James Bryce-Lind, Patersons Securities
Perseus Mining (PRU)
A weaker gold price has given investors an opportunity to reposition in the sector after a strong start to the year. PRU is one of our top selections in the space, although one of the smaller companies. We believe exploration upside and a high marginal cost of production gives it leverage to any move up in the gold price. BetaShares Australian Equities Strong Bear Hedge Fund (BBOZ)
To counter volatility in global equity markets, a strategy embraced by growth and aggressive investors is to hedge a portion of their portfolio in BBOZ. It’s leveraged 2 to 1, so BBOZ is likely to rise if the market falls. The fund enables speculation on short term movements in equity markets. Outperformance in defensive sectors, such as healthcare and consumer staples, amplifies our view that risk is returning to markets.
Netwealth Group (NWL)
Financial planners are increasingly choosing Netwealth or Hub24 as they shift from traditional wealth platforms provided by the major banks and AMP. Combined, Netwealth and Hub24 have about 4 per cent of funds under management in Australia, but are receiving about 40 per cent of new business in this space. As the NWL business grows, costs won’t move in parallel, resulting in higher margins. The stock would be a buy if it hadn’t doubled in the past year. Rio Tinto (RIO)
The materials sector has been the key outperformer, driving the S&P/ASX200 to below 10 year highs. RIO’s share price has rallied strongly in the past 12 months and is approaching key resistance at $88. We expect the cyclical bull market in materials to continue in the medium term. But investors can consider taking advantage of any pull back towards the 200-day moving average. Rio closed at $84.76 on May 23.
TPG Telecom (TPM)
TPG’s aggressive strategy to offer free 4G data services to new customers for six months shows acquisition costs are soaring in the competitive mobile market. TPM is also experiencing higher wholesale costs from NBN migration. As a result, we see a potential margin headwind. Link Administration Holdings (LNK)
A Federal Budget initiative to transfer inactive superannuation accounts to the Australian Tax Office has seen the stock tumble by up to 20 per cent. The ATO will endeavour to unite inactive accounts with their owners. The plan affects accounts with a balance of less than $6000 and where no contribution has been made for 13 months. Analysts forecast the Budget initiative is likely to have a material impact on future revenues.
Fiona Clark, Prime Value Asset Management
Since entering a significant downtrend last December, exacerbated by a profit downgrade earlier this month, shares have rebounded and triggered several technical buy signals. Investors at the recent AGM were relieved to learn that short term pain associated with the protect and grow capital expenditure plan should deliver long term benefits for earning going forward. Shares in the funeral operator closed at $12.91 on May 24.
G8 Education (GEM)
Shares in this childcare operator have fallen around 40 per cent since a guidance downgrade in December 2017. The key issues have been lower occupancy rates (strong supply growth) and changes to staff ratios. The supply environment is still challenging, but is expected to moderate, while the new childcare funding package should improve occupancy and revenue. GEM offers growth potential with high yield, but financial health is an issue, so this is a higher risk position.
A strong result in February was followed by a recent guidance upgrade from better than expected sales of haemophilia products and a severe flu season. This is a quality company with a strong track record of consistent earnings growth. While it’s hard to get excited at the current price, downside should be limited due to its size, strength and general investment appeal. The shares closed at $183.10 on May 24.
Flight Centre (FLT)
The global travel agency combines strong projected earnings growth, a modest dividend and strong balance sheet. It’s a strong brand, which has managed to combine the traditional physical shop fronts with a successful online strategy that appeals to a variety of customers. The first half earnings report was good and fiscal year guidance was upgraded. However, in our view, the valuation is stretched, so it’s a struggle to say buy.
Afterpay Touch Group (APT)
Shareholders in this technology driven payments company have enjoyed a great run since APT listed in June last year. News of US expansion provides further scope for growth. But potential for tighter regulation, an exorbitant valuation and the release of escrowed shares earlier this month all add up to increasing downside risk.
Facing intense competition and an increasingly fickle customer base, even the competitive advantage of network quality is under fire after recent outages. Even holding for yield might be at risk. Just when you think the shares can’t go any lower, another problem arises. It might be a trade one day, but not yet.
Michael Wayne, Medallion Financial Group
Steadfast Group (SDF)
Steadfast Group is Australia and New Zealand’s largest general insurance broker network. SDF has a large presence at a local level, which enables modest economies of scale. We believe the company is well positioned to capitalise on the repricing of risk, which provides a tailwind for insurance premiums.
Chorus is the biggest telecommunications company in New Zealand, owning 100 per cent of the copper network and 80 per cent of the new fibre network currently rolled out in a partnership with the New Zealand Government. Demand for fibre services will generate long term value. Its strong record of network rollouts provides confidence that costs won’t exceed expectations. Owning copper and fibre networks is a benefit. Customers can move across one product to the next while remaining under the Chorus banner.
Janus Henderson Group PLC (JHG)
The newly combined entity will be a far more diversified global enterprise, providing the opportunity for growth through an imposing transatlantic distribution platform. The merger between Janus Group and Henderson Global Investors brings together two asset management businesses with excellent reputations and track records. It should also offer the new entity an opportunity to cut costs. Diversified financials have fallen during recent market turbulence. With markets stabilising, we feel these businesses stand to benefit the most from any recovery.
Shriro Holdings (SHM)
A kitchen appliances and consumer products group operating in Australia and New Zealand. An underwhelming market update put it under pressure. The business looks cheap on a dividend and price/earnings basis. Although the headline downgrade read poorly, positive signs are emerging. The consumer products side of the business is tracking above last year’s numbers.
Fletcher Building (FBU)
The company has been losing market share, indicated by falling New Zealand dwelling approvals. With the business facing operational issues at the same time as the sector appears to have reached a cyclical peak is concerning. We feel it’s best to avoid FBU until an element of certainty returns.
Coca-Cola Amatil (CCL)
The shares were priced at $9.44 on May 8. The shares closed at $8.64 on May 24. We feel the structural trend of consumers shifting away from fizzy drinks will remain a headwind for some time. Competitor pricing pressure and intense competition across the grocery industry have the potential to further compress margins.
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