2019 has started on a bright note with the ASX 200 closing out the March quarter up 9.5%, the best quarter since September 2009. The sharp bounce has left many wondering where to from here.
Our short-term view reflects a more cautious outlook as we think the upside has been priced in. Overcoming a seasonally weaker period for markets and weathering uncertainty from the upcoming Federal election in May will be no small feat and for these reasons, we prefer to err on the side of caution. However, we do see a subset of opportunities for tactical investors from companies that have favourable offshore exposure and clear earnings upside potential.
Areas to trim some profits
We remain on alert for recent trading momentum to potentially unwind, particularly with several macro-economic unknowns in the mix.
In our recent blog (Sells, trims and non-preferred stocks) we flagged stocks under our coverage that are: 1) outright sells; 2) looking expensive (trim profits or switch); or are 3) least preferred in the sector (no need to be there).
'Outright sells' include ASX, FMG, NCM and AGL
'Trims' include JBH, BXB, MPL IAG, ALX, TCL, CWY and RHC.
Five high conviction stocks in April
Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.
Here are our five high conviction ASX100 stock picks this month:
Oil Search (OSH)
Oil Search is a major oil and gas developer/producer. Its key asset is a 29% interest in the world-class PNG LNG Project/Development, operated by ExxonMobil.
Key reasons to buy Oil Search
- We continue to rate OSH as a top large cap pick in oil and gas based on the strength of its earnings and quality of its growth profile.
- Despite a challenging backdrop, OSH and its partners have continued to make progress on its global-scale organic growth profile, with high margin/value growth from expansion of its PNG-based LNG operations and the upsizing and development of its large greenfield oil project in Alaska (also high margin)
- We view OSH's current share price as adequately reflecting the value of existing production from PNG LNG T1 & T2 operations, while we believe the market remains too conservative on the upside potential of both the PNG expansion and Alaska projects.
RMD is a global company involved in the development and manufacturing of medical products for the treatment and management of respiratory disorders, with a focus on sleep-disordered breathing.
Key reasons to buy ResMed
- The company remains well positioned in our view, with continued growth across masks and devices, a solid pipeline of new products and an expanding digital platform helping to drive resupply, low setup costs and improve adherence rates.
- Q2 was a little softer on the top-line but quarters tend to be quite volatile. We were impressed by the margins achieved – a sixth straight quarter of improving leverage and double-digit operating income growth. This continues to reflect the strength of the global business modal.
- RMD targets a very large potential market opportunity. The National Heart Blood and Lung Institute estimates that 12 million Americans suffer from sleep apnoea. According to RMD, fewer than 4 million are diagnosed or treated each year.
Reliance Worldwide (RWC)
RWC is the world's largest manufacturer of push to connect (PTC) plumbing fittings and specialist water control valves.
Key reasons to buy Reliance Worldwide
- RWC hold the #1 market position in a number of product categories and is the clear market leader in the US with around 90% market share in the US PTC fittings market.
- It has a stable earnings growth profile focused on the less cyclical residential R&R sector with operations in North America, Asia-Pacific and Europe.
- PTC fittings penetration in the US is only around 12%. Given its strong value proposition we believe there is still a lot of potential for further penetration of the category over the long term.
Sonic Healthcare (SHL)
Sonic Healthcare is an international medical diagnostics company, offering laboratory medicine/pathology and radiology services to the medical community.
Key reasons to buy Sonic Healthcare
- We see SHL as being ideally positioned as a global diagnostic and pathology provider, backed by defensive earnings, growing scale and a strong balance sheet. We forecast high single digit earnings growth through 2021.
- SHL's valuation is currently in line with its historical average 12-month forward PE multiple of 18.8x and offers a 3.7% fully franked dividend yield.
- The strategic Aurora Diagnostics acquisition not only increases scale in anatomical pathology, but also offers cross-selling opportunities in clinical pathology, supporting margin uplift and profit growth.
Westpac Bank (WBC)
Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.
Key reasons to buy Westpac
- WBC has a relatively low risk profile in terms of loan book positioning and low reliance on treasury and markets income.
- The bank stands to benefit most from re-pricing of investor home loans.
- Strong captal position and sound asset quality support the dividend. WBC reported a CET1 capital ratio of 10.6% at 30/09/2018, already above APRA's 'unquestionably strong' benchmark of 10.5%.
Contributed to Livewire from the Morgans Blog.
Putting FMG in "Outright Sells" is a mistake even after accounting for the latest doubling I believe. I couldn't find any ASX 100 with brighter prospects than FMG's from technicals and fundamentals point of view.