Eight top 100 stocks to buy in July

About the author:

Author name:

By Andrew Tang

Job title:

Analyst - Equity Strategy

Date posted:

30 June 2015, 9:32 AM

Sectors Covered:

Equity Strategy and Quant

The Greek debt impasse has overhung global financial markets for what seems like an eternity. We know that markets discount uncertainty so it's not surprising they have already retreated back toward fair value. We see a material risk that a Greek default could push markets lower in the coming weeks.

Despite this gloomy context, the 6% fall in the market since May has started to throw up some interesting opportunities. We remind investors of the strong performance of the Morgans Model Portfolios and High Conviction Lists. These prove that strong returns can still be generated in this environment through highly selective stock picking and without investors needing to take on excessive levels of risk.

Top stocks to buy in July

Our high conviction picks are companies we believe will outperform the market based on short to medium-term catalysts. We have made one addition to our Top 100 High Conviction list this month, adding global packaging company Amcor Limited (AMC).

Here are our eight top 100 stocks for July:

Amcor Limited (AMC)

Amcor Limited (AMC) is a global packaging company offering a range of packaging related products mainly servicing defensive sectors such as food, beverages, healthcare, personal and homecare and tobacco.

Reasons to buy Amcor Limited

• High quality, defensive business with growth from emerging markets. Given its defensive characteristics, we think the stock should be well supported in the current volatile environment.
• Reports earnings in USD. With our expectations of a fall in the AUD/USD to 73c by the end of FY16, we see this as the biggest positive catalyst for the share price in the short term.
• AMC is always a potential capital management candidate given its strong FCF generation. AMC is currently undertaking a US$500m buyback, which should provide support for the share price in the short term. We see potential for further capital management opportunities down the track.

We retain our Add recommendation for AMC with a share price target of A$15.52ps.

ANZ Banking Group (ANZ)

ANZ Banking Group (ANZ) is among the top 20 banks in the world, operates in 33 countries globally, and has the largest exposure of domestic major banks to the emerging Asian economies.

Reasons to buy ANZ Banking Group

• With further interest rate cuts looking likely in Australia, we think the domestic banks should continue to perform well.
• We think ANZ offers the best value of the major banks (on a PER and yield basis), and should deliver ROE expansion (as it gains economies of scale in its Asian operations).
• ANZ has the largest currency exposure and has leverage to Asian lending where growth should comfortably exceed the anaemic growth in domestic lending.

We retain our Add recommendation for ANZ with a revised share price target of A$39.00ps.

BHP Billiton (BHP)

BHP is the world's largest diversified resources company, with a large portfolio of highly diversified mining and energy interests across several key commodity markets and regions.

Reasons to buy BHP Billiton

• The demerger has removed a number of less profitable and smaller operations from BHP's asset portfolio, boosting its overall profitability and simplifying the business.
• We expect BHP's portfolio of predominantly high margin business segments will underpin its progressive dividend, supporting a fully franked dividend of 5.3%.
• BHP has flagged its interest in M&A in copper and oil markets (two of our preferred long-term commodity exposures) and offers a superior combination of commodity and market exposures within resources, enhancing the company's ability to defend its strong margins.

We retain our Add recommendation for BHP with a share price target of A$33.90ps.

Federation Centres (FDC)

Federation Centres (FDC) is a significant owner and manager of Australian retail assets.

Reasons to buy Federation Centres

• The newly merged entity (recently merged with NVN) is now a top 30 stock with a market cap of c$12bn and the 3rd largest REIT with $22bn of assets under management.
• Given the increased size and scale we expect the merged group will become meaningful for both offshore and domestic investors.
• The deal is expected to be highly accretive and we expect it will deliver a yield of around 6%.

Our share price target for FDC is A$2.90ps.

Qantas (QAN)

Qantas (QAN) is the largest airline in Australia providing domestic and international passenger services via its Qantas and Jetstar brands, as well as possessing the largest loyalty program in Australia in Qantas Loyalty.

Reasons to buy Qantas

• The capacity growth outlook is the most favourable for some time in both the domestic and international markets, providing the opportunity for QAN to increase revenue via increased load factors and ticket prices.
• Lower oil prices and a A$2bn internal cost-out program are providing a materials earnings benefit, with QAN likely to return to near record levels of profitability in FY16.
• News flow is a key share price driver of airline stocks and the next 6-12 months is likely to remain positive with monthly operating statistics and the full year result (expected Aug 20) reinforcing the strong operating conditions.

We retain our Add recommendation for QAN with a share price target of A$4.35ps.

Ramsay Healthcare (RHC)

Ramsay Healthcare (RHC) is Australia's largest private hospital operator and more recently has expanded its operations into the UK, France and parts of Asia (around 25% of revenue is now generated overseas).

Reasons to buy Ramsay Healthcare

• RHC is benefiting from an aging population which uses more medical services.
• RHC consistently delivers above market earnings growth (last three years averaging 18% per annum) and for the next three years is forecast to grow at 15% per annum.
• RHC is expected to benefit from further public hospital outsourcing opportunities.

We retain our Add recommendation for RHC with a share price target of A$73.54ps.

Resmed (RMD)

Resmed (RMD) is a world leader in the development, manufacturing and marketing of medical products to treat sleep apnoea.

Reasons to buy Resmed

• While recent results from the SERVE-HF clinical trial are disappointing, we believe it is ring-fenced from the broader business as the device used in the trial represents <2% of total devices sold and the trial was not targeting the core patient segment; we estimate the total earnings impact at <3%.
• The core respiratory and sleep-disorder breathing market remains intact, underpinned by a large and growing customer base, with favourable trends in obesity, ageing, cardiovascular diseases and increasing diagnosis rates; RMD controls c40% of this market.
• It remains early days in a new platform cycle, with the rollout of new products the most concentrated vs the last four major product platform launches over 15 years. The quarterly result exceeded market expectations with double digit sales growth (+14%)

We retain our Add recommendation for RMD with a share price target of A$9.73ps.

Sydney Airport (SYD)

Sydney Airport (SYD) is the 100% owner of a long-term leasehold of Kingsford Smith Airport, Australia's busiest airport.

Reasons to buy Sydney Airport

• SYD provides exposure to Australia's premier aeronautical infrastructure asset and prime retail space leveraged to Asian travel growth, as well as commercial property and airport car parking.
• Interest costs are expected to fall materially, as out-of-the-money interest rate swaps expire and are replaced at far lower interest rates.
• The combination of solid earnings growth and falling interest costs should generate strong distribution growth and potential for capital management initiatives.

We retain our Add recommendation for SYD with a share price target of A$5.82ps.

More information

Morgans clients can access detailed reports on all our high conviction stock picks. If you would like more information, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.