Rudi’s View: Earnings, Best Ideas & Favourite Stock Picks

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By Rudi Filapek-Vandyck, Editor

Quote of the week comes from Wilsons’ strategy update for the Australian equities market:

“The Australian equity market currently has an unattractive earnings growth outlook, with both the ASX 200 and ASX All Industrials indices offering EPS growth of only ~3% over the next 12 months while the resources sector is expected to deliver negative -8% EPS growth over this period.”

Understanding the implications and broader context behind that conclusion makes it a lot easier to understand why Wilsons remains a big fan of fast-growing, quality technology stocks on the ASX. These companies might trade on much higher valuation multiples than most ASX-listed stocks, they also offer much higher growth and longer lasting than just the next six or twelve months.

Wilsons spells out the contrast: ‘Growth’ (IT, Media & Healthcare) is projected to deliver 15%-plus EPS growth on average.

Conclusion: “Due to the scarcity of growth elsewhere in the market, the areas of the ASX that are offering attractive earnings growth are justifiably being afforded a valuation premium in the current environment.”

Wilsons’ Focus Portfolio has three such exposures, expected to outperform yet again over the year ahead:

-Xero ((XRO))
-TechnologyOne ((TNE))
-Hub24 ((HUB))

While shorter-term PE ratios might look pricey and act as a deterrent to own these stocks, Wilsons’ advice to investors is to take a 3-5 years view and focus on where respective PE ratios will be on continued double-digit percentage growth per annum, and where that should take respective share prices.

The added confidence booster is these companies’ growth trajectories are not dependent on what happens with economies and interest rates, though no company is fully immune from what happens in the world, of course.

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Irrespective of the rather dim-looking earnings outlook for corporate Australia, local key share market indices remain near all-time record highs, predominantly as a result of some weakness from macro-related factors including the US presidential election (close), rising bond yields and continued geopolitical uncertainty as Israel and Iran weigh up further actions and potential ramifications.

Some market commentators have been pointing in the direction of Australian superannuation funds when asked why bank shares are where they are given the context above that also includes a  low growth outlook for the sector locally. A recent update on this matter by strategists at UBS has dismissed the suggestion that super funds are buying regardless of valuations and thus responsible for what could be described as Australia’s 2024 banking shares bubble (?).

As an aside, I personally believe the term ‘bubble’ is way too often used, and way too liberally too, often simply indicating those who use it, and use it time and again, do not understand the forward-looking nature of financial markets, as well as current expectations for lower rates and a ‘no landing’ outcome for major economies.

Back to UBS’s assessment, the observation stands the recent June quarter in Australia saw a record $57bn in fresh liquidity flowing into Australian superannuation funds. Having increased at a pace of 13% over the past twelve months, the current pace of growth is almost double the average over the past twenty years.

But UBS makes the point these inflows need to be assessed against the totality in funds that sit in today’s system, as well as against the fact the share market too has grown significantly over that period. Hence, yes, those fresh inflows are significant, but in a relative sense they are not exceptional; far from it.

UBS points out the average allocation to local equities sits at 23.2% and hasn’t changed much, but the allocation to foreign equities has and now averages 29%.

Just to make sure, UBS has been tracking quarterly moves over the past decade and observes no relationship between funds flows and share market valuation. There’s an impact, for sure, but maybe not so much on valuation.

Instead, concludes UBS, if you want to figure out why the valuation for the local share market is where it is, it’s probably best to look offshore, towards US markets. The local bourse tends to take guidance, and direction, on valuation from US equities.

In this context, concludes the report, one “must accept the leadership the influential US market has on the sentiment and momentum behind equities down under”.

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The above, of course, easily explains why the current quarterly reporting season for US companies should also be closely followed by investors in Australia, even if they are 100% invested in the local market.

S&P Global Market Intelligence believes how this Q3 season unfolds is pivotal, with US corporate reports providing fresh insights into the key market dynamics that play a crucial role for determining the outlook for the US economy (and thus for share markets). These key dynamics have been identified as earnings (growth, margins), AI adoption and price stability.

