Sanlam Private Wealth notes that 2017 was a year of extremes for companies within the JSE Top 40 share with spectacular performances by the likes of Naspers mixed with mediocre ones by companies including Netcare.
“Only 11 of the Top 40 shares outperformed the average of the index, which reflects how narrow the advance of the widely quoted indices was. It was a year in which investors rewarded successful operational results exponentially, but they were equally punitive when companies disappointed,” said SPW.
Several portfolio managers at the financial services group have picked these six stocks which they believe will offer attractive value in 2018.
Pieter Fourie, head of Global Equities at Sanlam Private Wealth UK has also picked the following global stocks to look out for:
As the world’s leading consumer health and hygiene company, Reckitt Benckiser has operations in more than 60 countries. The company’s products include fabric treatments, air fresheners, detergent, personal care and over-the-counter drugs such as painkillers and flu remedies.
“Reckitt Benckiser is a high-quality business with high margins, free cash flow, a robust financial position and low capital requirements, rewarding shareholders with phenomenal returns and earning a reputation for its strong cash generation,” said Fourie.
He noted that Reckitt Benckiser has a free cash flow yield of 5.3% and a free cash flow conversion ratio in excess of 90% over the past five years. It’s been able to deliver a decade of superior earnings growth with best-in-class working capital and margins.
“We like the positioning of the portfolio to participate in the faster growth dynamics of the health and hygiene categories, and the Mead Johnson acquisition should provide another leg of growth for years to come,” equities lead said.
A global leader in medical technology, Medtronic develops therapeutic and diagnostic medical products. “We believe Medtronic is competitively well placed, as it holds the number one position in almost every product category it is in, and has a leading distribution footprint, deep clinical expertise and a strong pipeline programme.
“We’re attracted to the company’s emphasis on gross margin stability, operational leverage and its long-term financial goals. Management has a disciplined approach to allocating capital, with a focus on creating shareholder value and delivering long-term dividend growth,” said Fourie.
The company has a solid track record, having consistently achieved appealing cash returns on invested capital, which have averaged over 50% over the past 10 years. Medtronic has a prolific track record of generating free cash flow, having achieved an impressive conversion rate averaging more than 110% over the past decade, excluding the Covidien acquisition.
“We see this trend continuing, with Medtronic on an implied enterprise value to free cash flow yield of over 6% three years out,” the equities expert said.
Philip Morris is a high-quality business with exposure to a good mixture of markets in the European Union, Eastern Europe, Middle East and Africa (EEMA), Latin America and Canada. It’s the market leader in the tobacco industry with seven of the world’s top 15 international brands, and the capability to pass on costs to the end consumer.
“We believe dividends should continue to grow steadily in the near future, even when earnings momentum will remain under pressure, with negative foreign-exchange impacts from all the regions in which Philip Morris operates,” said Fourie.
In Japan, IQOS (heat non-burn technology) has gone from 1.6% market share of total tobacco products to 4.9% in just six months to end-December 2016. This sets the scene for the company’s ability to compound earnings per share at double digits over the next three or four years – twice the rate of competitors, and hence the premium valuation, Fourie added.
Priceline is a high-quality company that’s perfectly positioned to take advantage of the migration of travel bookings from offline outlets to online operations. Thanks to its end-markets being highly fragmented, the company provides much-needed scale to customers who would otherwise be unable to advertise and market in an efficient and successful manner.
Fourie said that Priceline is better positioned than its main competitor, Expedia, as it has greater exposure to more profitable markets: Europe and accommodation. It has also managed to grow revenues at an extraordinary rate over the past few years, while at the same time keeping the cost of revenues and operating expenses under control.
The travel market is currently valued at around US$1.3 trillion and is growing at 5% per annum. With only mid-single digit market share, Priceline has a large runway for growth.