Four stocks set to keep rising
Most investors have been conditioned to believe that successful share market investing is a matter of buying low and selling high – buying stocks that are “cheap,” and watching them subsequently go higher.
It seems counter-intuitive to buy high – but what if the stock is going higher?
52 weeks – one year – is too arbitrary a cut-off point. If the earnings growth story is strong enough, a company’s stock can certainly continue to advance after reaching a 52-week high. Quite often a stock rising to a 52-week high is just starting to attract the attention – or renewed scrutiny – of analysts and fund managers, many of which (because of the restrictions of their mandates) can’t actually buy a stock until it gets larger in market capitalisation. But it requires a bit of judicious homework on the fundamentals.
Here are four stocks that recently made 52-week highs, where the outlook seems to justify buying:
1. Telstra (TLS:ASX)
Market capitalisation: $42.6 billion
One-year return: 15.4%
Estimated Y22 dividend yield: 4.5% fully franked, grossed-up 6.4%
Analysts’ consensus valuation: $3.82 (Thomson Reuters), $3.80 (FN Arena)
The telco giant is on a bit of a roll recently, with Australia’s largest 5G network on track to reach 75% of Australians by the end of June. Also, the market appears to like Telstra’s T22 strategy, which aims to unlock value by monetising assets and splitting into three separate entities; is being construed as a much leaner business, with better growth prospects than for quite some time. The NBN headwind is easing for Telstra and the company is targeting mid to high single digit operating earnings (EBITDA) growth in FY22. Analysts see the TLS share price pushing higher and the company maintaining its 16 cents-a-share fully franked dividend for the foreseeable future, which implies a fairly alluring grossed-up yield and a solid total-return situation.
2. Australian Agricultural Company (AAC:ASX)
Market capitalisation: $761 million
One-year return: 20.3%
Estimated Y22 dividend yield: no dividend expected
Analysts’ consensus valuation: $1.55 (Thomson Reuters)
The share price of Australia’s biggest beef producer has been on a slow-burn recovery since early 2019, as agricultural conditions began to improve in its operating areas. The company’s results had been hit by the extremes of Australian agricultural life, from drought to flooding and associated stock losses and decline in beef herd value; then, the company’s food export markets were slammed by the COVID-19 pandemic. The business experienced lower calving in 2018-2020 due to the prolonged drought and then the floods event, with meat and cattle sales both slammed. But the signs of recovery came with an operating profit in the half-year to September 2020 and were confirmed with the full-year FY21 result, to 31 March 2021, despite the drought not being broken across all of AAC’s regions.
AACo posted an operating profit of $24.4 million, up $9.2 million on the previous year – while that sounds impressive, there is a bit of controversy there, because $6.7 million of that operating profit figure came courtesy of the federal government’s JobKeeper program. However, statutory EBITDA (earnings before interest, taxes, depreciation, and amortization) was up 24%, to $99.3 million. The lower calving of previous years translated into a lower volume of meat available for sale in FY21: sales volume was down 19%, but the average sales value per kilogram rose by 8%. That is the potential upside for AAC: to build paddock-to-plate global sales of its premium-branded Westholme and Darling Downs wagyu beef brands. The company is rebuilding its herd, with a 47% increase in number of calves in FY21. Despite the vicissitudes of agriculture, this is ultimately a high-end export food story: analyst price targets in the marketplace are around $1.55.
3. People Infrastructure (PPE:ASX)
Market capitalisation: $432 million
One-year return: 132.4%
Estimated Y22 dividend yield: 2.7% fully franked, grossed-up 3.8%
Analysts’ consensus valuation: $5.03 (Thomson Reuters)
Recruitment specialist People Infrastructure has been on a tear over the past year, more than doubling in price. PPE is effectively a workforce management company, providing contracted staffing, business services and operational services in Australia and New Zealand across three main sectors: health and community services, IT, and general staffing and specialist services.
Since 2015, People Infrastructure has grown its revenue and net profit at compound annual growth rates of close to 25% and 30% respectively, with earnings per share (EPS) also growing strongly. Analysts expect a big EPS surge for FY21, too.
Earlier this month, People Infrastructure reported deals to acquire majority stakes in:
- Techforce Personnel, a provider of casual workers in Western Australia and South Australia. The company provides staff to a range of industries, with a focus on industrial services and mining sectors.
- Vision Surveys, a multi-discipline surveying business servicing metropolitan and regional Queensland. The company is focused on large infrastructure projects, construction and residential development.
Analysts say the two acquisitions could add about 19% to annual EPS, which is a substantial boost. Both newly acquired businesses have a strong organic growth profile, and Techforce Personnel, in particular, takes PPE into Western Australia and South Australia, where it hasn’t had much exposure. The strategy is to incorporate the businesses such that they can cross-sell services with the broader group and share customers.