Overall sentiment among S&P500 firms remains “exceptionally positive”, reports Daniel Sandberg, Head of Quantamental Research & Solutions for S&P Global Market Intelligence. According to Sandberg, this optimism is primarily driven by the US economy trending towards a ‘Goldilocks’ scenario of ongoing steady growth and price stability.

In particular optimistic are firms in the Financials, Information Technology, and Energy sectors.

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Equally optimistic are US portfolio strategists at Goldman Sachs. Their view is based on the cycle which is entering a more benign period of ongoing economic growth and lower central bank policy rates. History shows such a combination is usually very positive for equities.

Here the negative news is that higher government deficits and a rebuild of term premia will prevent longer-term bond yields to fall from current levels, which is poised to keep a lid on already high US equity valuations. This means further gains need to come from growth in earnings.

Goldman Sachs thinks returns will be less one-sided from here onwards, i.e. investment return can come both from ‘growth’ and from ‘value’.

Here the good news is EPS growth forecasts have recently been upgraded to 11% for the S&P500 in the year ahead. This has generated a new twelve month target for the S&P500 of 6300, suggesting another leg of 10% upside remains possible.

Goldman Sachs also believes much higher valuations for US equities do not by default imply the rest of the world needs to catch up. Firstly, the relative outperformance over the decade past can easily be explained by superior growth for corporate America. More importantly: current valuations in combination with the likely growth outlook suggests US markets can continue to justify their valuation premium, say the strategists.

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For those who haven’t as yet read Part One of Weekly Insights this week, below are the 15 Most Highly Recommended Stocks in Australia on the basis of strategists and portfolio stock pickers locally.

For more details, see Part One: https://fnarena.com/index.php/2024/10/23/rudis-view-australias-most-highly-recommended-stocks/ 

Best Buys & Conviction Calls

Ord Minnett’s most preferred choices on the ASX:

-AGL Energy ((AGL))
-Alliance Aviation ((AQZ))
-ARB Corp ((ARB))
-Brambles ((BXB))
-CSL ((CSL))
-EQT Holdings ((EQT))
-Insurance Australia Group ((IAG))
-Judo Capital ((JDO))
-James Hardie ((JHX))
-Medibank Private ((MPL))
-Newmont Corp ((NEM))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-Qantas Airways ((QAN))
-Regis Healthcare ((REG))
-Rio Tinto ((RIO))
-ResMed ((RMD))
-SRG Global ((SRG))
-Santos ((STO))
-Strike Energy ((STX))
-Telstra ((TLS))
-Vault Minerals ((VAU))
-Vicinity Centres ((VCX))
-Westpac Bank ((WBC))
-Waypoint REIT ((WPR))
-Xero ((XRO))

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Wilsons Highest Conviction investment ideas:

-Santos ((STO))
-Car Group ((CAR))
-James Hardie
-Hub24 ((HUB))
-Aristocrat Leisure ((ALL))

Among Research Ideas, the following six names are seen as Long Term Growth ideas:

-Flight Centre ((FLT))
-Ridley Corp ((RIC))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Siteminder ((SDR))

For those with a more speculative mindset, Wilsons puts forward PYC Therapeutics ((PYC)). In the Resources sector, the choice is Beach Energy ((BPT)).

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Wilsons’ Australian Equity Focus Portfolio consists of the following:

-CAR Group ((CAR))
-Aristocrat Leisure ((ALL))
-WEB Travel Group ((WEB))
-Lottery Corp ((TLC))
-Collins Foods ((CKF))
-Breville Group ((BRG))
-Santos ((STO))
-ANZ Bank ((ANZ))
-National Australia Bank ((NAB))
-Macquarie Group ((MQG))
-Westpac Bank ((WBC))
-Hub24 ((HUB))
-Steadfast Group ((SDF))
-CSL ((CSL))
-ResMed ((RMD))
-Telix Pharmaceuticals ((TLX))
-Worley ((WOR))
-Xero ((XRO))
-TechnologyOne ((TNE))
-BHP Group ((BHP))
-James Hardie ((JHX))
-Evolution Mining ((EVN))
-South32 ((S32))
-Metals Acquisition ((MAC))
-Arcadium Lithium ((LTM))
-Sandfire Resources ((SFR))
-HealthCo Healthcare & Wellness REIT ((HCW))
-Goodman Group ((GMG))

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Goldman Sachs’s APAC Conviction List includes Life360 ((360)) and Xero ((XRO)).

