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Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt explains why one particular ASX share remains his best pick to hold for many years.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Emanuel Datt: I think given the context of the market… I said Whitehaven Coal Ltd (ASX: WHC) last time — and since then it's up 100%, incidentally. Not bad.
I think that ultimately Whitehaven has a really big advantage. Again, the advantages that I pointed out about being in New South Wales. But also I think that just from a valuation perspective, they're just, B, the management [is] trying to capture that value for shareholders via buybacks and, C, I think that just the microeconomics tailwinds, the type of coal they're producing will persist for at least another 18 to 24 months.
A four-year time frame with something that's priced at less than one times cash flow, and they have to be returning cash back to shareholders, I think that just makes it a bit of a no-brainer for me.
MF: Even if coal prices cool off in four years' time you'll still be ahead of the current share price. Is that how you're feeling?
ED: Yeah, absolutely.
For a commodity producer with long-life assets, I think a rule of thumb would be you see it trading at maybe six to eight times earnings. Sure, I understand that the oil price has run significantly, four times or so over the last 12 months. But I think that ultimately even if the coal prices are halved from here, I think it still looks very, very cheap.
I also think that because, ultimately, some companies can become value traps, right, if they're just sitting on the cash and not doing much with it. But I think the [Whitehaven] management have been quite proactive in listening to shareholders and actively trying to capture as much value via buybacks.
I wouldn't be surprised to see them increase their buyback, given they've bought back 10%, I think, in probably a three-month period. I wouldn't be surprised to see them apply for 20% or 25% or at least provide themselves with the flexibility to go that hard.
If the stock price does fall then the company would basically be eating itself, right? Which is a great outcome for shareholders.
MF: It's great that you have the consistency to back up Whitehaven from your last chat because if one year ago you thought that's the one to hold for four years, then logically it should still be!
ED: Yeah, well, I think that's the thing. You never know how good or bad your stock picks are but I think that there are very clear and fundamentally sound reasons why we want to maintain exposure to this. And I think that even though the whole market is looking weak, [you] just want to be invested in the strongest sectors in rough times.
