Picking this reporting season’s stock winners

Lincoln Indicators
Written by

Lincoln Indicators

Sep 2nd, 2021
Related topics

It is a wrap on a bumper reporting season, highlighted by generous dividend payouts, buybacks and the ASX hitting record highs. It would seem like a good time for long term investors, but there remains significant uncertainty and a major gap between the ‘haves’ and the ‘have nots’ – making now an even more critical time to identify Stock Doctor Star Stocks to fortify your portfolio.

The operating environment over the past financial year has been nothing short of challenging. Some companies flourished amidst the various lockdowns, including online retailers, supermarkets, healthcare, and food delivery services, while others continued to struggle. Despite this, low interest rates and the enormity of government subsidies and central bank stimulus has underscored the survival of many businesses – irrespective of its financial health. This has resulted in what we’d describe as a highly speculative environment.

Buoyed by a stronger than expected economic recovery and elevated commodity prices, companies – especially across the financials and resources sector which dominate the ASX market – were able to report compelling results. However with a new wave of lock downs and uncertainty now prevailing, many companies were unable to provide forward looking guidance.

This makes it particularly important for investors to conduct thorough due diligence, paying particular attention to a business’s financial health to ensure companies have adequate profit margins and solid cashflows to survive the ongoing challenges, and thrive in the long term.

To help in your research, we’ve applied the proven quantitative analytics that underpin Stock Doctor to identify five Stock Doctor Star Stocks that were able to navigate the uncertainty, ranked highly over the reporting season, and are well positioned for future growth.

BRG captures WFH trend

The vast work-from-home crowd contributed to an unprecedented level of demand for home appliances. Breville Group (BRG) is one company that has captured this market opportunity.

It reported strong double-digit sales growth across all regions, steady net profit margins underpinned by stringent cost controls, and a healthy net cash position of ~$130m. There remain a couple of near-term headwinds including higher supplier costs, however, its solid brand positioning and strong financial position will help underpin its growth ambitions over the next two years.

Stock Doctor - BRG

PNI emerges even stronger

Another company that has done exceptionally well is Pinnacle Investment Management (PNI), a fund-of-funds investment Group that holds ownership stakes in a number of fund managers.

The company remains in Strong Financial Health with no net debt and strong operating cash flows. Net profit margins surged to 68% from 55% in the prior year as the company increased its exposure to retail clients, which attracted higher margins.  With a cash war chest of $96.1m, there are options for the company to grow via value-added acquisitions. However, it would be prudent for investors to wait for a pullback before taking a position.

Stock Doctor - PNI

CBA a proven leader

Often considered a bellwether for the Australian economy, Australia’s largest bank and Star Income stock – Commonwealth Bank (CBA) reported a 20% rise in cash earnings, underpinned by solid lending volumes and lower bad debt charges. Government and central bank stimulus have helped the Australian economy recover faster than initially expected.

With a strong capital position, CBA announced a bigger than expected off-market share buyback of up to $6bn, following asset divestments and the release of surplus funds provisioned for the pandemic. The market is anticipating dividends for this year to grow by 11%, with the stock on a gross dividend yield of ~6%. The recent spate of statewide lockdowns poses a risk to earnings certainty. However, we feel the impact on future dividend payments is negligible as the Bank remains well capitalised.

Stock Doctor - CBA

CDA continues to impress

We first introduced Codan (CDA) into our Star Growth stock universe in June 2020, and since then, the stock has generated a return of over 150% for investors. Codan develops and sells hardware communication products.

With its Strong Financial Health, the company lifted ROE from 31% to 36% on the back of annualised revenue growth of 26%. FY22 earnings growth is expected to be in the high double digits, driven by acquisitions and the introduction of new products. We maintain our positive disposition towards the company’s longer-term growth thematic with its heavy investment in R&D, increasing demand from global defences forces and the rise in gold exploration activity.

Stock Doctor - CDA

CAR builds global footprint

Online vehicle classifieds business Carsales.com (CAR) came out with a solid result on the back of rising second hand motor vehicle sales, higher listing volumes and growth in its international businesses. However, much of the company’s earnings were diluted by the recent equity raise of $600m, which contributed to a decline in ROE from 51% to 24%. At face value, this appears concerning; however, we believe the ROE decline is merely a timing issue. The capital raise was in relation to the 49% purchase of US business Trader Interactive (a US digital classifieds business), which positively, delivered strong revenue and earnings growth over the last six months.

We have been particularly impressed by its investment in digital channels. If executed correctly, this is a potential gamechanger for the company as it transforms into an online transaction platform, similar to Star Growth stock REA Group (REA).

However, it hasn’t been all good news…

Unsurprisingly, travel and tourism has struggled, while reports from the energy sector have also been underwhelming. Fortunately, poor results typically don’t come out of the blue, and with Stock Doctor’s Financial Health model, we had the heads up on which businesses were facing hardship.

Our quantitative stock selection process has helped members avoid some of the underperformers in this reporting season, including Sezzle (SZL), Kogan (KGN) and Origin Energy (ORG).

Successful investing does not have to involve speculation. Let Stock Doctor show you how to Invest in the Numbers.

With rising economic uncertainty on the back of statewide lockdowns, Financial Health is now more important than ever. Without understanding the true financial quality of a stock, you are purely speculating, not investing.

For over 30 years, our Financial Health methodology and renowned Stock Doctor Star Stock recommendations have helped investors make confident and informed decisions – in all market conditions.

Stock Doctor separates quality businesses from potential disasters, and we invite you to trial Stock Doctor for free. In addition, you will receive access to every one of our Stock Doctor Star Stocks, selected for income-focused and growth investors.

Lincoln Indicators
Written by

Lincoln Indicators

Sep 2nd, 2021
Related topics
The information in this communication is market commentary only and reflects Lincoln’s views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

You should read and consider our Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. Where our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) for the product at www.lincolnindicators.com.au before making any decision.

At the date of preparation of this communication, Lincoln, Lincoln Financial Group Pty Ltd or directors, employees and/or associates of these entities "may hold" interests in these ASX-listed companies. Further information about particular stocks held by these entities or persons from time to time is disclosed within the Stock Doctor program and may change at any time without notice.

Lincoln, Lincoln Financial Group Pty Ltd, any directors, employees and agents of these entities, make no representation and give no warranty as to the accuracy of this communication and do not accept any responsibility for any errors or inaccuracies in, or omissions from, this communication (whether negligent or otherwise) and are not liable for any loss or damage howsoever arising as a result of any person acting, or refraining from acting, in reliance on any information in this communication. No person should rely on this communication as it does not purport to be comprehensive. This disclaimer does not purport to exclude any rights under, or warranties implied by, law which may not be lawfully excluded.

Lincoln has taken precautions to minimise the risk of transmitting software viruses, but we advise you to carry out your own virus checks on any downloadable content. We do not accept liability for any loss or damage caused by software viruses.

Copyright © 2021 Lincoln Indicators Pty Ltd. All rights reserved.

All financial services are provided by Lincoln Indicators Pty Ltd ABN 23 006 715 573 (Lincoln) as the Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167.