23 quality Aussie stocks for your COVID-19 watchlist
Companies that have carved out solid, and in some cases growing, competitive advantages will thrive even despite the coronavirus upheaval.
The Australian market can't seem to make up its mind amid the coronavirus outbreak. In March, we were in a bear market, down 21 per cent, but now we're re-entering a bull market, as shares rebound from heavy falls.
Morningstar analysts believe the aggressive social distancing measures will lead to containment of the virus in the coming months. Additional waves of the virus and social distancing measures are expected in the second half of the year, but not at current levels given the future availability of treatments.
Analysts are now forecasting a 2.9 per cent contraction in US GDP in 2020, but anticipate that the scope of the shutdown to disrupt the economy in the long term is likely overrated. They also expect a wave of drug treatments for COVID-19: Gilead Sciences’ remdesivir in the summer, targeted antibodies by the end of the year, and ultimately a vaccine in 2021.
S&P/ASX 200 | Year-to-date
Source: Morningstar Direct
Amid the uncertainty, Morningstar analysts have highlighted over 100 names they think are trading below their intrinsic value. Today, we're sorting through this list to highlight quality companies that have carved out solid (and in some cases growing) competitive advantages that will allow them to thrive for years to come.
To find stocks to fit the bill, we screened for the following:
Economic moat: First, they need to boast wide Morningstar Economic Moat Ratings—and their Morningstar Moat Trend Ratings must be stable or positive. In other words, these companies have competitive positions that are steady or even improving.
Fair value certainty: Second, we need to have a high degree of certainty in our fair value estimates for the stocks of these companies, limiting our search to stocks with fair value uncertainties of low. This rating represents the predictability of a company's future cash flows.
Discounted: Third, the stocks of these companies must be trading at a decent discount to our fair value estimates—selling at Morningstar Ratings of 4 or 5 stars.
Top notch steward: Lastly, we tossed out companies with Poor stewardship ratings, preferring to ride along with management teams that have a proven record of being good stewards of investor capital.
Don't think of this as a list of "buys," though. Instead, think of it as a collection of names to investigate further. See the individual stock pages for full analysis.
"A 5-star rating does not suggest that the stocks won't drop further," says Morningstar director of equity research Johannes Faul. "Our aim is not to pick the bottom, but to highlight to investors that they can pick names up at a discount."
Eight stocks dropped
Since we delivered you this list last month, eight names have been dropped. Brambles (ASX: BXB), ARB Corp (ASX: ARB), Atlas Arteria (ASX: ALX), BWP Trust (ASX: BWP) and Ramsay Health Care (ASX: RHC) were all removed because their shares are now trading within a range analysts consider fairly valued.
Ramsay Health Care has seen the biggest recovery, up almost 30 per cent since the end of March.
Scentre Group (ASX: SCG), Vicinity Centres (ASX: VCX) and Sonic Healthcare (ASX: SHL) were all removed after analysts raised their fair value uncertainties to high or very high. Scentre Group and Vicinity Centres both still screen as undervalued.
"While Scentre Group faces tough times, it looks undervalued to us, as we expect eventual recovery to conditions not dissimilar to before the outbreak," Faul said.
"A threat is a forced capital raising; however, that is not our base case. The outcome depends on unknown duration of shutdowns, and government response, and thus our Uncertainty Rating moves to very high, from medium."
This is a snapshot of how these stocks stand at the time of writing: 20 April 2020. Given the current market volatility, the valuations could jump around.
Morningstar Premium subscribers can access the full list of 100+ undervalued Australian stocks here. The latest Australian and New Zealand Best Stock Ideas list can be found here, which includes an assessment of each undervalued stock's balance sheet risk.
Wide moat stocks
Narrow moat stocks
Source: Morningstar Direct