Rudi’s View: Australia’s Most Highly Recommended Stocks

This story features NICK SCALI LIMITED, and other companies. For more info SHARE ANALYSIS: NCK

In Weekly Insights this week:

-Australia’s Most Highly Recommended Stocks
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

Australia’s Most Highly Recommended Stocks

Risk comes in multiple shapes and forms.

A lot is being written about top notch valuations for global share markets, but the risk that is showing itself yet again this month in Australia is the risk for disappointing operational performance. On Monday, Nick Scali ((NCK)) shares are trading down -4.7% following a subdued AGM trading update.

Nick Scali’s disappointment follows in the footsteps of ARB Corp ((ARB)) and EVT Ltd ((EVT)), as well as the travel sector representatives Flight Centre ((FLT)) and Web Travel Group ((WEB)) last week. For good measure, not all market updates are of a negative nature as can also be seen through the share price responses post market updates by the likes of Amotiv ((AOV)) and Bellevue Gold ((BGL)).

Maybe the safest conclusion to draw is that operational challenges remain a tangible headwind for many an ASX-listed company, smaller cap companies in particular.

For local investors, the art of successful investing hasn’t changed since the August results season: it’s about identifying which companies remain a great investment despite short-term weakness, plus separating out those unlikely to disappoint when communicating their latest insights.

Maybe FNArena can help with this mission?

After all, we do have access to research, opinions and views from analysts and strategists whose job it is to analyse, project and predict when it comes to share markets and individual ASX-listed stocks.

The Super Stock Report Top Twelve

The most straightforward methodology is through simply adding up all Buy/Hold/Sell ratings inside the FNArena universe, with our monthly Australian Super Stock Report providing exactly such an overview.

The October update, freshly published on the website last week, revealed a rather unique phenomenon. I say unique because in the more than two decades of compiling this Report, I cannot remember one single precedent.

The Top 40 of highest recommended stocks all have the maximum score on the FNArena Sentiment Indicator which ranks between positive 1 and negative -1. A positive 1 indicates all ratings are Buy or equivalent. A negative -1 implies all ratings are negative.

To compile our monthly Top 40 we require at least three (out of eight) brokers covering. Yet, all in the current Top 40 currently have no other ratings than Buy.

The local index is near an all-time record high, but this observation is as much a reminder to all of us the share market remains widely dispersed and polarised, with smaller cap companies representing both opportunity and risk.

Setting the minimum of analysts to five (5) generates the following twelve most highly recommended stocks on the ASX (as per last week’s update of the Australian Super Stock Report):

-Universal Store ((UNI))
-Whitehaven Coal ((WHC))
-Patriot Battery Materials ((PMT))
-Accent Group ((AX1))
-GQG Partners ((GQG))
-Paladin Energy (PDN))
-Nickel Industries ((NIC))
-Worley ((WOR))
-SiteMinder ((SDR))
-Seek ((SEK))
-Flight Centre Travel ((FLT))

The first observation to make is both Seek and Flight Centre have had their share of negative news announcements this year, but sector analysts clearly do not think this removes the fact both share price are undervalued and much better times should announce themselves on the horizon.

Also, the aforementioned Amotiv and Nick Scali are equally on the long list of maximum Buy ratings, as are Superloop ((SLC)), Lindsay Australia ((LAU)), SRG Global ((SRG)), Kelsian Group ((KLS)), Beacon Lighting ((BLX)) and Zip Co ((ZIP)), among many others.

For more details, FNArena subscribers can download the monthly Report via the website, or simply use the link near the bottom of today’s story.

FNArena’s R-Factor

Another way of looking at individual stocks is through analysts’ forecasts and establish where share price multiples are at in relative comparison. We have now entered the territory of FNArena’s R-Factor.

Starting with EPS forecasts for the current and next financial year, and also taking into account dividend yields for both years, provides us with the following Top 12:

-Beach Energy ((BPT))
-Atlas Arteria ((ALX))
-IPH Ltd ((IPH))
-Challenger ((CGF))
-Perpetual ((PPT))
-Nickel Industries ((NIC))
-Charter Hall Retail REIT ((CQR))
-Downer EDI ((DOW))
-Spark New Zealand ((SPK))
-Kelsian Group ((KLS))
-HomeCo Daily Needs REIT ((HDN))
-Nine Entertainment ((NEC))

Here, the obvious comment to make is that in all cases there is a reason for why the shares look ‘cheap’ and ‘undervalued’ when measured against analysts’ forecasts. In most cases the reason is a series of bad news announcements which have made investors rather reticent to jump on board.

Bear in mind, for example, Citi analysts on Monday repeated their view that Beach Energy is simply ‘too hard’ to assess at the moment, due to too many unpredictable negatives.

