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, Alphinity Investment Management portfolio manager Elfreda Jonker presents three ASX shares that her fund would love to buy now.
Hottest ASX shares
The Motley Fool: What are the three best stock buys right now?
Elfreda Jonker: Yeah, so I'll talk about three different stocks, all quite diverse to just showcase our ability to invest in a variety of different companies, be it growth, defensive or cyclical.
The first one is Brambles Limited (ASX: BXB). It's a supply chain logistics provider of reusable pallets, crates and containers. What we currently see is that globally there's a pallet shortage and that a lot of the competitors are actually behaving quite rationally, particularly in the US, and this has really helped Brambles to put through material price increases and the structure of their contracts are also improving.
So what you are seeing on the back of this shortage and the fact that they can push up their prices, you have seen Brambles actually really improving their margins despite also being exposed to a lot of input cost pressure. We also see upside from improved cycle times.
From an overall outlook… free cash flow is expected to improve. As lumber costs normalise we think a lot of these price increases will continue to roll through and we think there's quite a bit of upside still into 2022 and 2023. We expect to see ongoing earnings upgrades for Brambles.
It's also trading relatively cheap on a 16-times versus five-year average of around 20 times. So we quite like the story. We think it's exposed to some of these international trends that we can benefit from here in Australia particularly given their big exposure to the US.
The next stock is more on the consumer side, that is Carsales.com Ltd (ASX: CAR). Carsales is a dominant online car trading platform in Australia. They've got significant pricing power and an excellent management team in our view. We view Carsales as quite a well-managed business. They're dominant in their space, they really are getting strong yield improvements both on the dealer side as well as the private side currently.
As with Brambles, they're seeing like-for-like nice price increases coming through as well as new car volumes starting to flow through driven by the global shortages. So they are seeing a whole bunch of new products coming in, they're benefiting from higher volumes as well as higher prices. And I think that, in return, should drive solid margin expansion and we expect that to be ahead of where the market's currently expecting that to be.
In addition, they've also been boosted by their South Korean operations that's really booming and doing very well. So that's a key source of earnings upgrades. That's around 15% of revenues. And also in the medium term, we are quite optimistic about that US acquisition that they've made, Trader Interactive. That's a much less sophisticated business compared to the others. So we think there's a lot of synergies that they can flow through into that business.
For us, this is in the shorter term, we see upgrades coming through but also longer term, we see a good business model there that can continue to help grow that business.
MF: Compared to other digital companies, the Carsales share price has been reasonably resilient this year — it's only dropped about 20%?
EJ: Yes, it's definitely been very resilient in comparison. Firstly, as a starting point, it doesn't have as large a valuation as some of these other higher-growth companies. It's trading at a 25 PE currently versus the long-term average of 28. So that's a lot more palatable in an environment where [interest] rates are rising, to be in that sort of evaluation rather than these 60-plus companies. So I think that is definitely one reason. Also… they are doing used and new products, it's definitely I think a little bit more defensive than some of the other business models out there.
The third option is a little bit more on the defensive side — it's Medibank Private Ltd (ASX: MPL). That's one of the largest private health insurance companies in Australia and they're currently benefiting from big market share gains as well as the reshaping of the claims curve.
Obviously, they've been quite a big beneficiary of COVID in that a lot of people did not claim. As a result, they've built up a lot of reserves and a very strong balance sheet — it's really putting them in a very good position to do a lot with that balance sheet. They have been giving back to customers and that's created a lot of goodwill for customers, but it's also helped them to smooth out the earnings.
So that's what's creating this quite a defensive pipeline for them and a pipeline of really good strong earnings growth coming through, in combination with an ungeared balance sheet, which is always really helpful for business to help grow the non-insurance part of the business.
For us, it's probably one of our highest conviction positions currently in our funds. It might not be one of these great high-growth businesses with huge earnings growth, but in an environment where either the market's not growing or seeing really small upgrades, even the smaller upgrades that you can get from companies like this that's consistent and has got a lower risk to it, that's, in our view, a good position to be in.
MF: The private health insurance industry can become quite political — you're not too worried about that?
EJ: That's always, I think, a risk in this space. At this point in time, we think they actually have very good relationships and we are not overly concerned around something that we think is waiting in the wings that could surprise us massively.
But it is a risk that people need to bear in mind when they do invest in this space and take that into account in the valuation that they're willing to pay for a company like this.
