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Stocks for your stocking

Photo of Jeremy Hook By Jeremy Hook

min read

Opportunities for some end of year cheer.

What stocks should you buy to bring some Christmas cheer and ensure you begin the New Year as a winner? That is the subject of many ASX Investment Talks I have given in the lead-up to Christmas for several years. My task: to find some great companies at the right price to bring you the festive spirit.

In 2015 that goal is no less important. While the second half of the year has thrown up many challenges – a slowing China, US Federal Reserve interest-rate vacillations, bank capital issues, housing market concerns – the weaker market environment has also left a range of opportunities. Here are five of my preferred ones.
(Editors’ note: do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)
 

1. CSL
Suits a long-term investor

CSL has a market capitalisaton of $42 billion and is Australia’s leading biopharmaceutical company. Its major revenue stream comes from blood plasma products and the 2015 acquisition of the Novartis flu business offers continuing growth.

We recommend purchasing CSL for its strong balance sheet and growth opportunities from a solid R&D pipeline. Its FY15 result was solid, with earnings per share growing 11 per cent, but reduced earnings guidance for FY16 saw the stock sold off to attractive buying levels. CSL is a company investing in growth where it can achieve superior returns.

Although this has caused the ire of the market in the short term, we support this approach and think the market will come to agree. We love dividends, but think when generating return on equity of 49 per cent it is wiser to retain earnings, or even better, buy back your own stock if the market doesn’t value it correctly.
To that end, CSL announced a $1-billion share buyback to continue a buyback program that has rolled on for many years and, while leaving the balance sheet flexible enough to take new opportunities, will enhance shareholder value.

2. IMF Bentham (IMF) 
Suits a portfolio investor

IMF provides funding of legal claims and other related services in Australia, the US, UK and Europe. Since listing in 2001, IMF has an excellent record of success (only 10 cases lost out of 175). Most cases take an average of two to three years to complete and are settled before going to court. Typically IMF shares a margin of between 30 and 50 per cent of case proceeds.

IMF’s investment book has just exceeded $2 billion following the lodging of high-profile cases, including Lehmann Brothers and Wivenhoe Dam. IMF has $130 million of cash on the balance sheet and a small amount of debt. Its business has typically lumpy earnings, but has a history of regular franked dividend payments. IMF has paid 35 cents fully franked over the past four years.

Case returns have run at above 150 per cent of the invested capital, and losses and withdrawals have represented just 7 per cent of revenue. Recent weakness in the share price follows an unusual run of case losses in 2015, and it is after such losses (rather than after case wins and the consequent share price moves) that an opportunity exists to buy near five-year lows.

3. Aveo Group (AOG)
Suits a portfolio investor

Aveo is Australia’s second-largest owner and operator of retirement villages across the country, with more than 12,000 residents in 75 villages. It has a large development pipeline and could build as many as 5000 new units on existing land over the next decade. Following a 2013 recapitalisation and debt reduction, the balance sheet is in good order.

Gearing (debt to equity) is down to 13 per cent. Aveo trades at a small discount to asset backing and we expect growth in underlying profit of 46 per cent in FY16 and a commensurate growth in dividend. It is trading on a FY16 price-earnings (PE) multiple of 16.5 times and a FY16 yield of 3 per cent. We think Aveo is a well-managed company in a growing sector – and expect its share price to continue to perform.

 

4. REA Group (REA)
Suits a long-term investor

The 2015 result was very strong despite a self-imposed price freeze early in the year as the company moved agents onto its new pricing model. Counter-intuitively, the strong Sydney and Melbourne property markets actually hindered REA in FY15. Rapid property movements in the hot capital city markets caused a lower level of listings than the level of property turnover would suggest.

CEO Tracey Fellows confirmed this has reverted to normalised levels since June, and with the new pricing model to kick-in during FY16, the year ahead bodes well.
The move into Asia and the US has long-term potential and we continue to recommend what we regard as one of Australia’s highest-quality growth stocks.

REA has a tight share register, with two shareholders owning 72 per cent of the stock (News Limited has 61 per cent). With net cash of more than $200 million, REA has a strong balance sheet and excellent cash conversion. Its portfolio of offshore assets, including a 21 per cent stake in iProperty (see below), a 20 per cent stake in US-based move.com, and wholly owned businesses in China (myfun.com) and Europe, offers real upside in the years ahead.

Exceptional earnings growth (earnings per share have tripled over the past four years) has ensured a premium market rating (the PE is 25 times) and the dividend yield is 2 per cent and rising.
 

5. iProperty (IPP)
Suits an active investor

IPP is an ASX-listed and Kuala Lumpur-based business that owns the leading property portals in several Asian countries. It is like REA but operates in the Malaysia, Hong Kong, Indonesia, Singapore and Thailand markets. IPP’s businesses, with exposure to an aggregated population mass more than 15 times Australia’s population, are growing rapidly.

Following years of investment and development, IPP has now turned cashflow positive. The September quarter confirmed revenue growth leading to cash collections that were 67 per cent higher than the previous corresponding period. Profitability is not far away. We have been an investor in IPP for some time and its recent strength has been rewarding.

We would caution about the risk of paying too much and note that it is not a stock that suits all investors. However, the appeal of the two most dominant investment themes of our age – the rise of the internet and the rise of Asia – cross over with IPP and make it an exciting proposition. We believe there is upside over the long-term and so does REA, which owns 22 per cent of IPP.

So there you are: five stocks for your Christmas stocking, each different and each suiting a different investment objective. It remains for me to recommend that you choose wisely and well and hope that Santa delivers.

About the author

Jeremy Hook is investment director at TMS Capital, a boutique investment management business. 

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