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Experts
MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.
Today we hear from Fairmont Equities managing director Michael Gable.
Is the economy turning a corner? Are rates ready to cycle lower? Who will win this year’s Superbowl?
That last one is Kansas City – I put one in that we could answer, because unfortunately, this is a story less about exactly when the economic tide is going to turn… and more about what kind of raft you should be making for the special day.
The timing and pace of lower global interest rates is still very much a central bank/crystal ball affair, but – fortunately – which ASX sectors traditionally enjoy the return to some kind of economic grandeur is well documented.
On the bourse, it’s very much not a Barbie world, it’s a cyclical world, according to Michael Gable, the PM and founder at Fairmont Equities.
“What we want to do is parse out the sectors which do well when the economy is doing well. And highlight a few plum examples.”
“These shouldn’t be confused with growth stocks – which are the ASX shares expected to grow much faster than either the average index growth rate or the average growth rate of companys in a specific sector,” Michael told Stockhead.
“These are the companies that might not be making a profit and when they do they usually pile it back into further growth acceleration – rather than, say, paying out dividends.
“Happy to discuss those another time – but for now – in environments which favour higher levels of economic growth, these are the three main local sectors that need to be on your radar.”
This cyclical sector performs well when the economy is doing well, according to Mr Gable.
“These companies usually have fixed costs which they pay in all economic conditions. So, when the economy is good, their margins increase, and their revenues head higher. Companies are also more willing to spend more money on equipment upgrades and shipping when business is going well.”
Within industrials, Michael says there are a few segments of industrial companies to keep an especial eye out for:
Transportation –
As demand for products increases so does the demand for transportation. These services are still used in slow economic periods but more trains and trucks are utilised in busy periods. Margins can increase for these industries as revenues increase but fixed costs relating to the maintenance and storage remain the same.
Capital Goods –
Equipment Manufacturers. Companies would be more willing to spend more money on equipment upgrades as demand for goods increases.
Commercial and Professional Services –
Packing and Waste Management operations. As manufacturing of goods increase so will the needs for products on packing and waste management companies.
“In the industrials space we think one company worth tracking closely is NRW Holdings (ASX:NWH).”
NWH provides diversified contract services to the resources and infrastructure sector.
“As spending in resources and infrastructure picks up, NWH should pick up more contracts and this is exactly what has been happening in the past several months.
“Recent guidance on earnings and their tender pipeline was upgraded by the company.”
These are stocks in the mining, metals, chemicals, and forestry products, Mike says.
“Material stocks tend to go up in value when the economy is strong.
“As manufacturing beefs up, so does the need for supplies of raw materials to produce their products. Construction also increases when the economy is strong and so is an indicator of market strength.”
“Hence basic materials increase in demand as construction increases.”
Looking outside the big three Aussie iron ore majors, there is one impressively managed company which is worth getting to know – Champion Iron (ASX:CIA).”
“CIA certainly flies under the radar compared to the BHP (ASX:BHP), Fortescue (ASX:FMG) and Rio Tinto (ASX:RIO). But this little known iron ore miner is developing a large resource in Canada,” Mike says.
“Recent production has now hit a record with plenty more to come online over the next few years.
“Despite the share price sitting near all time highs, the valuation is still more attractive than the larger iron ore producers.
“A strong economy can lead to stronger consumer confidence. This can therefore lead to increased buying in the consumer discretionary sector.
“Consumers become more positive about their financial position as economic growth increases. This will affect their spending habits and they will be more likely to spend money on non-essential items in the consumer discretionary sector.”
Mike says Consumer Discretionary stocks tend to outperform the stock market in strong economic up-cycles.
Accent Group (ASX:AX1) is the business behind footwear brands such as The Athlete’s Foot and Sketchers.
“AX1 reports its H1 earnings, Friday next week, and is coming off an impressive FY23 where, excluding The Athlete’s Foot franchisees, total owned sales for the year hit $1.39bn, up well over 26% on the prior year.”
Earnings Before Interest and Tax (EBIT) surged 122.9% while, Net Profit After Tax jumped 181.8%.
Michael says AX1’s gross margin percentage improvement of 100 basis points (to 55.2%) last year was the achievement which impressed most analysts.
But so far in FY24, the Accent share price has been maudlin, Mike says, with Accent’s latest trading update suggesting flatter sales and rising costs, with management highlighting inflationary pressures.
“The market seems to be overly negative on the short-term headwinds in retail, and the stock is undervalued compared to the larger retailers. Given their large scale and strong brands, it is easily positioned to benefit from a recovery in consumer spending.”
And AX1 has delivered long-term shareholder growth over the last decade
“Over the last 10 years, Accent Group has delivered a total shareholder return of 20.9% – double that of the benchmark ASX200 at 10.1% per annum compounding annualised return.”
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.
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