly reflects the stubbornness of investors who are still looking at GM through an old lens. General Motors faced significant troubles back in 2009 after years of losses following a decline in market share. With the passing of the Global Financial Crisis in 2008, the automotive industry still remained in trouble. General Motors was soon declared bankrupt and required a bailout from the government.
Warner’s high valuation can be attributed to how the company handled itself post-bankruptcy. General Motors cut its workforce by more than 70%, negotiated up $USD 30 billion off its pension liabilities and ceased defined benefit plans for new employees. Senior Management was also restructured resulting in dramatic cultural changes that fostered cooperation instead of conflict. Overseas segments were sold off and certain brands were discontinued; what remained was a leaner version of GM which was no longer unencumbered.
Recent developments in the trade war have made it more difficult, and Trump is expected to impose tariffs of up to 25% on imported vehicle parts. Tariffs could significantly increase the price of manufactured vehicles by up to $3000, and force consumers into the second hand market. The downside risk is reduced however as GM derives a large portion of sales from its truck sales, a market where it has a more loyal customer following. The decision to enact tariffs has been delayed until further notice.
Experienced investor Geoff Wilson of Wilson Asset Management has recommended department store chain Myer as a good buy, stating that he could see prices rise above $1/share. It is currently trading at around $0.65/share.
As a department store chain, Myer retails a range clothing, footwear and accessory items for men and women, as well as an assortment of homewares, electronics, furniture and food items. In 2006, Coles Myer divested Myer to a private equity fund. Since its listing in 2009 at $4.1/share, it has seen a consistent decline much to the chagrin of shareholders.
More recent financial performance of Myer has been sluggish. Total sales are stagnant as its cost base continues to rise. Myer posted an abysmal net profit after tax of $32.5 million dollars, less than half of the previous year. NPAT after implementation costs stand at -$486 million, the first loss posted by the firm since listing. Poor performance was blamed on poor consumer confidence and increased competition.
Geoff Wilson still believes there is hope for Myer, unlike other department store chains such as David Jones. He has pinned his hopes on the young CEO John King to turn things around. John King has planned to take costs out of the business, and already restructured much of senior management. He also plans to improve efficiency, lower capital expenditure and stop the practice of discounting to chase sales.
It remains to be seen however whether John King can revitalise the ailing firm. His strategy on paper does not seem revolutionary, and are standard management practices. Wilson has conceded that it may take years before earnings double, and that this represents a long term investment.
There is no doubt that the current political and economic climate has made investors nervous. Investors are now throwing their lot into defensive assets and commodities, but investors still need to think for themselves. Good research into a firm’s senior management or fundamental analysis can still reveal hidden opportunities and lead to a good investment.
By Oliver Ju
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