2019 Losers Poised for a Comeback

Retail Investors who take pride in calling themselves “stock-pickers” are constantly on the lookout for picks. Twice a year they are treated to the annual delight of listings of best and worst ASX performers for the trading year, ending on or about 31 December, and for the fiscal year, ending on or about 30 June.

Typically, the lists provide something for everyone, with growth investors searching through the highest performers to assess their prospects for a continuation of upward momentum and bargain hunters sorting through the biggest losers to assess their comeback potential.

Australia’s largest online broker, CommSec, saw its list of the 10 worst large-cap shares of FY 2019 appear in multiple financial websites.

Bargain hunters who lean towards the more prudent, risk-averse end of the spectrum should appreciate the inclusion of year-to-date performance instead of the more common year-over-year only.

Active investors lived through the global market downturn at the close of calendar year 2018, as well as the temperature change from ice cold to red hot in the first half of 2019.

While some investors might wish to dig into each stock individually, a first pass based strictly on the numbers is more common. Solid stocks that were dragged down primarily by the gloomy year-end should have snapped back and joined the ride up in 2019. So next we investigate the six of the ten stocks in the green year-to-date to determine which, if any, have the “seal of approval” from analysts forecast of future earnings growth.

Three of the six, listed in the following table by market cap, have double digit 2-year earnings growth forecasts. Oil Search is barely in the red, so we included it, given its double-digit growth rates.

Going strictly by the numbers it would seem James Hardie Industries (JHX) is the most obvious choice.

The company is in building materials, a sector highly sensitive to cyclical changes in economic conditions. The company makes fibre cement siding and backerboard with its products in the US market assuming the coveted moniker of a generic identifier for all products in its category – Hardie board. James Hardie is global in scope, serving Europe, the Asia Pacific Region, and its largest market – the United States. Hardie has been the beneficiary of a weakening AUD for some time.

However, operating in a cyclical sector means the stock price is subject to the whims of impatient long-term investors and the active traders who favor momentum trading.

In February of this year another ASX building materials company that made the worst performer list, Boral Limited (BLD), issued a profit warning attributable to the oft-blamed bad weather along with project delays. To the surprise and delight of its investors, Hardie’s quarterly report and 2019 guidance were solid. Following those contrary announcements, the stocks of JHX and BLD parted company and began moving in opposite directions.

Oil Search Limited OSH) recovered much of its late-year 2018 losses but still finished year end for FY 2019 slightly in the red. Oil Search joined the rush to develop an operational LNG (liquefied natural gas) facility in Papua New Guinea, which is now producing what some proclaim to be among the highest quality LNG in the world.

All the Big Three ASX oil companies are LNG producers and all were hurt with future contract pricing for LNG determined by the dwindling price of oil. Yet Oil Search has grown both revenue and profit in each of the last three years and its share price has outperformed ASX rivals Woodside Petroleum (WPL) and Santos Limited (STO) over ten years.

The company is looking to expand its focus on oil with investments in north slope Alaskan oil fields.

Of the eleven major sector indices on the ASX, the XEJ Energy Index had the dubious distinction of being the only one to finish the fiscal year 2019 in the red.

Origin Energy (ORG) has fared better than others in the sector this past year, although some in the investment community believe that the federal government has etched a vibrant bull’s eye on Origin’s back with incessant hammering to lower energy prices.

In late February the company announced a possible AUD$44 million-dollar blow to pre-tax earnings should the government’s proposed cap on energy prices for consumers in New South Wales, South Australia and southeast Queensland from the Australian Energy Regulator’s Default Market Offer take effect. The DMO is now in effect with a similar regulatory move in Victoria, amidst expectations of confusion regarding who will be impacted and how.

To add to the potential long-term woes for a market goliath like Origin, the Australian Energy Market Commission’s (AEMC) 2019 Retail Competition Review found in FY 2019 the market share for Australia’s Big Three energy companies – Origin, AGL Energy (AGL) and EnergyAustralia – fell to 65% due to five new players entering the market and five existing players expanding their operating areas.

Despite its size and market dominance, Origin’s 10-year share price performance pales in comparison to James Hardie and LendLease Corporation (LLC).

LendLease Group (LLC) develops, builds, and owns a diverse array of commercial and residential properties and some of the road and rail infrastructure that connects them.

The company’s long-term performance has been solid but in the past year management has attributed its surprisingly weak performance to some projects within its engineering division experiencing some problems.

While the news was enough to sour investors, who drove down the stock price hard, analysts remain bullish as LLC has a solid OUTPERFORM analyst consensus rating.

While large cap stocks with dominating market share may find it more difficult to make the kind of big moves retail investors love to see, it is also generally true they do not fall as hard as most mid-cap stocks. The worst performing ASX mid-cap in FY 2019 was lithium miner Galaxy Resources (GXY), down about 60%.

Of the remaining ten not one turned positive in the market rally commencing in January.