Carey Smith, Alto Capital

BUY RECOMMENDATIONS

Cabcharge Australia (CAB)

Chart: Share price over the year to versus ASX200 (XJO)

We believe Australia’s largest taxi, bus and coach company is one of the most undervalued and unloved industrial companies on the ASX. Recently trading on a price/earnings ratio below 8 times, and forecast to pay a 30 cents dividend over the next 12 months (+7.5 per cent fully franked), we see little downside in the company. Yet it could easily rise significantly due to a short covering squeeze.

QBE Insurance (QBE)

Chart: Share price over the year to versus ASX200 (XJO)

After the shock profit downgrade by Australia’s largest insurer last year, which resulted in a 35 per cent fall in its share price, we believe the company now offers great value for the long term investor. Most of the profit downgrade was due to one-off items and no cash charges. We are forecasting that with increasing interest rates in the US, QBE will report strong profit results in 2015.

HOLD RECOMMENDATIONS

National Australia Bank (NAB)

Chart: Share price over the year to versus ASX200 (XJO)

The company’s UK division is returning to profitability. NAB continues to trade at a significant discount to its peers, therefore providing a discount entry into the banking sector. We expect the discount to narrow over the coming year.

Sonic Healthcare (SHL)

Chart: Share price over the year to versus ASX200 (XJO)

This international medical diagnostics company reported 4 per cent earnings growth for 2013 and increased its full year dividend by 3 cents to 62 cents. Earnings and dividends are forecast to continue growing at a modest rate in the coming year as health expenditure continues to increase globally. SHL is generally considered a defensive play due to its constant and reliable strong cash flows.

SELL RECOMMENDATIONS

Freedom Foods Group (FNP)

Chart: Share price over the year to versus ASX200 (XJO)

Operating in the health and wellness sector of the food industry, the company’s share price has benefited from media attention and market activity surrounding other food companies, such as Warrnambool Cheese & Butter and Bega Cheese. FNP’s share price rose more than 200 per cent in 2013 and is now trading on a forecast PE ratio of almost 40 times. Time to lighten the load and sell some.

Domino’s Pizza Enterprises (DMP)

Chart: Share price over the year to versus ASX200 (XJO)

There’s no doubt this fast food chain had a fantastic past five years, with its shares trading above $17 on January 9. Five years ago, the shares were trading at $2.50. However, with the stock recently trading on a forward PE ratio above 30 times, we feel the market is overvaluing the stock. We suggest investors take some money off the table as it’s currently trading at an all time high. 

 

Top Australian Brokers

 

 

Joshua Stega, JAS Wealth

BUY RECOMMENDATIONS

ASX Limited (ASX)

Chart: Share price over the year to versus ASX200 (XJO)

We view ASX favourably due to its good organic growth opportunities, a robust cost management program and the ability to leverage its earnings to the long term growth trajectory of the broader economy. Recently trading on a price/earnings ratio of 18.5 times and a dividend yield above 4.5 per cent, we still feel there’s share price upside in the near term.

CSL (CSL)

Chart: Share price over the year to versus ASX200 (XJO)

Develops and makes vaccines and plasma protein biotherapies. CSL is well regarded internationally and its strong brand delivers pricing power as customers connect the brand with quality. We believe an ageing population theme will play well to CSL’s strengths as dependency on plasma-derived compounds is set to grow. CSL isn’t cheap as it was recently trading a PE of more than 20 times. But we feel in this market, CSL can still provide some resilient growth.

HOLD RECOMMENDATIONS

REA Group (REA)

Chart: Share price over the year to versus ASX200 (XJO)

Operates some of Australia’s most popular residential and commercial real estate websites. The company has made significant investments in marketing and sales operations, and is currently using its strong cash flow to drive its offshore acquisition strategy. Recently trading on a PE of 34 times and a yield just above 1 per cent, REA is by no means cheap at current levels. Noting the buoyant domestic real estate market and the future prospects for REA globally, we are happy to hold the stock at these levels.

JB Hi-Fi (JBH)

Chart: Share price over the year to versus ASX200 (XJO)

JBH has an established national store network, strong brand and customer loyalty. It’s becoming a category killer, similar to Bunnings in hardware. However, with EBIT margins near 6 per cent, the business model requires high levels of constant turnover. With signs of improving sales during the Christmas period, we are happy to hold the stock at current levels.

SELL RECOMMENDATIONS

Mount Gibson Iron (MGX)

Chart: Share price over the year to versus ASX200 (XJO)

An iron ore explorer and producer. Despite encouraging signs from an earnings growth perspective, it’s difficult for us to remain positive on MGX in the long term. The company’s assets have a relatively short mine life and it’s therefore reliant on further exploration and discovery activity. With the share price recently approaching the top of its 52-week range, we recommend taking profits at current levels. The shares were trading at 98.5 cents on January 9.

Echo Entertainment Group (EGP)

Chart: Share price over the year to versus ASX200 (XJO)

Operates hotel and casino complexes in Australia. While casinos have traditionally been resilient business models, we are concerned about the increasing future competition in Australia and overseas. EGP will experience some margin benefits as a result of the rapid cost out program announced at its first half 2013 result. With a PE recently above 24 times and a dividend yield of 2.4 per cent, we see better opportunities elsewhere.

 

James Samson, Lincoln Indicators

BUY RECOMMENDATIONS

Aurora Oil & Gas (AUT)

Chart: Share price over the year to versus ASX200 (XJO)

Focuses on shale oil and gas production in North America. The company released strong production guidance for 2014, and a lower than expected capital expenditure program. This signalled that AUT may reach a free cash flow positive position in the second half of the year. With guidance signalling strong earnings growth and an improving cash flow position, AUT offers investors value in spite of oil price risks. 

Infomedia (IFM)

Chart: Share price over the year to versus ASX200 (XJO)

IFM shouldn’t be materially impacted by the deteriorating outlook for Australia’s auto manufacturing sector. The company’s focus is on providing information solutions to the after sales parts and service sector of the global automotive industry. The company is expected to grow its earnings base in 2014, and will be further enhanced by any decline in the Australian dollar. 

HOLD RECOMMENDATIONS

Mineral Resources (MIN) 

Chart: Share price over the year to versus ASX200 (XJO)

After a strong share price run, this iron ore crushing services and production business appears reasonably valued. Crushing volumes are increasing amid a stable iron ore price. MIN still offers an attractive dividend yield at current prices. The shares were trading at $11.70 on January 9.

RCG Corporation (RCG)

Chart: Share price over the year to versus ASX200 (XJO)

Amid speculation the retail sector enjoyed a strong Christmas, RCG is set to embark upon its integral back-to-school sales period. Having already upgraded earnings guidance once this financial year, the company appears poised to report positive half year financial results in February.

SELL RECOMMENDATIONS

Recall Holdings (REC)

Chart: Share price over the year to versus ASX200 (XJO)

Recently demerged from Brambles (BXB), REC is operating in a changing environment. Declining paper usage is altering the structure of REC’s traditional market, and the business will have to innovate in order to maintain growth. Despite expectations for strong cash flow, we see little upside above $4. The shares closed at $4.04 on January 8.

Atlas Iron (AGO)

Chart: Share price over the year to versus ASX200 (XJO)

Despite iron ore prices holding up in recent months, we believe uncertainty surrounds AGO’s expansion plans. The iron ore producer’s plans to expand rail into the Horizon II project area will come at significant cost. In our view, any dip in iron ore prices may put the company’s share price under pressure.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.