Day: 1 February 2023

We’ve been asking our Foolish writers to give us their top monthly share picks for some time now. The list is generally pretty diverse (or ‘motley’!) in terms of sector, type of investment, and company size. 

But this month, all the shares recommended by our writers have at least two things in common. They all have market caps over $2 billion and are all constituents of the S&P/ASX 200 Index (ASX: XJO).

Could it be a sign of the times that our Foolish writers are favouring the top end of town this month, or is it merely a coincidence?

Either way, they reckon these ASX heavy-weights have what it takes to deliver some serious profit punches over the long term.

Let’s take a look at the potential of these ASX 200 prizefighters:

7 best ASX shares for February 2023 (smallest to largest)

• Pinnacle Investment Management Group Ltd (ASX: PNI), $2.12 billion
• Super Retail Group Ltd (ASX: SUL), $2.87 billion
• Premier Investments Limited (ASX: PMV), $4.39 billion
• Lottery Corporation Ltd (ASX: TLC), $10.42 billion
• Xero Limited (ASX: XRO), $11.67 billion
• Resmed Inc (ASX: RMD), $13.02 billion
• Transurban Group (ASX: TCL), $42.31 billion

(Market capitalisations as of 31 January 2023)

Why our Foolish writers love these ASX 200 shares

Pinnacle Investment Management Group Ltd

What it does: Pinnacle is an investment management company. It enables leading fund managers to set up their own fund management businesses, and Pinnacle takes a stake in those businesses. The ASX 200 share also helps with areas like finance, legal, seed funds under management (FUM), compliance, and so on, allowing the fund managers to focus on the investing side of things.

By Tristan Harrison: The Pinnacle share price has plunged by more than 40% since early November 2021. I think growing, profitable businesses can look very compelling after a fall of that magnitude.

The drop in asset prices has been a headwind for Pinnacle’s FUM and earnings, but when regular asset price growth returns, this could be a tailwind for FUM again. Plus, I think good FUM inflows are more likely for the fund managers when the prospect of further interest rate hikes is less likely.

I also like that this ASX 200 company is looking to expand its portfolio of investments, including a start in Canadian funds management. I believe this will diversify and help grow its earnings.

Motley Fool contributor Tristan Harrison does not own shares of Pinnacle Investment Management Group Ltd.

Super Retail Group Ltd

What it does: Super Retail owns four well-known retail brands. They are Supercheap Auto, Rebel Sport, BCF (cue that catchy advertising tune, “boating, camping, fishing – it’s BCFing fun!”), and New Zealand sporting goods label, Macpac.

By Bronwyn Allen: Super Retail recently reported a record first half for FY23, with increased sales and margins. This was despite rising inflation and interest rates, which were expected to dampen consumer spending. They probably will at some point, but I think Super Retail’s brands may have more resilience than many others.

People always need new car stuff, activewear is incredibly popular, and plenty of people are still holidaying locally. Because of this, I like the ASX 200 company as a long-term buy and hold.

Right now, Super Retail shares are trading pretty close to their 52-week high of $13.03. But three brokers, Citi, Goldman Sachs, and Morgans reckon there is still around 10% to 12% upside potential over the next 12 months. Their share price targets are $14, $14.20, and $14 respectively.

Earlier this month, Goldman noted the business was trading on a 12-months forward price-to-earnings (P/E) ratio of 13.2. 

Super Retail also pays fully-franked dividends, with the next one to be announced on 16 February. Goldman and Morgans estimate a 5.1% dividend yield for FY23.

Motley Fool contributor Bronwyn Allen does not own shares of Super Retail Group Ltd. 

Premier Investments Limited

What it does: Premier owns and operates speciality retail brands, consumer products, and wholesale businesses. Its Just Group operates seven iconic Australian brands and employs more than 9,000 people. Premier is active in Australia, New Zealand, Asia, and Europe.

By Bernd Struben: 2023 is forecast to be a tough year for retailers, which are expected to face headwinds from high inflation and interest rates, and diminishing household savings.

But Morgan Stanley tips Premier to outperform.

