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Morgans unveils its “high conviction” stock picks for 2018

December has started on the front foot with broad based gains during lunch time trade today as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) gained 0.4%.

The positive mood on the market is fuelling optimism that 2018 will be another positive year for equities with the number of positive global economic indicators outnumbering the negatives.

Growth in key markets like the US and Europe is gaining traction in a low inflationary environment as interest rates are likely to stay depressed for much of next year.

But don’t get too excited. Morgans warns that the “Goldilocks” environment will be difficult to sustain in 2018 as global tensions (such as those afflicting the Korean peninsula), the increased risk of trade protectionism, and the future of the European Union could conspire to knock stocks off their high perch.

Add in the fact that the outlook for our economy remains mixed at best and you can see why it is a dangerous time to be complacent.

This isn’t to say that solid gains cannot be achieved over the next 12 months, but Morgans cautions that these shouldn’t come at the expense of investors taking on excessive levels of risk.

From that perspective, the broker has identified eight stocks that it believes can deliver the highest risk-adjusted returns in 2018.

One of its high conviction picks among the S&P/ASX 100 (Index:^AXTO) (ASX:XTO) is oil and gas giant Oil Search Limited (ASX: OSH) as it believes the stock is on the cusp of an inflection point that will be triggered when the company delivers a formal agreement to advance its PNG LNG project.

Another is respiratory treatment device maker ResMed Inc. (CHESS) (ASX: RMD), which posted strong first quarter growth numbers. The company is also seen as a key beneficiary of the weaker Australian to US dollar exchange rate.

Banking giant Westpac Banking Corp (ASX: WBC) also makes the cut. It has a relatively low risk profile due to its loan book positioning and low earnings dependence on treasury and markets income. Further, the broker believes it stands to benefit the most from any increase in investor home loan interest rates.

Superannuation administration services company Link Administration Holdings Ltd (ASX: LNK) is also worth banking on, according to Morgans. Its high levels of recurring revenue that is backed by three to five-year contracts in a relatively defensive industry is the main appeal.

What’s more, Link appears cheap as it is trading around 16 times FY19 P/E based on Morgan’s forecasts and the broker thinks that it is undervalued given the quality of its earnings.

At the smaller end of the market, the stocks that Morgans is backing for 2018 include oil & gas producer Senex Energy Ltd (ASX: SXY), Motorcycle dealership MotorCycle Holdings Ltd (ASX: MTO), retail showroom operator Aventus Retail Property Fund (ASX: AVN) and automotive cooling solutions developer PWR Holdings Ltd (ASX: PWH).

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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. 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.