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Rudi’s View: Lynas, Noni B And Citadel Group

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Sep 13 2018

In this week's Weekly Insights (this is Part Two):

Momentum Change: Don't Panic
August Reporting Season: The Final Snippets
Conviction Calls
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

It'll happen, says mining analyst Christopher Ecclestone at London-UK based Hallgarten & Company; rare earths will have their second coming. Investors preparing for the next specialty elements boom just have to be a little more patient.

In Australia, UBS retains a positive view on come-back kid Lynas Corp ((LYC)) which shouldn't surprise given the broker's price target is no less than 78% higher than where the shares are trading at.

Earlier this year, it seemed Lynas was making a successful come-back from the darkest corners of the local share market, where one also finds Millennium Services ((MIL)) and Sundance Energy ((SEA)) to name but two, but that successful come-back has since turned into yet another nightmare for investors who stayed the course with the share price down around $1.80 from $3 in May.

At least the shares are still a long way away from the 38c they were trading at in the darker days.

Analyst Dylan Kelly at CLSA cannot believe it has once again come to this. On his calculation, the Mt Weld operation as a stand-alone business would fetch a valuation of $3 in the current context. He thinks investors are running scared because of potential for renewed political obstruction from the freshly elected Malaysian government (previously in opposition).

No double guessing as to why CLSA carries Lynas as a Conviction Buy, sorry, make that a High Conviction Buy, reiterated on Friday with a price target of $4.10.

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Those who cannot believe why investors keep buying shares in CSL ((CSL)), and on my observation there is quite the number of naysayers out there, will be rubbing their eyes to read that sector analysts at Macquarie still have CSL as their most preferred healthcare exposure in Australia.

Say what?

Yes. Macquarie argues on the basis of the company's market position in plasma collection combined with an attractive earnings growth profile supported by solid fundamentals that CSL still is a solid buy at current share price level. The broker this week upped its price target to $230 from $223.50 after yet again digging deeper into Australia's foremost biotech success story if only to conclude the balance of risks remains to the upside.

The second most preferred healthcare stock is Ramsay Health Care ((RHC)), which is directly related to current market scepticism but Macquarie has been, and still remains, confident this quality ship will turn around assisted by brownfield development and incremental procurement savings.

Least preferred exposures are Cochlear ((COH)) and Primary Healthcare ((PRY)). The latter continues to perform weakly and exude ongoing uncertainty while the former constantly defies valuation limits amid challenges presenting themselves in developed markets.

Probably good to add here that healthcare analysts at UBS have also been lifting their price target for CSL recently and their latest adjustment has pushed the target to $232.

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Equally noteworthy, perhaps, is that the Recommended Australia Portfolio managed by Macquarie has reduced its exposure to the banks, while swapping Bingo Industries ((BIN)) for Cleanaway Waste Management ((CWY)) and also selling some James Hardie ((JHX)) shares.

Exposure to mining has been increased by adding OZ Minerals ((OZL)) while the position in Unibail-Rodamco-Westfield ((URW)) is now enlarged.

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Bell Potter's list of most preferred exposures to the local tech sector has equally experienced a few changes. Number one Key Pick is now Integrated Research ((IRI)), with Citadel Group ((CGL)) second and TechnologyOne ((TNE)) on position number three.

No change on the other side of the ledger where WiseTech Global ((WTC)) remains the least liked because of "valuation".

Investors familiar with the sector will remember Integrated Research delivering a negative surprise in mid-July, which explains the sharp fall on price charts. Bell Potter is willing to forgive and argues that event was simply a nasty one-off, not to be repeated. Double digit percentage growth should resume in FY19, and on that basis the stock is now Key Pick number one for the sector.

Both Citadel and TechnologyOne have proved to be less volatile, at least in their operations, with annual growth in the order of 15% a regularly recurring achievement.

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Diversified financials analysts at Citi maintain their number one preference for Link Administration ((LNK)), followed by Challenger ((CGF)), IOOF ((IFL)), Computershare ((CPU)), Janus Henderson ((JHG)), Perpetual ((PPT)) and, at the bottom of the sector ranking, the ASX ((ASX)).

Note that IOOF carries the extra tag of High Risk, while the analysts admit Challenger delivered a disappointing performance in August. A sharp fall in the share price plus ongoing belief in the company's long term potential has made this stock Citi's number two preference in the sector. ASX's position as least preferred is predominantly value-based, now in combination with a delay in the blockchain project.

