Rudi’s View: Brambles, Orica, Reece and… Tesla

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In today's story:

-Index Changes: One More Time
-Secular Growth, With Conviction
-Conviction Calls
-Rudi Talks
-Research Reports To Download

By Rudi Filapek-Vandyck, Editor FNArena

Index Changes: One More Time

Next week Friday, 11th December 2020, Standard & Poor's will announce the final rejigging (in this calendar year) of Australia's major indices and as per usual professional investors are already trying to assess who moves into certain indices and who is about to get booted out.

For us mere mortals, the importance of the official announcement next week, as well as the preceding speculation, is it helps at the very least explain some of the potentially erratic behaviour in certain share prices as money flows in and out in anticipation. In some cases the end result can be quite brutal, even after the changes have become public.

If, however, the sole cause of short-term volatility is inclusion in or removal from certain indices, then it is likely the impact will be of short duration only.

The most important index, where additions and drop-outs tend to have the largest impact, is the ASX200. Wilsons thinks S&P will announce the inclusion of Reece ((REH)), Kogan ((KGN)), and Pointsbet Holdings ((PBH)), as well as Tyro Payments ((TYR)). Codan ((CDA)) is seen as a potential extra inclusion while the likes of Champion Iron ((CIA)), Hub24 ((HUB)) and De Grey Mining ((DEG)) are labelled possible, but unlikely.

Those predicted to lose their membership of the ASX200 are Cooper Energy ((COE)), Western Areas ((WSA)), Avita Therapeutics ((AVH)), GWA Group ((GWA)) and Service Stream ((SSM)). If Codan does get in, Tassal Group ((TGR)) has been identifed as most likely victim.

All other indices might not see any changes, but Wilsons has lined up a few "probable" and "possible" changes. As such, Mineral Resources ((MIN)) and Reece could find they will be added to the ASX100 with Flight Centre ((FLT)) and nib Holdings ((NHF)) the likely victims.

Same principle for the ASX50 where Afterpay ((APT)) and Xero ((XRO)) potentially can make their entrance, switching spots with Vicinity Centres ((VCX)) and Oil Search ((OSH)). A lower probability, thinks Wilsons, is that Evolution Mining ((EVN)) might be included too, with most likely loser Computershare ((CPU)).

The ASX20 traditionally is the most stable of all indices, but Wilsons thinks Afterpay ((APT)) might be swapped with Insurance Australia Group ((IAG)) to officially become part of what was once upon a time referred to as Australia's Blue Chip stocks.

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Morgan Stanley doesn't put too much probability on Afterpay entering the ASX20 but if S&P does decide to do it, Insurance Australia Group is seen as the most likely to be dropped.

Afterpay is seen as the most likely new addition for the ASX50 with all of Xero, Northern Star Resources ((NST)) and Evolution Mining seen as a lower probability. Vicinity Centres is thus most likely to lose its spot among the Top50 with question marks now over Oil Search, Computershare and Ampol's ((ALD)) Top50 inclusion.

Morgan Stanley thinks Mineral Resources has a high chance of being added to the ASX100, with Flight Centre likely to be dropped in response. It is possible that either of Reece or IDP Education ((IEL)) might also be included in which case Iluka Resources ((ILU)) and nib Holdings might be booted out.

When it comes to the ASX200, Morgan Stanley lines up the same candidates as Wilsons', with exception of Champion Iron and Hub24. The same list of Cooper Energy, Western Areas, Avita Therapeutics, GWA Group, Service Stream, and Tassal Group have been singled out to lose their spot in Australia's leading share market index from the close of trade Friday, 18th December onwards, when the announced changes kick in.

Secular Growth, With Conviction

With share market strategists of all flavours and colours guiding investors towards more leverage to re-opening borders and recovering economies in 2021, and possibly beyond, Morgan Stanley makes the point there remain secular growth stocks out there that can, and most likely will, withstand the headwinds from portfolio rotation, because of their idiosyncratic strengths.

42 of such companies have been identified. Unfortunately, this is research done solely on the US share market, but I nevertheless believe there's value in sharing the list, even if not every reader of this story is an active investor in foreign equities.

