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Lincoln: 10 star stocks for new financial year

Photo of Elio Damato By Elio Damato

min read

Services sector a strong theme to realign portfolios.

With another financial year passing and a new one fast approaching, now is the perfect opportunity to realign your portfolio with your investment objectives.

Lincoln’s outlook for the sharemarket is one leveraged to the services theme. The role the services sector plays in our economy has increased significantly over the past decade and grown in prominence particularly in the past few years.

The traditional sectors of mining and energy will be a slight drag on market performance as sustainable earnings growth remains a challenge. Even the once-reliable banks and consumer staples face growth challenges amid a more difficult operating environment.

Despite the headwinds experienced by some bellwether sectors, Lincoln remains optimistic about the ability for investors to outperform the market by selecting great businesses that are financially healthy and holding them within a quality portfolio. We often find that by focusing on financially healthy businesses, the higher-performing sectors are easily identifiable at any point in time. The flipside is the current health of the market.

Assessing the market

Analysis using Lincoln’s Financial Health Methodology, created by founder Dr Merv Lincoln, indicates only a quarter of listed companies are rated strong and satisfactory. This means the vast majority of companies are exposed to unacceptable levels of financial risk. Now more than ever, investors need to focus on quality businesses, rich in cash flow with strong balance sheets.

Health of the market

Source: Lincoln Indicators

Lincoln not only identifies the financial health of all 2000-plus listed companies, it filters them using additional criteria based on its Golden Rules and Considerations to define the highest-quality stocks on ASX. We refer to these as Stock Doctor Star Stocks. Equally as important, Lincoln identifies the financially weak companies that should be avoided.

Sectors with the highest-quality stocks

For the coming financial year, tourism is one of the preferred sectors. Companies are leveraging the rising middle-class in China and their growing appetite for travel. They have been helped by a weaker Australian dollar.

Old favourites such as the healthcare, telecommunications and the online business sectors also contribute to a majority of Stock Doctor Star Stocks, which we believe represent the best fundamental businesses on ASX. 

It is not all doom and gloom for the banks and others in the financial sector. Many are rated by Lincoln as Stock Doctor Star Income Stocks and are valued for the stability and sustainability of earnings along with their above-market yield. When combining the underlying strength of our economy with the growing wealth of Australians, we believe income investors can expect many happy returns for some time.

Below is Lincoln’s selection of 10 Stock Doctor Star Stocks that it believes are poised to provide opportunity in the new financial year for the savvy and insightful investor.

(Editor's 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. Bellamy’s Australia (BAL)
Star Growth Stock
Bellamy's Australia is financially strong and a well-regarded brand in the organic baby food and formula market, both domestically and across Asia. Changing consumer preferences toward healthier eating habits, particularly in China, has been the catalyst for annualised growth on earnings per share (EPS) of 344.58 per cent in the most recent period. We expect this trend to continue in the medium to long term, with much of our 224.93 per cent earnings growth expectation centred on continuing demand from Chinese consumers.

2. Blackmores (BKL)
Star Growth Stock
The vitamin manufacturer and distributer is supported by its strong financial health base and has been aided by the rapid rise of its Chinese business, with group revenue growing 58 per cent. The recent purchase of a Chinese herbal medicine manufacturer should expand an already attractive offering to the Chinese vitamin market. Diversifying into infant formula product through the existing distribution network means we expect continued strong earnings growth of 129 per cent for the year ahead.

3. Credit Corp Group (CCP)
Borderline Star Growth Stock and Star Income Stock
Credit Corp Group is Australia’s leader in the purchased debt ledger (PDL) market and has maintained a rating of strong financial health for some time. A perennial under-promiser and over-performer, the company recently upgraded guidance on the back of steadily increasing purchases in the PDL market, improved collections strategies and its growing consumer lending book. Lincoln subsequently upgraded earnings expectations to 14 per cent, and expects management’s history of successfully delivering earnings growth to eventually earn recognition by the market.

4. Domino’s Pizza Enterprises (DMP)
Star Growth Stock
Domino’s Pizza has been a Star Growth Stock since February 2015. This financially healthy company has effectively leveraged technology to produce some astonishing results, delivering wealth for shareholders. DMP’s reach now makes it a truly global business, and although you have to pay a premium price, with forecast earnings of 31 per cent, Lincoln believes the company is well placed to maintain our benchmark level of performance.

5. Mantra Group (MTR)
Star Growth Stock
Mantra Group is an Australian accommodation operator with more than 100 properties and 13,000 rooms across Australia, New Zealand and Indonesia. The company has continued to grow both organically and through acquisitions, achieving a return on assets of 8.3 per cent and EPS growth of 43 per cent. With the group benefiting from increased international visitors and domestic tourism assisted by depreciation of the Australian dollar, this financially healthy leisure chain is positioned for profit.

6. Ramsay Health Care (RHC)
Star Growth Stock
With strong financial health, Ramsay Health Care has been a Star Stock since 2010. It is Australia’s largest private hospital operator and also has operations in France, UK, Malaysia, Indonesia and a “to be developed” presence in China. A global healthcare giant with $7.4 billion in sales annually, Ramsay saw revenues rise 39 per cent, resulting in a return on assets of 8.7 per cent. The weaker Australian dollar, ageing population and overall healthcare sector growth, provides a strong backdrop for what we expect to be 18.9 per cent earnings growth, while also offsetting challenges faced in some of Ramsay’s markets.

7. Sealink Travel Group (SLK)
Borderline Star Growth Stock
Sealink Travel Group is a financially strong marine transport company that has achieved a dominant position in the Australian market. The company has strong exposure to the tourism segment as well as local transportation of regular commuters and freight. Sealink has grown rapidly through acquisition and achieved an impressive 69.47 per cent EPS growth in the latest period. The company has maintained a rating of strong financial health for consecutive periods and Lincoln’s expectation is for another period of revenue growth, of 31.38 per cent, and EPS growth of 20.54 per cent for FY16.

8. Premier Investments (PMV)
Star Growth Stock
Among Australia’s rag trade, there is probably no bigger player than the financially strong-rated Premier Investments, with its suite of powerful brands, including the successful Smiggle and Peter Alexander. Success in the UK, penetration into Hong Kong and Malaysia, coupled with its online strategy, contributed positively to performance – return on assets of 8.3 per cent and EPS growth of 25.2 per cent over the past 12 months. Continued investment in technology should further strengthen sales, and we forecast revenue growth of 15 per cent and EPS growth of 21per cent.

9. TPG Telecom (TPM)
Borderline Star Growth Stock
TPG Telecom is Australia’s second-largest telecommunications service provider. It has experienced an incredible growth trajectory in the past decade. The company recently reported a financially strong half-year result on the back of integration synergies and a strong performance from the corporate segment. These translated to revenue growth of 49.23 per cent and EPS growth of 45.41 per cent. Management’s history of successfully integrating acquired businesses continues to bode well for FY16 performance and Lincoln estimates 53 per cent earnings growth next period.

10. Westpac Banking Corporation (WBC)
Star Income Stock
Australia’s third-largest company by market capitalisation requires little introduction. With strong financial health and the envy of many world banks, Lincoln believes that concerns around increased competition and increased funding costs are potentially overplayed. With a grossed-up dividend yield of 9 per cent, the increasing prospects for further rate cuts increase the desirability of dividend-yielding stocks, especially those that continue to pay above-market yields out of sustainable earnings. Westpac is among the leaders of the pack in that department.

About the author

Elio D'Amato is chief executive of Lincoln, a leading Australian share researcher and investor.

Follow on Twitter: @LIStockDoctor

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