It's well known that the majority of professional investors underperform their respective benchmarks over the long and short term. That's why SPIVA's global scorecard is infamous in financial circles, and why we've seen low-cost exchange-traded funds take the world by storm over the past 30 years.
And yet, the fund managers featured in the Outlook Series for 2023 have absolutely shot the lights out with their #1 stock picks. While yes, all the fund managers in this series run diversified portfolios, if you had followed their lead, your portfolio would have delivered a total return far higher than the local benchmark (28.32%, to be exact).
Nine of the fund manager picks delivered more than double-digit returns - including a lithium hopeful, an oil and gas vessel provider, and an Argentinian e-commerce giant that has continued to soar higher each week.
That said, five of the fundie picks are in the red for the year. So, what went wrong? And are the experts still backing these stocks, despite the poor share price performance?
More importantly, can the stocks in the black continue to skyrocket higher in the new year? Or is it time for investors to take profits?
To find out, I reached out to all of the fund managers featured in this year's Outlook Series for an update on their highest conviction stocks.
Portfolio manager: Marcus Padley, Marcus Today
YTD total return: 155.10%
No, joke - lithium hopeful Latin Resources was coming in second place until the final day of the competition - when it soared more than 35%. Congrats to Marcus Padley on picking the winning stock for the 2023 Outlook Series.
"When I tipped this stock last year, the lithium price had tripled in 12 months and lithium stocks were doing two hundred miles an hour with their hair on fire," Padley recalled.
"In a stock picking competition, you have to go hard or go home, so a lithium stock was the obvious pick."
So why Latin Resources? Well, it was the second favourite stock of the $65 million man - a Marcus Today reader who turned $189,000 into $65 million in Kidman Resources (taken over by Wesfarmers) and then Liontown Resources.
"Latin Resources was his next pick after Liontown," Padley explained.
"It helped that Latin Resources is a very well-managed lithium spodumene explorer pursuing a low-cost, environmentally sustainable project with an NPV of $3.6 billion ($534 million market cap) using conservative lithium price assumptions."
He also believes that it helps that Latin Resources is operating in Brazil - next to the already well-established Salinas Lithium Project.
"A series of exploration successes has seen Latin Resources develop an integrity of purpose despite the lithium price collapse this year," he said.
"The company is looking to be profitable in 2026 and despite having halved from its highs, it is a long-term lithium play. Its share price would perform a lot better with the lithium price rising instead of falling, but assuming that, this remains one of the best-managed small-cap plays in the sector."
Portfolio manager: Mary Manning, Alphinity Investment Management
YTD total return: 93.13%
Despite MercadoLibre's stellar run, Mary Manning is still backing the stock, revealing it continues to play an important role in Alphinity's global portfolio. Congrats to Mary for coming in second place in this year's competition!
"We bought MercadoLibre 18 months ago for a few key reasons. First of all, we believed the stock was entering a multi-year earnings upgrade cycle driven by improving Brazilian macro and good strategic execution by the MercadoLibre management team. This has played out," she explained.
"Consensus EPS for 2023 has increased from approximately $11.50 when we bought it in mid-2022 to $22 today. That is roughly a doubling of earnings expectations."
For those that don't know, MercadoLibre is an "ecosystem company" with e-commerce, fintech and logistics businesses that work together to increase customer "cross-sell".
"MercadoLibre's 3Q23 results showed that the ecosystem is stronger than ever with both e-commerce and fintech continuing to reach new highs for GMV, TPV and profitability," Manning said.
And yet, MercadoLibre's valuation is still attractive, she added.
"Even though the stock is up significantly since we bought it, earnings have doubled, so the PE is actually lower," she said.
"We bought the stock at a 12-month forward PE of over 65 times and the current PE is only around 44 times. Expected EPS growth for MELI in FY24 is 45%, which implies a very attractive PEG (Price to Earnings Growth) Ratio of approximately 1 times."
