The 5 "high conviction" ASX stocks two expert investors are backing for the long term

Banks and miners dominate the large cap scene on the ASX, and by most measures, they're trading at generationally high valuations. These companies are big, stable, and well owned – but does their collective success over the last 18-months mean value investing is dead?

"I hope not", says Simon Mawhinney, Managing Director and Chief Investment Officer of Allan Gray Australia. He's an ardent value investor who famously said on this platform that "I'd rather stick pins in my eyes than buy CBA". Put away the pins, readers, because Simon assures us that there is indeed value in the Australian share market if you're prepared to "dig for it".

Mawhinney is one of two of the most respected value investors in the Australian funds management industry. The other we had the pleasure of hearing from at Livewire Live today, Mark Landau, Joint Managing Director & Chief Investment Officer of L1 Capital, suggests investors may need to look overseas to find value, however he still had several key ASX value stock picks to share.

Valuations at the big end of the ASX are “nuts”

"It's nuts that they're priced the way they are given the earnings growth they're delivering," Mawhinney noted of the ASX’s biggest stocks, particularly with respect to the big four banks and Wesfarmers (ASX: WES). They’re "very, very expensive companies", he noted, pointing out that for many, earnings have gone backwards, but their share prices have increased. "There's been some significant multiple expansion," Mawhinney concluded.

Landau told the audience that he had never been more grateful to have a global mandate and not be confined to Australia. At 24 times next year’s earnings, the earnings multiples of ASX stocks are historically high. “The earnings growth just isn't there”, he lamented. Landau pays close attention to the PE Growth Ratio, (price to earnings growth, or PEG). The PEG helps investors compare whether a “high” P/E Ratio stock is actually justified by strong earnings growth – a lower value is better, but fund managers prefer a reading of 1 or below.

Compared to other markets, the ASX’s PEG is very high. It has a PEG of 3 versus a PEG of 2 for the Nasdaq and even lower for some European markets. We also see Commonwealth Bank of Australia (ASX: CBA) as particularly overvalued, and given it's 10-12% of a passive portfolio, it makes passive investing potentially dangerous. Our net long exposure to Australia is “close to zero”, concludes Landau, “it's the lowest we've ever had it”.

All that glitters… the case for gold

"We definitely like gold, our gold fund has been going for 6 months and it's up 65%" noted Landau, suggesting that there’s still plenty of upside in gold producers given many international fund managers are still yet to get involved in the trade.

Gold "feels like a one way trade for a very long time," said Landau, but he wasn’t presently interested in many ASX gold producers – again on the basis of a lack of value. He points out Toronto-listed K92 Mining (TSX: KNT) as a stock his fund owned.

Mawhinney noted his fund’s ownership of Newmont Mining (ASX: NEM), but was similarly circumspect when it comes to ASX gold producers. “Putting aside the macro attractions to gold, domestic producers are expensive”, he noted, adding that "I like gold, but I think it's much easier to find value in overseas gold companies".

Energy transition commodities are the most attractive

There are definite growth trends in future-facing commodities the experts were tracking closely. Landau: "We like those where supply is slow to come online... Gold is one, copper is another”. He likes copper mainly due to the commodity’s use in data centres. "Data centres are basically a big block of copper," he quipped. The fund manager noted his preference for dual ASX-TSX listed Capstone Copper (ASX: CSC).

Uranium is another area of energy transition commodities Landau considers “exciting”. But it's "excruciating", he also warned. The fund manager believed the underlying fundamentals for uranium are sound, but investing in uranium stocks is often problematic due to poor company execution. Nexgen Energy (ASX: NXG) (also dual ASX-TSX listed) is his top pick, as Landau noted that if his “more realistic” view of the uranium price, US$100/lb, eventuates – the stock could have substantial upside.

Mawhinney also liked copper, but saw limited opportunities among ASX copper producers which he saw as offering little value. He does, however, like aluminium. Data centres need aluminium for electricity transmission, he noted, adding that since China has capped its aluminium production, the rest of the global market is set to expand. “We are looking for opportunities in low cost production – it's one area we're quite exposed to”, he noted.

High conviction ASX value stock picks

For Landau, Mineral Resources (ASX: MIN) was one of the highlights of August earnings season. Onslow is performing well - it was built in record time. The major issues that were holding them back are being addressed, firstly governance, next Onslow is back on track and it will be highly profitable, finally there are concerns about the balance sheet – we think these are largely resolved, the company has ruled out a capital raising and are taking sensible steps to address the balance sheet issues. Lithium assets could be spun out – potentially triggering a rout among short sellers.

Imdex (ASX: IMD) was another very strong result that the market perhaps didn't like so much. "It's an example of a stock that had a miss, but their outlook is even better than we thought going in".

For Mawhinney: Ansell (ASX: ANN) is at our top end of our picks. It trades at a reasonable multiple, bar the recent raise to buy Kimberly Clark's PPE business, its share count lower now than it was several years ago. The management team has done a phenomenal job. The CEO is an excellent capital allocator. You have to dig outside the top five to find value!

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