Morning Report / Market Matters Morning Report Wednesday 13th July 2016

By Market Matters 13 July 16

Market Matters Morning Report Wednesday 13th July 2016

Market Matters Morning Report Wednesday 13th July 2016

 

3 stocks we like today if you are still in cash
 
The US market again pushed higher overnight with the Dow reaching an all-time high in what we believe is just the start of a move to the ~20,000 area; an 8-10% advance. Over the last few weeks, we have generally been talking on a macro / index level hence this morning we are going to look specifically at three stocks we like today for investors sitting on "too much cash".
 
Dow Jones Monthly Chart 
 
1.Suncorp Group (SUN) $12.43
 
We have been a fan/owner of Suncorp for many months. The stock is currently yielding 6.44% fully franked (9.19% grossed up) which is obviously attractive to cash, however, it seems to us that the stock is cheap. SUN trades on 12.1 times 2017 earnings versus IAG which trades on 14.9 times 2017. In the health insurance space, Medibank (MPL) trades on 18.8 times and NIB (NHF) trades on 20 times.
 
Suncorp’s valuation is largely a function of their banking operation which (rightly so) trades at a discount to the insurance business. The banking sector more broadly on the ASX now trades on 11.9 times, which is only a slight discount to Suncorp’s PE. Put simply, Suncorp is trading too cheaply versus its peers and we believe this presents an opportunity.
 
The catalyst for a major share price rally would come if rumours of a split between its banking and insurance business proved correct. Technically we are bullish Suncorp targeting over $15.50.
 
NB: We do also see upside from current levels in the banking sector.
 
Suncorp (SUN) Monthly Chart
 
2. REA Group (REA) $62.15
 
We have switched from technically negative REA to bullish after its breakout to fresh all-time highs over $56 - as investors we MUST remain flexible.
 
REA Group is a high-quality growth stock trading on a high multiple of earnings (37 times). Clearly, this is factoring in substantial growth in the future.
 
Looking historically, REA have grown their earnings at around +23% pa average over the last 5 years, it’s a very high return on equity business (given it relies more on smarts than physical assets), and has had great initial success in transitioning customers (largely real-estate agents) to a new premium product offering called Premier All.
 
As we all know, www.realestate.com.au has a hugely dominant market position and as a result, they now find it hard to increase the number of customers (has stayed around 9500 since early 2009) however, the average revenue per agent (ARPA) has more than tripled to ~$3400 over that time and the trend continues to look good.  
 
Although we do not currently own REA Group, we like the story and would buy into the current momentum if our cash levels were higher.
 
Technically we are bullish REA Group targeting the $70 region minimum with stops under $55.
 
REA Group Quarterly Chart
 
3. Vocus Communications (VOC) $8.40

We recently repurchased Vocus after its ~14% pullback aided by an equity raising. We believe the recent purchase of Nextgen is a good strategic acquisition and will now provide VOC with a great platform to focus on organic growth.  Trading at $8.40 the stock is on a p/e of 16.1x 2018 earnings which is relatively cheap compared to TPG which trades above 20 times.
 
While we believe the Telco sector is likely to be an underperformer in our forecasted move higher for equities (largely a result of the drag from Telstra)  we like VOC as an undervalued growth play leveraged to ever increasing data volumes. The pullback in price gave us the opportunity to re-enter.
 
Technically we are bullish VOC targeting the $10 region.
 
Vocus Communications (VOC) $8.40 Weekly Chart

 
Summary
  • Listed above are three stocks we like at current levels
  • We own two of them currently (SUN & VOC) and for those with significant cash on the sidelines, we believe REA looks attractive.

Overnight Market Matters Wrap
  • The US markets again finished on a high, with both the Dow and the S&P500 in record territory. The Dow finished up 121 points (+0.7%) to 18,348 and the S&P500 closing up 15 points (+0.7%) to 2,152.
  • Growth appears to be a more comfortable word to use in the markets with oil once again putting in a decent move last night. The price rose US$2.04 (+4.6%) to US$46.62/bbl.
  • Helping our market this morning will also be the news that Iron Ore put on a big push last night with the price rising US$3.70 (+6.7%) to US$59.38/t. Both BHP and RIO had a strong move up last night (both +3.3%) in the US.
  • With this more relaxed tone in the market, gold fell US$21 (-1.6%) to US$1,335/oz.
  • The September SPI Futures is indicating the ASX 200 to open stronger this morning, up 41 points to the 5,394 level.
 
 
Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney, NSW 2000

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 13/07/2016. 9:00AM.
 
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