4 high-quality, undervalued ASX 200 stocks exposed in an earnings improvement cycle: fund managers

4 high-quality, undervalued ASX 200 stocks exposed in an earnings improvement cycle: fund managers

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Ask a fund manager

The Motley Fool chats with fund managers so you can get a glimpse of how the experts think. In the second part of this issue we are joined by Andrew Martin, Director of Alphinity Investment Management. The Alphinity Concentrated Australian Share Fund has returned 7.6% pa after fees over the past five years.

The colorful fool: In part one of our interview yesterday, we talked about some of your best calls in 2022. Do you have any regrets about the past year, things you wished you had done in retrospect at 8:20 p.m., or perhaps not done in the investment markets?

Andrew Martin: We had some exposure to lithium IGO Ltd (ASX:IGO). But in hindsight, I wish we had more exposure to lithium stocks. Our exposure has developed incredibly well. And some of these stocks are now so big that not having a position can really hurt you. Where they go now is another question.

The other would be the risk of rising interest rates in hindsight. I always thought they were going up, but they’ve gone up much faster and stronger than the market expected.

So a company like Computershare Limited (ASX: CPU), which has been exposed to rising short-term interest rates in real terms, has performed very well. We don’t own it. We find it a bit risky when it comes to just macro things like rising interest rates, we prefer it to be more operationally oriented. But with hindsight, we might take a position on something like this given its exposure to rising interest rates.

MF: You still hold IGO shares today. What’s your outlook for this ASX 200 lithium stock?

AM: Lithium as a commodity is still doing very well. One of the reasons we were there was because the markets took time to catch up on that story, like what they expect the lithium price future to be.

It always softens things up a bit when they’ve done so well. We can’t have the same belief we had six months ago considering how well they all did.

The outlook for lithium remains positive and as such we remain invested.

But like everything else, we don’t want to buy companies just because they’re exposed to lithium. We want more of the story. We like IGO as a company and their strategy.

MF: When we spoke again in September 2021, you emphasized the importance of earnings and investing in high-quality, undervalued companies in an earnings improvement cycle. Which ASX 200 stocks fit this bill today?

AM: In such markets there are always such companies.

Qantas Airways Limited (ASX:QAN) is one of them. We’ve seen some really good income upgrades.

People have grumbled about it, lost bags and delays and what have you got. But the reality is that prices are going up, there is very strong demand at home and abroad. And there just isn’t much capacity. This allows them to generate very good profits and very good cash flows, which quickly improves the balance sheet quality.

I think the ASX 200 banks are also sitting in this space. This earnings season we are still seeing earnings growth for the banks. They have very strong balance sheets at the moment; big capital; great supply positions.

We prefer National Australia Bank Ltd (ASX:NAB) and Commonwealth Bank of Australia (ASX:CBA). They’re not the cheapest banks, but we think they outperform the other banks from a performance perspective.

And another is Steadfast Group Ltd (ASX: SDF), an insurance brokerage firm.

You are currently in a great market environment where insurance premiums are increasing. And they can deduct a commission and fee from it. They also buy small stakes in brokerage businesses and grow their network. And they’re on a very consistent upgrade cycle. It is a very strong quality company with a very strong quality management team.


Tune in tomorrow for part three of our interview with Andrew Martin. If you missed part one, just click here.

(Read more about Alphinity’s Australian, global and sustainable funds here.)

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