The 42 selected stocks are:

-Alnylam Pharmaceuticals
-Alphabet
-Amazon
-Apple
-Atlassian
-BeiGene
-Berkeley Lights
-The Blackstone Group
-Chewy
-Coupa Software
-Datadog
-DocuSign
-DraftKings
-Equinix
-Estee Lauder
-Facebook
-Five Below
-Horizon Therapeutics
-Incyte
-Insulet
-Iqvia Holdings
-Lululemon Athletica
-MasterCard
-Match Group
-Microsoft
-Netflix
-Nike
-Prologis
-Salesforce
-SBA Communications
-ServiceNow
-Sherwin-Williams
-Spotify
-StepStone Group
-Tesla
-Twilio
-Ultragenyx Pharmaceutical
-Veeva Systems
-Vertex Pharmaceuticals
-Visa
-Workday
-ZoomInfo Technologies

Conviction Calls

Stockbroker Morgans has refreshed its list of Best Stock Ideas which led to the addition of Orica ((ORI)), Lovisa Holdings ((LOV)), Bega Cheese ((BGA)), GrainCorp ((GNC)), Inghams Group ((ING)), Mainstream Group Holdings ((MAI)), and Coronado Global Resources ((CRN)).

Morgans' list of Best Stock Ideas contains no less than 48 ASX-listed names, so there definitely is no shortage in great ideas for investors, so goes the implication. Inclusions vary from Coles ((COL)), BHP Group ((BHP)), and Westpac ((WBC)), to TPG Telecom ((TPG)), Magellan Financial ((MFG)), ResMed ((RMD)), and NextDC ((NXT)).

In between we find Sydney Airport ((SYD)), Nufarm ((NUF)), Beach Energy ((BPT)), Jumbo Interactive ((JIN)), Zip Co ((Z1P)), and People Infrastructure ((PPE)), as well as APA Group ((APA)), Aventus Group ((AVN)), and Waypoint REIT ((WPR)). It's pretty much a broad banquet to please all tastes and preferences.

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Logistics services provider Brambles ((BXB)) has been part of my selection of All-Weather Performers on the ASX since the early beginnings, but the share price hasn't done much post 2016. Temporary pause or permanent damage to what has for a long time been considered one of the most defensive and sustainable business models on the ASX by many?

Morningstar is of the view investors are underestimating the opportunity for Brambles to find new growth avenues through expansion into Emerging Markets. According to analyst Grant Slade, Brambles possesses all the key characteristics to be able to secure long-term growth from already large and fast growing emerging economies.

But even if we stick with Brambles' current operations in North America and Europe, the analyst believes the shares are noticeably undervalued. Morningstar has a fair value estimation of $12.90 for the shares; which is above the FNArena consensus price target of $12.24, itself more than 10% above the share price in early December. This also easily explains why all but one broker is carrying a Buy rating, or equivalent, for the stock.

Mind you, it's going to take some time before this company can conquer markets in China, India, Russia and the like, but Morningstar believes, as a wide-moat company who can build from a small first-mover advantage, it'll likely pay off to give management the benefit of the doubt.

Morningstar in Australia acquired the newsletter once known as Huntley's and has relabelled it as Morningstar.

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Wilsons' Focus List has seen the removal of a2 Milk ((A2M)) due to perceived elevated earnings risk while Aventus Group has been added and exposure to Goodman Group ((GMG)) has been scaled back. Wilsons believes investors can play the recovery trade through REITs that own shopping malls and retail assets, but maybe not so much through owners specialised in offices.

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Managers of the Model Portfolio at Macquarie have made a series of changes because they remain convinced 2021 will bring us higher bond yields on the back of recovering economies worldwide.

Have been added to the Macquarie portfolio: Suncorp ((SUN)), Computershare and nib Holdings. Exposures that have been added to: ANZ Bank ((ANZ)) and Westpac.

Positions that have been reduced: James Hardie ((JHX)), Charter Hall ((CHC)), Spark Infrastructure ((SKI)), BHP Group, Fortescue Metals ((FMG)), and Aristocrat Leisure ((ALL)).

Have been sold out completely: GPT Group ((GPT)), GainCorp, and Evolution Mining.

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Finally, market strategists at stockbroker Morgans have freshly updated their thoughts and prognostications for the year ahead and their view is that energy, agriculture, banks & financials and gold stocks should provide investors with the best returns throughout 2021, alongside selected cyclicals and small cap stocks.

I think we can summarise that view as: Risk On! (The latest strategy update does predict a bumpy road ahead, so maybe best to keep this in mind).

