At this time of year, I tend to get a lot of questions about “what are your top picks for the year ahead?” More often than not, the answer is ‘same as this year’.
That’s not meant to be a smarty pants answer. History suggests your good ideas keep on giving and your bad ideas keep on taking. That is why in Part 1 of this series [1] I encouraged you to cut losers, even some I may have recommended.
Today, I want to focus on three 2013 winners I think will keep winning in 2014. They should all offer strong total returns under the macro and micro scenarios I forecast for the year ahead.
Management is key
One thing I have learnt over the years, sometimes the hard way, is the no.1 variable in successful stock selection is management. The no.2 variable is management and the no.3 variable is management.
Bad management can wreck great companies, but good management can make great companies even greater.
At the end of the day, I am backing people running assets, not assets running people. This is a key point of differentiation in my approach, where I spend a disproportionate amount of time meeting company management and making a judgment on whether I want to back them, or not.
You can see in my notes that I often name CEOs I am backing. This is a deliberate decision so those CEOs know they are on the hook. They need to know there is a constant pressure to perform well for us, as custodians of our investment capital.
The other variable that has served me well is backing companies where management has a lot of personal “skin in the game”. To me, being co-invested alongside management teams with a large percentage of their personal wealth in the given stock reduces the probability of disastrous management decisions. It doesn’t eliminate risk, but, in my view, it reduces risk.
Industry position, barriers to entry, ROE and free cash generation are also measures I focus on in terms of stock selection.
In the case of all three stocks below, I feel I know management extremely well. They also all have very tight registers due to their billionaire majority owners.
Favourites for 2014
My three key picks for 2014 are Crown Resorts (CWN), Fortescue Metals Group (FMG) and Platinum Asset Management (PTM).
Crown Resorts (CWN)
Source: Bloomberg
All three are major beneficiaries of the falling Australian dollar and have leveraged to major macro themes I believe in.
Crown is leveraged to the rising Chinese consumer class via Melco Crown Entertainment (MPEL.NAS) and inbound tourism. Fortescue is leveraged to a reaccelerating Chinese economy and market share gains in seaborne iron ore. Platinum is leveraged to “exporting Australian superannuation” and the outperformance of global equities.
James Packer is a winner, Andrew Forrest is a winner and Kerr Nelson is a winner. I want to be co-invested with those three as they experience macro and micro tailwinds.
Packer owns 50.1% of CWN, Forrest owns 34% of FMG and Nelson owns 57% of PTM.
All three stocks will experience consensus earnings upgrades in 2014 and concurrent P/E expansion.
In the case of Fortescue, a rapid balance sheet de-gearing will drive P/E expansion, as the stock becomes investable to all investors. This will be the year FMG truly “makes it” and the P/E ramifications will be large.
To me, the attraction of the three picks above is multi-faceted, but the key attraction is current price to growth multiples on consensus estimates, which I believe will be revised up as 2014 progresses.
CWN: FY14 P/E 18.2x, EPS Growth +36%
FMG: FY14 P/E 4.3x, EPS Growth +132%
PTM: FY14 P/E 19.5x, EPS Growth +44%
The year ahead
2013 was broadly about identifying the dividend yield compression theme. 2014 will be the year where the market focuses back on EPS growth. Cyclicals and growth stocks will lead global and local equity markets, while big dividend yield stocks will stay supported by those seeking income, in what will remain an ultra-low interest rate world.
I remain strongly of the view that the best total returning asset class in 2014 will be equities, but in an Australian equity context, we all now need more exposure to global growth equities.
US dollar earning global earners will lead the ASX200 in 2014 and that is why my three key picks for 2014 are exactly that.
That is the slight change to my equity strategy – more of a focus on global earners in 2014.
As Sam Chisolm famously said when he ran the Nine Network, “losers have meetings, winners have parties”. Let’s hope that in 12 months’ time the selections above allow us to have a nice little party.
I hope you all have a safe and Merry Christmas, and a prosperous New Year.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Margaret Lomas: Six mythbusters for 2014 [2]
- Fundie’s Favourite: A new pharma to have faith in [3]
- Roger Montgomery: Measuring the shonks – or how to value a company [4]
- Penny Pryor: Short ‘n’ Sweet – Aussie dollar and property [5]
- Penny Pryor: Buy sell hold – what the brokers say [6]
- Tony Negline: Get your succession plan right – or risk losing everything [7]
- Questions: Currency risks and property trusts [8]