There was a lot to like about the February reporting season. By our estimates, over 30% of large caps beat the market's expectations, while downgrades and significant misses among large caps were largely a non-event. However, the valuations investors are paying for earnings remain elevated by historical standards, and we caution investors who are expecting higher-than-average returns.
Current earnings growth sits well below the long-term average (approximately 9-10%), reflecting below-trend economic growth, while valuations (XJI on approximately 16x forward) appear to be pricing in earnings acceleration that is yet to be delivered. The market has been prone to overshoot the actual earnings trajectory in recent years and we think investors should stand ready to buy the dips when the inevitable bouts of market volatility hit, rather than chase expensive stocks higher.
Watch
Two changes to our list this month
We add BHP Billiton (BHP) back to the list in March. Higher commodity prices, robust profitability, further valuation upside potential and rising shareholder returns all support our High Conviction call on BHP. The company also recently outlined that data rooms for all of its US onshore oil & gas assets would be open by the end of March, with the bids expected in the June quarter and assessed in the September quarter. We see this as the strongest positive catalyst for BHP in 2018. We also believe strong leverage to cyclical growth positions BHP well into a multi-year recovery for commodities.
This month we remove Corporate Travel Management (CTD) from our list. While we believe CTD can continue to deliver strong double digit EPS growth over coming years, the stock has put on 27% following its recent result, and has now exceeded our 12-month price target. Beyond the strong result, share price catalysts include further accretive acquisitions with opportunities currently being evaluated in both North America and Europe.
Seven high conviction stocks in March
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 seven high conviction stock picks this month:
- Oil Search (OSH)
- ResMed (RMD)
- Westpac Bank (WBC)
- Link Administration (LNK)
- BHP Billiton (BHP)
- Senex Energy (SXY)
- PWR Holdings (PWH)
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Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.
