Last week we shared the ‘the ten most tipped stocks for 2019’ each of which received more than 1% of the ~2500 stock tips from readers in our recent survey. Today's wire looks at the next tier down: the stocks that got between 0.5% and 1.0% of tips. It’s an interesting list with a few surprises, so let’s see what the professional managers think about each of them.
A brave call! However, there is some historical evidence to support the strategy of tipping the most heavily sold stocks of each year. On this basis, Hugh Dive from Atlas ran the ruler over last year’s worst performers on the ASX200 in ‘Dogs of the ASX…. Woof Woof’, though didn’t see much in the way of positive catalysts on the horizon for this one...
“Looking at the two vertically integrated financial advisers AMP and IOOF, it is tough to see the near-term catalysts that will transform them into stars in 2019. The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is due to be delivered in March 2019 and is not likely to be kind to these two companies. Similarly, the three building materials companies in the above table are unlikely to see a reversal of the trend of declining building approvals over the next twelve months.
We are deeply disappointed with AMP’s divestment of its Australian and New Zealand wealth protection and mature businesses (a question of value). We are equally disappointed with the manner in which it has been handled by the company and the board of directors (a question of governance). We simply cannot understand how proposing to divest such a large component of a company’s enterprise value without shareholder approval or an independent expert’s opinion can be considered appropriate or acceptable by any investor in Australian shares under any circumstances.
Baby Bunting: 'Bunnings of baby retailing'
In the last episode of Buy Hold Sell for 2018, Matthew Kidman asked Tobias Yao from Wilson Asset Management and Arden Jennings from Ausbil for their views on Baby Bunting, with both managers positive. You can hear their synopses here.
Essentially, is the “Bunnings” of baby retailing. Since being first listed on the ASX in November 2015 it is now the leading baby retailer in the country. It has over 50 stores and is looking to grow its store network to over 80 stores. I am positive about Baby Bunting for two reasons.
- Competition: Over the last twelve months, Baby Bunting’s competitors have been decimated in a tough retail environment, leaving it to be the dominant player in the market. With 50 stores, compared to its nearest competitor who has only 3 stores, Baby Bunting is in a strong position. With the departure of Babies R Us, Baby Bunting is looking to accelerate its growth by taking on the vacant leases.
- Margins: At present, Baby Bunting is only doing 6% EBITDA margins, and we believe margins can get to 10% over the near term.
Mineral Resources: Still undervalued?
In ‘A busy year for takeovers’, Andrew Mitchell at Ophir looked at some of M&A that took place in the last quarter, which included Mineral resources. His argument implies potential upside based on current earnings in conjunction the valuation ascribed at the recent deal with industry leader, Albermarle:
"Similarly, Mineral Resources (MIN) produced one of the more interesting deals, agreeing to sell a half-share in its Wodgina lithium project to battery metals giant Albemarle (NYSE: ALB) for $A1.58bn. The deal certainly raised eyebrows given the Wodgina asset itself was only purchased by Mineral Resources in mid-2016 as a then- mothballed tantalum mine from Global Advanced Metals for less than $100m. Quite incredibly, the implied valuation of the Wodgina asset by the Albemarle deal (~$A3.16bn) equated to the entire market capitalisation of Mineral Resources at the time of the announcement (essentially ignoring the additional iron ore and mining services businesses that currently generate some ~$500m in EBITDA per annum)".
Nearmap: Another US expansion story
Nearmap (NEA), a provider of high-resolution aerial maps and imagery, was featured recently in a series we ran through December, in which we asked a group of partnering managers to nominate one of their most valuable ideas for 2019. Sebastian Correia from Monash Investors Limited replied with an investment case for Nearmap, providing 5 reasons to like Nearmap, concluding to say that:
We’ll be keeping a close watch on Nearmap’s cash and cost base management as FY19 approaches. We expect the US expansion may require an increase in sales and marketing expenditure to adequately penetrate that significant market. That said, Nearmap’s market is massive and with a proven organic growth track record, research and investment into new market-leading products, strong balance sheet and attractive LTV/CAC it seems well positioned to climb through turbulent times.
3 gold stocks: Northern Star, Evolution and Aurelia Minerals
- Diversification and portfolio protection in the face of high equity market valuations and gold’s role as an inversely correlated asset class and long-term store of value. This negative correlation strengthened as global equity markets fell from their September 2018 high
Global trade restrictions and economic uncertainty have seen growth expectations tempered. As a result, we have seen a weaker US dollar, reduced inflation expectations and real interest rates falling from +10yr highs. The weakening dollar and dropping real interest rates have in particular been helpful catalysts for the gold price over the last couple of months; and
A more dovish outlook from the US Federal Reserve in December, with the outlook for interest rate hikes for 2019 and 2020 lowered vs expectations earlier in 2018, following commentary that policy settings were approaching a neutral level and the implication that the end of the monetary policy tightening cycle is closer.
Given that backdrop, it was notable that there are three gold stocks on the next most tipped list.
