2 top shares to buy and 1 to avoid

Credit: Dennis Wilkinson

Company specific volatility is heating up as the ASX moves deeper into reporting season.

Each day shareholders of some companies reporting are experiencing significant moves up and down as the market reacts to unexpected results.

While accurately predicting how the market will respond to near term news is a difficult pastime, identifying a longer term trend for a company’s business is arguably a more achievable, sensible pursuit.

While I’m not sure how the market will react to the profit results of the following three stocks over the next month, here’s my take on how these stocks could perform over the medium term.

Pact Group Holdings Ltd (ASX: PGH)

While most investors will be familiar with leading packaging company Amcor Limited (ASX: AMC), many will be less familiar with Orora Ltd (ASX: ORA) which was demerged from Amcor in late 2013.

Around the same time as this demerger occurred, competitor Pact Group also undertook an initial public offering. Pact Group specialises in the manufacture of rigid plastic containers which pits is against the much larger Amcor.

There are a number of appealing attributes to the packaging industry including exposure to fast moving consumer goods and leverage to higher organic and inorganic volumes.

According to consensus estimates, Pact Group is trading on a two year forward forecast price-to-earnings (PE) ratio of 16x which compares favourably against Amcor and Orora on 19x and 18x respectively.

Tatts Group Limited (ASX: TTS)

As I noted in this article, some investors are calling for Tatts to demerge its wagering business from its lotteries business. While that scenario may (or may not) eventuate, for investors valuing the stock it certainly makes sense to utilising a sum-of-the-parts process.

Although the wagering division faces increasing levels of competition and is arguably a lower quality business, the lotteries division enjoys defensive earnings and is arguably an above average quality business.

Trading on a forecast PE of 22x, the stock trades roughly in line with the market average multiple of 21x.

Domino’s Pizza Enterprises Ltd. (ASX: DMP)

This franchisor has been a huge success story and its management has done a commendable job in growing the business not just across Australia but also abroad.

Despite the stellar historic record and high growth rates predicted over the next couple of years, I fear that the market has priced in too rosy a future for the group.

At the end of the day, Domino’s operates in a highly competitive market – cheap takeaway pizzas. Recent newspaper commentary suggests that the Eagle Boys and Pizza Hut chains are about to be snapped up by private equity. Combining these two businesses should provide better scale and potentially the ability to mount a more competitive response to Domino’s.

With Domino’s shares trading on a forward PE of over 55x, the risks of overpaying appear too high to me. (Source: CommSec).


3 Rotten Shares to Sell, and 1 to Buy Today

Wondering what other shares you should think about selling? After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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