MoneyTalks: Katana Asset Management reckons energy and financial stocks are the best inflation bets
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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Katana Asset Management portfolio manager Romano Sala Tenna.
Inflation and rising interest rates are the talk of the town.
Sala Tenna says 2022 will be that year you just ‘want to get through’ because it will be a struggle for equities.
“It’s more of a stock pickers’ market,” he adds.
“Interest rates need to re-base and stock prices need to re-base for those interest rates.
“It is a year to be more cautious rather than less – in the past we have said you need to be overweight rather than underweight, but I think the opposite is true for this year.
“Investors need to cherry pick opportunities, don’t be afraid to miss the bus because there’s always another bus coming, be a little more selective and have more cash in the kitty to capitalise on the volatility.”
That being said, Sala Tenna has one top stock, one large cap and one micro-cap stock pick within the energy and financial sectors, which he says are the two best sectors fit to handle inflation pressures.
“This is our top investment pick at the moment, and we are continuing to build our position in that, we have quite a good size already.
“What we like about Pepper is firstly, management have done a fantastic job.
“They’ve been growing their assets under management (AUM) at a compound annual growth rate of more than 21% for eight years – that puts them amongst the top companies in Australia for growth.”
After re-listing on the ASX last year, PPM exceeded its prospectus forecast of 14% growth, reaching 19%.
“The company has a sustainable competitive advantage, they won ‘Best Lender’ for nine years in a row and have been voted Best Non-Bank three times in a row including last year – just shows how good they are at what they do,” he continues.
“Moving on to the valuation side, PPM are trading on a price earnings ratio of 6.1 times this current year which is crazy, and they’ve got some of the best brokers on board, Goldman Sachs and Macquarie Bank.
“Their price target is currently $2.88 average plus 34% on the current price. We can see some real deep value here.
“With most companies we see either growth attributes, or deep value attributes, or we see quality attributes. In this case, we see all three which is very unusual.
“The holy grail in investing is what is called a Structural Growth Story – a company that grows year on year irrespective of economic cycles and we see that with Pepper Money.”
Sala Tenna says STO is the best large cap at the moment in the energy space.
“It is the largest oil company on the ASX and when the BHP Woodside merger goes through it will take pole position again.
“They are trading on a P/E sub 7 times, which is crazy for a large cap energy stock,” he says.
“The energy space is much unloved, but they have been doing a lot of work on decarbonisation and if things line up for them, they could be carbon negative by 2030.
“It’s a great story, they have announced their first ever buy back and are generating so much free cash flow with current oil prices over US$100 a barrel.
“We see the outlook for oil and gas being very good, obviously getting better short term with Russia but even beyond that because there has been a long-term underinvestment in the sector and Santos is a great way to play that.”
Sala Tenna’s last pick is a micro-cap pick.
“At Katana we look at any size company, there is no limit when moving up and down sectors, we aren’t scared away by small cap companies although we know they take on more risk,” he said.
“KSL is attractive because it’s purely a deep value play with some growth and quality attributes as well.
“The company is trading on a P/E of 6.3 times, so it is very cheap and they are generating huge free cash flow and paying out a dividend of about 12.7% which is three times the market average – we think that’s pretty sustainable.
“It has very strong growth credentials, having reached 16% earnings per share (EPS) growth this year and 19% the following year.”
He said with major banks leaving PNG, KSL has a huge opportunity to capitalise.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.