That said, there is a risk to the stock's outlook - with uncertainty surrounding the "unorthodox policies" of new Argentinian President, Javier Melei, she said.
"We are watching these closely, particularly decisions on a devaluation of the Argentina peso or a move towards dollarisation," Manning said.
"The second risk we’re monitoring is the intensification of competition in global e-commerce. Amazon continues to be the behemoth, but new players like Shein, Temu and now TikTok Shopping are growing in size and influence.
"MELI is somewhat removed from this given its Latin American target market, but we continue to watch e-commerce market share trends very closely."
Portfolio manager: Michael Goldberg, Collins St Asset Management
YTD total return: 65.45%
Taking home the bronze in this year's competition is Michael Goldberg with his pick MMA Offshore.
"MMA Offshore went from strength to strength throughout 2023 with several key contract wins (notably in the Government sector with CSIRO and the Department of Defence both coming on board)," Goldberg said.
"The full year results seeing a strong uptick across a range of key metrics such as operating cash flow, EBITDA and the net tangible assets of the company."
The Collins St Value Fund team bought MMA Offshore in the mid-30c range and with the stock significantly higher, the team has now exited its position in the stock - despite the "excellent operating business the stock represents".
"MMA Offshore has some incredible tailwinds that will drive the company throughout 2024 and beyond, with both traditional and renewable energy sectors providing substantial opportunity for growth alongside an increasing footprint in the Government sector," Goldberg said. "We believe the company to be well managed and well capitalised and in an exciting position as a dominant service provider in the Asia Pacific region."
Portfolio manager: Oscar Oberg, Wilson Asset Management
YTD total return: 59.63%
What a good year it's been for M&A activity (and by that, I mean shareholders invested in takeover targets).
In March, Oscar Oberg's pick Estia Health received a non-binding and indicative acquisition proposal from Bain Capital at A$3.00 a share, with the aged care provider's share price soaring around 18% on the news.
"Following four months of due diligence, on August 7, Estia entered into a scheme implementation agreement with Bain Capital, with shareholders receiving A$3.20 a share, representing an approximately 50% premium to Estia’s closing share price of A$2.14 a share on 21 March," Oberg explained.
"Following the signing of the scheme in early August, we exited our position in Estia Health."
Oberg remains positive on the outlook for the aged care sector, arguing that government-funded wage increases and a lack of new aged care homes should boost the profitability of larger operators.
"Since exiting our position in Estia in July, we have bought shares in the only other listed aged care operator, Regis Healthcare (ASX: REG) and note that the company has seen occupancy levels improve to 93.8% on 20 October versus 92.5% in the fourth quarter of the 2023 financial year," Oberg said.
"We expect Regis to be in a net cash position by June and see the potential of earnings accretive acquisitions."
Portfolio manager: Dion Hershan. Yarra Capital Management
YTD total return: 37%
Given that many market commentators called for a housing price crash in 2023, it was a contrarian call to back plumbing supplies company Reliance Worldwide. But Dion Hershan's pick certainly paid off.
"Reliance Worldwide has been a strong performer in 2023, building on the momentum observed through positive trading early in the year to outperform the market by more than 30%," Hershan said.
"Our investment thesis is largely playing out, with the business demonstrating genuine resilience in a difficult US economy for construction activity (due to high interest rates)."
This is because Reliance Worldwide has a large exposure to the renovation and remodelling part of the market - which has held up well over the past 11 months, Hershan said. And, he believes the business will continue to perform in 2024. "The company is an industry leader and is taking market share, selectively increasing prices and restoring margins which were hit when freight and commodity prices surged," he said. "With a modest valuation (14 times earnings) and leverage into a rebounding US economy, we are also encouraged by the available scope to improve productivity and the cost base."
Portfolio manager: Nick Griffin, Munro Partners
YTD total return: 34.96%
Coming in sixth place on our list is Nick Griffin with his pick Constellation Energy - a natural gas, electricity and solar provider in the US.
