We have spoken about market abnormalities and the risk of fresh volatility for some time. Overall we think current weakness will prove to be another 'reality check' for a market that had run a little ahead of itself, rather than a precursor to something more serious. The increased volatility in the market as a result of rising macro uncertainty and tighter financial conditions argues for a greater focus on portfolio resilience.
Market corrections are healthy and normal – US equities have navigated five technical corrections (+10% falls) since the GFC, and many other shorter bouts of nerves. We see these corrections as opportunities to deploy capital into our favourite exposures on weakness, rather than strength.
Three changes to our list this month
We add ResMed (RMD) and Lovisa (LOV) to our list in November. Resmed (RMD) is our top pick in the healthcare space. It remains well positioned with continued growth across masks and devices, a solid pipeline of new products and an expanding digital platform helping to drive resupply. Lovisa (LOV) has an attractive business model and quick store payback, less Amazon risk and potential for large-scale global rollout.
We remove Noni B (NBL) this month as we think market volatility and the illiquidity discount in combination with sector headwinds to domestically focused retailers will weigh on the stock over the short term. We remain attracted to NBL's long-term prospects given its dominant market position and ability to rationalise an industry that has been primarily focused on volumes/discounting, but we see risk that the stock may trade lower over the short term.
Ten high conviction stocks in November
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.
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. RMD sells a range of products in approximately 100 countries worldwide.
Key reasons to buy ResMed:
- In our view the company remains well positioned 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.
- 1Q results were above expectations, driven by the fifth straight quarter of double digit sales growth, an expanding product range, stable gross margins and strength in the company's leading connected-care offerings.
- 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, few 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 80% market share (on a volume basis) in the residential PTC fittings category.
- 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 >10%. Given its strong value proposition we believe there is still a lot of potential for further penetration of the category over the long term.
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 Carrapateena development project is gradually de-risked in the coming 1-2 years, and can justify valuations closer to $12.50 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.
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.
- We expect WBC to comfortably meet APRA's 'unquestionably strong' capital benchmark through undiscounted dividend reinvestment plans.
Lovisa is a fast fashion jewellery retailer in several international markets. It has over 320 stores across Australia, New Zealand, Singapore, Malaysia, South Africa, Spain, France, the USA and the United Kingdom.
Key reasons to buy Lovisa
- We are attracted to LOV's business model and quick stor payback, Less Amazon risk and potential for large-scale global rollout.
- Approximately 46% of LOV's capital is owned by incoming Chairman and CEO.
- We think an opportunity has opened up following the material de-rating – LOV is trading on 19.2x FY19F and offers a c16% three-year EPS CAGR.
- Like-for-like sales volatility/weakness is likely to persist over the balance of FY19, however we are more focused on LOV's store rollout potential as the group's key driver. We think CY19 will the year LOV takes a more definitive stance on the pilot markets' footprint potential, which have the potential to exceed our base forecasts.
CML Group (CGR)
CGR provides small business financing solutions, primarily debtor finance (invoice factoring) and equipment finance to small-medium enterprises (SME) in Australia.
Key reasons to buy CML Group
- CGR is the second largest non-bank provider of debtor finance in Australia.
- The group is well capitalised to continue to deliver organic growth via its increased scale and improving market share.
- In our view, CGR has the potential to outperform earnings expectations over the next two years, in part via executing on its recent acquisition (meaningful potential cost synergies). This is coupled with a relatively undemanding valuation of approximately 10.8x FY19F PE.
Kina Securities (KSL)
KSL is a diversified financial service provider in PNG. The group has two operating divisions, Kina Bank and Kina Wealth Management.
Key reasons to buy Kina Securities
- We think the stock remains mispriced by the market. We expect KSL to produce a record profit in 2018, yet it still trades at a material discount to its IPO price. We forecast a dividend yield of 8.7% for 2018 and 11.2% for 2019.
- The recent ANZ PNG acquisition adds significant inherent value in our view. KSL paid only goodwill and yet the deal is 25-35% accretive post synergies.
- KSL's underlying business metrics continue to track solidly – delivering 20% loan growth, credit quality has been improving and backed by a strong capital position (approx. 17% pro-forma and well above the regulatory minimum of 12%).
Australian Finance Group (AFG)
Since establishment in 1994, AFG has grown to become one of Australia's largest mortgage broking groups.
Key reasons to buy Australian Finance Group
- We believe concerns about regulatory risk regarding broker remuneration models as well as consternation about the cooling housing market are overdone. Such concerns have resulted in this stock offering good value and an attractive dividend yield.
- We forecast 8% EPS CAGR over the next 3 years and strong cash flow generation. AFG presently has an restricted cash postion of approximately $60m.
- If surplus cash does not need to used for acquisitions then we expect more special dividends to be paid.
PWR Holdings (PWH)
PWR designs and produces cooling solutions for the high performance automotive industry and has an established track record in servicing elite motorsports, including Formula One, NASCAR and V8 Supercars.
Key reasons to buy PWR Holdings
- PWH is a world leading automotive cooling business that delivers technically advanced solutions to elite motorsports customers (eg. Formula 1, NASCAR)
- PWH typically invests ahead of the curve and we expect FY19 and FY20 to be strong growth years underpinned by further penetration in motorsports and an increasing contribution from OEM markets. For FY19, we forecast 18% underlying NPAT growth to A$14.3m.
- Key growth opportunities include: 1) capturing a greater share of customer spend on cooling solutions; 2) partnering with OEMs on high performance/low production run vehicles; 3) increased presence and entry into adjacent markets; 4) increased penetration in the US automotive aftermarket segment; and 5) opportunities in emerging technologies (Tesla, Google etc).
Volpara Health Technologies (VHT)
Volpara is a leading IT healthcare provider aiming to improve early detection of breast cancer.
Key reasons to buy Volpara
- Volpara's SaaS model is linked to a growing medical need, which has recently seen 36 US states mandate that women are told of breast density.
- Volpara's market share of breast screening in the US is currently 3.7% with a pathway to grow to 9% in FY19.
- A business model leveraged to growing and reoccuring revenue (FY19 guidance of NZ$9.0m) with the ability to pass on improved pricing over time (average US$3 per screen).
Contributed by Andrew Tang from the Morgans blog: (VIEW LINK)