Brokers pick 2 conviction stocks to buy now

There are two outperforming stocks that are well placed to run even higher due to growing tailwinds. The stocks are Aveo Group (ASX:AOG) and Challenger Ltd (ASX:CGF). Here's why…

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Brokers are tipping two key stocks investors should buy now as near-term tailwinds are likely to send the stocks surging higher.

The first is retirement village operator Aveo Group (ASX: AOG) as its defensive income stream will put the stock in investors' good books amid the market volatility.

Morgan Stanley believes there is a 60%-70% chance of the stock running higher before the end of the calendar year and believes Aveo's annual general meeting on November 17 will be a catalyst for its outperformance.

The broker predicts that management will issue a positive update when it meets shareholders and unveil further strong growth momentum in sales of residential land projects with strong turnover and performance of its retirement assets.

The stock may have performed strongly over the past 12 months, with a 38% increase in its share price to $2.87, but there's more upside given that the stock is trading at its net tangible asset backing and is on an undemanding consensus price-earnings multiple of 16x for the next financial year.

Another stock to put on your watch list is investment management group Challenger Ltd (ASX: CGF), which is one of the nation's leading annuity products suppliers.

The federal government's response to the Financial Services Inquiry's (FSI) recommendations is a big positive for the stock, and has prompted Credit Suisse to highlight Challenger as a "key call".

The government has accepted 43 of the 44 recommendations put forward by the FSI and this includes support for the development of comprehensive income products for retirement.

The Turnbull government said it will continue to remove impediments to retirement income product development, and that implies a bright future for the annuity market in this country.

"If we assume that annuities' share of flows into retirement income increases 5%-30%, the total market could increase 40%-400% over a three-year period," predicted the broker in a research note.

"If Challenger is able to capture 25%-65% of this additional flow, its annuity book could experience growth of 40%-150%."

Challenger is one of the best placed to benefit from a growing market for annuities thanks to its strong brand and distribution network. In fact, its position is so strong that Credit Suisse thinks it will have a two to three-year window where it can operate with limited competition.

But Challenger can't rest on its laurels as a number of rivals are nipping at its heels. Challenger will need to continue to secure distribution networks and entrench its brand if it wants to maintain its lead in this high growth market.

Credit Suisse has an "outperform" recommendation on the stock with a price target of $8.30, compared with Challenger's current share price of $7.91.

Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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