“It is best positioned among retailers in our coverage to navigate the tough conditions with a strong balance sheet and high-quality leadership team,” Morgan Stanley analysts said.

The broker likes Premier’s global expansion opportunities and lengthy history of beating consensus expectations. The analysts also noted, “We see scope for more dividends/buybacks or highly accretive M&A.”

With the January 2023 payout now in shareholders’ bank accounts, Premier pays a 12-month trailing dividend yield of 4.5%.

Morgan Stanley has a price target of $30.50 for Premier’s shares. That’s around 10% above the current share price of $27.74.

Motley Fool contributor Bernd Struben does not own shares of Premier Investments Limited.

Lottery Corporation Ltd

What it does: Lotto Corp was recently spun out of Tabcorp Holdings Limited (ASX: TAH). It houses most of the country’s top lottery and gaming brands, including The Lott and Keno.

By Sebastian Bowen: Lottery Corp is one of the newest ASX 200 shares on the market. But despite this, I believe it’s a stock that could be worth considering this February.

The company has close to a monopoly in the Australian lottery industry, with the exception of Western Australia.

Furthermore, customers who buy lotto tickets or play Keno tend to be repeat users, which makes this company a very consistent cash flow generator. Lottery Corp’s bottom line is also helped further by the fact the company has a fairly light capital base.

So if you’re in the mood for what I believe is a consistent, sturdy, dividend-paying share this February, then Lottery Corp could well be worth a look.

Motley Fool contributor Sebastian Bowen does not own shares of Lottery Corporation Ltd.

Xero Limited

What it does: Xero is an online accounting and business services platform provider to small businesses across the globe. At the last count, the company had 3.5 million subscribers.

By James Mickleboro: I think Xero could be a quality option for ASX investors in February. With its shares down materially over the last 12 months, and the tech sector showing signs that the worst is now behind it, I believe the risk/reward on offer with Xeros shares is compelling.

Particularly given the company’s very positive long-term outlook. This is being underpinned by its high-quality platform, the structural shift to the cloud, and its estimated total addressable market of 45 million subscribers.

Goldman Sachs is bullish and recently named Xero as its top pick in the tech sector. The broker has a buy rating and a $109.00 price target on its shares. This represents a possible 40% upside to the current Xero share price of $76.80. 

Motley Fool contributor James Mickleboro owns shares of Xero Limited.

Resmed Inc

What it does: Resmed manufactures and sells medical devices assisting with breathing-related issues, separated into its sleep and respiratory care divisions. Its products are found in over 120 countries, helping improve the quality of life of its customers.

By Mitchell Lawler: Resmed shares have been a huge success story since listing in 1999, soaring by around 3,500% in the years since.

Some investors might baulk at the exceptional 160% 5-year capital appreciation and 43 times price-to-earnings (P/E) ratio of this ASX 200 healthcare share. However, the company’s recent second-quarter update gives me confidence there’s a good reason for this premium valuation.

According to the report, Resmed achieved a 16% and 13% increase in revenue and income from operations, respectively. Yet, it’s the company’s software-as-a-service (SaaS) segment that I’m excited about due to its high-margin potential.

Motley Fool contributor Mitchell Lawler does not own shares of Resmed Inc. 

Transurban Group

What it does: Transurban operates 21 toll roads across Australia and North America, including major tollways in Melbourne, Sydney, and Brisbane.

By Brooke Cooper: I believe Transurban shares could be a buy right now due to their built-in inflation hedge and growth potential.

The company’s earnings are derived from toll revenues, the majority of which are regularly adjusted for inflation. That means they’ll grow alongside the cash-creating measure.

Additionally, as Citi points out, Transurban’s earnings are also recession-resistant. While Australia could avoid a recession this year, experts at ANZ Group Holdings Ltd (ASX: ANZ) warn of recessionary impacts.

Finally, Citi expects Transurban to grow its dividends and has slapped a $15.70 price target on its shares, representing a potential 14% upside at the time of writing.

Motley Fool contributor Brooke Cooper does not own shares of Transurban Group.

