Treasure Chest: Conviction Lists And Index Changes

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By Greg Peel

CSL ((CSL)) shares have had a good run of late, which is why Macquarie felt it necessary to suggest “no, it's not too late” when deciding to include the stock in its updated conviction list, known as Marquee Ideas. Broker conviction lists represent those stocks for which a broker not only has a Buy/Sell rating, but is really, really sure about it.

Macquarie cites no sign of growth abating for plasma products in China, competitor constraints and a growing suite of new products as reasons to remain very keen on CSL. On a healthcare sector swap, Macquarie now has a more flaccid view on Ansell ((ANN)). Only because the shares have risen nicely since the stock's inclusion in the conviction list and the analysts feel happy to book profits.

QR National ((QRN)) is another stock Macquarie has decided to kick off the list (despite maintaining an Outperform rating). The Queensland government's stake has finally been removed, but analyst conviction has now waned as QRN is exposed to potential earnings downside from lower coal transport volumes in a lower coal price environment.

For those into pairs trades, Macquarie has been maintaining a short Westpac ((WBC)) / long National ((NAB)) recommendation for a while but now switches ANZ ((ANZ)) for NAB on the long side.

Sticking with the subject of pairs trades, Morgan Stanley has released two “Research Tactical Ideas” in the travel space. These are not “conviction list” changes but stand alone short-term trading ideas with a 60-day recommendation target. 

MS believes Flight Centre ((FLT)) will announce a solid increase in first quarter FY13 profit at its AGM on October 30. This should be a “positive surprise” as a very solid profit result in the first quarter FY12 has the market wary of annual “comparables”. MS assigns an 80% plus chance to the market being caught out.

On the other hand, Wotif ((WTF)) shares have had a good run of late and Morgan Stanley believes there is an 80% plus chance of disappointment stemming from the company's October 22 AGM. Wotif usually provides initial full-year profit guidance at its AGM but with the CEO having recently resigned, and no outlook commentary coming from management as yet, MS is prepared to bet this year no guidance will be forthcoming. No guidance means uncertainty and can hence be taken as bad guidance by the market.

Morgan Stanley is not recommending these two trades (Buy FLT, Sell WTF) as a pair per se but a pairs trade is implicit given the two are sector peers. Investors may choose to run with only one leg, nevertheless.

RBS Australia runs its conviction list as a lengthy set of pairs trades for large cap stocks but also maintains a straight-up small cap conviction list. RBS has now added Seven Group Holdings ((SVW)) to that list and as the offset has removed Bradken ((BKN)), which has proven rather volatile.

Among the small caps, Citi currently prefers small resources and gold sector names under global monetary policy influence, expecting pressure to remain on industrial earnings, although the analysts warn outperformance from here will be harder to come by. With cash rates continuing to fall, Citi expects more funds shifting out of fixed income and into yield stocks, and on that basis small cap stocks providing a defensive yield and forward earnings growth should be popular.

Citi's top small cap industrial Buys are thus ALS ((ALQ)), Flight Centre, Miclyn Express ((MIO)), Macmillan Shakespeare ((MMS)), and Southern Cross Media ((SXL)). Top small cap resources Buys include AWE ((AWE)), Gryphon Minerals ((GRY)), Karoon Gas ((KAR)), Mt Gibson Iron ((MGX)), Medusa Mining ((MML)) and Resource Generation ((RES)).

Moving on to upcoming S&P/ASX index changes, JP Morgan has provided its usual index predictions. To appreciate why index change forecasts are significant see Profit From Index Change Prediction.

JP Morgan notes the recent sell-down of the government stake in QR National will lift the free-float weighting of the stock and this takes its ASX 200 weighting up by 4.9 basis points to 0.597%.

The takeover of Hastings Diversified ((HDF)) by APA ((APA)) has exceeded 70% acceptance which affects a removal of Hastings from the indices. Hastings shareholders will receive a balance of APA shares so APA's weight in the ASX 200 will increase by 7.9 basis points to 0.377%.

The hole left in the ASX 200 by Hastings will be filled by Breville Group ((BRG)) with a weighting of 0.049%.

Hastings' place in the All Australia 200 index will be taken by Maverick Drilling & Exploration ((MAD)). 

 

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