Which ASX shares could be primed to stage a dramatic recovery?
Annabelle Dickson writes that analysts are now looking at shares of Fortescue (ASX: FMG), Cochlear (ASX: COH), Pushpay (ASX: PPH) and Amcor Ltd (ASX: AMC).
A focus on quality
High-quality businesses with balance sheets that will be resilient to this year’s Coronavirus and economic challenges, combined with future growth opportunities, are the features share market investors should be looking for as they get set for the sharemarket recovery.
Investors should favour companies with global businesses, which will be attractive to local and international investors. Companies with a significant proportion of their earnings coming from offshore revenue will also benefit from the low Australian dollar.
These are among the ideas informing a Macquarie Securities research report that highlights its best “long” ideas – the ASX stocks that are likely to pick up strongly as Australia emerges from the COVID-19 crisis.
“With Australian stocks already down 30 per cent in just over a month, investors are increasingly asking what they should buy for the inevitable recovery.”
“The scenario we gave the team was that Australia has a downturn in 2020 but the impact of COVID-19 is limited to this calendar year. The fading COVID-19 headwinds plus fiscal and monetary stimulus then support a recovery in the economy in 2021.”
“This note is not about calling the bottom. It’s about highlighting a group of quality stocks that investors could start to buy now, acknowledging that even the best investors rarely invest all their money at the bottom.”
Global leader stocks
The “global leaders” include Aristocrat Leisure (ASX: ALL), Amcor Ltd (ASX: AMC), Cochlear Limited (ASX: COH), Fortescue Metals Group (ASX: FMG), Goodman Group (ASX: GMG) and Transurban (ASX: TCL).
Aristocrat Leisure might seem like a strange call, given that all the pubs and clubs where its gaming machines are located are now closed. However, Macquarie says 28% of the company’s earnings come from digital channels these days. The company will maintain sufficient cash flow to continue with its design and development program.
Packaging company Amcor should benefit from a shift to greater home consumption of food and beverage products for which it supplies packaging. A greater focus on hygiene is also likely to increase demand for packaged goods. Amcor produces 95 per cent of its earnings outside Australia and is a big beneficiary of the weak Australian dollar.
The global leader in hearing implants, Cochlear, will take a hit to earnings as elective surgical procedures are put on hold but Macquarie’s view is that the procedures will be delayed not cancelled. Another positive for Cochlear is that one of its competitors, Advanced Bionics, has recently issued a product recall, giving Cochlear a chance to increase market share.
China is already starting its recovery from the peak impact of COVID-19 and will drive recovery with stimulus. This is good news for suppliers of raw materials, such as Fortescue Metals Group. The company will also benefit from low oil prices, which will reduce operating and shipping costs. It is another company that will benefit from the weak Australian dollar.
Goodman Group is exposed to the growth in online shopping through its ownership of Amazon fulfillment centres.
Thinking past the lockdown
The other stocks on the list are Cleanaway Waste Management (ASX: CWY), Harvey Norman (ASX: HVN), Northern Star Resources Ltd (ASX: NST), Medibank Private Ltd (ASX: MPL), Pushpay Holdings (ASX: PPH), REA Group (ASX: REA), Steadfast Group (ASX: SDF) and Technology One (ASX: TNE).
Macquarie says Cleanaway is well placed, as a provider of an essential service with exposure to critical waste management. The risk of negative impacts of lockdowns is more limited than for most other companies. It has a strong balance sheet and is well placed to take advantage of structural changes in the industry.
Among the big retail stocks, Harvey Norman is unusual in having a substantial property portfolio. Macquarie says its property assets will give Harvey Norman downside protection in a shutdown; it owns most of its stores and its overall rental cost of low compared with its rivals. The company generates a significant amount of its earnings in Europe and Asia and will benefit when those economies recover.
Gold has been a strong performer over the past year and Macquarie’s preferred gold miner is Northern Star. It has “the best potential for production growth in its peer group and has emerged as the value play.”
Pushpay: ‘religion is recession-proof’
Pushpay operates in a very specific niche of the payments industry – the faith sector. It has digitised parish donations and other faith-based giving. Macquarie’s view is that “giving to religion is relatively recession proof” and the proportion of total church giving going online is increasing. Pushpay is a leader in this market and does most of its business in the United States, making it another beneficiary of the weak Australian dollar.
REA Group is the leading real estate marketplace in Australia. Macquarie says listing will drop in the short-term but should rebound strongly. It has a very strong balance sheet and could enhance its industry leadership during a period of disruption.
Macquarie says toll road revenues will recover quickly once the crisis is over. This puts Transurban in a strong position to grow quickly when the recovery starts. The company has a strong balance sheet, overseas operations and is at the forefront of technology in its sector.
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