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The full list of UBS’s Most Preferred Best Stock Ideas:

In Resources:

-BlueScope Steel ((BSL))
-Newmont Corp ((NEM))
-Orica ((ORI))
-Origin Energy ((ORG))
-Rio Tinto ((RIO))
-Santos ((STO))

In Financials:

-AUB Group ((AUB))
-Dexus ((DXS))
-Medibank Private ((MPL))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))

Industrials:

-Brambles ((BXB))
-Car Group ((CAR))
-Coles Group ((COL))
-NextDC ((NXT))
-REA Group ((REA))
-Telstra ((TLS))
-Telix Pharmaceuticals ((TLX))
-Treasury Wine Estates ((TWE))
-Worley ((WOR))
-Xero ((XRO))

The list of Least Preferred exposures:

-APA Group ((APA))
-Aurizon Holdings ((AZJ))
-ASX ((ASX))
-Bank of Queensland ((BOQ))
-CommBank ((CBA))
-Cochlear ((COH))
-Domain Holdings Australia ((DHG))
-JB Hi-Fi ((JBH))
-Reece ((REH))
-Scentre Group ((SCG))

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Morgan Stanley’s Macro+ Focus List in Australia is currently made up of:

-AGL Energy ((AGL))
-GPT Group ((GPT))
-James Hardie ((JHX))
-Santos ((STO))
-WiseTech Global ((WTC))

Plus:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-Macquarie Group ((MQG))
-Paladin Energy ((PDN))
-Suncorp Group ((SUN))

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Morgan Stanley’s Australia Macro+ Model Portfolio is currently made up of the following:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
Westpac ((WBC))

-Macquarie Group ((MQG))

-Suncorp Group ((SUN))

-Goodman Group ((GMG))
-GPT Group ((GPT))
-Scentre Group ((SCG))
-Stockland ((STG))

-Aristocrat Leisure ((ALL))
-CAR Group ((CAR))
-Domino’s Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-WiseTech Global ((WTC))

-James Hardie ((JHX))

-Orica ((ORI))

-Coles Group ((COL))

-CSL ((CSL))
-ResMed ((RMD))

-AGL Energy ((AGL))
-Origin Energy ((ORG))
-Telstra ((TLS))
-Transurban ((TCL))

-BHP Group ((BHP))
-Newmont Corp ((NEM))
-Rio Tinto ((RIO))
-South32 ((S32))

-Paladin Energy ((PDN))
-Santos ((STO))
-Woodside Energy ((WDS))

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Crestone’s selected list of Best Ideas in Australia:

-Ampol ((ALD))
-APA Group ((APA))
-Aristocrat Leisure ((ALL))
-Beach Energy ((BPT))
-Brambles ((BXB))
-CSL ((CSL))
-Goodman Group ((GMG))
-IGO Ltd ((IGO))
-James Hardie ((JHX))
-Macquarie Group ((MQG))
-Metcash ((MTS))
-Monadelphous Group ((MND))
-REA Group ((REA))
-ResMed ((RMD))
-Suncorp Group ((SUN))
-The Lottery Corp ((TLC))
-Xero ((XRO))

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Stockbroker Morgans’ list of Best Ideas:

-Acrow ((ACF))
-ALS Ltd ((ALQ))
-Amotiv ((AOV))
-Beacon Lighting ((BLX))
-BHP Group ((BHP))
-Camplify Holdings ((CHL))
-Cedar Woods Properties ((CWP))
-ClearView Wealth ((CVW))
-CSL ((CSL))
-Dalrymple Bay Infrastructure ((DBI))
-Dexus Industria REIT ((DXI))
-Elders ((ELD))
-Flight Centre Travel ((FLT))
-GQG Partners ((GQG))
-HomeCo Daily Needs REIT ((HDN))
-Karoon Energy ((KAR))
-MA Financial ((MAF))
-Maas Group ((MGH))
-Mach7 Technologies ((M7T))
-NextDC ((NXT))
-PolyNovo ((PNV))
-QBE Insurance ((QBE))
-Qualitas ((QAL))
-Reliance Worldwide ((RWC))
-ResMed ((RMD))
-Rio Tinto ((RIO))
-South32 ((S32))
-Superloop ((SLC))
-The Lottery Corp ((TLC))
-Treasury Wine Estates ((TWE))
-Universal Store Holdings ((UNI))
-WH Soul Pattinson ((SOL))
-Woodside Energe ((WDS))

