Equities

In early 2019 we asked the five top-performing fund managers from Buy Hold Sell for their #1 stock pick for 2019. With one quarter to go, it’s time to check in on their calls, and to get an update from each of them. 

The average gain across the stocks is a chunky 45.9%. This puts them a nose ahead of the readers’ most tipped stocks up 45.7%, and well ahead of the ASX200 currently up 17.6%. However, there is one outlier underwriting most of this performance, with the current leader riding the move in the gold price to a 133.2% gain, so let’s see which fundie is currently in the running to take home the trophy for 2019.

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Alacer Gold: +133.2%

Alacer Gold (AQG), a $1.7 billion market cap gold producer, was also leading the pack as of our mid-year update. It was up 97.2% then but has since powered on to be up 133.2%. 

The surging gold price has been a strong tailwind here, having broken out convincingly and jumping from A$1,960 to A$2,200 over the quarter. Stock selection has been critical however, with some of the midcap gold stocks offering little leverage to gold through the year, and many small caps golds just blowing up completely. Only the best in breed have converted this move in gold into a bigger gain for investors, and Alacer has done it in spades.

David Allingham from Eley Griffiths Group nominated Alacer has his #1 pick for 2019 and has one hand firmly on the prize. We reached out to him for an update:

To be honest the gold sector has probably got a little crowded and has become a consensus trade. We’re seeing that now and the sector is unwinding from recent highs. In our view that is a short-term move and we think that the medium-term gold story is still intact. 
Within the sector our view is that Alacer is set to outperform and we’ve seen that play out even in the past month or so. The stock doesn’t have the same level of institutional ownership and the valuation is still attractive relative to peers.

Xero: +47%

Despite constant howls of protest from value investors, Xero (ASX:XRO) has been heading higher for most of the last three years, more than tripling over this time to now command a market cap of $8.8 billion. This one also placed 2nd in our last quarterly update, when it was also up by around 50%, so it seems have been treading water this quarter. 

While Xero is still unprofitable, the WAAAX stocks that it belongs to had an average PE north of 100 times as of mid-year, which has brought into question how much more upside there may be here. When we asked Ben Clark from TMS Capital for an update on his pick he said:

The WAAAX stocks have taken on a life of their own. There was a time when they would all move as one, now the market is starting to differentiate them. Xero is holding up quite well given there has been a rotation away from growth.
I speak with a lot of investors and even the value investors acknowledge it is high-quality and that they’d like to own it, albeit at a lower price. When value managers are interested in a growth stock that’s often a good sign.
I said at the start of the year that there are a few key drivers for Xero. In Australia payroll is moving 100% online and now the UK is forcing companies to lodge an electronic return. Everyone is going to have to go with someone and Xero is the #1 player in the UK. It is close to all-time highs and I think it is going higher. 

National Australia Bank: +24%

In terms of share price, NAB has led the banks so far in 2019, followed by WBC, then ANZ, with CBA bringing up the rear. While there’s no competing with a midcap gold stock on a tear, when you include the dividend paid earlier this year, NAB’s total return so far is a robust 24%, a strong return for an $80 billion company facing growing pressure on its net interest margins.

We caught up with Matthew Kidman from Centennial Asset Management to see what he thought:

NAB has rerated as result of the regulatory environment normalizing a bit and also from interest rates falling. The adjustment to new regulation for the banks will happen over a few years but at least they now know what is in front of them.
Ironically, falling rates has been the driver when it should be a negative, given the impact of low rates on bank earnings. From my perspective it feels like the rerating is almost done. That doesn’t mean NAB can’t climb a bit higher but I see limited upside from here. 

Alphabet: +16.4%

Ben McGarry from Totus Capital backed global heavyweight Alphabet (NASDAQ:GOOG). With a valuation over US$800 billion, it is hard to see the stock keeping pace with more nimble runners. 

The threat of regulation and a growth blip saw the stock struggle mid-year, however, the upward trajectory has resumed in recent months. The stock is regularly pitched as a long-term winner but with less than three months to go, it is hard to see Alphabet closing the gap on the leaders.

I'm still bullish on the outlook for Alphabet. In a nutshell there was a small growth scare in Q1 when topline growth slowed from 20% to 18%. That growth bounced back in Q2 and we think it is a positive sign that the company can maintain 20% topline growth for such a long period of time. The concerns around regulation presented an opportunity to buy the stock at a reasonable valuation.
The share price has consolidated over the past two years, but we think it looks attractive going forward from here. It is the value play in the US mega cap tech space, and it is our 2nd largest holding.

Murray River Organics: +8.9%

As the name may suggest, Murray River Organics (ASX:MRG) is an Australian producer, marketer, manufacturer and seller of certified organic, natural food products. With a nanocap valuation of just $36 million, it is the ‘roughie’ in this race, but with one quarter to go, the stock has barely left the starting stalls.  

With such a small market cap, and the stock barely trading ~$15k of stock each day on average, there is the right set up for a big move if things turn around here. We asked Dean Fergie from Cyan Investment Management for his take on where things stand today, and he told us:

Whilst MRG’s top-line revenue has fallen this year due to the deliberate running-off of unprofitable contracts, company losses also have dropped dramatically as harvest and processing efficiencies have improved.
This investment has always been a 2-3yr value turnaround story for us (MRG trades at its NTA) and the business remains well on track to release this value as management work towards profitability and the strong tailwinds of consumers demanding healthy organic food products grow.

Race to the finish

With less than three months to go, we will be keenly watching for any big moves in the fundies' key picks. 

We'll provide an update on the final outcomes in early January. In the meantime, you might want to start putting together a shortlist of candidates for Livewire's annual stock-picking contest which will open for submissions in December. 



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Michael Nevill

thank you