Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
These are the top 13 stocks for 2022
With 2021 done and dusted, Morningstar has released its monthly Best Stock Ideas, which highlight high-quality Australian and New Zealand companies that are trading at a discount to their fair value. The latter is important in this regard, as the group has a decidedly ‘value’ focus.
From nearly 200 companies in its research list, Morningstar has selected its best ideas, narrowing it down to 13 companies that form the “Best Stock” list. Since last month, it has removed AUB Group, Link Administration Holdings, and Viva Energy Group, following strong performances by all three in 2021.
It lists embattled milk and formula producer A2 Milk (ASX:A2M) as one of its main picks.
“Shares in a2 Milk still trade at a substantial discount to our fair value estimate. The infant formula producer has come under pressure as a result of a slower-than-expected rebound in China, principally in English-label” Morningstar says.
“Persistently high inventory through the sales channel has stifled re-ordering from key corporate daigou (where entities buy goods outside China for sale to customers in China) partners, weighed on market pricing, and led to the ageing of available product,” says Morningstar.
But all in all, A2’s narrow economic moat, underpinned by its strong brand, remains intact. The Chinese-language-labelled infant formula market continues to grow, and Morningstar is forecasting 15% annual revenue gains to fiscal 2026 as channel inventory levels normalise and market share recovers.
The group is decidedly positive in the energy space, primarily on the basis of under-investment, listing AGL Energy (ASX:AGL) and Woodside Petroleum (ASX:WPL) as its two main picks. The former has struggled significantly in recent years.
“Narrow-moat AGL Energy trades at a large discount to our fair value estimate. Earnings face major headwinds in fiscal 2022 from lower wholesale electricity prices, higher fuel costs, and unfavourable regulation. But a strong rebound in futures prices should underpin solid earnings in the medium term. We see substantial long-term value in the business, which is one of Australia’s largest generators and retailers of electricity,” says Morningstar.
On the other hand, Woodside Petroleum “remains materially undervalued,” and Morningstar says the market is insufficiently pricing for liquefied natural gas (LNG) growth potential. “Woodside’s excellent balance sheet and low costs are particularly advantageous in the near term, given high revenue leverage to the Brent crude oil price. The company is in extremely strong shape to weather low crude prices, but at the moment enjoys strong crude and LNG pricing.”
Morningstar also likes Aurizon Holdings (ASX:AZJ), CIMIC Group (ASX:CIM) and LendLease Group (ASX:LLC) in the construction and rail sector. The research house says, “COVID-19 led to temporary delays in awarding new projects and a slowdown in revenue, but Cimic had work in hand of $33.3 billion at June’s end, and it says the market outlook remains positive for construction and services, with new work recovering.”
Brambles (ASX:BXB) is trading at a significant discount to Morningstar’s fair value estimate of $13.70 . Morningstar says “Investors seem to continue to under-appreciate the substantial medium- and longer-term secular growth opportunities available to the global leader in supply chain pallet-pooling solutions. We expect the secular growth of Brambles’ North American and European pallet pools – which continue to garner incremental market share from single-use whitewood pallets – to underpin a 10-year group EBIT compound annual growth rate of about 10%. Longer-term expansion opportunities in the emerging markets of China, India, and Russia add an estimated AUD 1.40 to our fair value estimate.”
InvoCare (ASX:IVC) – Government-imposed limits on attendance at funerals have restricted InvoCare’s ability to offer its full range of services and has weighed on pricing. Morningstar expects impacts from COVID-19 to be transitory and forecasts earnings recovering from calendar 2021.
Also on the list is Magellan Financial Group (ASX:MFG). Morningstar firmly believes shares of Magellan are oversold. “By our estimations, the current share price implies Magellan will, over the next five years, generate annual returns less than passive equity exchange-traded funds and suffer outflows equivalent to more than half of its FUM as of November 2021.”