These purchases follow the March acquisition of Swingshift Nurses, a nursing agency focused on mental health, and the pick-up in February of ECT4Health, which trains and refer nurses for placement in rural and remote assignments.
PPE is a little-known stock that is quietly going on its way building an impressive suite of capabilities. It’s a fully franked dividend payer and analysts see scope for further share price gains.
4. QBE Insurance (QBE:ASX)
Market capitalisation: $16.7 billion
One-year return: 28.8%
Estimated Y22 dividend yield: 4.8%, 10% franked; grossed-up, 5%
Analysts’ consensus valuation: $12.02 (Thomson Reuters)
Global general insurance and reinsurance company QBE is the only truly global insurer on the Australian market, and its share price has benefited over the last 12 months from the tailwinds that have emerged for the insurance sector. Insurance premiums are considered to be in an upward cycle, and that’s driving revenue gains; analysts also think that QBE has made significant improvements to its business in recent years, which have not yet flowed into reported results. Rising interest rates are also an expected positive for the company’s investment returns. The scenario around claims for COVID-19 business interruption insurance – driven by a UK Supreme Court decision seen as favouring policyholders – worries some investors, and QBE has said that there might not be full clarity on this issue until next year. However, the outlook for QBE’s margins and premium rates appears to outweigh that, despite no formal FY21 guidance having been provided. QBE offers an attractive yield and a bit of scope to rise further.
What about a 52-week low, then? With investors keen to sniff-out bargains, for some a 52-week low is worth investigation as an attractive entry point. The caveat there is that the stock could easily be going lower as the sellers take over: the “story” has gone bad, and any buyer risks “catching a falling knife,” in old Wall Street parlance.
The list of ASX stocks making 52-week lows is characterised by a high representation of the “rats and mice” of the market: drawn from the 1,900 (or so) stocks outside the S&P/ASX 300 index. It contains several stocks that have been serial disappointers:
• Receivables management company Collection House (CLH) has been a slow disaster for shareholders: forget the all-time high of $5.30 in 2001, even the more recent highs of $2.40 in February 2015 seem a long way away. Last year the company was forced to sell its purchased debt ledger (PDL) to fellow receivables management company Credit Corp (CCP), for an upfront price of $160 million and up to $15 million over the next eight years, depending on the performance of the assets. Collection House got funds to repay its debt facilities and mount a refinancing and restructuring: after being suspended for 11 months, CLH shares returned to trading in January 2021, and promptly fell 63% to 43 cents. The situation hasn’t improved either, with the shares now under 20 cents. At 18 cents, CLH is only for the brave.
• Advanced-materials manufacturer Quickstep Holdings (QHL). I cannot get a handle on Quickstep, which makes carbon-fibre composites parts in Australia for Northrop Grumman for the F-35 Joint Strike Fighter, as well as wing flaps for Lockheed Martin, for the C-130J Super Hercules, and work for Boeing across the F-15, F/A-18 and AV-8B aircraft platforms. In February, Quickstep bought Boeing Defence Australia’s maintenance, repair and overhaul (MRO) operations in Australia. Outside its military work, Quickstep does work in the commercial aerospace market, as well as the rail, medical and electric vehicles (EVs) areas.
Quickstep shares were hit in March by a failed tender proposal, and all up, the stock is down 47% over the past 12 months. It is also in the red over three years (down 12.6% a year) and five years (down 18% a year). Analysts have it pegged for a 40%-plus slide in earnings in FY21. It sounds like a great story – an advanced Australian manufacturer with serious global credibility in the areas in which it operates – but it appears that the market simply doesn’t like it: QHL hasn’t traded above 16 cents in the last five years. At 6 cents, again, it’s only for the brave.
• Emergency medical solutions provider Medical Developments International (MVP). At $4.71, MVP is down almost 40% over the last 52 weeks. The company has one of the best pain management products on the market: Penthrox, also known as the “green whistle,” an inhaler that, after a few puffs, provides instant pain relief. Penthrox is currently sold in more than 30 countries, but cracking the US market is taking time: MVP says it had a “positive exchange” with the US Food & Drug Administration (FDA) at a meeting in January 21, but shareholders are still waiting for concrete news on the path forward. The product is also about to enter clinical trials in China, another potentially large market. In the meantime, MVP is working with the CSIRO on plans to develop alternative manufacturing methods for generic active pharmaceutical ingredients (APIs) using its continuous flow platform technology. Analysts cut revenue and earnings estimates in March, and the share price has not recovered. This is another stock that’s only for the brave – but here, I have a feeling that the brave could be rewarded. The three analysts polled by Stock Doctor have a consensus target price of $7.08.