FYI | Oct 20 2020
This story features ELMO SOFTWARE LIMITED, and other companies. For more info SHARE ANALYSIS: ELO
By Peter Switzer, Switzer Report
My 3 favourite stocks with a good one-year outlook
Last Thursday an attendee to our subscriber-only Boom Doom & Zoom webinar, asked me what my favourite three stocks going forward are. I instantly said I’d not include my ZEET (Zip, EML Payments, Elmo Software and Tyro) stocks because they’d already done well, so I put my hand up to go looking for other ones that have a good one-year outlook.
I chose one year because many investors can cope with a short-term loss on a stock tip but if a good result takes much more than a year to show up, then you’re really pushing a friendship.
Also the analysts surveyed by the likes of FNArena would be making their calls on a much shorter timeframe than a medium- to long-term investor.
To illustrate my point, I reckon CBA will be a $100 stock within three to four years. And given it has a $69 share prices now, that would be a $31 gain over four years, which would be a 44% gain or 11% per annum plus dividends and franking credits. That totals up to about 16% a year! Not bad for one of the best banks in the world.
And if it only makes $80, that would still be an 8-9% gain a year, which really isn’t worth sneezing at.
That’s all and good but what stocks do I like now for a one-year hold?
I think the tech stocks we know will do OK and the new ones could spike but I’m not usually a punter on new companies. My ZEET stocks call was unusual for me but all four did have some decent form to read, so they weren’t all fingers crossed tech-specs.
Before deciding what stocks I like, let me set the scene based on what I suspect lays ahead in 2021. Here goes:
- The US election result won’t be a huge issue and could provide a buying opportunity. Business might prefer Trump’s tax policies but Biden’s stimulus will be bigger. And some quarters might want less Trump unpredictability.
- A vaccine will show up and over 2021 more and more people will be vaccinated.
- This will help confidence and business will head towards normalcy but it could take a year or more for that.
- Economic growth will pick up globally and at home, with the stimulus helping stock prices.
- There could be some market sell-offs but as long as a vaccine looks imminent, I’ll call these buying opportunities.
I was asked for three stocks but I like to over-deliver, so I will give five from my longer list of seven.
The seven and what the analysts expect happens to their share price were:
Rio Tinto 12.8%; BHP Group 13.3%; Telstra 21.2%; a2 Milk 10.2%; South32 27.7%; ANZ Bank 11.7%; ELMO Software 53.6%.
If I was forced to pick three, I’d go for Telstra, BHP and RIO. All three will pay a good-to-reasonable dividend this year. Both miners will benefit from a global economy that should rebound after 2020 was crushed by the Coronavirus. China is the first out of the recession and has a big demand for iron ore and the Brazilians are likely to struggle longer than other countries with the pandemic, which could hurt Vale, the big rival to the local miners.
I think these miners are a safe play, while South 32 (S32) could be the sneaky chance for a big result. It’s a second-grade player compared to BHP and Rio, but with its diversity of resources and the likelihood that a global economic bounce-back will increase the demand for many resources, this could explain why the analysts think the company could spike 27.7%.
Telstra isn’t a company I love but since it fell to $2.77, I’ve liked the chances of this company rebounding and so far I’ve missed out on 2.8%. The five-year chart below shows that this company has seen its share price around $5.80 in 2016 and $3.97 only in July 2019.
And before the Coronavirus crash, it was $3.84 and given the iPhone 12 is expected to be a big seller with its 5G capability, it should be an opportunity for the company to deliver on a promise that has been disappointing for shareholders. I have to confess I could never believe the positive Telstra story on the way up from the June 2018 low, but I do think the market gets carried away in both directions with this company.
On the subject of companies with potential, all our big four banks should benefit from a better economic growth year in 2021. Also, the Federal Government’s desire to end responsible lending should increase the number of loans and banks’ bottom lines.
I’ve included ANZ because analysts think it has a 11.3% upside, while Westpac only has 8.3%. But both should be beneficiaries of a stronger economy in 2021 and a Government that knows healthier banks are good for the economy.
I like a2 Milk (A2M). I’d argue the market has hit this company too hard but there are nagging doubts about what the Chinese leadership is doing to unsettle the Morrison Government, which has been tagged Donald Trump’s deputy in the wild, wild east of Asia. Companies such as Treasury Wine Estates have been seen as a casualty of these political games.
The company says the Victorian lockdown has hurt business and the pandemic has disrupted its lucrative corporate daigou channels.
Sales of shares by company executives wasn’t a good look but I think as international trade and tourism reasserts itself, this company is likely to see its share price rebound.
In June this year, this was nearly a $20 stock. At $14.54, there is upside as normalcy creeps back over 2021 and into 2022. The analysts think there’s 10.2% upside, which I think will be a lot more as the years pass by. A2M is a great, enduring brand.
My final selection is ELMO Software (ELO). I know I said I wouldn’t include any of my ZEET stocks but that was before I saw the analysts still think it has 53.6% upside!
I have to admit liking this headline in the AFR only on October 8: “ASX gains 1.1pc; Zip, Netwealth, ELMO soar; Xero hits record.”
Zip was one of my ZEET stocks. So was ELMO. It’s nice when the market agrees with me.
When the share price spiked, this is what the AFR reported: “ELMO Software was the standout gainer for the day, with the stock soaring 12.2 per cent after it acquired UK-based human resources platform, Breathe, for $32 million.”
This is a company with potential, as it plays in the HR/payroll space and potentially can service businesses with many modules that help create better operations. The chart below shows how it has performed well since mid-2017. I liked how it bounced out of the Coronavirus crash, hitting a low of around $4.10. It now trades at $5.72, despite 22% of Australia, Victoria, in lockdown.
I like the overseas acquisition and the potential that lies ahead for this business services supply company as business returns to a 2021 normal.
My safest three for a good one-year return is BHP, Rio and ANZ.
My highest returning but riskier three are ELO, S32 and TLS.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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