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Macquarie Wealth‘s recommended Growth Portfolio:

-Goodman Group ((GMG))
-Seek ((SEK))
-Aristocrat leisure ((ALL))
-Northern Star ((NST))
-CSL ((CSL))
-Computershare ((CPU))
-NextDC ((NXT))
-Flight Centre ((FLT))
-Mineral Resources ((MIN))
-Cleanaway Waste Management ((CWY))
-Steadfast Group ((SDF))
-James Hardie ((JHX))
-ResMed ((RMD))
-Pexa Group ((PXA))
-Treasury Wine Estates ((TWE))
-Viva Energy ((VEA))
-Xero ((XRO))

Macquarie Wealth’s recommended Income Portfolio:

-Suncorp Group ((SUN))
-Telstra ((TLS))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-ANZ Bank ((ANZ))
-BHP Group ((BHP))
-CommBank ((CBA))
-Premier Investments ((PMV))
-Coles Group ((COL))
-Viva Energy ((VEA))
-Atlas Arteria ((ALX))
-Aurizon Holdings ((AZJ))
-APA Group ((APA))
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-Amotiv ((AOV))
-Charter Hall Retail REIT ((CQR))
-Amcor ((AMC))

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In December, Shaw and Partners released its 10 Best Ideas to benefit from the anticipated small caps’ revival in 2024:

-AIC Mines ((A1M))
-Austin Engineering ((ANG))
-FireFly Metals ((FFM)), previously AuTeco (AUT)
-Chrysos ((C79))
-Gentrack Group ((GTK))
-Metro Mining ((MMI))
-MMA Offshore ((MRM))
-Peninsula Energy ((PEN))
-ReadyTech Holdings ((RDY))
-Silex Energy ((SLX))

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Macquarie’s ASX Quality Compounders:

The highest quality compounders’ as identified by Macquarie quant research inside the ASX300:

-James Hardie ((JHX))
-Cochlear ((COH))
-REA Group ((REA))
-TechnologyOne ((TNE))
-ResMed ((RMD))
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure ((ALL))
-Spark New Zealand ((SPK))
-Codan ((CDA))
-Clinuvel Pharmacauticals ((CUV))
-Redox ((RDX))

Given Macquarie’s research strong leaning on the past five years, with high barriers to match, the following 11 companies fell just outside the above list:

-Fisher & Paykel Healthcare ((FPH))
-Medibank Private ((MPL))
-Coles Group ((COL))
-The Lottery Corp ((TLC))
-Lovisa Holdings ((LOV))
-CSL ((CSL))
-IDP Education ((IEL))
-Pinnacle Investment Management ((PNI))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

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Key Stock Picks for the year-ahead nominated by analysts at Bell Potter:

-Among listed investment companies (LICs); Australian Foundation Investment Company ((AFI)), Metrics Master Income Trust ((MXT)), and MFF Capital Investments ((MFF))

-Agriculture & fast moving consumer goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; TechnologyOne ((TNE)), Gentrack ((GTK)), and REA Group ((REA))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and McMillan Shakespeare ((MMS))

-Real Estate; Dexus Convenience Retail REIT ((DXS)), HealthCo Healthcare & Wellness REIT ((HCW)), and GDI Property Group ((GDI))

-Retailers; Premier Investments ((PMV)), Universal Store Holdings ((UNI)), and Propel Funeral Partners ((PFP))

-Aerospace & Defence; Electro Optic Systems ((EOS)) and Austal ((ASB))

-Industrials; Brickworks ((BKW)), IPD Group ((IPG)), and Cleanaway Waste Management ((CWY))

-Healthcare; Telix Pharmaceuticals ((TLX)), Cyclopharm ((CYC)), Aroa Bioscience ((ARX)), MedAdvisor ((MDR)), and Neuren Pharmaceuticals ((NEU))

