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Stocks for your stocking

Photo of Tania Smyth By Tania Smyth

min read

Five stocks to consider for some end-of-year cheer – but do your homework first.

It has been an interesting year for investors who follow the sharemarket, with volatility being remarkably absent. The S&P/ASX 200 has been trading in a tight range between 5650 and 5900 over the past four months, a mere 250 points.

But it is a tricky market to interpret. Equity valuations are generally elevated, there is a lack of clear acceleration in business activity in Australia, and geopolitical risks run high.

The task of finding some great companies at the right price has certainly become more challenging. Without the necessary ingredients for another broad-based rally, fundamentals and stock-specific catalysts will provide the important source of alpha (a return greater than the market return) over the medium term and in some, but not all, cases, this means looking outside the traditional blue-chip companies.

Here are five stocks to consider for some end-of-year cheer. Each is different and they suit investors with different investment objectives. All analysis/prices at 24 October 2017).

(Editors’ note: do not read the following ideas as stock recommendations. It is general advice only. Do further research of your own or talk to a financial adviser before acting on themes in this article).
 
1. Westpac Banking Corporation
Suits: portfolio investor

Westpac is currently Morgans’ preferred major bank. Its overall asset quality has improved over the third quarter of 2017 and we remain comfortable with its individual provision and collective provision levels.

While Westpac’s Australian home loan book was most exposed to interest-only loans at the end of the 2017 first half, efforts to rein in interest-only flow do not appear to be having a materially adverse effect on the asset quality of its book. Westpac has said it is on track to have the flow of interest-only lending below 30 per cent in the fourth quarter. The bank stands to benefit most from re-pricing of investor home loans.

We see a relatively low risk of a dividend cut because of Westpac’s strong regulatory capital position and good organic capital-generation capacity.

2. IPH
Suits: active investor

IPH is an intellectual property services firm, offering a wide range of services for the protection, commercialisation, enforcement and management of intellectual property across Australia, New Zealand, Papua New Guinea, the Pacific Islands and Asia.

It recently acquired AJ Park, New Zealand’s leading patent group with around 20 per cent market share, for NZ$66.1 million. IPH expects the deal to boost earnings by 5 per cent before accounting for any integration savings. We anticipate IPH will be able to significantly lift the margins of the AJ Park business from the mid-high teens currently being achieved.

In a recent company presentation, IPH said it continues to look at further growth opportunities through strategic acquisitions as they arise, and look to drive organic growth through leveraging and strengthening its existing network in Asia.

Looking through to the first full-year, including the new NZ business (2019), IPH is on a Price Earnings (PE) multiple of 15.5 times and an expected dividend yield of 4.5 per cent.

3. Webjet
Suits: active investor

Webjet is an online travel agency operating in Australia and New Zealand, whose business consists of a B2C division, comprising the Webjet, ZUJI and Online Republic brands, and a B2B division comprising the Lots of Hotels and Sunhotels brands.

Webjet’s full-year result in August was a strong outcome, with significant growth across each of its businesses. All businesses have had a strong start to the 2018 financial year and Webjet continues to win market share. It now has all the foundations in place for strong, double-digit earnings growth over FY18 to FY20.

The full benefit of the recent acquisition of UK-based JacTravel will be delivered in FY19, which we believe enhances the overall quality of Webjet’s business.

Look for 2018 company guidance at the Annual General Meeting on 22 November, when further details are expected on the nature and targeted level of synergies from the JacTravel acquisition.

4. Cromwell Property Group
Suits: long-term investor

Cromwell Property Group is an Australian Real Estate Investment Trust (A-REIT) and a property fund manager. It has $3.5 billion in assets under management and manages commercial properties throughout Australia. It recently sold its IOF stake, which we view as a positive resulting in a reduced gearing (debt to equity) level to below 40 per cent.

We continue to believe Cromwell’s active management style will deliver returns for investors over the long term, with a target of 80 per cent property earnings and 20 per cent funds management earnings.

Cromwell offers an attractive 8.7 per cent distribution yield, paid quarterly.

5. Elders
Suits: long-term investor

Elders is an Australian company with businesses in rural services and automotive components. The rural services operation supplies the physical, financial and advisory inputs and marketing options to help Australian and New Zealand farmers.

Performance across the agrifood sector over the last quarter has been mixed and driven by varying stock-specific factors. We continue to believe that an exposure to Australia’s promising agrifood companies deserves consideration. The sector’s medium to long-term fundamentals remains positive.

Companies with strong management, a disciplined approach to capital allocation and a diversified business model such as Elders are best positioned to navigate the cycle.

About the author

Tania Smyth is an adviser at Morgans Financial.
General advice warning: This article does not constitute advice and is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wishes to act upon any views in this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report. Morgans may publish research on the company(s) named here. Tania Smyth Authorised Rep #001258562 and Morgans advise that they and persons associated with them may have an interest in the above securities. Morgans Financial Limited AFSL 235410 / ABN 49 010 669 726

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