The following article has not been sponsored by any parties. The author, Luke Laretive, is our resident expert.
The pandemic whacked Australia’s economy harder than 2001 hit American airport security. But while Australia’s hospitality and travel industries continue to be devastated by border closures and lockdowns, the ASX, buoyed by a miraculous NASDAQ bounce back, has rallied harder than a supercar.
Now, almost two years after COVID-19 caused an en masse BASE jump, the ASX has bounced back hard. And we’re on the lookout for the best shares…
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While experts agree it will take years for the ~real~ economy to grow back to 2019 levels, the Australian stock market is currently living in a world of its own, having regained what it lost – and in some cases much more. Whether this can be maintained or whether it’s a peach about to go putrid, we’ll leave for the experts.
What’s not up for question is that you don’t want to be throwing money away right now. So rather than trust your mate’s brother’s cousin (or your Uber driver who assures you ‘there’s still momentum’), DMARGE, each month throughout 2022, will be bringing you the top three ASX stock picks of Luke Laretive, CEO of Seneca Financial Solutions – and his analysis on each one.
We’ve had some fantastic winners, and few duds, but overall, Laretive’s picks have averaged a 65.6% return over the period (before dividends, franking credits and currency movements).
This article is of a general nature only and does not consider your objectives, financial situation or needs.
You should consider the appropriateness of the information in light of your objectives, financial situation and needs before acting on it and obtain copies of any relevant disclosure documents. Seneca Financial Solutions does not warrant the accuracy or reliability of the information in this report.
Luke Laretive, Seneca Financial Solutions, its Directors and its associated entities may have or had interests in companies mentioned. They may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other financial services to those companies mentioned.
Luke provides clients with a weekly note, which you can access here.
In this best ASX shares story…
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- Australian Share Trading FAQs
Here are this month’s best ASX shares and stocks.
Collins Foods (CKF) $10.00 per share, $1.1bn market cap
Collins Foods operate the KFC restaurant chain in Australia, The Netherlands, and Germany, as well the emerging Taco Bell brand of stores here in Australia.
Investors have incorrectly assumed that falling consumer demand would see declining sales, while rising food and labour costs was negatively impact margins.
The stock had fallen 60% on the back of these assumptions, before rallying on the FY22 results, which saw 31 new stores, EBITDA growth of over 14% and improving profit margins across the European stores – a key pillar of future growth.
In short: High quality, consumer facing business that is less cyclical and more defensive than the average investor appreciates.
ARB Corporation (ARB) $28.50 per share, $2.3bn market cap
ARB is down 60% from its highs as investors believe the pandemic-induced, 4-wheel-drive-mania is over, sales growth has peaked and rising raw materials and labour costs are certain to erode margins.
However, ARB has an exceptional track record for managing costs, having invested early and ahead of the curve in offshore manufacturing capability. Their strong brand loyalty, bedded in a culture of R&D, means they do not face the same price sensitivity as many of their competitors.
In short: We think ARB is a long-term outperformer that’s been erroneously thrown out as a low-quality COVID winner in decline.
Credit Corp (CCP) $20.00 per share, $1.4bn market cap
Credit has a very simple business model. They buy debt ledgers and recover the money. The stock is down c. 60% from its highs on concerns around cost inflation, debt ledger availability and recovery rates as consumers become more and more distressed both here and in the US.
I’m not dismissing those concerns, however, it’s our view that is CCP continuing to expand geographically and continuing to find margin as a result of that scale through investment in offshoring, analytics and technology.
In short: CCP should continue to deliver 16-18% ROE, low gearing, and strong long-term growth as its always done for many years. Beauty is now, you’ve got a rare opportunity to buy at heavily discounted prices.
All figures in Australian dollars (1 AUD = 0.72 USD at time of publishing)
GQG Partners (GQG) $1.58, $4.6bn market cap
GQG is a leading fund manager with over $90bn USD under management, a strong performance track record and competitive fees. GQG, unlike many of their peers globally, generate 95%+ of its revenue from stable management fees and it’s because of this stability and scale, GQG has been able to rapidly expand profit margins, now over 80%. This is rare air for an ASX-listed company in any sector.
