The #1 stock picks for 2023
Well, folks... We made it through 2022. And what a year it was. Inflation soared for the first time in decades, interest rates lifted at frightening velocity, and bonds posted their worst year in history.
Just like the many years before it, the outlook for 2023 is completely and utterly unknown, as unforeseeable as the headwinds and tailwinds that will ultimately drive investment markets (and our portfolios).
Now, more than ever, expert analysis and ideas are paramount. And where better to find them than on this very platform. So, as part of our Outlook Series for 2023, Livewire reached out to 15 of the country's most respected fund managers for their highest conviction stock picks for the year ahead.
This includes an inductee into the Australian funds management Hall of Fame, a relatively unknown portfolio manager who has delivered returns of 22% per annum since his fund's inception in 2016, and nearly all of the most-followed fund managers and experts on Livewire.
Why? Well, last year's picks did not perform well. The fund managers' highest conviction ideas from 2022 ended the year with a total return of -28.10%. That said, 2022 was particularly tumultuous, and previous years' picks have truly shot the lights out.
In 2021, our 10 fundies' picks delivered a total return of 45.14%, far exceeding the S&P/ASX All Ordinaries and MSCI World Index's returns of 10.93% and 18.43%, respectively. The year before, these experts picked another round of winners, delivering a return of 13.88% (and beating the benchmark by an impressive 10.26%). In 2019, our fundie favourites delivered an eye-watering return of 59% (an outperformance of 35.86%).
So, without further ado, sit back, relax and enjoy this year's highest conviction stock picks. And as always, do your own research before making any investment decisions of your own.
Our featured experts include:
- Romano Sala Tenna, Katana Asset Management
- Nick Griffin, Munro Partners
- Jun Bei Liu, Tribeca Investment Partners
- Marcus Padley, Marcus Today
- Oscar Oberg, Wilson Asset Management
- Robert Gregory, Glenmore Asset Management
- Catherine Allfrey, WaveStone Capital
- Dion Hershan, Yarra Capital Management
- Matthew Kidman, Centennial Asset Management
- Nick Sladen, LSN Capital Partners
- Mary Manning, Alphinity Investment Management
- Michael Goldberg, Collins St Asset Management
- Andrew Clifford, Platinum Asset Management
- Anthony Aboud, Perpetual Asset Management
- Ben Clark, TMS Capital
Note: We would like to thank the fund managers for sharing their top stock ideas for 2023 in the spirit of the Outlook Series. All of the fund managers featured in this series run diversified portfolios, and do not invest solely in the stocks mentioned below. This list is not, nor is it intended to be, a set of recommendations. Please do your own research and seek advice from a professional before making any investment decisions of your own. Past performance is not a reliable indicator of future returns.
This vision was filmed on the 6th and 13th of December 2022. You can watch the video by clicking the player, listen to an audio version, or read an edited transcript below.
Matthew Kidman: Hello, I'm Matthew Kidman.
Ally Selby: And I'm Ally Selby. And today we have 15 investors putting their necks on the line to pitch their number one stock for the year ahead.
Mineral Resources (ASX: MIN)
Matthew Kidman: Romano, let's get into the dangerous part of the game, stock picking. Pick one stock for 2023.
Romano Sala Tenna: Look, it's an unusual one because it's up 140% in the past two years, but Mineral Resources (ASX: MIN). We think it has a lot of upside still to come from here. It's a top-five lithium producer globally, but they're moving into hydroxide. And we think over the next two years they'll increase that by a factor of about 10, and that's the high-margin product, of course. They're also a top-five iron ore producer, and they're bringing on a 35 million tonne of per annum production at $40 FOB, which is profited through the cycle.
They're the largest contract mining services company in the world today. And with work they've won recently, they'll double their EBITDA to about $1.2 billion over the next two years. And finally, they are the largest landholder in the Perth gas basin. And this is a really exciting basin, and it's just starting to get a lot of media attention, a lot of takeover activity in the last two weeks there. They have a first-mover advantage there. It has the best management team, we think, corporately in Australia, and we've been tracking for 16 years. So yes, it's had a big run, but the next two years look pretty exciting.
