Australian stocks are down heavily this year, an event-driven sell off owing to the impact of the COVID-19 pandemic. Given the uncertainty, many leading companies have withdrawn their earnings guidance for the year.
This uncertainty has created opportunities, with Australian companies being sold at discounted levels. Below we provide a list of companies which we designate as those “built to last”.
We believe these companies occupy leading positions within their respective markets, generate strong returns on capital, maintain strong financial positions and have the capacity to survive through most economic outcomes.
Banks and Financials
Our key stocks within the Financials sector are Commonwealth Bank and Macquarie Group. CBA has the strongest tier 1 capital ratio on a pro-forma basis, while it traditionally trades at a premium to the other major banks, it is at a discount to its own NTA – which is rare. For MQG, its strength in terms of earnings diversity has become its weakness as COVID-19 has emerged. Looking ahead, we expect MQG to rebound strongly which could be augmented by heightened capital markets activity.
Materials and Energy
Until we gain an understanding of the impact on global manufacturing and demand for raw materials and there is some resolution of the petroleum supply war between Russia and OPEC+ there will be volatility in share prices. However, this uncertainty is providing an opportunity to acquire quality companies when share prices are significantly below their long-term value. BHP, Rio Tinto and Woodside are well placed to deliver strong shareholder returns for investors with a two-year plus time horizon, rather than a six-month trading view.
Within the consumer staples sector, Coles and Woolworths enjoy strong industry positions, resilient business models and are currently benefiting from the unprecedented demand for product. Amcor is similarly a beneficiary of this demand trend given it is a global leader in packaging for food, beverage, pharmaceutical, medical, home and personal-care products. Wesfarmers is similarly well positioned, with all three of its businesses – Bunnings, Kmart and Officeworks – benefiting from a surge demand. Meanwhile, Telstra is currently experiencing unprecedented demand as companies seek to enable remote working for employees
Hear or read more
Click on the research report below or tune in to our podcast hear the EL&C Baillieu research analysts discuss the key attributes of each of these companies and why we like them.
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What no CSL?