Treasure Chest: Changes To Conviction Stock Picks

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-Not time to switch from yield
-Earnings certainty to the fore
-Care urged with fully priced stocks
 

By Eva Brocklehurst

Morgan Stanley has a general dislike of the valuation risks around crowded trades in bond proxy-styled equities, yet acknowledges that growth in earnings and yield remains a significant determinant for stock picks, amidst the general expectation that global rates will be lower for longer. A wholesale switch out of yield is not the right call to make on Australian equities now, the broker admits. Rather, a shift in market leadership is expected with "growth yield" outperforming "blue chip yield".

In terms of changes to the model portfolio this means Morgan Stanley switches Australia Real Estate Investment Trust (A-REIT) holdings to Federation Centres ((FDC)) from Dexus ((DXS)). Dexus has delivered acceptable returns but, at this juncture the switch is made on a risk/reward basis. Federation Centres is expected to maintain its superior growth profile from cost efficiencies and asset recycling.

The broker exits MMA Offshore ((MRM)), consolidating weights in energy-linked names further, placing all active weightings across Oil Search ((OSH)) and Origin Energy ((ORG)).  Henderson Group ((HGG)) is added as the broker is attracted to both the industry and product positioning. Weightings are trimmed in BHP Billiton ((BHP)), Telstra ((TLS)) and Wesfarmers ((WES)) while weight is added to Macquarie Group ((MQG)) and ResMed ((RMD)).

What's pulling strings at Citi? The broker has added ResMed back into its focus list for Australia/New Zealand following significant upgrades to earnings forecasts and a recent pull back in the share price following the third quarter result. The analyst at Citi has now included cardiology sales into forecasts, with the headline results of the heart failure trial to be released in the next few months.

High convictions stocks for Morgans include those where earnings certainty takes precedence over growth. Analysts continue to revise down earnings expectations and the broker stresses a cautious approach regarding holding onto stocks which are priced for perfection. Carsales.com ((CAR)), Qantas ((QAN)) and Sydney Airport ((SYD)) make it into the broker's ASX 100 high conviction list while Bellamy's Australia ((BAL)) and Qube Logistics ((QUB)) make it into the ex-ASX 100 list.

Macquarie Group has been removed because of strong share price appreciation as has Transurban ((TCL)) for similar reasons. Morgans still likes Transurban relative to other yield alternatives because of its proven network strategy. Seek ((SEK)) is removed from the high conviction list because of the lack of short-term re-rating catalysts. The broker recommends trimming overweight positions in Medibank Private ((MPL)), because of margin pressure, and Sirtex Medical ((SRX)), given risks around product adoption.

No changes are forthcoming this month for Goldman Sachs' small & mid cap focus list. Over April the list was up 1.5% versus the ASX Small Ordinaries Accumulation Index at 1.7%, implying 0.1% underperformance. Key performers from the list in April were Nine Entertainment ((NEC)), Cover-More ((CVO)) and Skilled ((SKE)). Key detractors on the list were OzForex ((OFX)), SAI Global ((SAI)) and Flexigroup ((FXL)).

The broker has removed Genesis Energy from its Australia/New Zealand Buy list as the company is struggling with over capacity and competitive pressures. Goldman downgrades the NZ-listed stock to Neutral from Buy. Declining consumption per customer also suggest to the broker that the customer mix is deteriorating. The company has the greatest earnings sensitivity in the sector to retail prices and volumes given a large customer base and relatively low overall margins.

Credit Suisse has updated its Australian top picks with Brambles ((BXB)) a key strategy idea. The stock has a dominant market position and defensive growth characteristics. Technology-driven improvements in asset tracking and efficiencies could raise capital returns in its high quality pallet pooling business to around 30%, in the broker's opinion. Average earnings growth above 10% per annum is considered possible over the next five years.

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