Matthew Kidman: Sounds like a show bag with something for everybody.
Romano Sala Tenna: Indeed.
Constellation Energy Corporation (NASDAQ: CEG)
Nick Griffin: So for us, we've spent a lot of time looking at the energy transition. And what was a dilemma, how do we decarbonise with lower costs? Turned into a trilemma, effectively. It got 50% worse. It's like how do we decarbonise, how do we lower costs, and how do we make sure we've got energy security because of what happened in Ukraine? And so when we think about that, that basically led us to the company we wanted to talk about today, which is Constellation Energy. Constellation Energy is a nuclear energy provider in the US. And we just think these are orphan assets that are going to become really attractive again.
Why? Because you have to keep them open. The Germans discovered that. Two, you have to extend their lives. Three, they're the largest source of renewable power in the world today, which means not only do they create renewable power, but they can create renewable hydrogen or green hydrogen. They are very cheap, these assets are very cheap today. Constellation's a new spin-out of Exelon. It's only been listed for about a year. And yeah, it's one of the biggest positions in our fund, and we really like it over the next 12 months.
Ramsay Health Care (ASX: RHC)
Jun Bei Liu: The best-performing stock for 2023 in my view is going to be Ramsay. We're a big believer in the premium asset that it holds. Its share price is very depressed because of its earnings, which COVID has impacted. It is one of the very few companies that is still yet to recover to pre-COVID levels. We know the waiting list is very long for public hospitals, and that generally translates straight into private hospital volumes. And it is already on the way up. This company will double its earnings and grow phenomenally just recovering from COVID.
And then on top of that, there's a huge backlog they need to work through, which will take years. The company is trading almost at its asset value. Clearly, the private equity bid stuffed up the valuation somewhat, but now it's back below the pre-private equity bid value. And to me, this is a really good stock to hold, particularly in a slowing economic environment as its earnings are going to grow regardless of the economic outlook.
Latin Resources (ASX: LRS)
Marcus Padley: I can give you a big one or a small one. I'll give you a small one. We have a member who we call the $12 million man, who turned $189,000 into $12 million in one stock. He has now grown that to $36 million. The name of the game is to find a stock, buy millions of it, and then tell everyone else about it. So I will tell you his stock for next year, it's called Latin Resources. It's a $250 million market cap. It's lithium, and I don't know anything about the fundamentals other than don't rely on them.
Estia Health (ASX: EHE)
Oscar Oberg: So it's the largest aged care provider in Australia. It's called Estia Health (ASX: EHE). So the aged care sector has been one of the most decimated sectors through COVID, and prior to that, it was actually through a Royal Commission. Now that you've had a change in government to Labor, the regulatory model is actually changing for the first time in a decade, and this should actually allow the sector, and obviously, Estia, to see increasing margins over time over the medium term. So as I said before, the company's recovering from COVID, which is positive. And also, a number of the smaller operators in the industry are actually struggling with the compliance burden. So we actually see a very positive environment for acquisitions for Estia over the next few years.
Now, if you look at the current share price, it's trading at a share price of around $2 a share. That's effectively what the property value for the company is right now. So you're getting the operating business for free. So we actually think this business can double over the next two to three years.
Retail Food Group (ASX: RFG)
Robert Gregory: My stock pick is Retail Food Group. It's a small-cap food and beverage company. It's had a bit of a chequered past under previous management, but it operates a number of key brands - Donut King, Crust Pizza, and Gloria Jean's. It trades on a very cheap valuation of around seven times PE. And the reason for that is there's an overhang of an ACC investigation, which is due to actions of previous management, that's been weighing on the stock. I think we'll get a resolution to this sometime in the next six to 12 months. And when that happens, I think the stock can move significantly higher. So my valuation is around 11 to 12 cents. And I think we just need to see that investigation be resolved and we can see that move forward.
