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5 Australian innovators tipped to outperform

Glenn Freeman  |  18 May 2017Text size  Decrease  Increase  |  

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Amid macroeconomic talk of reflation and synchronised global growth, companies in cyclical industries have outperformed, according to Julian Beaumont, investment director, Bennelong Australian Equity Partners.


"Cast your mind back to the start of 2016, we were pretty ho-hum, with pretty sluggish growth, interest rates were said to be lower for longer, and there was talk of deflation rather than reflation," Beaumont says.

"Now, particularly post-Trump, there was the greater prospect to find growth in stocks that were typically cyclical ... that rotation from lower risk--yield, growth, and quality--across to some of the cyclicals and inflation beneficiaries has been very dramatic."

He believes this shift has now largely played out, with the market "now relatively evenly balanced across style, sector, and the like, so it's going to come down more to stock specifics".

Some of the stocks his fund is most bullish on at the moment include smaller businesses that are "finding places to grow" rather than those in the upper portion of the ASX 200 in terms of market capitalisation.

Asked to name some of his top picks among innovative Australian companies, Beaumont says: "Australia does well in healthcare and in engineered and specialised products." He points to biotech and healthcare firms Resmed (ASX: RMD), Cochlear (ASX: COH), and CSL (ASX: CSL).

ResMed develops medical devices to treat sleep apnoea and other respiratory problems; Cochlear is an innovator in hearing aid technology; and CSL is one of three major global players in blood plasma-derived therapies.

Considered by Morningstar to each hold a narrow economic moat, Morningstar senior equities analyst Chris Kallos currently sees these three stocks as undervalued.

Referring to ResMed, he says: "At current levels, the stock is trading at a 7 per cent discount to our intrinsic assessment and is therefore undervalued, in our opinion."

Similarly, he recently increased his fair value estimate for Cochlear "due to a combination of time value of money considerations, revised currency forecasts, and a reduction in long-term cost assumptions".

Kallos also has a bright outlook on CSL, having increased his fair value estimate earlier this month in response to favourable currency shifts and regulatory changes in the US, which is the Australian firm's largest market.

Among consumer cyclical stocks, Bennelong's Beaumont also points to ARB Corporation (ASX: ARB) and Reliance Worldwide (ASX: RWC). Also considered a narrow moat stock by Morningstar, ARB manufactures and distributes four-wheel-drive vehicle accessories.

Morningstar equity analyst Daniel Ragonese considers the company undervalued, having last month increased his fair value estimate. With strong single-digit sales growth in its core market of Australia expected over the next five years, Ragonese also points to ARB's expanding offshore operations.

"The company is ramping up its distribution efforts in the US and the Middle East. While these segments are currently small, they are the group's key growth regions and should make a more meaningful contribution in coming years," he says.

Reliance Worldwide designs and manufactures plumbing pipe fittings, under the SharkBite brand. While not regarded as holding an economic moat, Morningstar equity analyst Tim Mann believes Reliance has compelling strategic and financial attributes.

He recently lifted his fair value estimate by 7 per cent on the widespread expectation of corporate tax rate reductions in the US, where Reliance generates around 60 per cent of its earnings before interest, tax, depreciation and amortisation.

With around 70 per cent of its earnings tied to housing alterations and additions, "Reliance is less cyclical than most of its building materials peers," says Mann.

He also points to ongoing strength in demand for plumbing supplies within Australia.

"Our housing outlook assumes continued momentum in single-family starts, thanks to firmer labour markets and early signs of a more affordable mix shift in single-family construction."

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Glenn Freeman is a senior editor at Morningstar.

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