The post Top ASX shares to buy in February 2023 appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Should I buy ASX 200 tech shares in early 2023 or wait?
• How I’d invest $200 a month in ASX shares to make a $20,000 passive income for life
• Forget lithium! I’m using the Warren Buffett method to help find winning ASX shares in 2023
• How I’d invest $20,000 in ASX shares in 2023

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Pinnacle Investment Management Group, ResMed, Super Retail Group, and Xero. The Motley Fool Australia has positions in and has recommended Pinnacle Investment Management Group, ResMed, Super Retail Group, and Xero. The Motley Fool Australia has recommended Premier Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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After an unambiguously terrible 12 months, one expert has declared now the time to buy up growth stock at rock bottom.

Frazis Capital specialises in “explosive” growth shares, predominantly on the US markets. While it almost doubled clients’ money in 2020, the 12 months to October 2022 saw it lose more than 61%.

But in a memo to clients this week, founder and portfolio manager Michael Frazis was upbeat.

“Our strategy from here is to make sure this fund is the single best way to play a recovery in technology and growth,” he said.

“Key companies are down 85% to 90%, are trading at 25% free cash flow yields, and are still posting solid revenue growth.”

Still many growth stocks at all-time lows

The Nasdaq Composite (NASDAQ: .IXIC) has jumped almost 10% so far this year.

But Frazis believes many stocks are still going for an absolute bargain.

“Many companies are still at lifetime valuation lows,” he said.

“At current trend lines, US CPI [inflation] will be sub 2% by May/June this year. This was a Fed-induced slowdown more than anything else. At some point, this headwind will become a tailwind.”

Technology and life sciences, which were hammered over the past 12 to 14 months, make up much of Frazis’ portfolio.

But recent headlines about ChatGPT demonstrate just how critical these industries are for the future.

“Professional and retail investors are significantly underweight on the sector that historically generates the most wealth, with recent advances in artificial intelligence a powerful reminder of why this is the case.”

Cheap shares but the businesses are still growing

Frazis demonstrated how a couple of his holdings that performed poorly in 2022 are now looking healthy for those willing to buy in right now.

“Shopify Inc (NYSE: SHOP) continued to stack revenues throughout 2022 but this was overpowered by a >90% multiple contraction,” he said.

“In January, Shopify broke above key moving averages for the first time in over a year. Since it has continued growing throughout this period, the stock can move to significant new highs without valuations ever approaching 2021 levels.”

Electric car maker Tesla Inc (NASDAQ: TSLA) saw its shares halve over the past year on the back of worries about production, sales, and chief Elon Musk’s distraction with Twitter.

So the stock can be bought on the cheap for a business that’s still growing strongly.

“Company reports are still solid. Tesla, which lost ~75% of its value, reported EPS growth of 78% year-on-year, on a forward PE that got as low as 20,” said Frazis.

“Tesla just reported Q4 37% revenue growth and 57% GAAP EPS growth.”

There are a whole bunch of software companies in the US that are in the same boat.

“On a growth-adjusted basis, software is cheaper than at any point in the last decade,” said Frazis.

“We’ve said this before, but that doesn’t make it any less true today: US growth software is a screaming long-term buy.”

Frazis reminded his clients that after the bear markets of 1973-74 and 1980-82, stocks posted their strongest-ever returns.

“There will be a point where fast growing tech companies transition from the very worst place to be invested to where they usually are: the very best. We will be there for it.”

The post ‘Lifetime lows’: Expert reckons these shares are ‘screaming buys’ right now appeared first on The Motley Fool Australia.

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More reading

• If I’d bought $5,000 of Tesla stock 3 years ago, what would my investment be worth now?
• Aussie investors are buying Tesla shares in droves. Should you?
• Should I buy Tesla stock for 2023 or not?
• Tesla share price correction: A chance to get rich?

Motley Fool contributor Tony Yoo has positions in Shopify. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Shopify and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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On Tuesday, the S&P/ASX 200 Index (ASX: XJO) ended the month in a subdued fashion. The benchmark index fell 5 points to 7,476.7 points.

