Stock investors have enjoyed an extended bull market since March 2009. It was particularly enjoyable during 2017, when the ASX 200 Accumulation Index rose by 11.8% over the year. Such an impressive return is quite extraordinary for an aging bull market going on nine years in 2018. The music seemed to stop abruptly when the S&P 500 plunged 10.2% over 13 days from late January through early February. Our market fared much better given we had missed most of the US January rally.
Although equities have recovered somewhat since, the episode is a reminder that expensive equity, bond and bond-proxy prices are at risk from the end of ultra-low cash and bond yields. The bout of volatility does present some opportunities and we added some names that we think will outperform on a risk-adjusted basis over the year.
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Four changes to our list this month
We add Suncorp Group (SUN), Cleanaway Waste Management (CWY) and CML Group (CGR) to our list in April.
This month we remove ResMed (RMD) following a strong 52% return since inclusion. While we maintain a positive view of the company's strategy, RMD has exceeded our price target and think it prudent to book in profit ahead of a typically volatile quarter for the company (RMD reports Q3 results on April 27).
Nine high conviction stocks in April
Our high conviction stocks are those that 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.
Here are our nine high conviction stock picks this month:
Suncorp Group (SUN)
Suncorp is a financial services conglomerate offering banking, general insurance, life insurance, super and investment products.
We think SUN can comfortably get back to its long run target of 12% underlying insurance margin in FY19. This is driven by non-recurrence of some costs in FY19, benefits of SUN's business improvement program (+ approximately A$130m in FY19) and roll through of recent rate increases.
Cleanaway Waste Management (CWY)
Cleanaway is a provider of waste management services in Australia, with operations in both solid and liquid waste.
With the growing importance of sustainability in household, business and government decision-making, we expect waste management to become an increasingly valuable sector with CWY the Australian leader.
Oil Search (OSH)
Oil Search is a major oil and gas developer/producer. OSH's key asset is its 29% interest in the world-class PNG LNG Project/Development, operated by ExxonMobil.
We still hold the view that OSH is ideally placed to benefit from a global-scale organic growth profile, which could be further enhanced by additional exploration and appraisal.
Westpac Bank (WBC)
Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.
We expect WBC to comfortably meet APRA's 'unquestionably strong' capital benchmark through undiscounted dividend reinvestment plans.
Link Administration (LNK)
Link is the largest provider of superannuation fund administration services to funds in the Australian super system and a leading provider of shareholder management and analytics and share registry services.
We believe the market's view on LNK's core Fund Administration business being ex-growth is too bearish. We think it will at least grow at inflation levels from here. Moreover, the synergy target from the CAS acquisition of £25m would appear to be conservative.
BHP Billiton (BHP)
BHP is the world's largest diversified resources company, with a large portfolio of diversified mining and energy interests.
BHP asserts itself as an attractive sector exposure, with group EBITDA margin stable at an impressive 52%, balance sheet gearing down below 20%, and the prospect for excess cash flow being returned to shareholders.
Senex Energy (SXY)
Senex is an oil and gas company focused on operating and developing energy sources in Australia's Cooper, Eromanga and Surat Basins.
SXY is ideally positioned to make a material impact on the east coast gas market with two gas projects expected to transform earnings over the next few years.
PWR Holdings (PWH)
PWR designs and produces cooling solutions for the high performance automotive industry and has an established track record in servicing motorsports, including Formula One, NASCAR and V8 Supercars.
Key growth opportunities include: 1) capturing a greater share of customer spend on cooling solutions; 2) partnering with OEMs on high performance/low production run vehicles; 3) increased presence and entry into adjacent markets; 4) increased penetration in the US automotive aftermarket segment; and 5) opportunities in emerging technologies (Tesla, Google etc).
CML Group (CGR)
CGR provides small business financing solutions, primarily debtor finance (invoice factoring) and equipment finance to small-medium enterprises (SME) in Australia.
In our view, CGR has the potential to outperform earnings expectations over the next two years, in part via executing on its recent acquisition (meaningful potential cost synergies). This is coupled with a relatively undemanding valuation of approximately 10x FY19 PE.
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