5 australian stocks to make us proud
Tasked with choosing five stocks for Australia Day I first considered writing about blue-chip “mum and dad stocks” that millions of Australians own. Then, travel and leisure stocks that are benefiting from an inbound tourism boom that is just starting.
However, I settled on small- and mid-cap Australian industrial companies that are taking on the world and winning. Why? Because backing the underdog is as Australian as its gets, and small caps that have a genuine, expanding international footprint are precious.
Australia has a long history of companies that have failed overseas. So much so that some fund managers sell our stocks when they announce international expansion plans. The country’s global success in sports and the arts has not translated broadly to business.
That is changing. Across the market, I see more small caps that are internationalising much earlier in their journey. Gone are the days when small caps focused on Australia for years and, if they were brave, tinkered with New Zealand (our seventh state!).
I also see more small- and mid-cap Australian companies succeeding overseas.
Yes, it’s early days and successful “born global” companies in this market are rare.
But look at the success of Australian fintech companies overseas, such as IRESS, GBST Holdings, Praemium and Bravura Solutions. Or WiseTech Global, Gentrack Group and Aconex in information technology. Or Webjet, Corporate Travel Management and Flight Centre Travel Group. Or the long list of small mining companies with overseas assets.
So, on this Australia Day, let’s cheer on our small- and mid-cap companies that are taking on global giants in their own backyard – and spanking them.
Here are five small- and mid-cap Australian stocks flying our flag in more markets offshore.
1. Breville Group (BRG:ASX)
Australia has no right to star in kitchen-appliance design. This is an industry for global giants that have manufacturing scale. Yet Breville has delivered a 10-year annualised total return (assuming dividend reinvestment) of almost 28%.
Even Cochlear has not done that well. As I wrote for The Super Report in June 2017, Breville’s new management is speeding up the company’s innovation cycle and transforming it from an Australian company that exports, to a genuinely global appliances company. I still think the market underestimates Breville’s potential to crank up sales in offshore markets.
Breville has rallied from $10.50 at the time of that June report to $12.24. The one-year total return is 51%. Breville continues to pulp the market’s doubts about its international strategy and capacity for innovation with its performance. It can go higher in 2018.
Chart 1: Breville Group (BRG:ASX)
Source: nabtrade
2. BWX (BWX:ASX)
Who would have thought Australia could produce a small-cap star in cosmetics? I’m no skincare expert, but cosmetics shelves seem to be stacked with well-known international names, not local companies whose idea of skincare in the past was based on Aerogard.
Enter BWX, developer, maker, distributor and marketer of skin and haircare products and owner of brands such as Sukin, Derma, USpa, Edward Beale and Renew Skincare.
BWX soared after it raised $39 million in a 2015 float at a $1.50 issue price. It now trades at $7.81, making it one of the best Initial Public Offerings in years.
I wrote in June 2017: “BWX’s offshore growth strategy is the key to its next re-rating … Watch the company do better than the market expects over the next two years as it sells more products in offshore markets that grow faster than Australia.” BWX has soared 33% since that story.
After strong gains, BWX looks fully valued and due for a share-price pause or correction. But the company is one to watch on any sustained share-price weakness. The global cosmetics industry is huge, BWX has popular products and mid-priced cosmetics are booming.
Chart 2: BWX (BWX:ASX)
Source: nabtrade
3. Lovisa Holdings (LOV:ASX)
All we seem to hear about retail stocks is doom and gloom: high household debt, poor consumer sentiment, record-low wages growth, offshore competition, online competition, Amazon and so on. If you believe the bears, our retail sector is a basket case.
That’s a reason why I became bullish on retail stocks and retail property trusts for The Switzer Report in the fourth quarter of 2017. There was excessive pessimism about consumers and too much hype about Amazon’s effect on local retailers. Right on cue, several retail stocks have rallied sharply from their lows in the past few months.
Granted, a retail recovery is a tactical, shorter-term idea. The sector faces intense long-term challenges. But for all the gloom, some Australian retailers are doing brisk business and a select few are expanding overseas and boosting earnings growth through store rollouts.
Fashion jewellery chain Lovisa Holdings is one of them (Premier Investments, owner of stationery chain Smiggle, is another). I’ve written about Lovisa several times for this report over the past few years, based on its potential to expand overseas and growth in demand for disposable fashion jewellery that is influenced by celebrity trends and social media.
Lovisa soared from $2 in early 2016, after a nasty earnings downgrade, to $7.90 earlier this year and is now $7.33. A strong trading update in January sparked the latest rally.
Macquarie Group’s revised 12-month share-price target of $8.60 for Lovisa looks about right. The potential for further earnings upgrades from the company, as more stores are opened offshore, should support a higher valuation in the next 12-18 months.
Chart 3: Lovisa Holdings (LOV:ASX)
Source: nabtrade
4. Reliance Worldwide Corporation (RWC:ASX)
The plumbing-products manufacturer was 2016’s largest float, raising $919 million. Reliance has rallied from a $2.50 issue price in April 2016 to $4.35.
I covered Reliance in detail for this report in March 2017 when it traded at $2.68 and nominated it as my top mid-cap stock for 2018.
To recap, Reliance designs, makes and supplies water-flow and control products used in plumbing and is known for SharkBite push-to-connect (PTC) fittings, an innovation used in behind-the-wall plumbing systems that is faster and easier to install than copper joining.
SharkBite sales are rising in the US as Reliance expands its presence in Home Depot and accesses Lowes’ network. Reliance now has distribution in the two giant US hardware chains. I’ve heard a few times now that SharkBite is popular with plumbers.
Reliance wants to increase SharkBite’s penetration in the US, roll out other products there and expand further offshore. The company is growing offshore organically and through acquisition.
Reliance is a great example of a small Australian family company that took its expertise to offshore markets, found a niche and ramped up its international expansion. If only more Australian manufacturing companies could do the same.
Chart 4: Reliance Worldwide Corporation (RWC:ASX)
Source: nabtrade
5. IDP Education (IEL:ASX)
It would be remiss on Australia Day not to include a stock from one of our star export industries: education. None is better than IDP Education.
The provider of international student placements and English-language testing services typifies the benefits of investing in industries where Australia has a competitive advantage.
IDP is a key player in Australia’s booming international education industry. The company places thousands of students each year at universities through a global network of 93 offices and conducts English-language testing in more than 50 countries.
IDP continues to expand offshore, acquiring a 20% stake last year in HCP Limited, a Chinese company that specialises in providing English-language test-preparation material via social media and its smartphone App.
IDP has soared from a $2.65 issue price in November 2015 to $6.24. It’s up 56% since The Switzer Report nominated it as “one of four oversold small-cap stocks” in January 2017. Gains will be slower from here, but IDP’s rally has further to go over the next few years.
Chart 5: IDP Education (IEL:ASX)
Source: nabtrade