The reporting season may have been lacklustre from an earnings upgrade perspective but that doesn't mean it hasn't thrown up some hot opportunities.
Never mind that FY18 earnings for large caps (excluding resources) were only bumped up 0.5% during last month's reporting season to a relatively anaemic 6% based on Morgan's estimates. The broker thinks there are still "plenty of compelling opportunities" and has picked three that are trading between 20% and 25% below fair value in its opinion.
That's good news for those worried that the profit growth profile for stocks in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) doesn't justify their valuations.
"Current earnings growth sits well below the long-term average (~9-10%), reflecting below-trend economic growth, while valuations appear to be pricing in earnings acceleration that is yet to be delivered," said Morgans.
"The market has been prone to over-shoot the actual earnings trajectory in recent years and we think investors should stand ready to buy the dips when the inevitable bouts of market volatility hit, rather than chase expensive stocks higher."
But there are three standout stocks that are already in the buy zone, according to the broker. The first is Telstra Corporation Ltd (ASX: TLS) after its share price crashed by nearly 30% over the past year.
Sentiment has only worsened post the reporting season with investors fretting over the earnings hole left by the rollout of the National Broadband Network.
But Morgans is convinced the NBN's value will be written down as it's a dud. If the federal government writes down the value of the NBN, it will mean lower access prices for Telstra and other NBN resellers. This is because NBN Co needs to generate a return over the value of the network, and the lower the value of the network, the less it will need to charge.
This will give Telstra a much-needed earnings tailwind and trigger a re-rating in the stock, according to the broker. In the meantime, shareholders are compensated for waiting from the stock's 6% plus yield.
The second standout is Macquarie Atlas Roads Limited (ASX: MQA). Traffic numbers posted by the toll road operator are strong and company earnings will be bolstered by a significant reduction in interest costs in the current half and the internalisation of management.
What's more, the broker thinks Macquarie Atlas is a likely takeover target.
Morgans has also nominated Australian Finance Group Ltd (ASX: AFG) as a standout pick as the broker is tipping the mortgage broker to pay special dividends thanks to its higher margin revenue and cash flow generation.
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