Will the market be able to bounce back from this on Wednesday? Here are five things to watch:

ASX 200 expected to rebound

The Australian share market looks set to rise on Wednesday following a solid night on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the day 29 points or 0.4% higher this morning. In late trade on Wall Street, the Dow Jones is up 0.6%, the S&P 500 is up 0.9%, and the Nasdaq is 1.2% higher.

Oil prices mixed

Energy producers Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS) will be on watch after a mixed night for oil prices. According to Bloomberg, the WTI crude oil price is up 0.75% to US$78.49 a barrel and the Brent crude oil price has fallen 0.5% to US$84.49 a barrel. The former was boosted by higher than expected US demand.

Beach upgraded

Another energy share that will be on watch today is Beach Energy Ltd (ASX: BPT). That’s because Morgans has just upgraded the energy producer’s shares to an add rating with a $1.81 price target. Although it was disappointed with its quarterly update, Morgans believes the worst is now priced in. It said: “We think that the bad news ahead of BPT is already largely in the price and we move to an ADD rating (from HOLD) on valuation upside.”

Gold price rises

Gold miners Evolution Mining Ltd (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) could have a decent session after the gold price pushed higher overnight. According to CNBC, the spot gold price is up 0.3% to US$1,929.1 an ounce. A softer US dollar gave the precious metal a lift.

Buy the Megaport dip

The Megaport Ltd (ASX: MP1) share price fell heavily on Tuesday following the release of the company’s quarterly update. While Goldman Sachs was disappointed with “the weakness in the operational trends,” it believes investors should buy the dip and has reiterated its buy rating with a trimmed price target of $8.10.

The post 5 things to watch on the ASX 200 on Wednesday appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Tuesday
• Why is the AMP share price smashing the ASX 200 on Tuesday?
• Why Bubs, Core Lithium, Megaport, and Pointsbet shares are crashing today
• Why Beach, Coles, Cronos Australia, and Woolworths shares are pushing higher

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Megaport. The Motley Fool Australia has recommended Megaport. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Ask A Fund Manager

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Schroders portfolio manager Ray David examines whether he’d buy up three heavily discounted ASX shares.

Cut or keep?

The Motley Fool: Let’s examine three ASX shares that have been devastated this year, and see if you think each of these fallen stars is now a bargain to pick up or if you’d stay away.

The first one is Coles Group Ltd (ASX: COL), a value stock that’s cooled off about 11% over the past six months.

Ray David: Look, Coles is an attractive stock to us. It’s held in our portfolios and we think it’s a buy. 

It’s quite a defensive business, as you know — consumer staples — and the supermarkets have also faced earnings headwinds from COVID. So the supply chain issues are labour costs, inflation, and the inflation regarding protective equipment. It’s not like they were a huge beneficiary of COVID. Obviously you had a sales uplift but there was a significant cost uplift. Some of those costs will come out of the business which will support earnings. 

The outlook looks pretty good for Coles relative again to the rest of the market where interest rates are going to have an impact on discretionary expenditure as well as building materials. 

When we look at Coles’ valuation, it’s about 20 times earnings, [with] about a 4% dividend yield, which actually looks okay to us. And it trades at quite a big discount to Woolworths Group Ltd (ASX: WOW).

It trades at about a 25% discount to Woolworths. And Coles offers a similar earnings growth profile at 4% CAGR. Woolworths is only growing at 4% CAGR as well. So here you can buy the number two supermarket player at a discount to Woolworths which gives you the same growth, the same exposure to a defensive segment. 

To us it’s attractive. And where we get really excited about Coles is its cash generation is much better than Woolworths. Coles’ capital expansion profile is in line with its depreciation, where Woolworths is actually spending about 1.3 to 1.4 times more [than] depreciation. It’s putting a lot of money into online e-commerce in warehouse logistics. It implies Woolworths’ valuation’s at a bigger premium to Coles’, yet it’s growing at the same rate. 

The other point on Coles is that about eight years ago, everyone was really concerned about Aldi being a disruptor to the market. If we [now] look at market share across Woolworths, Coles, and Aldi, it’s largely stabilised. The big differentiator that Coles and Woolworths have against Aldi is that actually Coles and Woolworths have got a comparative advantage in online. They’ve been investing in online for the best part of a decade. Aldi’s never going to do that. So we don’t see any threat to the industry structure. The market share’s pretty stable, so we quite like Coles.