"Our conviction in the Constellation Energy investment case has only strengthened throughout 2023, having consistently beaten and raised Wall Street estimates," Griffin said.
"The company now expects 2023 EBITDA 26% above initial expectations set in 4Q22."
So, what were some of the stock's most positive events from the year? Well, as Griffin explained, the company acquired STP’s nuclear assets for an effective price of $1.4 billion in June and introduced a capital allocation plan, including a two-times dividend increase and $1 billion allocated to share repurchases.
"We attribute this act of managerial confidence to the ever-improving backdrop for nuclear power as the only carbon-free baseload generation operating at scale," Griffin said. "We are holding our position in Constellation Energy into 2024, as we believe they can continue to sell contracted power to corporate customers (e.g. Microsoft) at lucrative premiums, given the scarce properties of nuclear previously discussed."
He also sees a range of upside opportunities over the year ahead - such as the return of capital to shareholders, leverage to higher power prices and other growth avenues, like capacity uprates and pink hydrogen.
Portfolio manager: Matthew Kidman, Centennial Asset Management
YTD total return: 34.56%
Small-cap life insurance and investment provider Generation Development has had a pretty incredible year given where the rest of the small-cap index currently sits, with the stock's delivering investors a nice 35% return in the first 11 months of the year.
"It has been a very pleasing year for GDG in 2023 despite equity markets proving tough," Matthew Kidman said.
"Generation Development has several businesses. The largest is an investment arm based on the tax-enhanced investment bond. The funds under management continue to grow by double digits and the product’s future looks bright as many people look for alternatives for tax-enhanced investment products given the new regulations imposed on self-managed superannuation."
Generation Development also has a 49% stake in ratings house Lonsec - which has grown by over 30%.
"The company has publicly declared that it will consider selling its stake in Lonsec in the middle of 2024 once its three-year turnaround of the business is complete," Kidman said.
"It could well be that Generation Development's stake in Lonsec could be around $125 million before tax (around 40% of the value of the entire group). Any realisation of Lonsec would result in a combined capital management initiative and a new acquisition."
Generation Development also has a relatively new annuity offering - which is still losing money. However, as Kidman explained, the company is paring back the costs of the division and trying to get it to break even.
"Overall, I can see the company continue to grow nicely and the share price, which is up 30% this year, continuing to climb towards $2.00 a share or 20% higher from the current level," Kidman added.
Portfolio manager: Ben Clark, TMS Capital
YTD total return: 31.57%
In times of economic pain, there's one thing that people continue to pour their hard-earned cash into, and that's pokies. Despite the obvious ethical quandaries, Aristocrat has had another great year - with its US business being a clear highlight.
"The company installed close to 5K gaming ops units for the year, hitting 64K in total," Ben Clark said.
"Outright sales saw a record result and there is some growing evidence the company is successfully rolling content from land across to their iGaming segment. It’s early days but we believe the launch of their NFL-themed offering could provide further sales momentum."
In May, Aristocrat announced it would be acquiring NeoGames, which Clark believes will open up new avenues of growth, "specifically through the fast-growing RMG (real money gaming) segment, iLottery and, conceivably, an entry point into the US sports betting market." "With a bulletproof balance sheet, numerous areas of new growth and an undemanding valuation we’d be happy to continue buying the stock at current levels," Clark said.
Portfolio manager: Anthony Aboud, Perpetual Asset Management
YTD total return: 16.83%
Anthony Aboud's pick for 2023 LGI has had a strong 2023, delivering investors a nice 17% total return in the year so far. For those that don't know, LGI has long-term contracts with landfill operators to flare methane from operations and convert this gas into dispatchable renewable energy. "Having non-intermittent renewable energy is scarce in Australia and we believe that LGI is in a strong position to be able to redeploy capital into high-returning projects over the next five to 10 years," Aboud said. "The upside to our thesis will come if we see a spike in ACCU prices (which we believe have a natural base at their current levels of $30/t)." Aboud is a big fan of founder-led businesses, of which LGI is one. Insiders hold most of the shares on issue. "Operationally, LGI had a fantastic first year as a listed company beating prospectus forecasts at the NPAT line by 33%. This was despite ACCU prices falling off towards the end of the financial year," he said. Aboud and the team have been adding to their position in LGI throughout the year.
