When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
Seven post-reporting season share ideas from three experts
With reporting season wrapped up, we review three experts’ views on the market and the companies where they are seeing opportunities.
Long software, short banks
Long-short fund manager Totus Capital is notably cautious about the outlook for markets. It expects further price gyrations as inflation eats into corporate earnings and equity valuations continue to fall.
“We’re looking for resilient earnings, with a proven track record of free cash flow generation so if we go through a protracted drawdown at least we can be comfortable in owning that business through it,” portfolio manager Tim Warner says.
On that note, Warner revealed a small position in Adobe, the leading global provider of design software for creatives including Photoshop. Its products are deeply embedded with customers resulting in high switching costs. Subsequently, Adobe has high pricing power to weather inflation pressures in addition to strong recurring revenues each year.
On the short side, Totus is betting against Australian banks as house prices and economic activity fall. Additionally, the banks also have big cost bases that will be susceptible to inflation. Admittedly, margins will expand as interest rates rise, but this will be offset by a deterioration in lending growth.
“Fixed-rate loans rolling off will create a huge churn event for the banks as everyone scrambles to get a better deal on their mortgage,” founder and portfolio manager Ben McGarry says.
Cash is king
Down the smaller end of town, A Rich Life founder Claude Walker has more cash on the sidelines than ever before. Speaking to The Inside Investor, he says this helps “maintain a psychological even keel” and the chance to take advantage of market dislocations.
“The number one most important thing for small-cap investors in times of unfavourable macro – as opposed to mere volatility, which is constant – is to have a lot of cash sitting on the sidelines,” Walker adds.
As for a company he likes today, he points to Sequoia. The $80 million business provides trading, licensing and professional services for the finance industry. Walker believes it has the potential to become a decent dividend stock as the payout ratio increases and earnings grow. Today it trades on a dividend yield of just 2.3 per cent. However, on conservative growth estimates, the business should payout 3.7 cents per share in FY26, which at the current share price implies a 6.1 per cent fully franked yield.
Another business on his radar is Alcidion, which provides electronic health records for hospitals. The business has fallen out of favour with the market due to making a series of acquisitions while remaining unprofitable. However underlying earnings are expected to turn positive in 2023, which Walker believes could be the catalyst for the share price to re-rate.
Three quality reopening plays
The team at Wilson Asset Management (WAM) Leaders fund is focusing on the best companies in each sector with proven management teams, particularly ones benefitting from the reopening of the economy.
In their FY22 review, equity analyst Anna Milne adds: “You have the earnings upside and then you also have sentiment, so that is positive from both a valuation and earnings, which translates into higher share prices.”
Three companies she calls out are CSL, Treasury Wine and Insurance Australia Group.
CSL has struggled over the past two years for plasma supply as lockdowns and government stimulus has kept donors away from centres. Positively, supply is returning which will be aided by CSL’s new Rika plasma collection device will improve collection yield, reduce donor discomfort and result in less waste from consumables.
Treasury Wines lost its fastest growing and most profitable market when China imposed tariffs on all Australian wines entering the country. However, it has quickly pivoted, moving inventory to other markets in Asia. Treasury has several new country of origin launches planned in addition to the purchase of Frank Family Vineyards in North America. WAM believes it can grow annually by 10 per cent for the next decade, making today’s valuation attractive.
Australians and subsequently insurers have been by a litany of natural disasters including flooding and bushfires. Despite past events, WAM is bullish on the growth of NRMA, one of the brands in IAG’s stable. With the addition of new key hires, the insurer is optimistic about the national rollout, highlighting growth opportunities in both Western Australia and Victoria.
Note: this article does not constitute financial advice.
