Lincoln's 10 'hot stocks to watch' in the August 2010 reporting season.
By Elio D'Amato, Chief Executive Officer, Lincoln
The August 2010 reporting season is viewed as a 'vote for the bulls or the bears' and could be a frustrating one! Although more positive surprises are anticipated than negative ones, companies are well aware of the broader macroeconomic situation and are likely to set uncertain or low estimates. Investors will either take earnings on board and reward stocks that have clearly done well, or choose to ignore good news and continue to take cues from macroeconomic worries overseas.
To borrow one of the government's current election clich?s, it will either be a vote for moving forward, or a vote for going back; a vote for earnings-backed share price growth or a vote for economic malaise, investor trepidation and falling markets. It will be, in short, a vote for the bulls or for the bears.
Either way, we expect fundamentals to be good overall. As such, even if the market does continue to believe the glass is half empty, good results will be rewarded eventually.
We expect that the balance of results will surprise marginally on the upside. This is in contrast to six months ago where market sentiment was riding the crest of euphoria following the rapid recovery in 2009 and we expected that not all companies would be able to perform to these expectations. In these uncertain times, companies will have to be measured by their merits to determine their long term potential.
Lincoln's summary of key expectations for this August 2010 reporting season are: Mixed results, with surprises to both the upside and downside but marginally more positive than negative Major companies will on balance most likely report in-line or better-than-expected earnings Company outlooks look likely to be defensive, in the current climate Federal election to add a layer of uncertainty to this reporting season Minerals, information technology, healthcare and consumer staples should do well Concerned about real estate and insurance reports and the outlook statements for bulk commodities and consumer discretionary sectors Look for the first few retailers to report as a gauge for the health of the Australian consumer Beyond the election ? what to expect A major economic focus for market participants will be interest rates, a symptom of Australia's ability to buck the global recessionary trend. The possible threat of inflation rising above 3% may see the Reserve Bank of Australia (RBA) raise rates, but Lincoln does not anticipate significant rate rises if any in the current environment, in the short term. However it won't take long for the RBA to convince itself a rise is necessary should global economic conditions stabilise further. Tax policies implemented following the election may have a major impact on inflation risks going forward.
From a Financial Health perspective, our biggest concern is surprisingly not debt. With a handful of exceptions, this issue was tackled by most businesses over the last two years. Instead we feel that the coming challenge will be obtaining financing, particularly for companies outside the top 100. The current market appears unwelcoming to further capital raisings and IPOs (initial public offerings). Arguably, an environment suitable for private equity companies to recommence their craft.
Lincoln's 10 'hot stocks to watch' in the August 2010 reporting season Utilising our unique research methodology, we've identified 10 'stocks to watch' during the reporting season and throughout the second half of 2010. These stocks to watch are potentially quality, long-term opportunities and not only hold a Lincoln Financial Health rating of 'Strong' but are viewed as undervalued, efficient and growing:
1.JB Hi-Fi Limited (JBH) Home entertainment specialty discount retailer JBH has continued to deliver impressive results and maintain a Strong Financial Health position despite the general weakness in the retail sector. Its robust business model and dominant market position has allowed it to take advantage of the surge in demand for Visual, Computers/IT, DVD and Telco. Growth prospects are promising with more new stores in the pipeline.
2.Webjet Limited (WEB) WEB through its two main websites, www.webjet.com.au and www.lotsofhotels.com.au, has been an outstanding performer delivering a four-year average annual EPS growth rate over 51%. Profits have increased significantly as the company benefited from the continuing shift from traditional retail travel services towards internet bookings.
3.Ramelius Resources Limited (RMS) Gold miner RMS has the potential to perform well this reporting period due to increased production and record gold prices. The company is in a Strong Financial Health position and continues to show a lot of promise with production at its Wattle Dam underground gold mine still a way from its full capacity. The acquisition of Mt Magnet will increase marginal cash flows and the exemption from MRRT (mineral resources rent tax) bodes well for future earnings.
4.Kingsgate Consolidated Limited (KCN) KCN is a gold miner primarily focused on the low cost Chatree mine in Thailand in Strong Financial Health. The company has secured a fiscal support from the Thai government to expand its Chatree plant. Fourth quarterly production report was solid and construction of expansion has commenced. Prospects lie with improved production levels on completion of expansion.
5.Forge Group Limited (FGE) Engineering and construction holding company FGE had an excellent interim result driven by the strong contributions of all divisions of its wholly owned construction company, Cimeco. The company is in a Strong Financial Health position and has a positive outlook with the strategic alliance formed with Clough Limited (CLO) and a forward order book totaling approximately $300 million.
6.Credit Corp Group Limited (CCP) Whilst the recent economic uncertainties have been agonising to most people, CCP ? a debt collection agency ? had continued to grow and maintain a Strong Financial Health position as more people struggled to pay their credit cards or utility bills. Given its strong purchased debt ledger book and collection track record, CCP is well positioned to shine.
7.Decmil Group Limited (DCG) DCG is an engineering company specialising in accommodation villages and civil works. With strong exposure in Western Australia, the company's Financial Health has been gradually improving to a Strong position on the back of the state's mining boom in recent years. Future earnings are supported by existing contracts with major clients like BHP Billiton Limited (BHP), Chevron, Woodside Petroleum Limited (WPL) and Leighton Holdings Limited (LEI).
8.iiNET Limited (IIN) IIN is a fast-growing internet service provider. Despite being up against the incumbent Telstra Corporation Limited (TLS) and a host of smaller ISPs in a highly competitive industry, it has managed to remain in a Strong Financial Health position in recent years. Organic growth through client services as well as product innovation and acquisitions will continue to help IIIN grow market share and earnings.
9.Mermaid Marine Australia Limited (MRM) MRM is Australia's largest marine services provider to the offshore oil and gas industry. The strategic location of its two supply bases are core support assets and have helped the company to attain a Strong Financial Health position. The Dampier Supply Base will benefit from the Gorgon Project and the Broome Supply Base is ideally positioned to service the highly prospective Browse Basin region.
10.PanAust Limited (PNA) PNA is a copper and gold producer, operating in Laos and Thailand. It has attained a Strong Financial Health position on the back of higher copper prices and the first full year copper concentrate production from its flagship Phu Kham Copper Gold project in Laos. Further ramp up at the Phu Kham should support earnings going forward.
CCP Price at posting:
$2.81 Sentiment: Buy Disclosure: Held
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