Health care, technology and natural resources companies are among the top stock picks from leading investors in 2024.
Sharing their investment ideas for those thinking long-term, these Australian and global fund managers are offering a sneak peek into their expectations for the upcoming year. They’re also generous with their time, investing pro bono on behalf of the Future Generation listed investment companies (ASX: FGX and FGG) – Australia’s first dual-purpose investment vehicles that deliver both investment and social returns.
By managers waiving their usual management and performance fees, Future Generation can give 1 per cent of its assets each year to youth-focused Australian charities – donating $13 million in 2023 and a total of $75 million since inception.
Check out their picks below:
Bill Pridham, Portfolio Manager, Ellerston Capital
Stock pick: GFL Environmental
Ticker: GFL CN
Sector: Waste Management
GFL is the fourth-largest environmental services company in North America and the only major player offering a diversified suite of services in solid waste management, liquid waste management and soil remediation.
Rarely do we come across a business with as many internal initiatives which will drive earnings growth, irrespective of the economy. GFL is leveraging its landfills in producing renewable natural gas (RNG) which should deliver >$175m in earnings in the next couple of years (up from zero last year).
Additionally, the Canadian extended producer responsibility (EPR) regulation means large consumer companies such as Nestle and Unilever now need to track and trace single use and paper products. This will deliver another $80 million to $100 million over the coming years as GFL is paid to provide this service in its recycling facilities. Management recently described this sustainability investment opportunity as the best risk-adjusted returns that they have seen in decades.
GFL has defensible earnings and given the high barriers to entry for an essential service, the industry is demonstrating strong pricing power. Long-term cash flow growth will be underpinned by the core operations, the opportunities mentioned earlier and lower funding costs as it achieves investment grade rating in the next 12-18 months. Coupled with accretive acquisitions, which will be tucked into its existing footprint, GFL should grow earnings at a double-digit clip for the foreseeable future.
James Rodda, Antipodes Partners
Stock pick: Compagnie de Saint-Gobain S.A.
Saint-Gobain is a leader in light and sustainable construction. Over 50 per cent of the business is exposed to building renovations and approximately 70 per cent of products are aligned with sustainability (insulation, low carbon materials, recycling).
A weak housing cycle following a sharp increase in mortgage rates have impacted Saint-Gobain’s share price. However, the market is missing the stock’s multiple ways of winning.
Saint-Gobain is a key beneficiary of global government regulation and stimulus packages targeted at net-zero goals. In Europe for example, 90 per cent of buildings will need to be renovated by 2050 to reach carbon neutrality, requiring a three times increase in the rate of renovations. More broadly, Saint-Gobain is positioned to benefit from the inevitable turn in the housing cycle as old builds in developed markets are renovated, and emerging markets meet increased demands with new builds.
The company’s portfolio and cultural transformation has also led to improvements in profitability, with one third of sales rotated since the end of 2018 to acquire high margin and return businesses such construction chemicals, while underperforming businesses such as flat glass and building distribution have been exited. Further, the empowerment of regional CEOs through decentralised incentives has resulted in better value-creation driven decisions aligned with local performance.
We see an attractive margin of safety in Saint-Gobain with the stock trading at 8.5 times forward earnings, which is cheap given the stock has historically traded in-line with the market multiple and since 2018 has achieved a structurally higher level of profitability.
Kelli Meagher, Portfolio Manager, Sage Capital
Stock pick: CSL Limited
A high-quality healthcare company at a reasonable price. CSL’s share price has been weak on the back of concerns around new therapies and competition, a slower than expected recovery in margins post-COVID and the acquisition of Vifor. Margins should continue to recover and given it is now trading well below its long-term average PE ratio we believe competitive risks are more than factored into the share price.
CSL is a leader in global plasma fractionation, an industry with high barriers to entry, and has the competitive advantage of being the lowest cost producer. Demand for CSL’s core products is strong and while there will always be threats of new therapies and competition, CSL continuously invests in research and development, has an excellent track record of execution, innovation and commercialising its R&D portfolio. Improved manufacturing efficiencies and a pipeline of new product launches should continue to drive growth and margin expansion. In addition, its return on invested capital should rise over the coming years follow a period of high capital expenditure to expand manufacturing capacity. This should further underpin share price appreciation.
Tom Richardson, Portfolio Manager, Paradice Investments
Stock pick: Catapult Group
Sector: Information Technology
A global leader in sports technology and data analytics. The company has some of the world’s most recognisable sports teams as customers, such as Chelsea FC, and is continually innovating and adding value to their clients.
Despite the strength of their technology, the company has struggled to generate profits as they pivoted to a recurring revenue business model away from capital sales. Catapult recently achieved a period of free cash flow after several years of investment. Should this be sustained the stock could be valued considerably higher.
Their technology and innovation provide a long runway for growth. The demand from their clients is insatiable and should they continue to develop new products the business could grow by multiples in the years ahead.
James Kinghorn, Nikko AM
Stock pick: Progressive
Progressive is one of largest auto insurers in the US, and they have been winning market share consistently over the last few years. This trend will continue as Progressive’s direct model is more efficient than peers and allows for more competitive pricing.
