Rudi’s View: CSL, Mineral Resources, Ridley & ReadyTech

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As promised in Weekly Insights earlier this week, below is an overview of analysts' and share market strategists' favourites and Conviction Calls ahead of the February reporting season.

Weekly Insights: https://www.fnarena.com/index.php/2023/02/01/rudis-view-2023-will-be-different/

By Rudi Filapek-Vandyck, Editor

Put simply: corporate earnings are still facing a down-cycle this year, but there are a number of offsetting positives in the form of declining inflation, central bankers nearing the end of their tightening policies, China re-opening and broad expectations that economic recessions are not unavoidable this year.

Market strategists at Wilsons have drawn the conclusion that the sum total of this year's conflicting drivers will be a net positive for equity markets, albeit not in a major way.

In Australia, Wilsons agrees with the perception that iron ore prices are probably a bit bloated here, and this makes share prices for major bulk miners on the ASX possibly equally bloated, while local banks will not escape the impact from higher interest rates on businesses and household budgets.

Moderate, but positive returns thus, at the index level.

Wilsons' asset allocations have moved to Underweight cash and Overweight global and domestic equities, with (now) a neutral portfolio allocation to fixed income (bonds) and alternative investments (think infrastructure and gold).

In terms of ASX favourites, Wilsons has chosen the following five:

-Insurance Australia Group ((IAG))
-Mineral Resources ((MIN))
-NextDC ((NXT))
-Netwealth Group ((NWL))
-ResMed ((RMD))

Then there's a separate list from the institutional research desk, which consists of the following "investment ideas":

-Aroa Biosurgery ((ARX))
-Immutep ((IMM))
-Nick Scali ((NCK))
-PeopleIn ((PPE))
-Pro Medicus ((PME))
-ReadyTech Holdings ((RDY))
-Ridley Corp ((RIC))
-Select Harvests ((SHV))
-TechnologyOne ((TNE))

We're not done yet as Wilsons has also shared its favourites for the upcoming February reporting season:

-Autosports Group ((ASG)), CSL ((CSL)), Costa Group ((CGC)), Family Zone ((FZO)), Nick Scali, PeopleIn, Pepper Money ((PPM)), ReadyTech Holdings.

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Chief investment officer Tim Rocks and his team at Evans & Partners is equally drawn to the market's newfound optimism in 2023. Small caps have underperformed last year, but should do well if things improve throughout 2023, both in terms of interest rates and economic recoveries.

Analysts at the firm, when queried about their favourites, came up with the following short list:

-Life360 ((360))
-KMD Brands ((KMD))
-OFX Group ((OFX))
-Enero Group ((EGG))
-Flight Centre ((FLT))

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Small cap specialists at UBS have equally been updating views and projections for ASX minnows ahead of the February tell all fest. UBS's overall view is that short-term the bias remains towards negative earnings adjustments, but the broker has plenty of favourites to own for this year and beyond:

-Breville Group ((BRG))
-Corporate Travel Management ((CTD))
-Hansen Technologies ((HSN))
-IDP Education ((IEL))
-IPH Ltd ((IPH))
-Kelsian Group ((KLS))
-Nufarm ((NUF))
-Ridley Corp ((RIC))
-Webjet ((WEB))

Others worthy mentioning (says the broker) are APM Human Services International ((APM)), NRW Holdings ((NWH)) sand Siteminder ((SDR)).

UBS is cautious on Eagers Automotive ((APE)), Bega Cheese ((BGA)) and InvoCare ((IVC)).

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Zooming in on the February results season, UBS sees risk for negative surprises from AMA Group ((AMA)), Megaport ((MP1)), as well as from disappointing guidance from Eagers Automotive, Autosports Group ((ASG)), Bapcor ((BAP)), InvoCare, NRW Holdings and Temple & Webster ((TPW)).

Positive risk is seen for IDP Education, Imdex ((IMD)) and Inghams Group ((ING)) with expectations for upgrades in forward guidance from Audinate Group ((AD8)), AMA Group, APM Human Services International, Costa Group, G8 Education ((GEM)), Hansen Technologies, IDP Education, MA Financial ((MAF)), NextDC, PWR Holdings ((PWH)), Ridley Corp, and Siteminder.

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UBS's team of real estate analysts equally shared their 2023 sector favourites: Stockland ((SGP)), Goodman Group ((GMG)), GPT ((GPT)) and Lendlease ((LLC)) with Sell ratings for Vicinity Centres ((VCX)), Charter Hall Long WALE REIT ((CLW)), and BWP Trust ((BWP)).

Ord Minnett's three favourites for the sector are Charter Hall Long WALE REIT (in contradiction to UBS), RAM Essential Services Property((REP)), and Waypoint REIT ((WPR)).

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Portfolio strategists at Shaw and Partners are not prepared to shift to an Overweight position on equities, but they have moved to a Neutral stance (from Underweight) as the risk for global recessions has receded.

Within Australian equity portfolios, Shaw prefers Energy, Materials and global growth stocks to Banks and Real Estate.

As reported on January 19 already, Shaw and Partners is now also in the business of publishing selections for its Model Portfolio, including eight large cap (ASX100) favourites; James Hardie ((JHX)), Metcash ((MTS)), Qantas Airways, ResMed, Santos ((STO)), Telstra ((TLS)), Worley ((WOR)) and Xero ((XRO)).

Among smaller cap propositions ("emerging companies") Shaw selected Audinate Group, Black Cat Syndicate ((BC8)), Boab Metals ((BML)), Calix ((CXL)), Catapult Group International ((CAT)), Hub24 ((HUB)) and Regal Partners ((RPL)).

