Five high conviction stocks in June

With the election out of the way and Labor's more disruptive reforms defeated, market sentiment has clearly taken a turn for the better. Looking ahead, the most likely scenario is that the domestic and global economy will find ways to grind higher, although the likely pace of business activity now looks slower than previously expected.

Political certainty provides some relief but more will be needed

The Coalition victory is undoubtedly positive for the equity market and particularly domestic cyclicals. We note that the market had already priced in the risks that a Labor Government and their 'controversial' policies posed. Banks had their best week in over three years, up 8.1% the week following the election. While investor sentiment has improved and will continue to buoy the market over the short term, we think a clear agenda for stimulating economic growth, other than solely relying on tax cuts and monetary policy, will be necessary to sustain further gains.

Two changes to our High Conviction picks this month

We have removed Reliance Worldwide (RWC) from our list due to the weaker-than-expected downgrade in May and our subsequent change in recommendation to Hold. While the absence of a freeze event in the US was in line with our expectations, we are concerned about the downturn in multi-res in Australia and the increase on US tariffs on imports from China that could negatively impact FY20 earnings.

We have added OZ Minerals (OZL) given the near 20% correction from its early April peak. In our view this looks far too overdone versus a less dramatic adjustment in A$ copper fundamentals.

Five high conviction ASX100 stocks in June

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:

OZ Minerals (OZL)

OZ Minerals is a copper-focused international company based in South Australia.

Key reasons to buy OZ Minerals

• OZL enjoys robust cashflows from an established production base in copper, which has among the best outlooks in the commodities suite, driven by electrification of the developing world. OZL's balance sheet and cost structure provide good downside protection.
• We think OZL's counter-cyclical growth strategy will be rewarded as the Carapateena development project is gradually de-risked in the coming 1-2 years, and can justify valuations closer to $13.00 per share upon successful commissioning.
• We think that recent share price weakness has been driven by macro-economic uncertainties, which we think can pass in time.

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 political 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 for the PNG expansion and Alaska projects.

ResMed (RMD)

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.
• We were impressed by the margins achieved at the recent Q2 result – 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.

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 20.8x and offers a 3.5% partially 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 regarding loan book positioning and low reliance on treasury and markets income.
• Concerns about the asset quality and margin ramifications of WBC's relatively high interest-only home loan exposure continue to weigh on the share price. We continue to believe these concerns are overblown. WBC has reduced its interest only exposure to 50% of its Australian home loan book at Mar-2017 to 32% at Dec-2018 without its asset quality underperforming peers in any material way. WBC's group Net Interest Margin has been broadly flat over this period.
• Strong captal position and sound asset quality support the dividend. WBC reported a CET1 capital ratio of 10.6%, above APRA's 'unquestionably strong' benchmark.

Contributed to Livewire from the Morgans Blog.