Progressive have invested heavily in technology over the last decade. Not only does this give them a customer friendly platform to enable direct interaction with consumers but it also improves efficiency in all aspects of the business including claims management, risk management etc. As a result they have had significantly better underwriting results, over the last few years, than competitors, and the cost to acquire customers is lower. They entered the US home insurance market a few years ago, which has increased their addressable market meaningfully.
Their competitive advantage allows them to be one of the most competitively priced products on the market but maintain far better underwriting results, leading to high return on equity. The price advantage enables them to win market share and therefore grow faster than most peers. We believe these characteristics are sustainable over the next few years, and will generate growth and returns.
Dr David Allen, Senior Portfolio Manager, Plato Investment Management
Stock pick: Novo Nordisk
Ticker: NOVOB DC Equity
Sector: Pharmaceuticals & Biotechnology
Novo Nordisk, a company few had heard of outside of Europe ten years ago, is now the largest company in Europe, eclipsing LVMH. The growth potential is phenomenal.
We invested in Novo Nordisk and Eli Lily, the makers of the weight loss drugs that has been making headlines worldwide, two years ago. Obesity is the 4th largest cause of death globally and is associated with over 240 co-morbidities. For this reason, the GLP-1 class of drugs are being touted as the Swiss-army knives of drugs, showing promise for diseases as disparate as heart disease, Alzheimer’s, addiction, diabetes, depression, and arthritis.
The anti-obesogenic drugs pioneered by Novo Nordisk will be the blockbuster drugs of the next decade, just as immuno-oncology drugs defined the last decade. There is a very real possibility that these medicines will go on to be the best-selling drugs of all time and generate $100 billion revenue a year.
Jun Bei Liu, Portfolio Manager, Tribeca Investment Partners
Stock pick: Promedicus
Pro Medicus is a health software company which is proving the value of cloud deployment of software.
The superiority of the group’s offering has been proven by its customer list (which includes many of the leading US academic hospital groups) and its pricing. The group’s streaming technology provides instantaneous access to diagnostic tools in virtually any location. This compares to the traditional on-premise systems which are increasingly struggling with larger image files slowing radiologist workflow in an environment of elevated clinician burnout. Visage offers a clear productivity advantage which has starting to create a network effect as more radiologists use the system.
Despite the impressive customer list, Pro Medicus’ market share in the US is only 7 per cent leaving enormous opportunity for growth. In addition, the group is developing software to cater for images from other medical departments, starting with cardiology. Pro Medicus’ growing share and technology positions it to be a key player in the deployment of AI tools to support diagnosis.
Pro Medicus is an attractive long term buy given its enormous growth potential and rising margins thanks to increasing prices and the very low cost deployment.
Zehrid Osmani, Head of Global Long Term Unconstrained Equities, Martin Currie
Stock pick: Moncler
Ticker: MONC IM
Sector: Consumer Discretionary
Moncler is well positioned within the luxury goods market segment to monetise on the ongoing rise in emerging market middle class.
The brand is reinforced by a creative director who has been successful at forming relationships with fashion figureheads and influencers.
Managed carefully, Moncler remains under-exposed, with many opportunities for further expansion in the store network.
The stock has been weak recently, as a result of the cyclical headwinds in China. Should these headwinds ease, the company is well-placed to monetise on the structural growth opportunities in the luxury goods market in the medium term. We forecast the company to grow at over 12 per cent annualised over 5 years on sales, 14 per cent on earnings, and 9 per cent on an earnings per share basis.
Gabriel Radzyminski and Campbell Morgan, Sandon Capital
Stock pick: IDT Australia Ltd
IDT is a pharmaceutical manufacturer based in Melbourne. COVID-19 looked like boon for IDT early in the pandemic, when IDT secured government funding. Unfortunately, nothing else came to pass.
The company has undergone a significant change of board and management and is now focused profitable growth. IDT’s manufacturing facility is licensed by the Australia’s Therapeutic Goods Administration and the US Federal Drug Agency for certain drugs.
IDT is manufactures Active Pharmaceutical Ingredients (APIs), Specialty Orals (like medcann and psychedelics) and Advance Therapies (mRNA and Antibody Drug Conjugation). It also provides R&D services to those three segments. Today, has recapitalised and IDT is focused on diversifying and growing its commercial revenues.
The COVID-19 pandemic highlighted the importance of sovereign manufacturing capabilities, especially in certain critical industries like pharmaceuticals. IDT has certain capabilities that can contribute to Australia developing and maintaining supply of essential pharmaceuticals.
Oscar Oberg, Lead Portfolio Manager, Wilson Asset Management
Stock pick: Viva Energy
Viva Energy is a leading energy company that supplies approximately a quarter of Australia’s fuel requirements. The company is in the process of converting its 700 Coles Express service stations into the highly successful “On the Run” brand of service stations that have dominated the South Australian market.
On the Run was acquired by Viva Energy earlier this year and generates more than double the profit per On the Run service station compared to an average Coles Express service station. Viva Energy is planning to roll out an additional 300 service stations under the On the Run brand over the next five years which will bring the total to over 1000 service stations in Australian in the medium term.
Once Viva reaches this milestone in CY27, we estimate that group earnings will be over $1 billion with over 50 per cent of earnings from convenience retail compared to – 25-30 per cent at present.
At present, Viva is trading on a price to earnings multiple of 11 and a dividend yield of 6 per cent. We believe the share price can double in the next three years if management execute on their strategy which should generate a re-rating of Viva Energy’s valuation.
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