The ASX 200 has risen by more than 50 per cent since the March crash of 2020, when the pandemic first set fears amongst investors.

This year, the index has climbed further by more than 10 per cent.

That gain has surprised seasoned portfolio manager Luke Winchester of Oracle Investment Management, who Stockhead spoke with for this article.

“At the start of the year, I thought the market would be relatively flat across 2021, largely because of the strong move in 2020, “ Winchester told Stockhead.

“What’s driven the market so far in 2021 has largely been the banks and the miners.”

Winchester pointed to the big surge in stocks like  CBA (ASX:CBA) and BHP (ASX:BHP) as the main driver for the rise in the broader index.

Since the beginning of January, CBA has risen by 27 per cent, and BHP by 11 per cent.

So do earnings justify their valuations?

“CBA currently trades around 21x earnings, when their historical multiples are only around 14 to 15x. The market has priced in a very high 20-25 per cent earnings growth into the stock.”

Winchester believes that there would be a price pullback to let earnings catch up, and on this basis, he reckons the broader index would struggle to see another hike in the second half.

Having said that, he still thinks there are pockets within the market that are still undervalued.

Two undervalued sectors

He believes the market is being overly pessimistic on the brick and mortar retail sector, as well as on defensive stocks.

In the retail space, he prefers stocks that offer an omni-channel business model.

“We (Oracle) own Premier Investments (ASX:PMV), but you can also throw names like Adairs (ASX:ADH), Dusk (ASX:DSK), and Baby Bunting (ASX:BBN).

“They have physical retail stores, but also the online presence as well. I think the market is being too negative on these stocks.”

Those companies, according to Winchester, have now optimised their physical versus online channels, pivoting from underperforming stores to servicing customers online.

The structural benefits from these cost cuts will have a longer lasting impact than what the market is currently pricing in, he said.

Within the defensive sector, two stocks that Oracle has been adding to its portfolio recently are Bapcor (ASX:BAP) and Collins Foods (ASX:CKF).

Bapcor is a provider of vehicle parts, and its share price has risen by over 40 per cent in the past year.

Collins Foods meanwhile, is the company behind leading names like KFC, Sizzler, and Taco Bell, and its share price has surged by 55 per cent in one year.

“These stocks have defensive earnings, and regardless of what happens on the discretionary side, people will still drive cars.”

“Collins has also done a tremendous job with establishing KFC as a front-of-mind franchise,” Winchester added.

“These stocks are not screamingly cheap, but because of that earnings defensiveness, they are both relatively good value.”

Stock pick

Asked which stock he would pick for a six-month investment horizon, Winchester named MNF Group (ASX:MNF) as his choice.

MNF is a telco company that has pivoted its business to integrating cloud communications with traditional telecommunications.

“One of the reasons I chose them for a six-month investment period is that they recently announced the divestment of a portion of their direct telecommunications services business.”

MNF has recently spun off the retail and small business segment of its business, and has kept the enterprise and government part, which Winchester believes is a more attractive segment with higher margins.

He believes investors will see the benefits of this streamlining shine through in the first half results of FY22.

MNF is currently trading at $5.47, and Winchester sees the stock rise to $6 in six months time.


The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.