Domino's Pizza Enterprises (ASX: DMP)
Catherine Allfrey: I'm going to go with the one that we've just added, it's not without risk, and that would be Domino's. We haven't been in that stock for a long period of time, but what gives us confidence is they've fixed the balance sheet with their equity raise. They're still sticking to their 8-12% store rollout target. And in terms of the cost inflation that's really impacted their cost of goods served, you've seen in January '22 a huge impact, the same in July '22, and now we'll get another small impact I think again in February. So the first half of 2023 will be a tough result in February. But from there, we think that's the bottom. And after that, we think they'll be able to grow and grow quite strongly, so we are backing Domino's.
Ally Selby: Okay. It has quite a big short interest, Domino's. What do you think the shorters are getting wrong?
Catherine Allfrey: They're worried about the balance sheet, which they're fixed in terms of the equity raise. And clearly, the earnings going into this first half result [are worrying]. Shorters obviously look short term. We always look three to five years out when we are looking at a story. And for us, we can see that there will be a growth story with Domino's.
Reliance Worldwide Corporation (ASX: RWC)
Dion Hershan: At Yarra, we're always happy to take a contrarian position if we can find high-quality companies that are out of favour. One that's a standout to us at the moment is Reliance Worldwide (ASX: RWC). They're a leader in the plumbing parts business. It's got a degree of cyclicality, it's exposed to the US economy, and there are pretty despondent expectations around that company. In fact, the stock's gone from over $6 a share to around $3 a share, and the selloff has been stark. And a lot of people are concerned that there's going to be a slump in US housing, and they'll be dragged down with it. And we think those concerns are largely misplaced.
Most of what Reliance does is sell small plumbing parts for essential repairs. We don't think it's particularly discretionary. This company's had a 20-year track record of growth. It is a market leader. Margins last year were under pressure because copper and plastic and other input costs went up. They've now re-priced their product suite, and we think they're placed into 2023. So as it stands, we're buying a high-quality company that's out of favour, stock has halved, but it's trading 11 or 12 times forward earnings, and we think that's really compelling.
Generation Development Group (ASX: GDG)
Matthew Kidman: I'm going to go back to a small company because they have been pounded in 2022. The big guys have held in there, and not done so badly. So I'm going to go back to a little company called Generation Development (ASX: GDG). It's a fund manager of sorts that sells an interesting product called a light bond, which is a competition to superannuation, much smaller, but it's a tax-effective product, and they're dominating that market out of Melbourne. They've also launched an annuity product, and they also have a shareholding in ratings agency Lonsec, which is doing really well. Grant Hackett, the former swimmer, is the CEO. Very driven. And I think it hasn't performed this year, but not through operational issues. It's small, illiquid, and forgotten, so I think it can rebound.
Hansen Technologies (ASX: HSN)
Nick Sladen: We really like Hansen Technologies. It has a market cap of about $1 billion. It has a really strong market position. It has high barriers to entry. It's founder-led - the CEO and founder owns 17% of the company, which we think is very, very appealing and aligns with investors. It's attractively valued, and it has a good balance sheet. They've recently moved their chief financial officer to Europe to pursue a pipeline of acquisitions, which we would expect them to deploy some of their balance sheet capacity in 2023 to complement an already strong organic growth pipeline with some acquired growth. So we're quite excited about that position, and we think the outlook is very strong for 2023.
MercadoLibre (NASDAQ: MELI)
Mary Manning: My stock pick is MercadoLibre. MercadoLibre is the biggest e-commerce company in Latin America. It has over 80 million users. And the reason that I like it is that it's in a very strong earnings upgrade cycle. Brazil is actually ahead of the rest of the world in terms of the macro. They have raised interest rates 13 times, over 1,000% since the bottom, but now they're starting to be on hold and actually starting to cut interest rates expected for next year. Unemployment has peaked and inflation has peaked. If you think about what's going to happen to the US and Europe in the next 18 months, Brazil is already there.
