Rudi’s View: AUB Group, Endeavour, Lottery Corp & Suncorp

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Analysts' and share market strategists' favourites and Conviction Calls ahead of the February reporting season.

By Rudi Filapek-Vandyck, Editor

The Australian share market is no longer 'cheap', but then it's equally not 'expensive' either.

Such is the conclusion drawn by Matthew Hodge, Director of Equity Research, ANZ at Morningstar Australia.

Like so many market observers, Hodge is surprised the market has put in the performance it has to date, given risks remain on the horizon, but maybe this is yet another great moment in time to reassess the portfolio and review the strategy?

What if markets go through another period of above-average volatility, or maybe another meaningful downturn? Hodge's advice is to prepare a wish list now.

Which stocks would you like to own, but at a cheaper price?

Hodge's personal wish list revolves around "businesses with strong competitive positions, pricing power and either robust cash flows and dividends or growth prospects at least in line with nominal GDP growth."

Candidates that instantly spring to mind have a clear Quality tag attached (revealing a large overlap with my personal research into All-Weather Performers – see bottom of today's story).

As such, Hodge would strongly consider AGL Energy ((AGL)), APA Group ((APA)), ASX ((ASX)), AUB Group ((AUB)), Auckland Airport ((AIA)), Aurizon Holdings ((AZJ)), Brambles ((BXB)), Carsales ((CAR)), Charter Hall ((CHC)), Cochlear ((COH)), CSL ((CSL)), Domain Holdings Australia ((DHG)), Deterra Royalties ((DRR)), Domino's Pizza ((DMP)), Endeavour Group ((EDV)), Fineos Corp ((FCL)), Goodman Group ((GMG)), James Hardie ((JHX), InvoCare ((IVC)), Lottery Corp ((TLC)), REA Group ((REA)), Seek ((SEK)), Sonic Healthcare ((SHL)), Steadfast Group ((SDF)), Telstra ((TLS)), Transurban ((TCL)), and WiseTech Global ((WTC)), alongside the Big Four banks.

As is always the case when considering adding Quality to the portfolio: "It’s just often hard to grab them at a decent price though."

Evans & Partners

The three person strategy team at Evans & Partners is not quite as sanguine and relaxed as is Morningstar, instead conveying the message investors should prepare for downside.

In their own lingo, this becomes: "The risks to markets look increasingly skewed to the downside given the recent run in asset prices and assumptions around future earnings growth."

Australia will avoid economic recession, but there'll be a slowing in economic activity and probably recessions elsewhere, warns E&P. Which is why the team's focus lays with high quality businesses with defensive earnings profiles, sustainable dividend yields and/or clear earnings momentum.

To please all sorts of clients and portfolios, Evans & Partners has constructed multiple lists, each with their own focus and specific filters.

First up, Quality companies. The current short list comprises of:

-Brambles
-CSL
-Macquarie Group ((MQG))
-Rio Tinto ((RIO))
-Woolworths Group ((WOW))

Note: BHP Group ((BHP)) was previously included but has recently been replaced with Rio Tinto.

Growth stocks:

-Carsales
-NextDC ((NXT))
-Treasury Wine Estates ((TWE))
-Xero ((XRO))

Yield stocks:

-APA Group
-HomeCo Daily Needs REIT ((HDN))
-Telstra
-Wesfarmers ((WES))
-Waypoint REIT ((WPR))

Tactical recommendations (these are temporary 'value' opportunities that do not necessarily meet any criteria for the above lists):

-Flight Centre ((FLT))
-Qantas Airways ((QAN))
-Woodside Energy ((WDS))

Canaccord Australia

Strategists at Canaccord Australia now prefer bonds, where they see "even potential for capital gains" while a share market near all-time highs cannot muster more than a Neutral view.

That Neutral view is backed up with a preference for more defensive sectors and stocks on the ASX, with all of Woolworths, Endeavour Group, The Lottery Corp and Amcor ((AMC)) prominently held, alongside post-pandemic recovery stories through Qantas, Ramsay Health Care ((RHC)), Transurban and Computershare ((CPU)).

The latest round of changes has seen Treasury Wines and Goodman Group being added, alongside the removal of Medibank Private ((MPL)) and Lendlease ((LLC)) from the Model Portfolio.

The Portfolio retains an overweight allocation to large cap resources and an underweight position in local banks.

Morningstar's Best Ideas

The February update on Morningstar Australia's Best Ideas saw the removal of Magellan Financial ((MFG)) and the inclusion of AUB Group.

Magellan's departure marks a change in view with Morningstar no longer as confident in a pending earnings recovery for the asset manager while the nomination of the small-cap insurance broker, on my observation, falls in line with a general re-appraisal of this specific sector, with analysts generally lauding the cash-generative and resilient nature of the industry, which also includes Steadfast Group and PSI Insurance Group ((PSI)).

Usually, the sector preference goes to either Steadfast (the largest) or to AUB Group (cheaper priced).

Outside of the newest inclusion, Morningstar's Best Ideas now consist of:

-AGL Energy
-Aurizon Holdings
-Brambles
-Fineos Corp
-InvoCare
-Kogan ((KGN))
-Lendlease
-Newcrest Mining ((NCM))
-Santos ((STO))
-TPG Telecom ((TPG))
-Westpac ((WBC))
-WiseTech Global

Morgan Stanley

Morgan Stanley's focus remains on forecasts for corporate earnings which are (firmly) believed to be too high still, in particular in the US but equally so in Australia.

While resources companies might still enjoy upgrades to forecasts on the back of renewed optimism for the sector (including higher product prices), Morgan Stanley is not so confident about all other sectors of the local economy.

Changes made to the Model Portfolio include the removal of Sonic Healthcare, OZ Minerals ((OZL)) and Worley ((WOR)) and adding exposure to Suncorp, GPT Group ((GPT)) and The Lottery Corp.

Technology Sector

ETF provider VanEck Portfolio Manager Cameron McCormack predicts cheaper-valued Value stocks will continue to outperform in 2023, with the Australian share market poised to outperform most foreign peers.

This view comes also with the assessment the US technology sector is repeating the experience post Nasdaq meltdown in 2000. Don't go there, is the warning, anything that looks 'cheap' will prove a trap.

"Investors chasing easy money in tech growth stocks should be wary of prolonged macroeconomic headwinds facing the sector."

McCormack is willing to concede there will be exceptions, but unprofitable technology companies in particular remain in the sin bin, on his multi-year trend assessment.

The team of technology sector analysts at RBC Capital in Australia is not quite as negative, but here the warning is nevertheless: slowing economic growth implies more downside for Growth and Technology stocks.

History suggests there's more PE compression coming for the sector, warns RBC Capital, and this means investors picking exposures in the sector better be selective.

RBC Capital prefers companies that are profitable, enjoy high margins, with positive free cash flow, and a strong balance sheet.

Ahead of February results, the preference lays with Altium ((ALU)) and InfoMedia ((IFM)).

Investors are advised to steer clear of Appen ((APX)) and EML Payments ((EML)).

All-Weather Performers

My personally curated lists of High Quality, All-Weather Performers, including Quality names among technology and growth companies, is 24/7 available for paying subscribers via the FNArena website:

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

(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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