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5 Aussie growth stocks in this silver-medal strategy

Glenn Freeman  |  22 Mar 2017Text size  Decrease  Increase  |  

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While Australian retail investors in fixed-income and bond-like sectors face headwinds in the current market environment, there are attractive opportunities in growth-focused equities.

 

In the context of the US Federal Reserve's latest interest rate increase in early March, "the challenges for bonds and bond surrogates are the toughest they've been in many years," says Neale Goldston-Morris, senior investment analyst, Bennelong Australian Equity Partners.

Bennelong Australian Equities [16998] and Bennelong ex-20 Australian Equities [17595] each hold a Silver Morningstar Analyst Rating.

"Likewise, for REITs [real estate investment trusts], infrastructure and utilities--where there's very little growth and purely yield--the headwinds are going to get progressively tougher," Goldston-Morris told an audience of investors and media at Bennelong's quarterly fund update this week.

"So, to bet on a pure bond surrogate, or bond, we would regard that as a highly problematic place to be, particularly as you're coming off such lows," he says. However, in contrast, he believes "a lot of the growth stocks, relative to the market, are now attractively priced".

"There's no reason why the Aristocrats and the CSLs of this world cannot continue to perform very well, particularly as we've seen much of the bulk of the reflation trade," Goldston-Morris says.

Aristocrat Leisure (ASX: ALL)--which has a narrow-moat rating from Morningstar--is one of the world's largest manufacturers of electronic gaming machines, with licences in more than 200 jurisdictions globally.

Morningstar equity analyst, Daniel Ragonese, says the company had "a flying start to fiscal 2017" and is anticipating growth of between 20 and 30 per cent in its net profit after tax but before amortisation for the full year.

While this rate of growth is not viewed as sustainable over the long term, with various threats including ongoing regulatory challenges and the impact of online gaming, the outlook remains positive and its moat rating is stable.

"We project average revenue growth of 6.6 per cent per year for the next three years, boosted by contributions from the recently acquired Video Gaming Technologies ... [and] beyond the next three years, our top-line growth assumption is 4.9 per cent per year," says Ragonese.

Another narrow-moated stock, CSL (ASX: CSL) is a Melbourne-based distributor of biopharmaceutical products. The company reported US$806 million in net profit after tax for the first half of fiscal 2017, up 12 per cent year on year, and an unfranked dividend of 64 cents a share.

As one of three major players in the global blood-plasma-derived biotherapies space, Morningstar equity analyst Chris Kallos expects its consistent product innovation will drive "high-single-digit top-line growth in developed markets, augmented by mid-teen lower-margin sales growth in emerging markets".

"With moderate operating leverage, this should result in double-digit profit growth during the next few years," he says.

This positive outlook is shared by Bennelong's Goldston-Morris: "I'll back a CSL with a [return on equity] ROE in the mid-20s rather than a low-quality cyclical, which is just having a short-term bounce."

Julian Beaumont, Bennelong's investment director, concedes that the fund manager has underperformed the market for the last two fiscal halves, "reflecting the market rotation, which was unhelpful for the types of stocks we're invested in ... it was the largest period of underperformance for us".

However, he believes this market rotation has helped level the playing field, "positioning the portfolio for good returns, which is particularly relevant to the market over the foreseeable future".

With Bennelong taking a broad-based approach to stock selection, rather than concentrating on specific markets or sectors, Beaumont points to three very different stocks where he sees strong opportunities.

While Domino's Pizza Enterprises' (ASX: DMP) franchise network has faced considerable negative media scrutiny in recent months, Beaumont believes these are not material to the overall value of the business: "The broader network has dealt with those issues in a way that's right."

The narrow-moated company reported $59.7 million in net profit for the first half of fiscal 2017--up 30 per cent on the same period a year earlier.

Treasury Wine Estates (ASX: TWE), while not regarded as having an economic moat because of the fragmented and highly competitive nature of the wine industry, is an example of a highly successful turnaround.

With a stable of well-recognised Australasian and US brands, Treasury is the only listed global wine company of its type. It is pursuing considerable expansion opportunities in Asia and the United States.

"The essence is one of turnaround ... getting the benefit of the future, and that's a much more powerful business with greater bargaining power, strong prices and margins in China and elsewhere offshore," Beaumont says.

Reliance Worldwide (ASX: RWC) designs, manufactures and distributes high-quality water flow and control products for the plumbing industry, with the SharkBite-branded push-to-connect fittings its flagship product.

In 2016, 75 per cent of its sales were ex-Australia, with the US market accounting for around two-thirds of this. In the first half of fiscal 2017, its net profit of $35.3 million exceeded Morningstar's estimate by 7 per cent.

Net profit forecasts have been raised 11 per cent and 3 per cent for 2017 and 2018, respectively, on the back of slightly higher US margins and lower A$-to-US$ currency assumptions, according to Morningstar equity analyst Tim Mann.

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Glenn Freeman is Morningstar's senior editor.

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