Why We Just Bought 2 ASX 200 Stocks Everyone Ditched: Expert
Some ASX stocks were once staples of investor portfolios and superannuation accounts, but recent years have become stinkers.
It could be their fault for mismanaging their business or it could be caused by external factors.
We could name AMP Ltd (ASX: AMP) as an example of the old and Cash Wine Estates Ltd (ASX: TWE) to demonstrate the latter category.
AMP’s stock price has fallen 80% in the past 4.5 years after a series of financial, governance and personnel scandals of its own making.
Meanwhile, Treasury Wine is down about 33% from its pre-COVID highs after losing its biggest export market, China. In 2020, Beijing imposed steep tariffs on wine imports in retaliation for Canberra’s call for an independent review into the origins of the pandemic.
However, this week, Montgomery Investment Management founder Roger Montgomery surprisingly revealed that his funds recently bought these two stocks:
Don’t let this ASX stock’s past fool you about the future
Montgomery, in his role as a guest lecturer at the University of Sydney, introduced AMP to students as the prototypical example of a company that fails to meet the definition of “quality”.
So why did his funds join just now?
“AMP is an example of a so-called ‘quality-improving’ company with a solid valuation because the upside potential is not appreciated or priced in by the market,” he said on the blog. of Montgomery.
“Ignoring it or canceling it based on its historical performance would potentially miss the future value created right under the noses of investors.”
Montgomery pointed to the “significant progress” ASX stock has made under new management since the disastrous financial industry royal commission.
“Management is completing the divestiture of Collimate Capital (formerly AMP Capital), which will result in a strong excess capital position,” he said.
“Consulting division losses are less than half of those of a year ago, and the goal remains to break even by 2024.”
The speed of cash outflows from the wealth management business has also slowed. The AMP North platform attracts new capital from investors despite the tarnished AMP brand.
“AMP Bank also continues to contribute steadily to group earnings, with recent growth outpacing that of the rest of the industry,” Montgomery said.
“Elsewhere, the bank’s digital-only offering is gaining traction with new and existing customers.”
With AMP’s stock price having fallen so much in recent years, Montgomery thinks stock buyers are now getting many of these companies for nothing:
With excess capital of $2 billion, after the sale of assets, and a valuation of over $1.5 billion for AMP Bank – based on book value – AMP’s market capitalization of approximately $3.5 billion suggests shareholders will receive the $100 billion+ cross-platform AMP North business, the Australian and New Zealand consultancy and a share of a Chinese asset and pension management company , free.
It’s a different company than it was in 2020
The Treasury Wine Estates tragedy is so ingrained in the minds of investors that it is now seen as “a barometer of Australia-China relations”, according to Montgomery.
But for him, the company now has a completely different investment thesis than two years ago.
“This year they embarked on an expansion into the high-end luxury sector with acquisitions of other high-end wine labels,” Montgomery said.
“The quality of the US division’s results also improved with the divestment of commoditized commercial wines, which resulted in lower volumes but much higher operating margins.”
But the catalyst for his team’s decision to buy this ASX stock recently has been its Asian expansion outside of China.
“This came despite a virtual ban on the export of the company’s prized Penfolds branded wines, reflecting management’s expertise in distribution and providing confidence in their multi-country expansion of the Penfolds brand.
“The strategy simultaneously expands the company’s total addressable market and reduces geopolitical risk.”
He believes that reducing reliance on China has actually improved the quality of the business and provides better downside protection for investors.
“Growth options concurrent with margin expansion have the potential to grow earnings for many years above current analyst projections.”