The end of the tax year looms large. And for some investors, this may have involved selling losers to offset capital gains liabilities arising from winners in their portfolios.

While it’s impossible to know whether the 12 month decline of the shares we’ll discuss has been hastened by tax loss harvesting, one thing is certain – our analysts think they have fallen too far.

In each case, we’ll look at why the shares have performed poorly this year and why our analysts think they are undervalued. But first, a quick reminder to only consider individual shares in the context of a broader investing strategy.

For a step-by-step guide to devising your strategy, see this article by my colleague Mark LaMonica.

PWR Holdings

  • Moat Rating: Narrow
  • Fair Value estimate: $9 per share
  • Star Rating: Four stars

PWR Holdings (PWH) rose to prominence as the motorsport world’s premier supplier of advanced cooling systems. For proof of this, look no further than the fact that PWR systems are currently used by every single Formula 1 team.

Yet PWH is no longer all about motorsport and aftermarket radiators. It has successfully leveraged this expertise into aerospace and defence, and these markets now represent a 15% and growing share of revenue.

In July 2024, our analyst Angus Hewitt warned that PWH’s shares were priced for perfection. And in the twelve months since, a raft of bad news has seen them shed roughly 40% in value.

Sales growth in the core motorsport business has disappointed, an uptick in headcount saw costs rise, and there have been problems with the firm’s new factory. What’s more, founder Kies Weel was forced to take a leave of absence for health reasons.

These factors have all added fire to a sell-off that Angus now thinks is overdone. More than anything, he thinks that investors have become too focused on near-term earnings weakness and lost sight of PWH’s longer term opportunities.

Angus has left his Fair Value estimate for PWH at $9 per share, meaning they look undervalued at recent prices of closer to $6.50. A key assumption behind this is Angus’s expectation that PWH can grow its revenues at 12% per year for the next five years.

Angus thinks this is possible as PWH wins more motorsport business aside from F1, continues to be featured in new high performance road car designs, and sees further growth as a supplier to prime contractors in the defence space.

PWH’s Narrow Moat rating stems from the brand equity and intellectual property in its motorsports franchise. While this IP from high performance environments has helped the move into aerospace and defence, Angus doubts its brand power is as strong here.

SkyCity Entertainment

  • Moat Rating: Narrow
  • Fair Value estimate: $2.60 per share
  • Star Rating: Five stars

SkyCity Entertainment (SKC) is a casino operator in Auckland and Adelaide. It currently enjoys a monopoly in both jurisdictions, with exclusivity in Adelaide until 2035 and Auckland until its current license expires there in 2048.

It has not been a good year for SkyCity. Economic weakness in New Zealand and cost of living pressures have weighed on gambling spending, as have tighter regulations (such as mandatory carded play in Adelaide) that have also added extra costs.

In addition to this, hopes for a recovery in SkyCity’s VIP business to pre-Covid levels have all but been extinguished. And its construction of the New Zealand International Convention (NZIC) centre next to the Auckland property has continued to drag.

Add in a sprinkling of poor sentiment due to the problems at Star Entertainment, and the shares have been crushed – down almost 40% in the past twelve months. Our SkyCity analyst Angus Hewitt thinks this leaves them materially overvalued.

Angus thinks the tighter regulatory environment is here to stay and that SkyCity’s profitability will struggle to recover to past levels. However, he expects the cycle in discretionary spending to turn at some stage and boost earnings from depressed levels.

He also sees potential for further recovery in tourism to New Zealand to support stronger performance at the key Auckland property. Once the NZIC build is finally completed next year, the company’s capital spending should also ease substantially.

Angus thinks SkyCity is worth AUD 2.60 or NZD 2.80 per share compared to current share prices of under AUD 1.

A reminder...

Individual shares should only be considered as part of a well defined investing strategy. Go here to read Mark LaMonica’s guide to defining your investment approach.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.