The Australian sharemarket is posing an interesting conundrum. Should investors stick with defensive yield plays or chance their arm by taking on more risk?
It depends on your investment profile and appetite for risk. In terms of balance, a suitable portfolio will contain a mix of defensive and growth stocks. During 2012, investors have been chasing stocks with relatively strong earnings streams backed by solid and reliable dividends – particularly Telstra, the major banks, Wesfarmers and Woolworths. Interestingly, James Samson, of Lincoln Indicators, says growth stocks that generally carry a built-in price/earnings premium are now trading at a discount.
“The Reserve Bank has been chipping away at providing economic stability,” he says. “It’s cut rates and demand for the Australian dollar has recently cooled. Investors may be asking whether the market is at a point of flux, where growth businesses are becoming more attractive than highly valued defensive stocks. For some time now, growth assets have traded at steep discounts to their defensive counterparts, which can be counter-intuitive.”
Samson says now be the time to add more growth stocks to a portfolio in light of a brighter outlook for equity markets. “But it’s essential investors align exposure and risks with their appropriate investment objectives,” he says. With that in mind, Samson offers reasons behind Lincoln’s top five growth stocks and five value stocks that investors can consider adding to their portfolios.
Miclyn Express Offshore (MIO)
A vessels service provider to the offshore oil and gas sectors in Australia, Asia and the Middle East. Given significant offshore LNG production, energy exploration and development, Samson says MIO is set for continuing growth as it invests in an increasing fleet. Also, he says, there’s a slim possibility that private equity may launch a takeover following Macquarie Capital’s departure from the MIO share register.
G8 Education (GEM)
A small business that’s grown in recent years. The company operates and franchises childcare and early learning centres in Australia and Singapore. “Through its acquisition growth strategy, the company is consolidating a fragmented market and benefitting from a trend of increasing demand for childcare services,” Samson says. “Unlike sector predecessors, GEM is fundamentally a strong business and paying a fully franked yield above 3.5 per cent.
Maverick Drilling & Exploration (MAD)
Owns and operates oil prospects in the “resource rich salt dome regions” of the US state of Texas. Samson says the company recently signed a memorandum of understanding with US oil company Gulf South Holdings that will significantly lighten Maverick’s expenditure burden. “As a result, Maverick is well placed to execute an extensive drilling and development campaign in the next three years and this may lead to more oil production,” he says. “The company has a strong balance sheet.”
Crown operates casinos and entertainment businesses in Melbourne, Perth and Macau. Samson expects the company to invest heavily in developing its Perth-based casino complex and to establish a significant presence in Sydney. “The proposed investment at Barangaroo is significant, but not without potential balance sheet risk,” he says. “But it offers investors an opportunity for potentially strong earnings growth in coming years.”
A copper, gold and silver producer in Laos. With copper and precious metals prices remaining relatively stable, Samson says PNA is well placed to lift production and profits in the medium term. “Despite its strong financial health, PNA has been heavily sold off, as the mining sector has been under considerable pressure,” he says. “PanAust provides an opportunity to buy an overseas operation in mining that’s not subject to the same labour force issues as its Australian- based counterparts.”
VALUE DEFENSIVE STOCKS
This diversified industrial conglomerate owns Coles Group, the Bunnings hardware chain, Officeworks, coal mines in Queensland and chemical manufacturing facilities nationwide. Samson says “heavyweight” earnings in defensive divisions, such as Coles and Bunnings, means Wesfarmers “is a good prospect for more risk averse investors looking for a stock offering strong fundamentals, good health and stable value creation”.
Supplies blood plasma to the health care and medical industries. Given the defensive nature of health care, Samson says CSL’s strong financial health and dominant market position provides a cushion against cyclical impacts. However, CSL is exposed to currency risks.
Breville Group (BRG)
Makes and distributes small kitchen appliances to the retail sector. Samson says the company has produced strong consistent earnings and returns over a period of weaker retail in Australia. “It’s a top businesses,” he says.” Breville exports overseas, so it provides investors with a globally diversified and defensive retail opportunity.”
Australia and New Zealand Banking Group (ANZ)
The banks are mostly about attractive, fully franked dividends. Simply, Samson says, income investors must consider banks to be part of their portfolio. “While we expect little-to-no earnings growth from banks in the short-term, Australia’s big four are stable, well capitalised and very profitable,” he says. “As such, ANZ is Lincoln’s preferred bank, offering the greatest potential for growth in coming years from its Asian expansion.”
Like health care, telecommunications businesses are considered defensive for their earnings and cash flow generation. iiNet is now Australia’s second biggest internet service provider, behind Telstra, and has developed a big base of subscribers that provide strong recurring revenue. Samson says: “With the National Broadband Network (NBN) opening further potential markets, iiNet’s prospects look attractive. Strong operating cash flows underpin satisfactory exposure to financial risk.”
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