Investment bank Morgan Stanley has released an ideal portfolio based in part on the following investment themes:
- An Australian recovery, mainly on the East Coast
- A positive outlook for iron ore and copper
- A housing-led recovery
- A consumer-spending recovery
While it is prudent to maintain a balanced portfolio, this appears to have led to the reluctant inclusion of some sectors and stocks. The broker's strongest convictions were either housing-linked or related to an increased functional discretionary spend. The latter was defined as the consumer's preference to "do" things rather than "have" things.
Let's analyze the respective merits of recommended stocks in these sectors of the economy.
Dulux (ASX: DLX) provides premium-branded paint, coatings, adhesives, garden care and other building products to a range of markets across Australia, New Zealand and Papua New Guinea, with growing businesses in China and southeast Asia.
I have recently highly recommended Dulux and concluded that the reduction in debt, the passing of Alesco integration risk, the increasing dividend and the potential for Asian expansion should provide ongoing profitable growth alternatives for 2014 and beyond. Total shareholder return has been over 150% since listing in July 2010.
REA Group (ASX: REA), owner of real estate website realestate.com.au, is a real estate-focused digital advertising company. It operates 13 websites in Australia, Europe and Hong Kong and is 61.6% owned by News Corporation (ASX: NWS). It has developed a strong brand through its first-mover advantage. A successful international expansion could potentially result in very significant growth.
Bluescope Steel (ASX: BSL) produces and supplies steel products and solutions to the global building and construction markets. It has repaired its balance sheet with asset sales and equity raisings since the GFC, but operates in an intensely competitive and capital-intensive industry, which resulted in negative cash flow for FY2013.
Flight Centre (ASX: FLT) has market share dominance in selling domestic and international travel. Recent weakness in the Aussie dollar has not affected departure volumes, while the Australian Competition and Consumer Commission's (ACCC) price fixing case is not likely to have a material effect. On valuation metrics it is starting to appeal again, after retreating to $47.20 from a high of $53.12.
Twenty-First Century Fox (ASX: FOX) is an international media and entertainment company with a broad range of well branded cable assets with significant exposure to the valuable sports market. A strong TV focus positions it well for the rising value of content. As a bonus, it may benefit from a widely predicted fall in the Aussie dollar.
Domino's Pizza Enterprises (ASX: DMP) runs a pizza chain comprising both franchise owned and company owned corporate stores. The acquisition of 75% of Domino's Japan in August resulted in several broker upgrades, as it could potentially provide another growth alternative. So pro-active has management been in accelerating its online presence that Domino's is often referred to as a technology stock.
Super Retail Group (ASX: SUL) is the operator of specialty retail stores in the automotive, tools, leisure and sports categories. Store rollouts are building volume with annual sales of $2 billion which enables negotiation of favorable buying terms. However, there are no real barriers to entry in a highly competitive retail space.
Foolish takeaway
It is always useful to peruse potential investment themes and stocks that would benefit accordingly.
However, my personal preference is for stocks that are all-weather performers with company-specific tailwinds. On this basis, those best suited to the medium-to-long-term investor are Domino's, Twenty-First Century Fox, Dulux and Flight Centre.
According to the Morgan Stanley research, banks are fully valued and resources are underweight, apart from a preference for Fortescue Metals Group (ASX: FMG) and BHP Billiton (ASX: BHP) based on the outlook for both iron ore and copper.
