Rudi’s View: Telstra, CSL, Xero & Charter Hall

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

In today's update:

-The Iron Ore Riddle Solved
-Not Giving Up On Technology
-Morgans: Be Active, Take Advantage
-The Dividend Disconnect
-Canaccord's Model Portfolios
-FNArena Talks
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

The Iron Ore Riddle Solved

This year's reflation trade is just that, a temporary reflation trade and not the beginning of a new Supercycle for commodities, stated the team of mining sector analysts at UBS last week.

Once 2021 is gone, so will disappear the strong upward momentum that is feeding into the sector this year. UBS very much prefers base metals and new battery materials over bulk commodities, including iron ore, and precious metal gold.

The battle lines are drawn. The public debate is heating up. Is Fortescue Metals ((FMG)) thus a Sell? Or is this simply a signal that South32 ((S32)), to name but one alternative, is now a superior opportunity?

Not everyone agrees with UBS on every conclusion drawn, and that is putting it mildly. Macquarie, to name but one expert with an opposing view, continues to update on local iron ore producers with a seemingly iron conviction (pun intended) supply is to remain in deficit, and that means lower prices seem unreasonable, if not unrealistic.

Australian market strategists at JPMorgan, well aware of the schism in public views and predictions, decided to sit down with colleagues from the resources desk at the firm. Together they worked out iron ore prices may well decline by between -5%-10% this year. This sounds like UBS might yet be vindicated, but that's not the conclusion drawn at JPMorgan. Not at all.

Offsetting the price decline are the fact EPS forecasts continue to climb (and more is yet expected), the sector continues to enjoy near-record high free cash flow levels, while balance sheets this time around are in "pristine" condition, whereas large scale M&A remains out of the question and dividends should remain plenty and high (with JPMorgan anticipating DPS estimates have further to rise).

All in all, JPMorgan would not sell out of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals just yet. Instead, the Model Portfolio has exited from Harvey Norman ((HVN)) and Qube Holdings ((QUB)) while adding Qantas Airways ((QAN)) and Domino's Pizza ((DMP)) to further enhance the portfolio bias towards value stocks and this year's reflation trade.

Given the strong gains achieved by Materials and Financials already, JPMorgan's Model Portfolio has reduced its Overweight position to both sectors, while decreasing its Underweight position to local healthcare stocks. Positions in Telstra ((TLS)) and CSL ((CSL)) have increased, while those in Rio Tinto and Super Retail Group ((SUL)) have decreased.

The in-house forecast is that the US ten-year treasury will be at 1.95% by year-end, which underpins the portfolio's bias and the adjustments made.

Not Giving Up On Technology

Technology analysts at Credit Suisse remain of the view that unless government bond yields have a lot further to rise, and those increases prove sustainable, local technology stocks retain the ability to outperform on a twelve months horizon. Many of the better quality companies in the sector are multi-year compounders, the team points out.

Credit Suisse's sector preferences are, in order of preference, Xero ((XRO)) first, followed by Life 360 ((360)), Audinate Group ((AD8)), Altium ((ALU)), Iress ((IRE)), and Infomedia ((IFM)). For those investors looking to play the re-opening theme, Credit Suisse suggests Corporate Travel ((CTD)) and Webjet ((WEB)) offer the most upside potential.

The report was put together before Webjet announced yet another capital raising.

Talking about Credit Suisse and Technology; NZ-originated Jarden was until earlier this year Credit Suisse's partner in research for everything relating to the New Zealand Stock Exchange, but both have now parted ways and Jarden is starting up its own research for ASX-listed companies.

This week, Jarden added local technology stalwarts Xero ((XRO)) -okay, that's actually the Russell Crowe in the sector- WiseTech Global ((WTC)) and Altium ((ALU)) to its broadening coverage. Those three were initiated respectively with Outperform, Buy and an Underweight rating. Maiden price targets are $150, $31, and $23 respectively.

