by Peter Switzer
As one financial year ends and another one starts, let’s see if I can give you a range of stocks that might help you beat the 13% our overall stock market returned, if you throw in dividends. To make sure I’m not influenced by my own bias, I’ve recruited a lot of my smart mates, including Charlie Aitken, Geoff Wilson, Mary Manning and a whole lot more, who I’ve asked to give me one stock that they think will perform well in 2018-19.
I’ve always said that 2019 would be a year that would start to test out my positivity towards stocks. But I’m more worried about the second half of that year because 2020 could be the year when economies start to feel the pinch of rising interest rates, slower commodity price rises, slowing economic growth around the world and rising debt levels powered by political leaders like Donald Trump.
So, let’s get on with it
Kicking off with a surprise selection was WAM’s founder Geoff Wilson, who opted for a retail business that many might not even know! This is what he said: “Specialty Fashion (SFH): Market cap $190 million; PE 11.6x; $15 million net cash post asset sales. Profit growth is expected to be 20% plus. The catalyst for a rerating is potential earnings upgrades. Also, the shares are significantly under owned by institutions. We expect the company to change its name to City Chic, the only business left in the group after the recent asset sales. City Chic is a niche market and it’s interesting to note that online sales make up over 30% of revenues.”
Our own Tony Featherstone has given BHP (BHP) another year! This is what he said: “It’s as much a micro idea as a macro one: BHP will have plenty to give back to shareholders via special dividends, or perhaps through buybacks when the sale of its shale assets concludes and is doing a good job on cost-cutting/capex front. I like its more streamlined structure/disciplined approach outlined in May.
Re the macro, I expect another solid year for global growth, once the market gets past current worries about trade tensions, Italy, etc. although perhaps not as strong as FY18. I reckon talk about a US recession is overdone and any slowdown there is still a way off.”
CMC’s Michael McCarthy is always trying to avoid ‘dog’ stocks but he’s got something to woof about with Ramsay Health Care (RHC). This is his take on this once faultless stock: “Still working through the year end, but Ramsay Health Care (RHC) is sticking out like the dog’s proverbials to me.
In my view RHC has cleared the decks, and the industry is suffering a setback in the longer term demographically-driven demand for healthcare services. RHC is trading at its lowest share price in four years, and the lowest PE (after downward earnings revision) in six years. Happy to nominate this higher quality operator at depressed pricing.”
Bell Direct’s Julia Lee has made an educated guess on a local business and I have to say she has a good record at picking up and comers. She likes IDP education (IEL).
“With a weaker $A, it should make Australia an attractive destination for education,” she says. “We don’t focus on education as much as things like iron ore when it comes to talking about stocks, but it is Australia’s fourth largest export. This company is well placed to ride the growth of emerging nations such as India as well as the crackdown on visas by the US.”
When it came to Charlie Aitken, I gave him two bites of the cherry — one for the locals and one for overseas. This is his thinking: “I think Europe/UK and China are very cheap right now and offer good prospects for FY19. On that basis, my ASX-listed idea is Clydesdale Bank (CYB), which will complete the transformational merger with Virgin Money to create a mid-scale UK challenger bank. Merger synergies are underestimated and I see CYB as a cheap financial growth stock now that is potentially 50% undervalued versus medium term earnings forecasts.”
And this was his foreign story: “My international stock is Tencent (700:HK), the Chinese internet giant. Again, I think Tencent is 50% undervalued versus its medium term growth prospects. If you own only one stock for pure Chinese consumer exposure it should be Tencent, with the massive 58% market share of China’s mobile eyeballs. This is Facebook five years ago but with a bigger addressable market and no real competition.”
While overseas, this is the company Nathan Bell of Peters MacGregor Capital Management likes — Discovery Communications. (NASDAQ:DISCA).
“This is the world’s largest unscripted entertainment content producer (operator of the Discovery Chanel, Animal Planet, Oprah Winfrey Network, Eurosport and numerous others) merged with Scripps Networks Interactive in March. This merger with Scripps, owner of the Food Network, HGTV and others, offers significant cost savings and greater negotiating power in distribution and advertising deals.
“We are generally sceptical of merger/acquisition ‘synergies’, but in this case we expect that the planned $350 million of cost savings will be easily met. Recent commentary from CEO David Zaslav suggests he has lowballed his estimates. For example, Discovery has 600 sales people while Scripps has 500, which represents a huge opportunity to cut costs and increase profit margins.
“We added to the position around $17 after it had fallen rapidly from the low $40’s. Mr Market hated the debt used to finance the Scripps merger. If the post-acquisition cash flows reach management’s target, however, then the shares are worth close to $40 — still well above the current price of around $26.”
Remaining global, Ellerston Capital’s Mary Manning is hot on an Indian company.
“My top pick for FY19 is Reliance Industries (NSE:RELIANCE), one of the largest companies in India with market leading positions in energy, petrochemicals, Telecom and retail,” she told me. “With all the trade war noise, the Indian market looks relatively attractive because it is a domestic demand story and has strong domestic funds flow into equity markets.
“Reliance is a disruptor in the telecom space and its long-term ambition is to make Reliance Jio (RJio) the Tencent of India. Reliance’s retail business is the largest in India and spans across formats and products. We expect both the telecom business and the retail business will be spun off in the next year or two, crystallising the value of these assets in the Reliance share price.”
Coming back home and my old mate Rudi Filapek-Vandyck, founder of FNArena, like Macca above, is going for a quality company that has been a victim of a market beating.
“I nominate TechnologyOne (TNE). Reason? The market has treated the stock harshly, following a rather soft year, when compared to its historic track record. Double-digit growth should remain on the agenda, and this should translate into a higher share price throughout the year ahead.”
Shawn Burns portfolio manager at Contango Asset Manager, in charge of Contango Income Generator and also the fund manager for SWTZ, goes for Challenger (CGF).
“Challenger Ltd is a leader in the provision of annuity income streams in Australia,” he explained. “The demographic support for these products has been evident for several years as the ageing baby boomers move from accumulation phase in superannuation to spending, having an annuity in their portfolio makes more sense.
“However, to reach maximum potential, the annuity product needs to align with social security and tax policy. The government looks to have aligned with this outcome. Also deferred lifetime annuities (DLAs) appear now to be legislated in a favourable context.
“These products open up another, potentially large, market where retirees can manage the risk of outliving their savings. With this positive backdrop, Challenger has a proven ability to use its brand and distribution to capture attractive flows over the medium term.”
The final pick comes from Ben Griffiths of fund manager Eley Griffiths. Ben has opted for Alliance Aviation (AQZ), which is into mining charter services to remote areas. It also does passenger services as well and is into the fly-in, fly-out activities famous in the resources sector. Ben says this company has “top 10 management of the small cap companies” he has surveyed and expects it to head towards the stock’s old high of $2.32 from its current $1.95 price. “The company should win more resources work and I’d expect Alliance will renew their existing work,” he tipped.
Ben says its forward P/E is 10.5 and the Bloomberg consensus on the company’s EPS rise for FY19 is 25%, which adds to its appeal.
So, let’s recap on the stocks:
- Specialty Fashion Group (SFH)
- Ramsay Healthcare (RHC)
- BHP (BHP)
- IDP Education (IEL)
- Clydesdale Bank (CYB)
- TechnologyOne (TNE)
- Alliance Aviation (AQZ),
- Challenger (CGF)
- Tencent Holdings (700HK)
- Reliance Industries (NSE:RIL)
- Discoveries Communications (NASDAQ: DISCA)
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.