It’s a dangerous and uncertain time for investors, but there are still good companies to be bought at good prices. Here’s where some of Australia’s top fund managers are hunting.
James Aitken, the highly respected adviser to some of the world’s biggest investors, has a saying that could not be more appropriate in these difficult times: we all want to be Warren Buffett, until a Warren Buffett moment arrives.
Aitken’s point is that while the wisdom of Buffett is often spouted by investors – be greedy when others are fearful; the sharemarket is a device to transfer money from the impatient to the patient – when moments of crisis arrive, many investors panic and freeze.
But the best investors, Aitken recently wrote, are still out there buying great assets at below-market prices.
“These are not bets on Trump’s reaction function,” Aitken says. “Nor are they bets on uncertainty being resolved across weeks of difficult tariff negotiations, and perhaps two quarters of economic weakness. And they are not bets on pivots, either.
“If you are buying assets on their merits (intrinsic valuation, how very quaint), you can be a successful investor without being a perpetual forecaster.”
With Aitken’s advice ringing in our ears, we’ve collected 15 stock tips from some of Australia’s top fund managers who work with Future Generation, the philanthropy-focused investment firm that runs three strategies – the Future Generation Australia and Future Generation Global listed investment companies, and the newly established unlisted investment trust, Future Generation Women – that donate 1 per cent of their asset bases to charity each year.
David Prescott, Lanyon Asset Management
Johns Lyng Group: The days of the building group being a market darling are long gone; shares in the company, whose core business is rebuilding and restoring properties after insurance events, have crashed 80 per cent from their highs less than three years ago.
But Prescott sees the potential for a turnaround. Johns Lyng can lift annual profit to $70 million over time, putting it on an earnings multiple of eight times. With a national market share below 10 per cent, there’s plenty of room for growth, and rumoured private equity interest doesn’t hurt either.
Jacob Mitchell, Antipodes Partners
Tencent: American exceptionalism might be on the nose, but Mitchell is looking further afield. He argues Chinese tech giant Tencent can continue to deliver double-digit growth through an ecosystem of integrated businesses across communication, payments, gaming and software that gives it utility-like qualities in China.
Siemens: The German giant should be well positioned to benefit from the big themes in global capital spending (and, since the arrival of Trump, particularly in Europe), including automation, energy efficiency and infrastructure renewal. Siemens also cheap, trading at 15 times earnings, or a 25 per cent discount to industry peers.
HCA Healthcare: Mitchell offers this one US stock, which operates the largest for-profit healthcare network in America. Earnings growth is running in the mid-teens, the stock trades on an earnings multiple of just over 13 times, and Mitchell is optimistic about HCA’s ability to weather any economic storm in the US. The company has a strong presence in wealthy states like Florida and Texas, where the ageing demographic should support long-term demand.
Jun Bei Liu, Ten Cap Funds Management
A2 Milk: The Chinese infant formula market is not a sector for the faint-hearted, but Liu argues ASX-listed group A2 Milk is proving it can swim against the tide. In a year in which the sector shrank 6 per cent, A2 Milk grew revenue by 10 per cent, and management is guiding to stronger growth and better margins in the second half.
Liu says the company’s balance sheet, with over $1 billion in cash and no debt, gives it room for deals or bigger capital returns – and she’s also excited about the Year of the Snake. It’s typically an auspicious time for marriage in Chinese culture, and a baby boom often follows.
JB Hi-Fi: The fund manager’s reasoning around JB Hi-Fi is pretty simple. This is one of Australia’s best-run retailers that has proven it can grow market share even in tough times. As rate pressure eases and confidence returns, Liu says JB Hi-Fi’s earnings are well-placed to bounce. “It’s a quality compounder with a proven team and a model that works through cycles.”
Fisher & Paykel Healthcare: Finally, Liu is betting on a turnaround at Fisher & Paykel, which has plunged almost 12 per cent this year on concerns around potential tariff impacts on products manufactured in Mexico for export to the US. Liu reckons the risk is now priced in, and possibly a bit overstated; over time, Fisher & Paykel will have the ability to pass on any cost increases through pricing, given its selling essential healthcare products.