In short: Trading on a c. 8.0% dividend yield, current pricing offers an attractive long-term entry point.
Amcor (AMC) $18.41, $14bn market cap
Amcor is the global leader in packaging, their customers are the multinational fast-moving consumer goods (FMCG) companies that populate the supermarket shelves around the world. Amcor, like many other industrial companies, are facing a range of challenges as a result of the current macroeconomic environment.
Rising raw materials and commodity prices, labour shortages and freight costs all impact Amcor’s cost base. Unlike many of their industrial peers, Amcor’s market position allows the company to pass on price rises to customers, protecting their margins, free cash flow and dividends (which have grown at 8.5% CAGR since 2003).
In short: A high quality, defensive company offering reliable mid-single digit growth and a c. 3.8% dividend yield.
Australian Finance Group (AFG) $1.91, $515m market cap
AFG is Australia’s #1 mortgage aggregator, and over the past 7 or 8 years has taken dividends from 6cps in 2015 to 17cps in 2022. Yet, here we are today, buying the stock at 2018-prices and on a pretty much all-time high dividend yield of 8.80%. We think concerns about rising compliance costs and commission rate pressure is consistent across the financial services industry and perhaps, overplayed.
In fact, our view is there is adequate evidence to support the idea that AFG can grow margins over time, as higher margin products are seeing faster volume growth than legacy, lower-margin white label products.
In short: A reliable dividend payer at an attractive price, with significant potential for a re-rate if they can continue to transition to these higher margin products.
All figures in Australian dollars (1 AUD = 0.71 USD at time of publishing)
Australian Finance Group (AFG) $1.99, $534.76m market cap
AFG is a bit like a mortgage bank in that it makes its incremental profits through margins and loan volumes.
AFG is unique in that its historical 3rd party loans are far less profitable than their AFG-branded products, either the white label product (funded by NAB, BEN etc.) or the loans funded by the AFG securitisation warehouse. We think that product mix and a normalisation in margins, coupled with better-than-expected volumes could see AFG stock bounce from c. $2.00 currently back towards its fair value of around $3.00 per share.
In short: The stock is currently trading on an almost 5-year low PE multiple of 8x despite a track record for double digit EBITDA growth and c. 15% EBITDA margins.
Amcor (AMC) $16.52, $19.06bn market cap
Amcor report earnings this month and have guided to 7-11% EPS growth and $1.1-1.2bn in free cash flow at the Q2 results in February.
We think based on current valuation; the market is pricing in a 7-10% earnings downgrade to this guidance. While reasonable given the known headwinds, such as raw materials costs have risen, labour challenges are real and the fact most cyclical companies are experiencing margin compression, we think this discount will turn out to be unwarranted.
We have faith in Amcor’s demonstrated ability, over time, to pass on costs and use its dominant market position to maintain margins.
We agree with most competent analysts that this is a $18 stock, offering a 4% dividend yield and trading on 12x EV/EBITDA.
In short: Pricing power and an ability to manage costs in difficult operating environments is more valuable than ever
Macquarie (MQG) $203.99, $78.26bn market cap
Macquarie has transitioned from a largely transactional revenue base to a majority reoccurring revenue base over the past 10 years, making its revenue and profits more predictable, less cyclical. As a result, the stock has re-rated from a stock that trades on 12x to 18x PE.
However, incremental profits, above analyst expectations, are often still derived from the performance in some of the spicier divisions – such as fixed income, commodities and currencies of FICC. These guys benefit from volatility in markets, volatility in rates and frothy commodity markets… which pretty much describes the last 12 months perfectly.
We see Macquarie EPS surprising to the upside by c. 5-10% when it reports Q4 numbers on Friday and we think this would see the share price head closer to broker consensus price target of $226 per share
In short: High quality business benefiting from volatile markets.
For April’s top picks, our author Luke Laretive has chosen to talk about 3 fund managers to buy. He adds that if readers want access to any of these products, more information or copies of the regulatory documents etc, they are welcome to email him at [email protected]
Fairlight Global Small & Mid Cap
Nick & Ian from Fairlight run a global small and mid-cap strategy with a very similar philosophy and approach to the way I manage the Seneca Australian Shares portfolio, but investing in a totally different universe of stocks.
