The market has fallen 10% in the last 8 weeks. Or as the inimitable Franco Cozzo put it: “Grand sale, Grand sale, Grand sale...”. No one can be certain if equity markets will get cheaper still, but there is no denying that some long-absent value has reappeared.
Livewire recently reached out to ten portfolio managers asking them to outline their thesis of a recent stock idea they are ‘genuinely excited by’. We have pulled their responses together here, which include those from Aitken Investment Management, Perpetual, Pengana, Perennial, Monash, Cyan, Nikko, Morphic, Moelis, and Evans and Partners. Read on for 10 quality stocks for the watchlist, and be ready for the rebound.
Two Aussie big caps
Charlie Aitken from Aitken Investment Management outlined an ASX 50 stock with compelling metrics. He told us that “consensus FY19 P/E is now under 19.4x, yet we believe the stock offers another year of 20% EPS growth. At a PEG ratio of under 1, that is an opportunity ahead of a seasonally strong period”.
Picking a stock from the ASX 20, Adam Alexander at Evans and Partners made the case for one of Australia’s blue chips which is: “well positioned with infrastructure and resources to supply this insatiable demand”
Five Aussie small caps
The infrastructure thematic has performed very well in recent years, and the vast and growing pipeline of projects ahead suggests that it will play out for another 3 or 4 years at least. At the smaller end of the market, Andrew Smith from Perennial Value discussed a microcap infrastructure play that his fund corner-stoned, and that he makes a convincing case for being worth 50% more than the current share price.
Anthony Aboud at Perpetual Investments lays out his thesis on a small cap that may be trading half of its fair value. It is a global leader in a growing industry, so is ideally positioned to capitalize on a growing market. Anthony writes that:
“By our figures, we estimate that if the company were to generate similar internal rates of return on these investments - it may well generate around 50 cents per share EPS by 2022. On a 12-times multiple, this leads to a valuation of around $6.00/share - which is double the current share price today.”
Another compelling valuation argument came from Dean Fergie at Cyan with a microcap professional services roll-up that the market has been ignoring:
"For those that like regular cash flow, it pays quarterly dividends, currently 1cps fully franked. And it trades on, what we think, is a highly attractive PE of just 11x FY19. Given such attractive metrics, from the current share price circa $1.25, we comfortably see upside of 50% or more in the near-term for this defensive growth business.
Simon Shields at Monash Investors also nominated a microcap roll-up. This one is being led by the founder and former CEO of Greencross, the Veterinary roll up that increased 20-fold in price in the five years following the GFC. Like Greencross in the early days, this one is also in the very early stages of rolling up what is currently a fragmented healthcare industry with vast scope for rationalisation and modernisation.
Tougher conditions for the banks have led to a redistribution of business to other segments in the industry, one of which is business lenders. As John Garrett, MD of Moelis put it: “Tougher capital requirements imposed by APRA have made factoring less attractive to banks and seen most exit the market. The recent banking Royal Commission is likely to tighten lending criteria and further limit the financing options available to SME’s, making factoring an attractive solution for businesses.”
In this wire, John described one such business trading on around 11 times earnings, compared to more than 18 times recently offered by the acquirer of its key competitor.
Three Global stocks
Fintech has been on a roll for the last few years. Globally the sector attracted $30 billion of deals in 2016, $40 billion in 2017, and more than $42 billion in the first half of 2018 alone. The size of the prize for new players carving up the incumbents justifies the investment.
Deals are getting bigger and more selective too, as the theme matures and future winners emerge from the pack. One of the biggest market opportunities is in India, where a large portion of its 1.3 billion population has not had access to basic banking services. Fintech is changing this, and one company doing just that was nominated by James Tayler from Morphic Asset Management.
“We see them as one of the strongest retail banks with an opportunity to grow its book annually by much more than the likely market rate of 25%. The combined entity will be largely financed by customer deposits, the cheapest source of funding, and is expected to have tier 1 capital of 15% vs the requirement of 8% and an expected ROE of well over 20%”
Buffett once said: “Our favourite holding period is forever”. This is exactly what Steven Glass at Pengana said about the global stock he selected. It is the largest business in its peer group, and Steven describes it as having:
“...sustainable competitive advantages, high incremental margins, is highly free cash flow generative, and has an attractive growth outlook. It is the type of business that we would like to hold forever”.
Greig Bryson at Nikko Asset Management nominated a global healthcare stock exposed to demographic tailwinds as aging patients create demand for its products. Internal restructuring is streamlining the business, and with a pipeline of new products stemming from a 2 billion Euro annual innovation budget, the company has improving fundamentals.
Full listing of ten stocks
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