This week we have lots of favourites. First off Mary Manning, portfolio manager at Ellerston Capital Limited, likes Chinese white goods company Midea Group
It is largest white goods companies in China with 25% market share and a market cap of $70b. There are three main reasons why we like Midea: growth and valuation, play on robotics and MSCI A share inclusion.
“Midea is a very high growth company with 24% EPS growth expected in 2018. This high growth is driven by relatively low white goods penetration in China, particularly in lower Tier cities. Despite this high strong growth outlook, Midea is trading at a PE of only 16x,” Manning says.
“Ellerston Asian Investments is a growth fund and we like to look at company’s PEG ratios (i.e. the PE divided by the growth rate). This gives investors a gauge of what they are paying per unit of growth. For Midea, the PEG ratio is only 0.7x. By way of comparison, the Australian market is trading at approximately 16x PE with only 7% expected EPS growth, for a PEG of 2.3x. So Midea’s PEG valuation is extremely attractive.
“Midea is also very profitable with an ROE of 25%, more than twice as high as the ASX 200 ROE of only 12%. Midea also has a strong balance sheet, high Free Cash Flow generation and a 2% dividend yield.”
Michael McCarthy from CMC Markets likes REA Group (REA).
“The half year report last Friday showed underlying growth remains solid at 21%. However its higher PE means its share price is likely to suffer more in the current market sell down. Am adding it to the radar, awaiting market and REA share price stability,” he says.
And chartist Gary Stone from Share Wealth Systems likes Aristocrat Leisure (ALL).
He says Aristocrat’s share price has bounced between a support zone at $20.00 and resistance zone at $24.00, which it has tested four times over the past six months. More recently it has found support in the $22.00- $22.50 zone and looked set to break out above the $24.00 zone prior to last week’s broad market sell off. A close above $24.50 would be positive for the stock.
He also likes CSL Limited (CSL) and A2 Milk (A2M).
Michael McCarthy doesn’t like Amcor (AMC).
“The packaging and containers group enjoys significant market share in most of its products, limiting growth prospects as input material cost rise,” he says.
Michael thinks there are earnings downgrades to come that are likely to lead to lower share prices, despite an already substantial decline.
Gary doesn’t like Retail Food Group (RFG).
“Since crashing through the $4.00 level and falling to $1.60 in December RFG has tried to move higher only to find eager sellers at the $2.50 level, sending the stock back below $2.00. Retail Food Group’s price is now over 70% lower than the same time last year and has wiped out 100% of its gains over the prior 6 years. Until it forms a solid base within this level it is a stock to be avoided at all costs,” he says.
While Mary and Ellerston Capital are finding 3D sensing companies unattractive right now.
“A big theme in 2017 was the introduction of a 3D sensing camera into the iPhone X for the facial recognition feature. There was an expectation that Android smartphone makers would follow suit with facial recognition in 2018, driving both strong volumes and supportive pricing for 3D sensing companies. However, sales of the iPhone X have been very disappointing due to the high price point.”
Therefore, companies like Win Semiconductors (3105 TT) probably have more downside to come.
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