Toll road operator Atlas Arteria is facing multiple risks and headwinds in both France and the USA. IPH Ltd shares are being weighed down by negative filing volumes in Australia. Challenger has just released its Q1 trading update, described by Ord Minnett as its worst performance in more than a decade.

And so forth, and so forth.

While FNArena’s R-Factor can be a great starting point to find companies that seem grossly undervalued, the real challenge is to decipher why this is the case, and whether it’s temporary or longer-lasting.

The presence of HomeCo Daily Needs REIT might be directly related to the high yields on offer, alongside the prospect of a robust recovery in earnings per share. This REIT, like so many others, would benefit from RBA rate cuts and lower bond yields, although investors shouldn’t bet on it for the months ahead, according to market consensus.

Best Buys, Conviction Calls & Model Portfolios

A third method is a lot more labour intensive, but we’ve done the hard yakka over the weekend by combining all the various Conviction Lists, Model Portfolios and sector favourites from the brokers FNArena monitors regularly.

This effort has generated a list of 15 companies that might well be described as Australia’s most favoured equities as markets prepare for a different twelve months ahead. Given the input, this selection is much more focused on larger cap companies, which in light of the disappointments that are coming out of the smaller cap segment, might well be the better risk-adjusted option, still.

The following might surprise a few, including myself, but ResMed ((RMD)) is the most favoured among professional strategists and portfolio stock-pickers. We counted ten nominations, plus a 0.6 reading on the FNArena Sentiment Indicator, plus two Buy ratings from brokers not monitored daily.

The shares have recovered more than 70% since the depths of the GLP-1s scare this time last year and, clearly, the expert opinion is this growth story has a lot more to offer, still. ResMed is scheduled to report Q1 financials on Friday morning, Sydney time. A lot of attention will be paid to the gross margin, alongside the underlying composition of what should prove yet another robust performance.

Equally (if not more) important: irrespective of what happens in response to Friday’s result release, analysts generally remain confident to see ResMed grow earnings at double-digit percentages for many more years ahead.

The second most highly rated company is James Hardie ((JHX)) whose short-term outlook is currently in question because of devastating hurricanes raging through the south of America. James Hardie is oft referred to as possibly the highest quality cyclical on the ASX and experts’ confidence in continuation of this longer-term growth story seldom wavers.

James Hardie does occasionally update the market with unexpected  misfortunes and its key markets are highly cyclical, but all tends to end well, as also shown by the fact the share price hit an all-time record high earlier this year. James Hardie too will release quarterly financials shortly, on November 13.

James Hardie has been nominated nine times, rates 0.7 on the FNArena Sentiment Indicator, with two extra Buy ratings from brokers not monitored daily.

The four following nominations are Xero ((XRO)), Aristocrat Leisure ((ALL)), CSL ((CSL)) and Santos ((STO)). All have eight nominations with otherwise minimal added differences.

Xero has successfully convinced analysts and investors it can adhere to the Rule of 40, which has pretty much become the golden standard for fast-growing technology companies, and make successful inroads into the US market. Don’t just take my word for it, look at the share price over the past twelve months.

Most share price targets set by analysts are still above today’s share price. Xero will report FY24 financials on November 7.

Gaming multinational Aristocrat Leisure remains off limits for selectors with a strict ESG focus, but fact remains Aristocrat has been one of the prime outperformers among larger caps on the ASX, also beating most smaller caps along the way, and it’ll be a brave forecaster to predict this feat shall not be repeated in the years ahead.

The company is looking to divest of its non-core Social Casino operation, while continuing to invest heavily elsewhere and put the squeeze on competitors who cannot replicate. One of the new competitors, Light & Wonder ((LNW)) recently lost a court case with as yet unknown full ramifications.

As more US states are opening up for online ‘gaming’, the years ahead could offer additional avenues for growth. Aristocrat is yet another company that reports financials out of the normal cycle in Australia. Its release of FY24 financials is scheduled for November 13.

CSL reports in August and February and the case for owning Australia’s number three index weight was yet again neatly summarised by Bell Potter on Monday, with the broker initiating coverage with a Buy rating and $345 price target.

The core business, which is Behring (plasma), represents circa 72% of CSL’s annual revenues and, assisted by ongoing margin increase, this part of the business should continue to grow at double-digit percentages for many more years ahead. Says not only Bell Potter.

The two other main parts, Vifor (relatively new acquisition) and Seqirus (vaccines), have been struggling of late and Bell Potter’s forecasts assume nil growth from both. Regardless, the broker remains confident management will deliver on its promise to grow the total business at double-digit earnings per annum over the mid-term.

