Stocks to buy in January
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 07 January 2016, 11:42 AM
- Sectors Covered:
- Equity Strategy and Quant
Entering 2016 we re-iterate our confidence in our high conviction stocks, which have performed well over the past 12 months. Our ASX100 list has achieved an 8% return over an average period of seven months while our ex-ASX100 list has returned 17% over the same period.
Our high conviction picks are companies we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.
This month we have removed Villa World (VLW) from our high conviction list. We continue to like Villa World over the medium term but we think short-term share price upside will continue to battle against negative housing market sentiment.
Here are our eleven (six ASX100 stocks and five ex-ASX100 stocks) high conviction picks for January:
ASX100 stock picks
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
- Its defensive characteristics are appealing in an uncertain environment. AMC generates 95% of revenue from sectors such as food and beverage, healthcare, personal care and tobacco packaging.
- A falling AUD has a positive impact on our AUD-based valuation and the translation of USD dividends.
- AMC is always a potential capital management candidate given its strong free cash flow generation. AMC recently completed a US$500m buyback and we see potential for further capital management opportunities down the track.
We retain our Add recommendation for AMC. Morgans clients can login to view our target price.
ANZ Banking Group (ANZ)
ANZ Banking Group (ANZ) is among the top 20 banks globally and has the largest Asian exposure of the Australian banks.
Reasons to buy ANZ Banking Group
- ANZ is the cheapest bank on every metric and is executing well domestically.
- ANZ has the largest currency exposure and has leverage to Asian lending where growth should comfortably exceed the anemic growth in domestic lending.
- Domestic high yield equities including the major banks should remain well supported with further interest rate cuts looking likely in Australia.
We retain our Add recommendation for ANZ. Morgans clients can login to view our target price.
Qantas (QAN)
Qantas (QAN) is the largest airline in Australia providing domestic and international passenger services, as well as owning Australia's largest loyalty program.
Reasons to buy Qantas
- The capacity growth outlook is the most favourable for some time providing increased revenue opportunities 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 sustain near record levels of profitability.
- News flow is a key share price driver with the next 6-12 months looking positive with monthly operating statistics and further capital management upside.
We retain our Add recommendation for QAN. Morgans clients can login to view our target price.
Ramsay Healthcare (RHC)
Ramsay Healthcare (RHC) is Australia's largest private hospital operator and is expanding into the UK, France and parts of Asia.
Reasons to buy Ramsay Healthcare
- Strong demand growth for medical services is driven by a global demographic shift.
- RHC has consistently delivered above market earnings and dividends growth (last 17 years averaging 16.8% and 16.6% pa, respectively), and for the next three years we forecast both metrics to grow at c13% per annum.
- RHC is expected to benefit from further public hospital outsourcing opportunities.
We retain our Add recommendation for RHC. Morgans clients can login to view our target price.
ResMed (RMD)
ResMed (RMD) is a world leader in the development and manufacturing of medical products to treat sleep apnoea.
Reasons to buy ResMed
- RMD controls c40% of the respiratory and sleep-disorder breathing market which is underpinned by growing trends in obesity, aging, cardiovascular diseases and increasing diagnosis rates.
- Double-digit sales growth is underpinned by strong US flow generator uptake and continued strength in masks beating market growth rates.
- RMD is supported by structural growth, a weakening AUD, a strong net cash position and ample balance sheet capacity.
We retain our Add recommendation for RMD. Morgans clients can login to view our target price.
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 a premier infrastructure asset and prime retail space leveraged to Asian travel growth, as well as commercial property and 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. Morgans clients can login to view our target price.
Ex-ASX100 stock picks
360 Capital Industrial Fund (TIX)
360 Capital Industrial Fund owns a portfolio of 21 industrial assets across Australia.
Reasons to buy 360 Capital Industrial Fund
- TIX offers investors exposure to Australian industrial property with quality tenants (Woolworths, Greens and Orora are the three largest tenants).
- Cashflows are supported by stable rents, underpinned by long-term leases which average around 3.2% rental growth per annum. FY16 forecasts imply an 8.7% yield at current prices.
- The compulsory acquisition of ANI is now complete and near-term catalysts include asset re-ratings, accretive acquisitions/non-core asset sales, and potential ASX200 index inclusion in CY16.
We retain our Add recommendation for TIX. Morgans clients can login to view our target price.
AP Eagers (APE)
AP Eagers operates a network of automotive dealerships across Eastern Australia.
Reasons to buy AP Eagers
- APE aims to double its share of the new car market from approximately 5% to 10% - plenty of acquisition opportunities are available in a fragmented market.
- Higher margin used car sales are a key growth platform. APE aims to be an innovator/disruptor of the established sales models, with the shopping centre concept expected to launch in early CY16, replicating the success of US peers.
- APE enjoys ample cashflow and balance sheet capacity. We see material earnings upside over the coming 12+ months.
We retain our Add recommendation for APE. Morgans clients can login to view our target price.
Corporate Travel Management (CTD)
CTD provides innovative and cost effective solutions to the corporate travel market globally.
Reasons to buy Corporate Travel Management
- CTD's market share is rising in all of its geographies and new acquisitions are performing well. CTD is a key beneficiary of a falling AUD with over 50% of earnings now in USD.
- CTD recently announced another accretive acquisition in the US and upgraded FY16 earnings guidance. The acquisition provides CTD with the scale to leverage its buying power in the US.
- The next share price catalyst is a strong 1H16 result. We also expect further accretive acquisitions in 2016.
We retain our Add recommendation for CTD. Morgans clients can login to view our target price.
GBST (GBT)
GBST is a provider of fund administration and financial markets systems growing in popularity with major institutions.
Reasons to buy GBST
- GBST has an impressive recent track record of new contract wins with major global institutions.
- Prospects look good for some existing clients to upgrade from single to multiple applications.
- Despite heavy investment in new product development, the company generates high levels of free cash flow.
We retain our Add recommendation for GBT. Morgans clients can login to view our target price.
Vitaco (VIT)
Vitaco manufactures and distributes branded products within the nutrition, health and wellness industry.
Reasons to buy Vitaco
- VIT's differentiator is its diversity across vitamins, sports nutrition and health foods including well known consumer brands.
- The group is targeting strong growth in exports via e-commerce channels, noting that China has 300 million active online consumers.
- Trading on an FY17F PEG of 0.6x, VIT looks attractively priced versus its peers (Blackmores, Bellamy's and Freedom Foods).
We retain our Add recommendation for VIT. Morgans clients can login to view our target price.
More information
Morgans clients can access our detailed research on companies in our high conviction list. 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.