Why we just bought 2 ASX 200 shares that everyone abandoned: expert

There are some ASX shares that used to be staples in investor portfolios and superannuation accounts but in recent years have become stinkers.

That could be their own fault for mismanaging their business, or be caused by external factors.

One could name AMP Ltd (ASX: AMP) as an example of the former and Treasury Wine Estates Ltd (ASX: TWE) to demonstrate the latter category.

The AMP share price has lost a painful 80% over the past 4.5 years after a series of financial, governance and staffing scandals of its own making.

Meanwhile, Treasury Wine is about 33% down from its pre-COVID highs after it lost its largest export market, China. In 2020, Beijing imposed stiff tariffs on wine imports in retaliation to Canberra’s call for an independent review into the origins of the pandemic.

However, this week Montgomery Investment Management founder Roger Montgomery stunningly revealed his funds have recently bought both these stocks:

Don’t let this ASX share’s past fool you about the future

Montgomery, in his role as guest lecturer at the University of Sydney, has presented AMP to students as the prototypical example of a company that doesn’t meet the definition of “quality”.

So why did his funds buy into it just now?

“AMP is an example of a so-called ‘improving quality’ company with a strong valuation case because the potential upside is not appreciated, nor factored-in, by the market,” he said on the Montgomery blog.

“To disregard it, or write it off, on the basis of its historical performance, would be to potentially miss the future value being created under investors’ noses.”

Montgomery pointed out the “significant progress” the ASX share has made under new management since the disastrous finance industry Royal Commission.

“Management is completing the divestment of Collimate Capital (formerly AMP Capital) which will result in a strong surplus capital position,” he said.

“The advice division’s losses are less than half of those from a year ago, and it remains on target to break even by 2024.”

The speed of fund outflows from the wealth management business has also slowed. The AMP North platform is attracting new investor capital despite the tarnished AMP brand.

“AMP Bank also remains a steady contributor to group earnings with recent growth outpacing the rest of the industry,” Montgomery said.

“Elsewhere, the bank’s digital-only offering is gaining traction with new and existing customers.”

With the AMP share price tanking so much in recent years, Montgomery believes stock buyers now receive many of these businesses effectively for nothing:

With surplus capital of $2 billion, after the sale of assets, and a valuation of over $1.5 billion for the AMP Bank – based on book value – AMP’s market capitalisation of about $3.5 billion suggests shareholders are receiving the +$100 billion multi-platform AMP North business, the Australian and New Zealand advice business and a share of a Chinese asset management and pension company, for free. 

This is a different business from what it was in 2020

The tragedy of Treasury Wine Estates is so ingrained in investors’ minds that it’s now considered “a barometer for Australian-Sino relations”, according to Montgomery.

But for him, the business now has a completely different investment thesis from two years ago.

“This year, they have embarked on an expansion into the premium luxury sector with acquisitions of other premium wine labels,” said Montgomery.

“The quality of the American division’s earnings has also improved with the divestment of commoditised commercial wines, resulting in lower volume but much higher operating margins operations.”

But the catalyst for his team’s decision to buy into this ASX share recently was its Asian expansion outside of China.

“This occurred despite a virtual ban on the export of the company’s prized Penfolds brand wines, reflecting management’s distribution expertise 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 the reduced 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.”

The post Why we just bought 2 ASX 200 shares that everyone abandoned: expert appeared first on The Motley Fool Australia.

(function() {
function setButtonColorDefaults(param, property, defaultValue) {
if( !param || !param.includes(‘#’)) {
var button = document.getElementsByClassName(“pitch-snippet”)[0].getElementsByClassName(“pitch-button”)[0];
button.style[property] = defaultValue;
}
}

setButtonColorDefaults(“#0095C8”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#0095C8”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);
})()

More reading

• Why is the AMP share price beating the ASX 200 today?
• Treasury Wine share price climbs on strong Q1 performance
• This is what will get ASX shares rising again early 2023: economist
• 5 things to watch on the ASX 200 on Tuesday
• Is the company’s buyback helping boost the AMP share price?

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

from The Motley Fool Australia https://ift.tt/27BLXfZ