75% of the way through the market cycle, here are 13 stocks WAM Leaders is backing

The S&P/ASX 200 has rebounded more than 8% since hitting a low in late June, but Wilson Asset Management lead portfolio manager Matthew Haupt believes there's more pain on the horizon. 

In fact, in a recent WAM Leaders FY22 results webinar, he argued that we are only 75% through the current cycle, with further lows likely to be tested over the coming three to six months. After that, investors can expect a change in the direction of central bank policy, he predicts. 

"The reason why we think the policy direction will change is that there are a lot of signs of stress [in markets]," he said. 

Think the inverted yield curve, widening credit spreads, as well as the rising US dollar, Haupt said. And we have central banks hiking into this environment. 

"We are on a collision course, but it really depends on when the central banks back off," he said. 

"We think they'll back off in about three months from here because the underlying data is so weak and there are so many signs of underlying stress." 

So how do you outperform in this market? Well, the WAM Leaders team is banking on quality companies that are leaders in their markets. They are also wading into the waters that others are steering clear of, like real estate investment trusts (REITs) and cyclical companies. 

In this wire, I'll summarise WAM Leaders' latest webinar, including the 13 stocks the team is backing at this point of the cycle. 

Investing in the stocks that others are "scared" of right now

During the webinar, WAM Leaders portfolio manager John Ayoub noted that the team had been focused on identifying the opportunities that others would gravitate to next - when central banks' hawkish hiking comes to an end. 

"Right here, right now, people are scared of the cyclical names. They're scared of property. They're scared of the building sectors," he said. 

"We're attracted to those and we're starting to deploy capital into those spaces. We acknowledge it's early, but that's okay. We are always typically early and by the time the cycle turns... we'll hopefully have a full weight in those positions to capture that performance." 

Despite the rapid rate rises we have seen, earnings remain robust in these sectors, he added. 

"We continue to like the insurance space. We continue to like oil and gas and in particular Santos (ASX: STO), but we're starting to deploy capital in areas where there's a discount to net tangible assets, and the REIT space is becoming attractive," he said. 

"Stocks like James Hardie (ASX: JHX) and Reliance Worldwide (ASX: RWC). These were at cyclical lows even before we started to see the downturn." 

He also points to companies like Dexus (ASX: DXS) and Stockland (ASX: SGP), which he believes both present good value at current prices, in addition to Star Entertainment (ASX: SGR) and Seek (ASX: SEK), as well as some of the iron ore names. 

3 stocks that impressed this reporting season

WAM Leaders equity analyst Anna Milne pointed to CSL Limited (ASX: CSL), Insurance Australia Group (ASX: IAG) and Treasury Wine Estates (ASX: TWE) as three stocks that the team is currently loving. 

"All three of these names are the highest quality names in their respective sectors," she said. 

"CSL is arguably one of the highest quality names on the ASX, given its defensive earnings profile over the coming decade... IAG is the owner of the brand in NRMA, which is one of Australia's most trusted brands. And then Treasury Wine Estates owns Penfolds, which I think speaks for itself." 

While these companies have suffered from setbacks in recent years, "their turnarounds are just starting to happen", Milne added. 

"When companies have been through tough periods and they're coming out of them, it's the perfect recipe for us. You have the earnings upside, and then you also have the sentiment. So that's positive for both valuation and earnings, which translates to higher share prices," she said. 

For example, Treasury Wines recently acquired US-based Frank Family Vineyards, Milne said, while they continue to acquire new wineries in France. 

"They had their first French vintage launch last month, and then the China country of origin is an exciting opportunity over the coming years," she said.  

Meanwhile, CSL's new Rika device - a machine that's used to extract your plasma - is a lot more comfortable for patients and less time-consuming for staff. 

"There's a whole lot of yield upside," she said. 

Meanwhile, IAG is rolling out NRMA across the country and is starting to gain pace, Milne said. 

"NRMA is very strong in NSW but doesn't really have a presence in Victoria or WA and that's just beginning to take off," she said. 

"And then also what's really going to move the IAG share price from here is the intermediated business turnaround, and they made a few key personnel hires. So we should see that over the coming 12 months as well." 

In addition, on the back of the August reporting season, the team has also been topping up on Qantas (ASX: QAN), REA Group (ASX: REA) and A2 Milk (ASX: A2M). 

Why there's no need to panic

While Haupt recognises that the last few months have been a difficult period for investors, he is adamant that there's "no need to panic." 

"The cycle is quite predictable. The timing is harder," he said. 

"The market is operating in the extremes in the tails of risk at the moment, it's either boom or bust. There is actually a chance that growth stays quite solid, or quite decent in the 2-3% GDP range, inflation moderates, and policy stays where it is. 

"There is a potential here of almost below-trend growth and equity values will be okay. But the key takeout is there is actually a path out of this." 

You just need to back quality companies, stay diversified, and take advantage of the opportunities as they arise. 

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