James Thomson, Chanticleer at Australian Financial Review.
The start of a new year provides a perfect time for investors to review their portfolio.
With an impressive rally through November and December dragging the ASX 200 and the MSCI World Index back to the same level they were at two years ago, the big question is obvious: what comes next? Given 2023 started with predictions of global recession and Chinese resurgence, predictions for 2024 to bring a soft landing and more pain in China should probably be treated with scepticism.
The best strategy may be to honour Warren Buffett’s late, great wingman Charlie Munger, and look for great companies that can ride out whatever cycles lay ahead in the coming year. With this in mind, we’ve turned once again to the fund managers who invest on behalf of the Future Generation family of listed invested companies.
Not only do these managers do the right thing by the Future Generation Australia and Future Generation Global vehicles – waiving their fees to allow the company to give 1 per cent of its assets each year to youth-focused not-for-profit organisations – but they’ve also given Chanticleer a sneak peek of their top long-term stock picks for the year ahead.
QVG Capital: PSC Insurance
ASX-listed insurance broker PSC Insurance ticks a lot of boxes for QVG Capital portfolio manager Chris Prunty: an impressive track record of mid-teens earnings growth; strong profit margins; and a group of directors who own 35 per cent of the company.
But what’s missing is market recognition – the stock has gone sideways for two years, which means PSC’s price-to-earnings multiple has fallen from 25 times forward earnings to 18 times.
Prunty reckons that makes it the cheapest large listed insurance broker in the world, and expects more earnings growth in the 2024 and 2025 financial years will eventually see the market re-rate the stock.
Magellan Asset Management: SAP
The German enterprise software giant is up more than 40 per cent in the last year, but Magellan portfolio manager Nikki Thomas sees the potential for more gains as its shift to the cloud is turbocharged by the artificial intelligence revolution.
Thomas admits SAP has disappointed investors at times through poor execution and questionable strategic decisions, but argues investor scepticism means the company is now mispriced.
A stronger management team and the opportunities created by the shifts to the cloud and AI can put SAP’s ambitious growth targets in reach.
L1 Capital: Mineral Resources
Rafi Lamm, L1 Capital’s joint managing director and chief investment officer, believes Chris Ellison’s West Australian mining conglomerate Mineral Resources is at an inflection point.
He believes the company can double its earnings in the next three years as its lithium production surges, its Onslow iron ore project in Western Australia progresses, and its newly formed energy division delivers both energy self-sufficiency for the company and exposure to the attractive Australian gas market.
Ellison has delivered a total shareholder return of more than 30 per cent per annum since listing Mineral Resources in 2006, and Lamm believes there’s more to come.
Plato Investment Management: Vertex Pharmaceuticals
US biotech Vertex scored a big win in November when it gained the first ever approval for a therapy in Britain that uses the Nobel prize-winning CRISPR gene editing technology.
But Plato’s head of long/short strategies, Dr David Allen, sees an even bigger opportunity in the company’s VX-548 pain drug. Where opioids are notoriously addictive and hazardous, VX-548 interrupts pain signals before they reach the brain and is non-addictive, making it a huge potential game changer.
Allen ascribes a 50 per cent probability of the drug succeeding, but sees plenty of other opportunities in Vertex’s R&D pipeline.
Tribeca Investment Partners: CSL
In the last year, the market has seen something unusual from the $138 billion Australian blue chip CSL – its shares haven’t gone up.
But Tribeca portfolio manager Jun Bei Liu says recent concerns about margins in the company’s core plasma business are abating and a return to strong growth is around the corner, at the same time the company’s shares are looking attractive again.
The cherry on top could be results from CSL’s new treatment for heart attack patients, which are expected early next year. Expectations are low, but Bei Liu says this could be a new, high-margin addition to CSL’s portfolio.
Lanyon Asset Management: Melrose Industries
There’s a good reason Lanyon portfolio manager Nick Markiewicz sees Melrose Industries as a long-term stock pick – the company’s key source of revenue has a 40-year lifespan.
Melrose’s key business is GKN Aerospace, a supplier of airframes and critical jet engine components to almost every commercial and military aircraft platform in the world; management estimates its installed engine base can deliver royalties for four decades.
While the stock has doubled in the past year, Markiewicz says Melrose has shed several lower-quality assets in recent years which will allow its jet engine business to shine in a way the market still hasn’t fully appreciated.
Paradice Investments: ResMed
Sleep apnoea giant ResMed was a victim of the great Ozempic craze of 2023, when the rise of GLP1 drugs for diabetes and other obesity-related conditions led investors to bet demand for a number of established healthcare players could dry up as the world slimmed down.
But after a 30 per cent fall in ResMed’s price, Paradice portfolio manager Tom Richardson sees value, arguing the business can keep growing despite the GLP1 revolution. He says a competitor’s product recall has allowed it to win market share, with ResMed increasing its installed base by 60 per cent over the last two years.
Nikko Asset Management: Amphenol
Investors love a compounder and Amphenol, a US-based maker of cables, connectors, sensors and antennas, certainly fits the bill.
Nikko portfolio manager James Kinghorn says it has produced a compound annual growth rate of 10 per cent for 15 years. While he loves the company’s flat management model that pushes autonomy down to its leaders, he also believes Amphenol is set to enjoy strong tailwinds from digitalisation and electrification. The shift to electric vehicles, for example, should double demand for the connectors the company makes.
Firetrail Investments: Incitec Pivot
Explosives and fertiliser maker Incitec Pivot has been going through a period of what Firetrail portfolio manager Blake Henricks describes as a period of radical simplification, selling its US fertiliser business, examining offers for its Australian fertiliser business, and focusing on the explosives sector.
It’s here that Henricks sees big opportunities. Not only should Incitec enjoy demand from the rush for critical minerals (which tend to be harder to mine, requiring more explosives) but there are broader supply concerns in a market where replacing cheap explosives and energy from Russia is becoming harder.
Ellerston Capital: DigitalBridge
The rise of AI and the digital infrastructure required to support it will remain a dominant theme of markets for years to come, and Ellerston portfolio manager Bill Pridham says U-based digital infrastructure asset manager DigitalBridge provides a unique way to ride that growth.
The firm has $US30 billion ($43.98 billion) under management, and Ellerston sees that growing to $US50 billion by 2025 as demand for infrastructure to support generative AI explodes. The stock is up 60 per cent in the last year.
Regal Funds Management: Stanmore Resources
Shares in metallurgical coal producer Stanmore Resources have risen 33 per cent in the last year, but Regal portfolio manager Henry Renshaw argues the company remains materially undervalued, given it trades on just two times EBITDA and a free cash flow yield of 21 per cent.
With demand for steel likely to remain robust as the world decarbonises, Renshaw says the acquisition of Queensland coal mines from BHP leaves Stanmore with a portfolio that is strategically important and increasingly lucrative, given how hard it is becoming to bring on new metallurgical coal mines.
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