MoneyTalks: Why Morningstar is Christmas bullish on these unexpected ASX bargains
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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 Morningstar Head of Equity Research Peter Warnes.
Warnes says it’s been a year of turmoil with geopolitical and economic risks including the war between Russia and the Ukraine, the China shutdown impacting supply changes adding to pandemic-driven stimulus inflation.
He said financial markets, particularly in the US, have been extremely volatile associated with the elevated level of uncertainty.
“This uncertainty has impacted the Australian market and we are now seeing several sectors trading at cheaper price levels, including the energy sector,” Warnes told Stockhead.
According to Morningstar, parts of the basic materials and energy sector have come under added pressure with investor concerns around ESG.
“It’s a sector our senior equity analyst Mark Taylor also likes and while these companies are trading at cheaper prices, they are also well positioned for thematics such as the sustainable demand for energy and food supply.”
Warnes reckons these ASX energy, industrials and basic materials stocks are worth consideration for investors.
In the energy sector, the future appears bright for Australia’s second-largest oil and gas producer Santos. Warnes said its production forecast is expected to double by 2028 while cash flow and earnings are at record levels.
“The absence of investor flows due to ESG concerns should not be underestimated,” he said.
“However, patient shareholders are likely to be rewarded as natural gas and liquified natural gas (LNG) remains a meaningful energy source for decades.”
Warnes believes when global economic activity rebounds, energy demand will also recover strongly.
STO is also on Morningstar’s Best Stock Ideas list – a list of names which are currently trading at discounts to its assessed fair values.
The STO share price is up more than 15% year to date.
Warnes also favours businesses in that are more than extracting resources like industrial play, maintenance service provider Ventia (VNT).
He said VNT is a classic retail investor stock and is capital light, defensive, and has a comparatively high fully franked dividend yield.
“We don’t think Ventia is being sufficiently credited for its exposure to increasing defence, housing, and renewable energy-related infrastructure spending, “ he said.
“Spending tailwinds from these three sectors will support its four business divisions including Infrastructure services and defence and social Infrastructure.
“At Ventia’s recent Investor Day, management provided an encouraging outlook on the group, with future growth expectations of major business units comfortably above our more conservative forecasts.”
The VNT share price is up more than 24% year to date.
Agricultural chemical company NUF is Warnes’ pick in the basic material sector. NUF is a major producer of crop-protection products, selling into all major world markets.
“With the world’s population pushing through the eight billion mark recently, reliable, and sustainable food supply becomes increasingly important,” he said.
“Such favourable megatrends are a tailwind for Nufarm, although weather-related rural risk cannot be ignored.
“However, longer term the company has positioned itself to be a meaningful player in the global crop protection and seeds market and strategic growth initiatives have raised its profile as an agricultural innovator.”
Warnes said next year should be more settled but one thing is certain, uncertainty will remain the investor’s constant companion.
“It could be a year where markets finish near starting points. There are always opportunities to find quality businesses at good prices.”
Warnes said equity portfolios should be diversified with a defensive bias and meaningful cash holdings should be on hand to take advantage of any of these opportunities when they arise.
The NUF share price is up ~26% year to date.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees 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.