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The list of Best Ideas at stockbroker Morgans has shrunk to 33 companies with the recent update leading to the removal of BHP Group ((BHP)), AGL Energy ((AGL)), Incitec Pivot ((IPL)), Healius ((HLS)) and IDP Education.

In their place four others joined: CSL, Mineral Resources, Qantas Airways ((QAN)), and Megaport.

Morgans also offered a few "tactical trading ideas" into February reports: Qantas, Megaport, Lovisa Holdings ((LOV)), Coles Group ((COL)) and HomeCo Daily Needs REIT ((HDN)).

The last time we published the complete list of inclusions we counted 44 companies. Might be time to publish the full overview in the next update.

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If 2023 is to become the opposite of last year, then local technology stocks should return into investors' favour yet again. Sector analysts at Goldman Sachs are hopeful.

Their advice to investors is to focus on profitable growth, sector inflections and mergers and acquisitions (M&A).

Higher Risk Buys are: Xero ((XRO)), Life360, and Megaport.

Defensive Buys are: Objective Corp ((OCL)), Data#3 ((DTL)) and REA Group ((REA)).

Goldman Sachs has also upgraded both Fineos Corp ((FCL)) and ReadyTech Holdings to a Buy.

Macquarie's 'TMT' specialists (Technology, Media and Telcos) have a different take on things. Their favourites are: Telstra, IDP Education, Carsales ((CAR)) and oOh!media ((OML)).

Macquarie thinks there's more negative news yet to unfold for your traditional media companies and suggests investors should consider buying into this sector by mid-year, maybe.

UBS's TMT analysts have Buy ratings for TPG Telecom ((TPG)), Nine Entertainment ((NEC)), News Corp ((NWS)), Carsales, Domain Group ((DHG)), Seek ((SEK)), and WiseTech Global ((WTC)).

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Also: the irony of the share market. Shares in Qantas Airways left solid earth behind in late December and seemed to be cruising to ever higher highs until mid-month January. On January 25, Wilsons published a dedicated strategy update, singing the praises of Australia's national airline, while signaling there could be a lot more upside ahead.

Qantas shares have only continued to fall since.

This by no means is any reflection on Wilsons research. As a matter of fact, Qantas and Telstra are probably the two most quoted stocks in Australia when it comes to improving views and forecasts. It's just the share market is not always willing to play along, not immediately anyway.

Wilsons anticipates a re-rating for Qantas shares on further earnings upgrades, which should remove the current discount for a relative valuation premium instead.

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Healthcare sector analysts at RBC Capital have lined up their favourites ahead of financial results: CSL, Sonic Healthcare ((SHL)), Estia Health ((EHE)), Alcidion Group ((ACL)), Integral Diagnostics ((IDX)), Capitol Health ((CAJ)), and Alcidion Group ((ALC)).

Macquarie only has two favourites: CSL and ResMed. Least preferred (for Macquarie) are Cochlear ((COH)) and Sonic Healthcare.

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ETF services provider VanEck is increasingly communicating the views and forecasts by its Portfolio Manager Cameron McCormack.

Not that dissimilar from opinions and forecasts expressed elsewhere, McCormack suggests the banks may no longer be superior performers in 2023, with CommBank ((CBA)) in particular singled out as one of the most expensively priced banks in the world.

Resources like BHP might yet experience more tailwind benefits from China re-opening, while A-REITs look attractively priced with the RBA about to pause in its tightening. Here McCormack highlights Goodman Group, just about everyone's favourite in the sector.

Pressure on discretionary spending should refocus investors attention on consumer staples, such as Woolworths Group ((WOW)).

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Matt Peron, director of research at Janus Henderson, advises investors it's time to start looking for Quality companies again.

"While quality is considered a factor in its own right, we believe the concept of steady cash flows and fortified balance sheets is style- and market cap-agnostic; these companies exist across the equities universe."

Janus Henderson's view is economies such as the US are facing a mid-cycle slowdown this year, but will avoid economic recession.

Peron's favourite investment style, not just this year, but beyond 2023, is the so-called GARP; Growth at a reasonable price. Look for Quality that has been beaten down, is the implicit message from Peron's recent strategy update.

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On the subject of Quality, Bell Asset Management recently shared the following with investors in its managed funds:

"We feel that Quality is poised for a period of strong outperformance in the next few years. As macro conditions soften, inflation remains high and interest rates creep higher, companies with strong balance sheets and pricing power will collectively deliver superior earnings outcomes which should drive better relative returns.

"We also feel that the ‘Reasonable Price’ part of our ‘Quality at a Reasonable Price’ approach will be an important driver for our strategy. 2022 gave us a glimpse of how painful multiple contraction can be and how important valuation discipline can be."

But also:

"Over the last 40 years, the Quality factor has outperformed by an average of 9.0% in years when US CPI has exceeded 4.0% with the exception of 1988 and 2022.

"When looking at the more recent performance of the Quality factor we would make the point that in the last 3 years, it has marginally outperformed to the tune of 1% annually vs its 3.3% annual outperformance since 1994."

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Price and performance tables for my personal check lists on All-Weather Performers and other Quality performers of interest have been updated up until January 31st, clearly showing last year's laggards are back in fashion early in 2023.

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Prior updates:

This is the second update on Conviction Calls in 2023 thus far. The earlier update was published on January 19th and can be accessed directly here:

https://www.fnarena.com/index.php/2023/01/19/rudis-view-telix-telstra-treasury-wine-more/

(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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