These include Evolution (EVN) and Northern Star (NST), both are close to becoming ten-baggers in under five years, and Aurelia Minerals (AMI), which cratered at 1.3c in 2015, and now trades at 79.0c today with a $700mil market cap.
"Evolution Mining (EVN) is an ASX-listed gold miner with a market cap of A$5.2bn. Evolution provides the portfolio with exposure to the gold price as well as to an asset base that has low capital intensity growth options. We believe this growth can be funded without stretching the balance sheet, even if the gold price falls.
We believe the market is yet to price in the growth potential at Cowal, Evolution’s largest mine. Guidance is for flat gold production over the next three years, but during a recent site visit to Cowal the Manager concluded that there is high potential for production to increase."
For a $6 billion stock that has gone up (and paid a franked dividend) each of the last five years, we have had surprisingly little manager commentary on the site. Michael Wayne from Medallion touched on it briefly in one of our thematic discussions on the mining cycle to make the case of currency tailwinds:
“So an environment like we've seen where the Aussie dollar has come back from 80 cents towards sort of 72 cents I think is a really big tail wind. So your quality players such as your Northern Star (NST), your Evolution Mining (EVN) with high grade assets, long mine life, and low cost of production are probably the area we're looking for at the moment.”
And regarding Aurelia, (as I wrote in December) in a recent episode of Buy Hold Sell, James Miller from Firetrail Investments and Justin Braitling from Watermark Funds, discussed the big trends in the gold sector and both spoke very positively on Aurelia, with Justin saying:
“…it'll be a replay of what Northern Star did with Jundee, with what Evolution did with Cowal. They're going to put more feed through the mill, they'll buy other mining operations along the strata length there in the Cobar Basin. They'll drive the cost down and create enormous value to their investors".
James echoed the sentiment, saying that:
"Over the next year we estimate free cash flow will be about $150 million, that's 25% of their market cap back within a year. So that's a great metric when you look at that and you look at two times into enterprise value to EBITDA, there's no doubt it's a cheap name, plenty of growth still to come with a great management team as well. That's one we like as well".
Jumbo Interactive: An easier way to win from the lottery
Lottery game reseller, Jumbo Interactive (JIN), doubled in price during the second half of 2018, to put it up 8-fold over 4 years, and it is already on the move in 2019. James Dougherty from Lennox Capital and Oscar Oberg from Wilson Asset Management discussed the stock on Buy Hold Sell recently.
James was more guarded, with a ‘hold’, saying: “They've done a really good job with customer acquisition and slowing down churn, but the share price move in August meant that it's now a hold for us”.
Oscar gave it a ‘strong buy’, something we don’t see that often He justified his conviction saying that:
“The changes to Powerball have been very positive for the business, from the perspective of the first eleven jackpots of FY19 have had a value 60% higher than the average over FY18. It's a very strong balance sheet. There's prospect of special dividends and acquisitions. It's a buy”.
Challenger Financial: Dominant player in a solid market
Despite a 30% fall last year, Challenger Financial (CGF) got some attention in the survey. It has a market share in excess of 70% of the annuities (retirement income) market in Australia. Challenger's alliance with MS Primary in Japan is starting to bear fruit, with 15% of annuity sales ($0.6B) originating through this channel in FY18. And over the next three years, it will see the introduction of Compulsory Income Products for Retirement (CIPRs), which will require super funds to offer income solutions to retirees with $100,000 or more. Bell Potter included this stock in the ten picks for their most favoured stocks for 2019, encapsulating their rationale in saying it is:
"A financial group comprising a Life Company, which specialises in retirement income products and annuities and accounts for most of the group’s earnings, and a funds management business. As baby boomers continue to move into retirement, it is inevitable that annuities will become a major and rapidly growing product".
Nanosonics: Healthcare smallcap on the rise
Nanosonics (NAN), is a small cap healthcare company involved in the production of ultrasound probe disinfectors (and respective consumables). While it was more popular a few years ago, it is not a stock that we have much recent manager commentary on recently.
It was however touched upon in the excellent annual outlook piece from JCP Investment Partners’ in their first post on Livewire. This covered five big-picture issues, including removal of stimulus, China’s challenges, effects of the Royal Commission, effects of falling household wealth, and technology, and is well worth a read. On Nanosonics, they wrote:
“Caring for patients better that are already in the system remains an area of future growth, one that Australasia appears to excel at. Companies like Fisher and Paykel Health (FPH) or Nanosonics (NAN) improve critical hospital outcomes and have developed global markets”.
More of the most tipped stocks?
The surprises continue further down the spreadsheet. So, if you are interested in being the first to see a third (and final) wire covering them, please hit the follow button below. Alternatively, please like, comment or share this with investing friends. Thanks for your support, and all the best for a prosperous 2019!
Excellent commentary Alex both with most tipped stocks and next most tipped stocks - is it time to revisit the Mining/Resources sector which appears to be coming back??
CGF not looking so hot right now
Yes Daniel, painful day for those of us who had been listening to all the general positive commentary of recent days re CGF. Anything but hot.
I'm thinking that 2019 will be good for resources with an AUD around the low 70 cents