Prelude to reporting season: current star stocks in tough sectors

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With reporting season on our doorstep, it is the time of year that I am usually asked for a view on which sectors will perform well, and which are expected to do poorly. The application of any response is to focus on businesses in ‘hot’ sectors for possible investment consideration, and businesses in ‘cold’ sectors for avoidance.

However, at Lincoln Stock Doctor we do not prescribe to such a simplistic view of the investing landscape. Such an unrefined strategy means there is the potential to miss significant gains that often comes from finding a gem amongst the rocks. Our research process is described as a ‘bottom-up’ approach which involves looking at the fundamentals of a company first. If the company reflects the qualities we are seeking, we will  place the stock on our consideration list. The next steps are to review industry dynamics, active risks and how the company fits within the current landscape. This allows us discover the gems that many miss as they have applied a broad brush to a poor performing sector.

So, in the lead up to the reporting season let’s look into the three sectors that are currently on the nose of most analysts from an earnings growth perspective, and spotlight a shining star that has bucked the sector’s sentiment and rewarded investors who did their legwork.

Telecommunications – This sector was one of the poorer performers last financial year. With rising competition, large capital expenditure projections, continuing issues around the rollout of the NBN and perennial disruption, analysts have formed a pessimistic view leading into this reporting season with earnings expected to decline by some -22%. Compounding the issue, of the 22 stocks in this sector, only 45% are Financially Healthy highlighting the risks of investing blindly. With more disruption to come it is buyer-beware.

Our shining star is Speedcast International Limited (SDA); a specialist provider of satellite-based broadband and communications services to over 2,000 clients in 140 countries. Underpinned by Satisfactory Financial Health, SDA generated a total return of over 80% for investors in the last 12 months and is a Borderline Star Growth Stock[1] that is expected to report earnings growth of over 50% this earnings season, capitalising on the rising demand for mobile data solutions in remote areas.     

Insurance – Under pressure due to policy holders reconsidering their coverage, rising costs and constant government pressure to keep premium rate increases at a minimum, analysts have formed a less than exciting view of what lies ahead for insurers, with earnings expected to grow a modest 3.8% across the board.

Though growth will be a challenge for many in this sector, a shining star is Medibank Private Limited (MPL). A current Star Income Stock, the company has bucked the trend of margin declines and has delivered a total return of close to 20% over the past year. It has stated that it expects stable policyholder numbers with similar underlying revenue trends in 2H18, adjusted for the lower premium rate increase of 3.88%. With analysts expecting earnings growth of 3.54% this is not stellar growth story. But from an income perspective, with a forecast gross dividend yield of 5.97% it appears solid and worthy of consideration as we expect the dividend to come in at the top end of guidance.

Property – Recent talk of impending price declines in the property sector saw many analysts factor in lower positive revaluations over the coming few months resulting in earnings growth expectations of 3.9% this earnings season. Compounding negative sentiment is the fact that many in this sector are traditional income players that have come under strain as rates rise globally diminishing their ‘bond proxy’ like status.

Our shining Star Stock in this sector is Charter Hall Group (CHC). Not only have they delivered a total return of over 30% last year, but this Star Income Stock also has the benefit of a growth driver being its fund management services business which accounts for about 40% of income. With a forecast gross dividend yield of greater than 5% and strong institutional interest in the funds management part of the business, CHC trades at a premium to NTA. We believe this is justified given its strong track record, quality of assets, plus diversified and recurring revenue stream.

Source: Lincoln Stock Doctor / Thomson Reuters


Code Name Star Stock status 12-month total return Sector
CHC Charter Hall Group Star Income Stock + 35.48% Property
MPL Medibank Private Star Income Stock + 18.92% Insurance
SDA Speedcast International Borderline Star Growth Stock + 82.56% Telecommunications

Data to 31 July 2018 and includes dividends paid. Source: Lincoln Stock Doctor

[1] Star Stocks are identified by Lincoln as fundamentally superior businesses that exhibit the Financial Health qualities investors should consider as core to their selection process. Yielding strong returns over the long-term, they represent possible opportunities for both the growth and income focused investor.

Published 14 August 2018 | Financial Review

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