So some of the companies in Latin America are already in that really strong earnings upgrade cycle, and you've seen that with MercadoLibre. I also really like it because it's an ecosystem stock. So they have MercadoLibre, which is the e-commerce part. They have Mercado Pago, which is payments. And Mercado Crédito, which is their FinTech part. And so once you're in that MercadoLibre ecosystem, it's very easy to keep those customers and cross-sell their different products. Also, the stock halved last year, so the valuation is much more attractive than it used to be. So for those three reasons, MercadoLibre is my top pick for 2023.
MMA Offshore (ASX: MRM)
Michael Goldberg: The sector that we like the most at the moment is the energy space. We've liked it for quite some time. I think it offers some promise going forwards in the next couple of years. Specifically, one of the companies that we own quite a bit of is MMA Offshore. They've got their foot in both the old camp - they service and they provide services to offshore oil and gas. But they also have about 20% of their revenue now coming from wind farms. So that's a space that we really like. We think that they're trading at a substantial discount to what we think they're worth. We tend to think they're probably worth about $1.50, which is a little bit less than two times their NTA. They're currently trading at about 75% of their net tangible assets. And that's a real NTA, unlike a lot of companies that make promises but don't deliver when it comes time to sell. So MMA Offshore is probably our favourite pick at the moment.
ZTO Express (HKG: 2057)
Andrew Clifford: It's ZTO Express. I think this is one of the most exciting opportunities I've seen in years. It's the leading parcel-delivery company in China. Very fast growing, obviously because of e-commerce. Lots of price competition. The competitors are all losing money and that price competition's receding. So they're now not only getting volumes and taking market share, they're getting a little bit of price. Profits are up 70-80% in the last few quarters. And right at the moment, you can buy this on around 15 times next year's earnings.
LGI Limited (ASX: LGI)
Anthony Aboud: So the company I'm talking about is a company called LGI. It's not a big company. It IPO'd in October, just a couple of months ago. It's a founder-led business, but the founders didn't sell into the IPO, which is a good sign. Basically, just to describe the company, Australia's just signed on to a methane pledge to reduce methane emissions. The third largest emitter of methane is landfill gas. LGI provides a solution to municipalities for landfill gas, it either flares the methane, or it turns into electricity and sells renewable energy back into the grid. So for me, this is a really interesting play.
It generates its revenue through electricity, but also ACCUs, which are carbon credits or LCGs, which are also carbon credits. So we see this as one of the best exposures to inflating carbon credit prices over the next 12 to 24 months. And the Australian carbon price is about $30 bucks a tonne. In the EU, the equivalent is about $130. We're not saying it's going to go there in the next couple of years, but if it were to go up there, that would increase profits fourfold.
Aristocrat Leisure (ASX: ALL)
Ben Clark: I'm going to go with Aristocrat Leisure. We've owned this business for nearly a decade now, and I thought they'd posted an outstanding result in November, with 25% earnings growth. They're really riding the resurgence of the opening of the US in-premise gaming market. It did slightly come at the expense of the digital business, which has become a nice balancer for them over the last couple of years.
But looking forward, 13-14% consensus growth in the coming year, half a billion dollars in net cash on the balance sheet. And I think M&A could be a catalyst this year because there are some areas they've been eyeing, and we've seen a crunch in valuations in a lot of these players. So hopefully, they can put that money to work this year. 20% ROE, great management team. US gaming is very resilient in economic downturns, so I like that. And you're paying 19 times the business. That's kind of the sweet spot I think that the market's looking for at the moment.
What is your #1 stock pick for 2023?
The fundies have revealed their top stocks for the year ahead, now it's time to turn the mic to you. Let us know your highest-conviction stock pick for 2023 in the comments section below.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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