Buy Hold Sell: 5 high quality mid-caps

Strong balance sheets, predictable earnings and strong cash conversion are the hallmarks of high-quality businesses. If you subscribe to the view that we’re late in the investment cycle, then high quality stocks should be on your radar.

We screened the mid-cap sector of the market and identified IRESS (ASX:IRE), Netwealth (ASX:NWL) and Ansell (ASX:ANN) as three companies that pass the quality filters. The question for our panel is whether they also represent good value.

Tune in as Jeremy Hook from TMS Capital hosts Jun Bei Liu from Tribeca Investment Partners and Sam Granger from Totus Capital to hear their views on these three stocks. Jeremy also asks our two guests to nominate a quality stock that they think looks attractive right now.

Click on the player below to access the latest episode of Buy Hold Sell 

Transcript:

Jeremy Hook: Welcome to Buy Hold Sell. I'm Jeremy Hook from TMS Capital. With me on the panel today is Sam Granger from Totus Capital and Jun Bei Liu from Tribeca. Now, we're going to look at quality stocks, and we mean stocks that produce better margins, better returns, and the criteria here is stocks whose cash conversion is greater than 100%. So we're looking at the really good ones.

And let's start with the very first one, we're going to look at IRESS. Sam, buy, hold, sell?

Sam Granger: IRESS is a buy, for us. High quality business, 90% recurring revenue, sticky customer base. Trading cheap versus peers, versus very expensive software peers and quite conservative accounting, expense their R&D, so it's a buy.

Jeremy Hook: Good one. Moats like Sam was talking about Jun Bei are what it's all about to be a quality company. Is IRESS buy, hold, or sell for you?

Jun Bei Liu: No IRESS is a buy for me, but probably is a weaker buy. To me it's a great company, got a good moat, but share price has expanded quite a bit. But of course, we are living in an expensive market, so I do expect this company to do reasonably well, given the growth is still in the double-digits; the targeted growth. So we think that will be supported.

Jeremy Hook: Excellent, another one that's probably got the valuation issue around it but quality, Netwealth. High returns, aren't they?

Jun Bei Liu: Well, yeah, it's high return, it's a great company, you’re paying for it. It’s around something like 70 times earnings. Now it's not the multiple that scares me, it's the margin expectations. So the flow, obviously they are offering this amazing, huge flow industry taking share away from the majors. But, the margin expectation is too high, it's going to continue to come down, the fee will continue to be revised. It's an intensively competitive environment, we expect their earnings could potentially be downgraded at the full year. It's a sell.

Jeremy Hook: What about you Sam? Buy, hold, sell?

Sam Granger: Yeah we're a bit more optimistic about Netwealth. It's one of those rare ASX businesses with moat and runway, which explains the heady multiple. We're just a little bit concerned by fee pressure in the industry. So for us, it's a hold at 65 times earnings, it's a bit rich.

Jeremy Hook: Yeah okay, now Ansell in the health-care industrial side. It's been around for a long time, buy, hold, sell?

Sam Granger: Yeah Ansell, spits out a lot of cash which is great, but I think the reason it spits out cash is because it has a very limited opportunities to deploy capital and grow organically. So that concerns us, we're also concerned by some of the accounting, they've put restructuring charges below the line every year. So for us that's probably a sell.

Jeremy Hook: Okay, Jun Bei do you share those concerns?

Jun Bei Liu: I do, Ansell is probably a hold for me. It's a low-quality company, the cash is okay but it is a heavy-industrial related business, sell gloves. And so, it's not expensive, it's going to buyback in place, good balance sheet so, that will support the share price. But, we do expect this trade conflict will impact this company.

Jeremy Hook: Okay now, one of your favourites in this space that you like for our viewers.

Jun Bei Liu: Oh I love James Hardie, I think it's well priced. 16 times earning next year, growing at 15% at least for the next three years. Potentially upside to earnings given the momentum in the core business is turning around, and the business has this cost-efficiency programme that is delivering very well at the moment. So that to us is a great buy.

Jeremy Hook: That's great, thanks for that. Sam have you got a special one there for the viewers?

Sam Granger: Yeah, we think Objective Corp in the small-cap of software spaces is buy. It's a very high-quality business for two reasons. Number one, their transitioning from a perpetual licence fee model to a subscription model. And what that does is it means cash runs ahead of profits through that transition. And second, it's got a very defensive and customer base. So they sell to governments, local, state, federal. 98% customer retention, and a very defensive high-quality business.

Jeremy Hook: There you go, a couple of really good-quality ones from our panel, Objective and we had of course James Hardie from Jun Bei. Thanks very much.