Jarden's sector update contains a few warnings for investors keen on investing in the sector: Xero must keep its pace of growth high to justify a premium valuation, while for WiseTech 2021 is the year management has to prove it can grow organically at a solid pace, against a background of potential goodwill write-downs.

Altium is considered more mature in corporate development, which translates into a tougher growth outlook, not made easier because of fierce competition from Cadence and Mentor Graphics for its high-end product Nexus, though the analysts would not dismiss the possibility the company can still surprise to the upside.

Morgans: Be Active, Take Advantage

Market strategists at stockbroker Morgans remain of the view investors should have exposure to regions and sectors that are strongly recovering after being the hardest hit by the global pandemic. However, buried deeper inside the latest strategy update is the fact that Morgans is also advocating active portfolio management whereby extreme market volatility either way is taken advantage of.

In simple terms: those covid beneficiaries will become over-priced, as that is how humans/markets operate, while quality growth stocks will become under-priced. Within this context, Morgans suggests investors should actively sell and take profits from strategy part one (buy banks & financials, energy, resources, agriculture, cyclicals) and recycle profits into quality growth stocks that fall out of favour and become too cheaply priced.

Regarding the latter part of the strategy, Morgans is currently referring to CSL, Magellan Financial ((MFG)), and NextDC ((NXT)).

The broker updated its list of Best Ideas, stocks that offer the highest risk-adjusted returns over the year ahead backed by a higher-than-average level of confidence. Morgans has added Dalrymple Bay Infrastructure ((DBI)) and Frontier Digital Ventures ((FDV)) to the selection, while removing Aurizon Holdings ((AZJ)) and Redbubble ((RBL)). The latter, it has to be noted, despite share price weakness for both.

The list of Best Ideas currently counts 44 stocks, which firmly underlines the broker's view there remain plenty of opportunities in today's market, starting from Aristocrat Leisure ((ALL)), Coles Group ((COL)), BHP Group and Sydney Airport ((SYD)) among large caps, to Bega Cheese ((BGA)), Senex Energy ((SXY)), Mainstream Group ((MAI)) and Alliance Aviation Services ((AQZ)) among small caps.

In between we find TPG Telecom ((TPG)), Ansell ((ANN)), ResMed ((RMD)) and Incitec Pivot ((IPL)) among mid-cap stocks.

Some of the lesser known inclusions are Booktopia Group ((BKG)), Universal Store ((UNI)), Mach7 Technologies ((M7T)), HomeCo Daily Needs ((HDN)), and Strandline Resources ((STA)).

Australia's Dividend Disconnect

Market strategists at UBS believe they have discovered a disconnect in local forecasts between the current recovery in profits and what is expected in terms of dividends for shareholders. Analysts in general are believed to be too cautious in light of the strong recovery in economic growth and in corporate profits.

UBS suspects there is a general reluctance to forecast higher payout ratios after last year's carnage, but being familiar with the average board's obsession with pleasing shareholders, and in light of past practice, one would have to agree with UBS that on the premise this year's strong economic recovery remains intact, dividends most likely will make an even stronger come-back than profits at many a local retiree-favourite.

UBS thinks there is a positive double-whammy building in the Australian share market. Not only will profits and cash flows recover strongly, facilitating a strong come-back for dividends, but companies will likely also increase payout ratios from last year's cuts and this will provide an extra kicker upwards.

Last week's report contains a select list of local dividend payers UBS believes are prime candidates for upside dividend surprises, including AusNet Services ((AST)), Bendigo and Adelaide Bank ((BEN)), Downer EDI ((DOW)), OZ Minerals ((OZL)), Spark Infrastructure ((SKI)), Suncorp Group ((SUN)), and Vicinity Centres ((VCX)).

In more general terms, the suggestion is that all three major dividend paying sectors on the ASX -banks, other financials, and resources- will likely increase payout ratios this year, with ratios for all three currently well below levels of 2019.