MF: How about CSR Limited (ASX: CSR), which is down about 15% since April?

RD: CSR we don’t hold in the portfolio but it’s starting to look attractive given the sell-off in the market. 

The management team have been quite good at taking investors through their facilities and they’ve had an investor day which showcased a lot of the surplus property within the business. 

But if we step back, it’s a building materials company specialising in plasterboard and mainstream bricks. It’s a pretty good industry structure for those two segments of the market. CSR is number one with about a 50% to 60% share in plasterboard within masonry. Bricks [it’s] a number two player, but they’re both consolidated. We expect it’s going to be a pretty rational industry. 

The issue you have with CSR is it’s largely exposed to construction of detached housing. As you go into a higher interest rate environment, we think earnings are going to come under quite a bit of pressure.

Margins currently are about sort of 13%, 14% EBIT for the building materials business. In the past they’ve gotten down to as low as 8%. So we think earnings will come into a bit of pressure, which is why we don’t own it in the portfolio. 

But having said that, the market cap of $2.4 billion is backed by quite a bit of freehold property, like Ramsay Health Care Ltd (ASX: RHC). There’s that surplus land there that’s worth about $1.4 billion. If they can realise the value of that property, you’re actually not paying a huge amount for that building materials business, even though earnings are about to fall off the cliff, effectively.

MF: So you would say it’s interesting but not buying yet?

RD: Yeah, we’d say it’s interesting. Like I said, it’s not that expensive. It’s not in our portfolio, but yeah, it’s a stock we’ve got a watching brief on.

MF: The third one used to be called IOOF, and it’s now Insignia Financial Ltd (ASX: IFL). The share price has more than halved from its pre-pandemic high.

RD: Insignia, for us, is a value trap and it’s a stock we don’t hold and we don’t see ourselves holding stock even at these levels. 

Think about what Insignia is — it’s basically a wealth management platform business, which makes up most of its earnings. Insignia or IFL has been on the acquisition spree acquiring competing platforms such as the ANZ Group Holdings Ltd (ASX: ANZ) platform. But it’s also an incumbent in the industry that’s being disrupted by specialists like Netwealth Group Ltd (ASX: NWL) and Hub24 Ltd (ASX: HUB). 

And Netwealth and Hub24 are gaining shares at a pretty fast clip relative to these incumbents such as Insignia. The reason why Netwealth and Hub are gaining share is that, unlike these incumbents, they’re not saddled with legacy technology. They’re not having to worry about integrating previous acquisitions. They’ve been quite nimble. They’re able to roll out new features to the platform pretty quickly, which is why they’ve got better net promoter scores, better customer service scores, and that’s why they’re winning in terms of net flows.

So Insignia, to us, it’s a declining business. We think it’s a technology business, [but] it’s legacy technology. And you never really want to own legacy technology when there’s new tech, new competitors with better technology that are disrupting you and they’re lower cost. 

The other reason why we’ve been cautious on Insignia is, while it looks cheap on 12 times earnings, if you look at the balance sheet, there are about half a billion dollars of remediation provisions still there which are yet to be paid out. That’s a liability. Also, they’ve flagged to the market that there’ll be close to $100 million of integration charges as they integrate previous acquisitions. 

So as a shareholder, the cash flow returns are going to be well below reported earnings, and that’s on top of them losing market share. So for us, [it’s] a value trap. Not a company we would be interested in putting in the portfolio.

The post ‘Attractive stock’: Fundie names one ASX share to buy, one to watch, one to avoid appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Leading brokers name 3 ASX shares to buy today
• Why Beach, Coles, Cronos Australia, and Woolworths shares are pushing higher
• Coles share price surges, brokers say more gains to come
• Buy these ASX dividend shares for income: broker

Motley Fool contributor Tony Yoo has positions in Insignia Financial. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Hub24 and Netwealth Group. The Motley Fool Australia has positions in and has recommended Coles Group, Hub24, and Netwealth Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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