Stockbroker Baillieu Holst has also updated its preferences among diversified financials, with a slightly different outcome than at Citi (also because it covers a number of different stocks). Baillieu Holst most likes Challenger, followed by Magellan Financial Group ((MFG)), Hub24 ((HUB)), Computershare, Link Administration, Perpetual, Platinum Asset Management ((PTM)), Netwealth Group ((NWL)) and equally ranks ASX last/least preferred.

Analysts at Credit Suisse also re-shuffled sector preferences. They now have IOOF as most preferred arguing the -25% fall in share price over the year past "more than compensates" for the risks and challenges ahead. Just as well, says the Devil's Advocate, because that Royal Commission appearance was truly despicable, with more shocking revelations following as management keeps looking down from its ivory tower in Sydney's CBD. A more hands-on regulator surely is needed and IOOF seems ripe for a lot more scandals and revelations under current management and group culture.

Second in line, on Credit Suisse's ranking order, is Challenger, followed by Magellan Financial Group, Hub24, Computershare, Link Administration, Perpetual, Pendal Group ((PDL)), Platinum Asset Management, Janus Henderson, Netwealth Group and, you guessed it, ASX on last position.

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Stockbroker Baillieu Holst specialises in small and midcap stocks on the ASX. The broker actively covers 80 ASX listed stocks, but, of course, some are more preferred than others.

Baillieu Holst's Top Stock Picks post the August reporting season comprises of AUB Group ((AUB)), Auswide Bank ((ABA)), EML Payments ((EML)), EQT Holdings ((EQT)), Galaxy Resources ((GXY)), Hansen Technologies ((HSN)), Pacific Energy ((PEA)) and Reliance Worldwide Corp ((RWC)).

Within the present context, the broker believes  it is prudent to focus on higher quality small companies that have demonstrated a track record of earnings growth, typically have high returns on invested capital and low levels of debt.

Baillieu Holst has also lined up its favourites among Listed Investment Companies (LICs), with sector top picks including AFIC ((AFI)), Diversified United Investment ((DUI)) and Milton Corp ((MLT)) in Traditional LICS; WAM Leaders ((WLE)) in large caps; Acorn Capital Investment Fund ((ACQ)) in the small caps; and MFF Capital Investments ((MFF)), PM Capital Global Opportunities Fund ((PGF)) and Templeton Global Growth ((TGG)) among international LICs.

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Stockbroker Morgans has equally updated its list of High Conviction Stocks, while noting this late in the business cycle investors should prepare for the unexpected. Morgans predicts the Australian share market will probably finish the year around the 6300 level where the index was trading last week.

There are currently nine stocks on the High Conviction List with both Noni B ((NBL)) and Australian Finance Group ((AFG)) having been added in early September. The other seven are Atlas Arteria ((ALX)), OZ Minerals ((OZL)), Westpac ((WBC)), Volpara Health Technologies ((VHT)), PWR Holdings ((PWH)), CML Group ((CGR)), and Kina Securities ((KSL)).

Since the prior update, Suncorp ((SUN)) has been removed from the list with the broker highlighting Suncorp remains its preferred large cap diversified financial. Elsewhere, Morgans also expressed its post-reporting season preference for Link Administration, believing the stock is too cheaply priced for a company with this track record and given the level of free cash flow generation.

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Finally, and in contradiction to Bell Potter's tech sector ranking, Wilsons has now removed Citadel Group from its list of Conviction Stocks. The stocks that kept their position on the list are ARQ Group ((ARQ)), Afterpay Touch Group ((APT)), Bravura Solutions ((BVS)), Collins Foods ((CKF)), Ruralco ((RHL)), Ridley Corp ((RIC)), ImpediMed ((IPD)), Mastermyne ((MYE)), NRW Holdings ((NWH)), Pinnacle Investment ((PNI)) and Noni B.

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Thursday, midday-2pm
-Friday, 11.15am, Skype-link to discuss broker calls

Rudi On Tour

-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 10th September 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. This is Part Two).

(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. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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CHARTS

ABA ACQ AFG AFI ALX APT ARQ ASX AUB BIN BVS CGF CGL CGR CKF COH CPU CSL CWY DUI EML EQT GXY HSN HUB IFL IPD IRI JHG JHX KSL LNK LYC MFF MFG MIL MLT MYE NBL NWH NWL OZL PDL PEA PGF PNI PPT PRY PTM PWH RHC RHL RIC RWC SEA SUN TGG TNE URW VHT WBC WLE WTC