CSL will update analysts at its R&D investor day on October 22, though no major new revelations are expected.

The inclusion of Santos very much reflects the falling out of favour by Woodside Energy ((WDS)) whose capital allocation decisions in recent times do not receive widespread approval. Loyal shareholders with appetite for tasty dividends should prepare for much reduced payouts in the years ahead, says virtually everyone.

Santos is now the most preferred energy sector exposure locally. As for the outlook for energy prices generally, let’s just say expert opinion and projections remain divided.

Next in the ranking is Brambles ((BXB)), the world’s number one pallet logistics company whose fortune has made a turn for the better, after a long period of disappointing shareholder experiences. The release of FY24 financials in August is a case in point with the share price quickly rallying from below $16 to above $19.

Brambles is now seen as on a more sustainable growth path, with plenty of management’s in-house initiatives (including technology) seen as further cementing the company’s new growth profile.

The following three companies’ high ranking stands in contrast with sector analysts’ ratings, as shown by rather subdued readings on the FNArena Sentiment Indicator. Those companies are Rio Tinto ((RIO)), Westpac Bank ((WBC)) and ARB Corp ((ARB)).

This might be explained, particularly in the case of Rio Tinto and Westpac, through relative preferences. For institutional investors, the question is never shall we own Large Cap diversified resources or banks, but how much must we own. Call it the tyranny of large index weights.

Hence, given just about everyone views Australian banks as grossly overvalued, but definitely not ‘cheap’, the best way of interpreting Westpac’s high ranking is probably: if you must own at least one bank, Westpac is most preferred.

Rio Tinto has been criticised for paying a high price to acquire Arcadium Lithium, but most sector analysts have targets above today’s share price. More stimulus forthcoming from China feeds into sector optimism as well, as does the general view the global economy is poised for a recovery next year, not economic recession.

ARB Corp recently issued a disappointing market update, but most expert voices are clearly not too worried. The large US market, and the company’s investments and alliances, should bode well for many years to follow.

ARB Corp has five nominations, as do BHP Group ((BHP)), Car Group ((CAR)), South32 ((S32)), Suncorp Group ((SUN)), and Telstra ((TLS)). The latter five all enjoy a positive reading on the FNArena Sentiment Indicator (equally backed-up by brokers not monitored daily).

The big surprise here, I assume, is the inclusion of Telstra. This long vilified large cap has long provided shareholders with an elongated erosion in the share price as dividends went backwards, then stagnated. That trend is now reversing and expectations are for ongoing increases in dividend payouts in the years following.

I think Telstra is now Australia’s most favoured dividend stock, also helped by the fact banks are seen as pricey and Suncorp will pay out a big dividend this year (sale of bank), but it’ll fall quite heavily in the year thereafter. On current consensus forecasts, Westpac’s dividend is set for small declines in both FY24 and FY25.

Those forecasts will be put to the test when three of the local Big Four report financials in November, including Westpac.

****

To stay on top of corporate results locally (including calendar): https://fnarena.com/index.php/reporting_season/

FNArena’s Australian Super Stock Report: https://fnarena.com/index.php/analysis-data/super-stock-report/

FNArena’s R-Factor: https://fnarena.com/index.php/analysis-data/consensus-forecasts/the-rfactor/

For recent updates on Best Buys, Conviction Calls and Model Portfolios:

https://fnarena.com/index.php/2024/10/17/rudis-view-ai-lithium-uranium-steadfast/

https://fnarena.com/index.php/2024/10/10/rudis-view-china-scepsis-energy-preferences-the-us-election/

FNArena Talks

Danielle has interviewed Nilesh Jasani, founder of GenInnov Global Innovation Fund. The video has been added to the website  and is also available via YouTube:

https://youtu.be/0mVrFMA2CUY

All-Weather Model Portfolio

FY24 review for the All-Weather Model Portfolio:
https://www.fnarena.com/index.php/download-article/?n=DE2A4552-E2C7-4DC7-0A896CE5CF68ACD8

Prior years:

FY23: https://www.fnarena.com/index.php/download-article/?n=DFC11150-CB36-C777-1AA3EDA640E2F5BF

FY22: https://www.fnarena.com/index.php/download-article/?n=DFE7241B-9CD8-61F1-1602C581A8E539C4

FY21: https://www.fnarena.com/index.php/download-article/?n=DFF82691-E53E-3CF5-17A2337D72CDB54F

Video: Why FNArena & All-Weather Stocks

I’ve used my participation to the InvestmentMarkets’ conference in July to explain how/why FNArena started & what investors get out of it, including research in All-Weathers and Gen.Ai

The video: https://bit.ly/3A1pLuz

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 14th October, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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