"We feel from a macro perspective the outlook has improved," he said.
"For starters, market participants are working out just how difficult it is to get project approvals and new transmission built for both renewable and carbon-based electricity generation. The fact that there has been an underspend in carbon abatement for large emission companies increases our conviction that ACCU prices will spike at some point in the next few years.
"Even if the recently announced capacity investment scheme (CIS) is implemented quickly, an unintended consequence of artificially motivating more solar will exacerbate the duck curve which will increase the attractiveness of LGIs dispatchable and renewable energy."
So what's on the horizon? As Aboud explained, LGI has a few brownfield expansions set to come to market, which will combine renewable energy and batteries to take advantage of intraday volatility. "LGI's execution of these brownfield investments on time and on budget as well as generating good returns will be an important achievement for the company going forward," he said.
Portfolio manager: Nick Sladen, LSN Capital Partners
YTD total return: 0.32%
Nick Sladen's pick Hansen Technologies was having a strong year in 2023, but post its result in August its share price has slid around 14%. That said, a strong dividend has pushed the stock's total return for the year into the black. "It was a solid year for the company, delivering revenue growth of more than 5% in FY23, and guidance for FY24 organic growth to be particularly strong as they take advantage of and support the rapid changes in the energy and communications industries," Sladen said. Hansen has already made solid progress with customer wins, contract extensions and upgrades in FY24, he added.
"The company is highly cashflow generative and during 2023 moved into net cash position which places them well for the next strategic acquisition, so with a strong balance sheet and lower acquisition prices, they are in great shape heading into 2024," Sladen said.
"Hansen remains a core portfolio holding. We are confident about the outlook and see more than 20% valuation upside from current levels."
Portfolio manager: Romano Sala Tenna, Katana Asset Management
YTD total return: -15.54%
Romano Sala Tenna's pick Mineral Resources has not had a great 2023 - but that doesn't mean the Perth-based portfolio manager has given up on the stock. "The elephant in the room for 2023 was always going to be the lithium price and its impact on investor sentiment," he said.
"Our conservative modelling forecast a material deterioration in the price of the entire lithium complex, but even we were surprised by the speed and magnitude of the decline. We expect that the price will rebound in due course."
Sala Tenna believes that poor investor sentiment has overshadowed the "substantial earnings growth" of Mineral Resources' other two divisions. "In the mining services division, EBITDA is on the verge of doubling based purely on contracted work," he explained."In the iron ore division, Mineral Resources is just over six months away from shipping the first product from its Onslow min, which is slated to eventually ramp up to 45mtpa." This will be "transformational" for earnings - particularly if iron ore prices can hold at their current levels, he added.
"Given the closer proximity to these triggers combined with the significant decline in the share price, we are more bullish today than at the corresponding time in 2022," Sala Tenna said.
Portfolio manager: Catherine Allfrey, WaveStone Capital
YTD total return: -16.31%
While Catherine Allfrey admits that Domino's has had a "disappointing" year, she argues that its important investors take a long-term view.
"We did buy the stock in the December quarter of 2022 with the view that the equity raising in December fixed the balance sheet and the management team could focus on the recovery of the business," she said.
"In hindsight, we underestimated the stickiness of the cost inflation that has hampered franchisee profitability and the speed in which DMP can win back the hearts and minds of customers given they raised prices aggressively including introducing a delivery fee, in what has been a very competitive QSR environment. FX with the USD/Yen has also been a headwind for their Japanese business."
