article 3 months old

These Stocks Look Good

FYI | Oct 11 2017

By Peter Switzer, Switzer Super Report

These stocks look good but pray the Trump plan is passed

One of the best pieces of news for anyone who wants stocks to go higher, as we get deeper into the December quarter and then rolling into 2018, is the overall optimistic views for stocks from fund managers and economists. Apart from short sellers and failed doomsday merchants, is there anyone else who doesn’t want this?

Pivotal to this positivity will be two important US developments. First, the Congress supporting President Donald Trump’s tax reform measures and second, the pace at which the Fed raises interest rates over 2018. If it’s too fast, Wall Street could easily give into gravity, given US stock markets are into record territory. It has to be remembered that these elevated market indexes were created because there is a belief that Congress will say ‘yes’ to tax cuts and the Fed will time the rate rises to perfection, or at least cautiously so as to ensure the US economy is not prevented from growing at a solid clip.

So let’s assume that neither of these positive expectations turn out to be curve balls for stocks, and that outlook statements for many local companies rested on conservative economic forecasts for the Oz economy, then if our economic growth turns out to be better than expected, we have both external and local reasons to believe stocks head higher.

I’m betting on this happening.

If so, what stocks look like good value? This is what I asked Raymond Chan from Morgan’s and ST Wong, the portfolio manager at fund manager Prime Value.

ST thinks there’s value in what he called “fallen angels”. He put CBA, Ramsay and Suncorp in this category and we saw on Friday there are others who believe our banks have been over-beaten up.

For example, Suncorp was $15.17 in July but now is $13.25, while in April CBA was an $87.40 stock but now is a $76 stock. It was an $87-stock when the economic outlook was questionable but if 2018 is as good as many now expect, then growth will create income for bank customers and therefore the banks. Also, interest rates are bound to rise over the course of the year and higher rates helps the bottom line of banks.

A year ago, Ramsay was an $80-stock and now is at $63 and ST Wong thinks it’s a compelling buy. FNArena’s survey of analysts/brokers has a target of $73.05, which says there’s a 16% upside, if the analysts are right.

Wong thinks the infrastructure boom ahead will help Adelaide Brighton, while Qube Holdings looks well placed to benefit from an expanding economy. The analysts have a target price of $2.78 for Qube, which is 13.4% higher than the current price of $2.45.

Raymond Chan is not an excessively speculative type but thinks BHP, Rio, Oil Search and Brambles all look to be in the buy zone.

Brambles is the one that surprised my colleague Paul Rickard, who might have been ‘brambled’ out over the years but the analysts are still believers. Its current price is $9.07 but the target is $10.38. That suggests there could be a 14.5% ‘pocketable’ profit, if they’re right.

But wait there’s more, with Raymond now giving Telstra a thumbs up for dividend players. Its current price is $3.42, while the target price from the experts is $3.88 and that means a capital gain of 13.8%, if they’re on the money.

At current prices and promised dividends, the yield is over 9% (grossed up for franking) and this percentage dividend pay-off would still be damn good when the dividend is cut again in two years’ time. I know Telstra needs to come up with a post-NBN game plan but given its position in the Australian economy and our dependence on smart phones and data, it seems inconceivable that the company doesn’t come up with a good moneymaking idea, even if it buys someone else’s great idea!

Finally, for those who like to play the potential takeover targets, Beulah Capital’s Tom Elliott (who doubles as a radio host on 3AW) thinks APN Outdoor and oOh!media still look interesting.

Earlier this year, the two companies were in a $1.6 billion merger talks situation, but called them off after the ACCC noted that it “would concentrate more than half of the nation’s out-of-home advertising industry in one company, lessening competition and resulting in higher prices and worse service for clients” (SMH May 19, 2017).

Tom thinks WorleyParsons, which was targeted by the Dubai-based Dar earlier this year, still could find suitors knocking at their door in the not-too-distant future. Finally, as a play on the good performing NZ economy, he likes SKYCITY Entertainment. A year ago, this gambling monopoly in Auckland was a $4.46 stock but now is at $3.39. Its other venues in Adelaide and Darwin have had the struggles lately, but in the latter city, the business is looking at developing land beside the casino as an alternative source of revenue. Takeover merchants might see potential that the current board might be missing.

This stock play is more of a gamble but I guess you could say that about a lot of our investments. Anything over a term deposit or government bond falls into that more risky category but buying quality companies when the market is too negative ahead of an expected uptick in economic growth is always a reasonable ‘punt’.
 

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms