These are the top six stocks for May

Stockbroker and wealth manager Morgans has released its “best ideas” paper, which outlines the broker’s best ideas offering the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are also the broker’s most preferred sector exposures.

Here are six of its best picks:

• Wesfarmers (ASX:WES) – Large-cap idea – Morgans is positive on Wesfarmers due to its high-quality retail portfolio which includes brands such as Bunnings, Kmart, Target and Officeworks. One of the few companies that was able to operate most of its assets during the pandemic-forced lockdowns. Strong management and solid financials. Bunnings accounts for +60 percent of the group and continues to grow as consumers invest in their homes. “We see the recent pullback in the share price as a good entry point for longer-term investors,” says Morgans.

• Endeavour Group (ASX:EDV) – Large-cap idea – Australia’s leading liquor business, which was part of Woolworths Group before it demerged. Popular brands include Dan Murphy’s, Jimmy Brings, Cellarmasters, BWS. EDV is a Covid-winner, having benefited from lockdowns and higher at-home alcohol consumption. The hotels business was negatively affected by the pandemic lockdowns, border restrictions and recent floods. A post-Covid world will see it doing a lot better.

• Santos (ASX:STO) – Large-cap idea – Morgans says Santos’ diversified earnings base sees it as best-placed to outperform against the wider market. The broker is bullish on Santos and sees significant upside still remaining, especially with the possibility that Asia starts to consume more gas in the early phases of its energy transition. Morgans says “While pre-FEED (front-end engineering and design), we see Dorado as likely to provide attractive growth for STO, while its recent acquisition increasing its stake in Darwin LNG has increased our confidence in Barossa’s development. PNG growth meanwhile remains a riskier proposition, with the government adamant it will keep a larger share of economic rents, while operator Exxon has significantly deferred growth plans across its global portfolio.”

• GQG Partners (ASX:GQG) – Midcap ideas – The well-regarded global fund manager recently listed on the ASX, looking to take on Magellan. Morgans is confident on the company, saying “GQG’s early flows update and strong relative investment outperformance through the current market weakness should solidify the near-term flows outflow. GQG has diversified earnings (by strategy and clients); a solid performance track record; and ongoing growth prospects. Against a volatile/weak market in CY22 to-date, GQG has delivered relative outperformance across its four strategies. 1Q22 has begun solidly, with US$2.2bn of inflows to-date. In our view, the current ~11x FY22F PE (versus a sector medium-term average of ~16x) is attractive.”

• Lovisa (ASX:LOV) – Despite the recent share price pullback, Lovisa isn’t immune to the headwinds facing the entire retail industry. From supply constraints to Covid-19 lockdowns, Lovisa has fallen only 23 per cent from its $22 high, reached at the start of the year. In comparison, some retailers are doing it really hard. A good example is Kogan (ASX:KGN), which is down 57 per cent year to date, or Redbubble (ASX:RBL), down 65 percent. Morgans says: “LOV has a substantial multi-year global rollout opportunity across four continents. This opportunity has been materially boosted by the acquisition last year of beeline, which took LOV into several new European markets (notably Germany) and accelerated its expansion in France. We think LOV’s products fill an underserved niche, offering good quality fashion jewellery at prices that are attainable to the target demographic.”

• Webjet (ASX:WEB) – Morgans is positive on the travel sector in general especially given most of the world has moved past Covid. Morgans thinks: “The travel selloff in response to the Omicron variant, and now Russia’s invasion of Ukraine, is overdone. Based on our forecasts, WEB is trading on an FY24 recovery year P/E, which is at a material discount to its five-year average PE (pre-Covid). Its WebBeds (B2B) business is highly leveraged to the next northern hemisphere summer holiday season, which is forecast to be strong. Webjet OTA (online travel agency) is leveraged to Australia/New Zealand domestic and international travel. Management continues to maintain its aspirational market share targets and aims to reduce the company’s cost base by 20 per cent when it returns to scale. This means that WEB should be materially more profitable post-Covid.”

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.