Treasure Chest: Changes To Broker Conviction Lists

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By Greg Peel

Beyond the standard Buy, Hold and Sell ratings or their equivalents (Outperform, Neutral, Underperform; Overweight, Neutral Underweight), some major brokers maintain “conviction lists” of those stocks with either a Buy or Sell rating for which the analysts have the most conviction – sort of  Buy Plus and Sell Plus.

With the interim reporting season now over for most large cap stocks, Goldman Sachs has moved to update its Conviction List while Macquarie analysts have also made changes to their list of Macquarie Marquee Ideas. BA-Merrill Lynch has reorganised its Asia-Pacific Focus List while Citi global analysts have updated their country rankings for equity investment.

Macquarie has decided to “take profits” on REA Group ((REA)), removing the stock from its Marquee Ideas after three years of inclusion, right from the inception of the list. REA has outperformed the index by 47.5% in that time.

Macquarie has added several stocks to its Buy conviction list of Marquee leaders — ANZ Bank ((ANZ)), Charter Hall ((CHC)), Oil Search ((OSH)), BlueScope ((BSL)) and Spark Infrastructure ((SKI)). Emerging leader DuluxGroup ((DLX)) has also been added.

ANZ is trading at a PE discount to the other bank majors, the broker notes, while offering unique Asian growth potential along with cost cutting progress. BlueScope earnings have improved and the company is exposed to a pick-up in the Australian economy, and may also win some welcome legal claims. Spark is the broker’s preferred infra play and should benefit further from solar feed-in tariffs, while Oil Search is a stand-out in the LNG sector, the broker believes, trading at only net asset value while third and even fourth trains at PNG are possible.

Charter Hall is the only stock in the broker’s Property subset, with the analysts backing increasing demand from local and offshore fund managers for direct property investment.

For Dulux, Macquarie believes there is upside risk to its own FY14 earnings forecasts on higher than anticipated corporate cost synergies. The broker has also added one high conviction Kiwi call in the form of Air New Zealand ((AIZ)), which remains the dominant airline in NZ while seeing stronger demand internationally.

Stocks retained in Macquarie’s list include Beach Energy ((BPT)) and CSL ((CSL)) with Buy conviction, with Cabcharge ((CAB)) and Mesoblast ((MSB)) on Sell conviction.

Goldman Sachs disagrees with Macquarie with regard to ANZ Bank. The story might be the same but GS sees the value as well priced and has in fact downgraded ANZ to Neutral other than just removing it from the broker’s Conviction List. You will not, however, get an argument out of Goldman with regard to Oil Search.

Goldman Sachs has added Westfield Retail Trust ((WRT)) and Oil Search to its Conviction List while removing ANZ, Lend Lease ((LLC)), SAI Global ((SAI)), Ansell ((ANN)), WorleyParsons ((WOR)) and Fletcher Building ((FBU)).

Westfield Trust has underperformed its REIT peers yet boasts low-risk, quality assets exposed to an improving retail outlook. Value is becoming more difficult to find among the well supported REIT names, the broker notes.

Goldman believes Lend Lease and Fletcher Building are now well valued. SAI is facing uncertainty with the implementation of a new platform while Ansell posted a limp result. Worley’s earnings growth is expected to moderate in FY14.

The ongoing Buy-rated members of Goldman’s Conviction List are OceanaGold ((OGC)), Asciano ((AIO)), Orica ((ORI)), Santos ((STO)), Austbrokers Holdings ((AUB)), Mirvac ((MGR)), Wesfarmers ((WES)) and Super Retail ((SUL)), along with Kiwis Air New Zealand, Guinness Peat Group (GPG.NZ), Infratil (IFT.NZ) and Sky City Entertainment (SKC.NZ).

The sole Sell-rated member is Western Areas ((WSA)).

The Merrills Asia-Pacific analysts have added Mirvac to their “Focus1” list given progress in the turnaround of the company’s development division along with yield support. Out goes Westfield Group ((WDC)) following a strong rally to fair value.

The 22 names in the Focus 1 list otherwise include Australians Rio Tinto ((RIO)), ANZ, Treasury Wine Estate ((TWE)), and Newcrest ((NCM)).

Australia has moved up to third position in Citi’s list of preferred equity investment destinations by country. Korea remains in second spot while Belgium, of all places, jumps nine places to number one. Germany and Canada make up the Top Five.

Mexico claims the bottom of the list, and the Bottom Five otherwise consists of Brazil, Malaysia, Hong Kong and France. In the list of 22 countries, the US comes in sixteenth, just above Italy.
 

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