That said, with Don Meij coming back to run the Australian franchise, Allfrey believes operational improvements are on the horizon.
"In its large shareholders, Jack Cowin (a Director and owner of Hungry Jacks) and CEO Don Meij, DMP has the best minds in QSR. This gives us confidence that they can restore the business to its former glory," Allfrey said.
"Our investment process is to look for companies that have a Sustainable Competitive Advantage that are trading at reasonable prices.
"We are patient investors and still believe that DMP is a global franchise with a store rollout targeting 5000 stores by CY2028 that should deliver over our investment horizon of three to five years."
Portfolio manager: Andrew Clifford, Platinum Asset Management
YTD total return: -18.53%
Despite ZTO Express sinking into the red in 2023, Andrew Clifford maintains that it still is one of Platinum's highest conviction calls.
“ZTO Express is China’s leading express parcel delivery company. It performed strongly this year, gained share and delivery volumes were up 20% in the first nine months against industry growth of 16%," he said.
"Our original investment case posited an improving pricing environment as we believed loss-making competitors would lift prices to stem losses. This played out in the first half with ZTO’s operating profits up over 50%."
That said, pricing deteriorated in the second half, as second-tier players chased volume.
"This slowed ZTO’s earnings growth and weakened the share price. ZTO now trades on just 12 times expected earnings for 2024," Clifford said.
"We believe ZTO’s size and position as the low-cost player will see them take more share of this fast-growing market. The weaker players can only sustain uneconomic pricing for so long and their eventual exit should result in pricing that works for the market leader."
Portfolio manager: Jun Bei Liu, Tribeca Investment Partners
YTD total return: -23.34%
It's been a difficult three years for Ramsay Health Care - firstly, thanks to the COVID-19 pandemic, and then, with KKR withdrawing its $20 billion bid to take the hospital operator private. Now, however, things are starting to change, Jun Bei Liu said.
"Ramsay is moving into a steady recovery phase," she said.
"After are challenging post-pandemic period, Ramsay’s leading domestic private hospital business is benefitting from a steady recovery in volumes which is in turn supporting a lift in productivity."
The group's UK operations are enjoying an even quicker recovery with the loss-making mental health business rapidly returning to profitability, Liu added.
"We expect a couple of years of above-normal demand across these markets given the elevated waiting lists," Liu said.
"Concerns over the group's stretched balance sheet have been addressed with the recent sale of the Group’s Asian operations for over $900 million. This leaves the underperforming European hospitals as the key remaining issue with management promising a review is underway. Any move to sell the European operations should be well received."
Portfolio manager: Robert Gregory, Glenmore Asset Management
YTD total return: -30%
Last but not least is Retail Food Group, picked by Melbourne-based Robert Gregory. Despite the stock underperforming this year, Gregory believes the stock could turn the ship around in 2024 and still has a position in the Aussie food franchisor.
"Retail Food Group delivered a strong result in February 2023, with 1H23 underlying EBITDA of $13.7 million (up +47% vs 1H22) and reiterated guidance for FY23 for EBITDA between $26-$29 million," he said.
"However, a week later, Retail Food Group shocked the market by announcing a $25 million capital raising. The funds were used to reduce debt rather than for an acquisition, which saw the stock sell down."
Not a good move. However, in August, the group reported a "solid FY23 result" - with EBITDA of $26 million despite challenging trading conditions.
"In November, Retail Food Group acquired Queensland-based “Beefy’s Pies” for a cost of $10 million (EV/EBITDA multiple of ~4 times). Also in November, RFG provided a trading update for 1H24, which was broadly in line with our expectations," Gregory said.
With that in mind, he remains positive on the stock.
"While trading conditions remain challenging, we believe this is factored into the stock’s valuation (FY24 PE multiple of 7 times). Delivery of FY24 earnings in line with market expectations should be enough for the stock to outperform," Gregory added.
This article was originally published on Livewire Markets.
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