-Gold sector; Capricorn Metals ((CMM)) and Santana Minerals ((SMI))

-Base metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), and Mineral Resources ((MIN))

-Strategic Minerals; Alpha HPA ((A4N)), IperionX ((IPX)), and Liontown Resources ((LTR))

-Energy sector; Boss Energy ((BOE)) and Paladin Energy ((PDN))

-Mining services; Seven Group Holdings ((SVW)), Mader Group ((MAD)), and SRG Global ((SRG))

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Morningstar’s selection of Best Buys on the ASX:

-IGO Ltd ((IGO))
-TPG Telecom ((TPG))
-Domino’s Pizza ((DMP))
-Bapcor ((BAP))
-Endeavour Group ((EDV))
-Santos ((STO))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Dexus ((DXS))
-SiteMinder ((SDR))
-APA Group ((APA))
-Fineos Corp ((FCL))
-ResMed ((RMD))

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Ord Minnett’s Conviction Calls:

-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Electro Optic Systems Holdings ((EOS))
-Lindsay Australia ((LAU))
-Pinnacle Investment Management ((PNI))
-Qoria ((QOR))
-Red 5 (RED)
-Regis Healthcare ((REG))
-SiteMinder ((SDR))
-SRG Global ((SRG))
-Stanmore Resources ((SMR))
-Waypoint REIT ((WPR))

In addition, research analyst Athena Kospetas, recently communicated the following Key Preferred Ideas per sector:

Financials
-Westpac ((WBC))
-Judo Bank ((JDO))
-Insurance Australia Group ((IAG))
-Medibank Private ((MPL))
-nib Holdings ((NHF))
-Pinnacle Investment Management ((PNI))
-EQT Trustees ((EQT))

Resources
-Rio Tinto ((RIO))
-Newmont Corp ((NEM))
-Red 5 ((RED))

Energy & Utilities
-Santos ((STO))
-Strike Energy ((STX))
-AGL Energy ((AGL))

Healthcare
-ResMed ((RMD))
-CSL ((CSL))
-Regis Healthcare ((REH))

Consumer stocks
-Qantas Airways ((QAN))
-ARB Corp ((ARB))

Communication Services & Technology
-Xero ((XRO))
-Seek ((SEK))
-Telstra ((TLS))

Industrials
-James Hardie ((JHX))
-Brambles ((BXB))
-Alliance Aviation ((AQZ))
-SRG Global ((SRG))
-Qube Holdings ((QUB))

Real Estate
-Vicinity Centres ((VCX))
-Waypoint REIT ((WPR))

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Jarden’s Best Ideas among emerging companies (small and mid-cap):

-IPH Ltd ((IPH))
-Temple & Webster ((TPW))
-EVT Ltd ((EVT))
-Dicker Data ((DDR))
-Universal Store ((UNI))
-Nick Scali ((NCK))
-AUB Group ((AUB))
-Webjet ((WEB))
-Integral Diagnostics ((IDX))
-Capricorn Metals ((CMM))
-Michael Hill ((MHJ))
-NRW Holdings ((NWH))
-Light & Wonder ((LNW))
-Pointsbet ((PBH))
-National Storage ((NSR))
-Ingenia Communities ((INA))
-Karoon Gas ((KAR))
-Domain Holdings Australia ((DHG))
-Pepper Money ((PPM))
-Telix Pharmaceuticals ((TLX))

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Barrenjoey’s Top Picks:

-Insurance Australia Group ((IAG)) among financials, as well as GQG partners ((GQG)) and Westpac ((WBC))
-Xero ((XRO)), Pexa Group ((PXA)) and Dicker Data ((DDR)) in the technology sector
-Vicinity Centres ((VCX)) and Abacus Storage King ((ASK)) among REITs
-South32 ((S32)), Lynas Rare Earths ((LYC)) and Perseus Mining ((PRU)) among miners and Strike Energy ((STX)) in the oil&gas sector
-ResMed ((RMD))
-Metcash ((MTS))
-Aristocrat Leisure
-Reliance Worldwide ((RWC))
-Brambles ((BXB))
-Seven Group ((SVW))

My research and All-Weather stock selections are 24/7 available for paying subscribers: https://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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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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