UBS also makes the general observation that increasing dividends should bode well for the (ultimate) direction of the share market and I can only add such statement is backed up by historical anecdotes, research done by Citi and others, and by common sense, really.

Separately, Morgan Stanley research has identified four prime candidates to buy back their own shares as a form of capital management give-back to shareholders; ANZ Bank ((ANZ)), Scentre Group ((SCG)), BlueScope Steel ((BSL)), and Fortescue Metals.

Canaccord's Model Portfolios

Canaccord Genuity runs an Australian Core Model Portfolio comprising of 16 mostly large caps that has either slightly underperformed or outperformed the broader market, depending on what timeline we pick to compare. Over the past year and two years the market performed better. Over three years the Portfolio wins.

But what is most remarkable about this Core Portfolio is that the managers don't seem to be making a lot of changes. It appears the last change made was adding ANZ Bank ((ANZ)) shares, and that happened in late December 2019. Before that, the Portfolio added Ansell, Atlas Arteria ((ALX)) and Cleanaway Waste Management ((CWY)) all in June of the same year, while Macquarie Bank ((MQG)) was added in the month prior.

So much for "active" and regular management, or for playing market momentum and the switches between Value and Growth. Portfolio managers at Canaccord Genuity haven't been doing any of that, and still their selection of 16 stocks has only underperformed by -0.9% over the two years till February 28th.

Make of it as much, or as little as you like. The sixteen names you're all dying to find out are, apart from the five already mentioned, Telstra ((TLS)), Woodside Petroleum ((WPL)), National Australia Bank ((NAB)), CSL, Ramsay Health Care ((RHC)), Sydney Airport ((SYD)), Amcor ((AMC)), BHP Group, Rio Tinto, South32 and Charter Hall Group ((CHC)).

To add a little bit of extra juice: the portfolio is holding 25.8% in cash.

Canaccord Genuity also runs an Australian Income Portfolio, which hasn't kept up with either Core or the broader market most of the times (investors pay attention). Here we find 17 equities plus a few fixed income products, with 11.6% held in cash. The 17 inclusions are Telstra, Tabcorp Holdings ((TAH)), Wesfarmers ((WES)), Woodside Petroleum, ANZ Bank, CommBank ((CBA)), Magellan Financial, National Australia Bank, QBE Insurance ((QBE)). Westpac ((WBC)), Alumina Ltd ((AWC)), Arena REIT ((ARF)), Charter Hall Group, Stockland ((SGP)), AGL Energy ((AGL)), AusNet Services, and Spark Infrastructure.

Equally noteworthy: both portfolios are handsomely beating the ASX200 Accumulation index since inception, which was December 2010, but none is doing it over the past five years. If ever one is looking for how share market dynamics have changed, it is right there, staring us in the face.

FNArena Talks

Less than two weeks ago, I gave an online presentation for members of the Australian Investors Association (AIA) about the topic of investing for income. A video of circa 45 minutes is available via the website:

https://www.fnarena.com/index.php/fnarena-talks/2021/03/31/reinventing-income-in-australian-shares/

Paid Subscribers (6 and 12 months) have also access to the slides I used during the presentation. Visit SPECIAL REPORTS via the drop down menu starting with Analysis & Data and scroll down. Incidentally, this is also where fresh subscribers can download their Bonus reports, including Dividend Investing, The Smart Way and The AUD and the Australian Share Market.

Research To Download

Research reports that can be downloaded for further analysis and investment ideas:

RaaS on Shekel Brainweigh ((SBW)):

https://www.fnarena.com/downloadfile.php?p=w&n=ABC65D1D-065B-F7CF-AAD3742E61741431

RaaS on BetMakers Technology Group ((BET)):

https://www.fnarena.com/downloadfile.php?p=w&n=ABBF694F-9929-58FB-32DCD54D0ECBC9D8

(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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