Julia Weng, Paradice Investment Management
Newmont: Just about the only thing glittering on financial markets right now is gold, and Weng sees substantial upside in Newmont, the world’s largest producer.
The current macro environment continues to make the case for the precious metal, Weng argues, as investors flock to a perceived hedge against slower growth, higher inflation and geopolitical risk. Central bank buying should continue, and Weng says ETF buying is becoming a bigger feature in the market.
Newmont’s stock is up 41 per cent year to date and the producer is on a path to lifting production and lowering unit costs, while its lean balance sheet is supporting the sizable buyback it has in train.
Geoff Wilson AO, Wilson Asset Management
EVT: There’s nothing Geoff Wilson loves more than a bargain, and the wily veteran thinks he’s spotted one in the ASX-listed EVT, which owns and operates the Event Cinemas chain, a hotel portfolio that includes the QT and Rydges brands, and the Thredbo ski resort.
WAM liked the group’s interim result in February, but the big catalyst for the firm was EVT’s announcement that it would sell one of its most valuable property assets, 525 George Street in Sydney. “This is a catalyst for us and with the stock trading at $13.30 and property assets valued at $14.15 per share, we see this as a strategic shift that should enhance returns on capital,” Wilson says.
Catapult: Sports lovers will probably be familiar with Catapult, which provides hardware and software that helps more than 4400 professional sports teams across more than 40 sports monitor the performance of athletes. The company, which has been listed since late 2014, has seen its shares surge 165 per cent in the past 12 months. And Wilson sees room for more growth as Catapult aims to grow to 20,000 teams and $US1 billion ($1.5 billion) in revenue over the medium-to–long term.
The company’s cost base is largely fixed, which means strong operating leverage and the opportunity for re-rating as higher earnings and cashflow comes through.
Gabriel Radzyminski, Sandon Capital
Magellan Financial: It’s a tough time for listed active managers, but Radzyminski’s case for buying Magellan Financial comes down to maths. Sandon estimates it holds over $6.00 per share in investments and cash (including a stake in investment bank Barrenjoey). So with the stock trading at about $7.25 per share, the market values its core asset management business at just over $1.00 per share. But this business could earn $125 million next year, putting it on an implied price-to-earnings multiple of just 1.4 times.
Fleetwood: Radzyminski would like Magellan to return more capital to shareholders, which is a strong part of his rationale for buying Australia’s largest modular construction company, Fleetwood. The group pays out 100 per cent of earnings as dividends and trades on a fully franked dividend yield of between 12 per cent and 13 per cent.
Nick Markiewicz, Ellerston Capital
Aercap: As anyone in the aviation sector will tell you, there is a critical shortage of commercial aircraft thanks to strong demand and supply chain disruptions at manufacturers, which is providing a big tailwind to New York-listed Aercap, the world’s largest aviation leasing company. Markiewicz says the lift in both aircraft values and leasing rates to airlines will increase both book value and earnings for the company.
Kodiak Gas Services: Another market leader, Kodiak is the largest provider in the US of gas compression equipment and services, which is vital infrastructure equipment required to move natural gas through pipelines.
With demand for natural gas set to increase significantly over the coming years, the compression market is tight and dominated by just three players.
That should push up prices and margins. Markiewicz thinks Kodiak, trading at just nine times earnings before interest, taxes, depreciation, and amortisation, could double over the next few years.
Katie Hudson, Yarra Capital Management
Auckland International Airport: This stock has one of the things Hudson loves most: the optionality to generate compound earnings growth over many years. Clearly, Auckland Airport is a high-quality, defensive asset that continues to recover from the pandemic hit to travel, but Yarra sees hidden value in the large land bank around the airport, offering multiple reinvestment opportunities.
“Infrastructure assets such as airports are beneficiaries of declining interest rates, and the lack of quality exposures underpins Auckland Airport as an attractive opportunity for long-term investors.”
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