Fairlight build a portfolio of assets which broadly fall into three categories: high quality growth, stable compounders and special situations/low-risk turnarounds aiming to deliver 8-12% returns per annum after fees. The Fairlight team have been able to achieve 14.3% pa returns since inception, outperforming their relevant benchmark by 3.2% on an after fees basis.
In short: For those investors who like the Seneca philosophy but want to diversify into global small and mid-cap companies.
GQG Partners Emerging Market Equity Fund
With emerging markets underperforming developed markets over the past 12 months, we see an opportunity for active managers in those high growth regions.
GQG also focus on high-quality, reasonably priced businesses with sustainable competitive advantages. The resulting portfolio has fairly good downside protection characteristics (for an equity fund in emerging markets) with the manager focusing on larger, lower PE stocks, relative to the benchmark. This has resulted in 5.5% outperformance over the past 3 years and 10.59% p.a returns on an after-fee basis (9.68% p.a since inception)
In short: If GDP Growth is a good proxy for sales and earnings growth, then you need to be invested in the fastest growing economies on the planet – this fund gives you exposure to these exciting markets.
Australian Ethical Emerging Companies Fund
I don’t particularly care if you are interested in ethical investing or not, this fund stacks up regardless of your personal preferences. AE Emerging Companies invests in Australian small and mid-cap companies and is benchmarked to the ASX Small Industrials index. The fund has achieved 17.2% returns since inception in 2015, beating the benchmark by almost 9% through disciplined portfolio management and exceptional stock-picking.
In short: The AE team are better at buying small caps than you are. Stop throwing darts at the dartboard and hire a manager with a proven track record and proper investment process.
All figures in Australian dollars (1 AUD = 0.73 USD at time of publishing)
Whitehaven Coal (WHC) $3.21, $3.4bn market cap
You might not realise, but thermal coal and natural gas are semi-substitutable goods, both used to create electricity all over the world.
And while this invasion is underway, Russia isn’t supplying gas to Europe, which is driving up gas prices and subsequently, demand for thermal coal.
Thermal coal prices are at 10-year highs, over US$250 per metric tonne, and coal miners like WHC are raking in the cash.
WHC plan to pay down debt and continue to return money to shareholders via fully franked dividends, which should be a catalyst for a sustainable re-rate.
In short: Making the most of a bad situation
Nickel Mines (NIC) $1.55, $4.06bn market cap
Russia is the 3rd largest exporter of nickel on the planet, and with supply disrupted, and demand from battery-manufacturers growing by the day, sustained higher nickel prices are a reasonable assumption. Nickel Mines is set to triple production over the next 12 months after a couple of years of significant investment, which may end up being fortunate timing and see their free cash flow balloon.
In short: Right commodity, right production profile, right time
Paypal (PYPL) $111.93, $130.4bn market cap
If you weren’t convinced that global payments are the most critical infrastructure we have, go look at the importance of kicking Russia out of SWIFT. Meanwhile, the world’s most dominant, innovative payments company is 60% off its 52-week high despite expanding EBIT margins, 20% return on equity and 20% top line sales growth. It’s currently trading on c. 22x EV/EBITDA or a forward PE of about 23x, which is about 5-year lows (including the depths of the COVID-19 crisis).
In short: One of the best businesses on planet earth, at fire sale prices.
Australian Share Trading FAQs
Which ASX stock trading site is best for beginners?
CommSec by Commonwealth Bank or CMC Markets Stockbroking are the most popular trading platforms for beginners. Their trading fees are roughly $20 per trade to buy and sell shares online.
How to invest in stocks?
Investing in shares can be done via a stockbroker or by yourself using an online trading platform.
How to buy shares in Australia?
Trading shares in Australia is relatively easy. You simply need to set up a trading account with your bank or an online trader like CommSec. Once you have deposited funds into your trading account you will be able to buy and sell Australian shares.