Some of the hot favourites at Morgans include Aurizon Holdings ((AZJ)), Orica ((ORI)), Nufarm ((NUF)), Santos ((STO)) and Ramelius Resources ((RMS)).

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To those who still haven't got their heads around this whole concept of portfolio rotation that has gripped global equity markets, the easiest way to view it is: everything that worked well up until mid-November is out of favour, for the time being, and everything that could not attract much interest and still had a lot of ground to make up from the losses suffered earlier in the year, has now been elevated to most favoured investment status.

The previous dynamic upside down, a turn of 180 degrees, everything nobody wanted to buy, they do now, you get the idea. Maybe I should've simply said: winners become laggards and laggards turn into winners.

Analysts at Citi have applied a more rigorous filter to the theme, including, for example, historical relationships with rising bond yields and combining the information with input from the analysts who cover stocks from a fundamental point of view.

The exercise has generated 18 most preferred 'Value' stocks on the ASX, in no particular order:

-Australian Pharmaceutical Industries ((API))
-Myer ((MYR))
-Metcash ((MTS))
-Austal ((ASB))
-Super Retail Group ((SUL))
-NRW Holdings ((NWH))
-Harvey Norman ((HVN))
-Fortescue Metals Group ((FMG))
-Downer EDI ((DOW))
-Origin Energy ((ORG))
-Accent Group ((AXI))
-Nick Scali ((NCK))
-Mount Gibson Iron ((MGX))
-Beach Energy ((BPT))
-Worley ((WOR))
-Inghams Group ((ING))
-Asaleo Care ((AHY))
-Sonic Healthcare ((SHL))

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Strategists at Morgan Stanley have their own summary for the change in market dynamics: investors should embrace cyclicality. In other words: buy companies that profit from an uptrend in economic growth.

Morgan Stanley's Macro+ Focus List for Australian investors currently comprises of ten names:

-ANZ Bank ((ANZ))
-Downer EDI
-Qantas Airways ((QAN))
-QBE Insurance ((QBE))
-REA Group
-Scentre Group ((ACG))
-Stockland ((SGP))
-Santos ((STO))
-Super Retail Group
-TPG Telecom ((TPG))

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And finally, no I am serious, this is the final contribution to my final update on Conviction Calls for calendar 2020, the team of quant analysts at Morgan Stanley also updated their thoughts and ideas on value stocks, portfolio rotation and 2021.

-(1) Ideas to play the steepening yield curve (rising bond yields at the further-away end): ANZ Bank, NextDC ((NXT)), Scentre Group, Stockland, Santos, and Viva Energy Group ((VEA));

-(2) Ideas to benefit from the unwinding from prior valuation discounts and negative market momentum (with a shorter-term focus): APA Group, Downer EDI, Insurance Australia Group ((IAG)), QBE Insurance, and Westpac

Not enough? They did offer a few more:

-for (1): Adelaide Brighton ((ABC)), Flight Centre ((FLT)), Metcash ((MTS)), Nufarm, South32 ((S32)), Shopping Centres Australasia Property Group ((SCP)), Treasury Wine Estates ((TWE)), and Whitehaven Coal ((WHC));

-for (2): Atlas Arteria ((ALX)), Aurizon Holdings, Inghams Group, Incitec Pivot ((IPL)), nib Holdings, Orica, Suncorp Group, and… Treasury Wine Estates.

Rudi Talks

On Monday, I was interviewed by Peter Switzer about that stellar performance for the Australian share market in November, and what it means for portfolios and the outlook for the share market:

https://www.fnarena.com/index.php/fnarena-talks/2020/11/30/your-editor-on-switzer-portfolio-rotation-good-or-bad/

Research Reports To Download

A few research reports from Research as a Service (RaaS) for those specifically interested in small and micro cap stocks:

-RaaS on Pointerra ((3DP)): https://www.fnarena.com/downloadfile.php?p=w&n=844995BA-CCCF-73F0-00527EABC74469E1

-RaaS on Rofina Group (NSX:218): https://www.fnarena.com/downloadfile.php?p=w&n=845472FC-9421-269B-9963765CE3F6174B

-RaaS on Stealth Global Holdings ((SGI)): https://www.fnarena.com/downloadfile.php?p=w&n=845E6948-B9B4-E291-D8463FDADDDB8EA8

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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