It’s going to be more challenging to generate decent returns this financial year as the risk of a global trade spat and less accommodative monetary policies around the world will drag on profit growth.
This means your ability to pick winning stocks will become ever more important if you want to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
On that note, Morgans is highlighting its five “conviction buy” recommendations that it believes offers the best risk-adjusted return for your investment dollar. In order words, these are companies where the broker has the most confidence that they will achieve their growth potential.
This first is Kina Securities Ltd (ASX: KSL) as the broker thinks it is one of the most mispriced stock on the market.
“We expect KSL to produce a record FY18 profit, yet it still trades at a ~22% discount to its IPO price. We forecast a dividend yield of 10.8% for 2018 and 14% for 2019,” said Morgans.
“The recent ANZ PNG acquisition adds significant inherent value in our view. KSL paid only goodwill and yet the deal is 25%-35% accretive post synergies.”
Kina Securities has the greatest potential total upside of the five (around 70% including dividends and franking) with Morgans putting in a price target of $1.34 per share.
The conviction stock with the second highest total return potential is Westpac Banking Group (ASX: WBC). Bank stocks may be out of favour due to a challenging operating environment, a falling property market and unethical behaviour uncovered by the Banking Royal Commission, but Morgans believes it has a relatively low risk profile.
The broker notes that the bank has a low reliance on treasury and markets income and a quality loan book. Westpac also stands to benefit the most from lifting mortgage rates on investor home loans and has a strong balance sheet.
Morgans has a $35.00 a share price target on the bank.
The third best from a total return perspective is PWR Holdings Ltd (ASX: PWR). The automotive cooling solutions company is emerging from a difficult period with the currency market and higher investment expenses dragging on its bottom line.
But PWR is facing a much brighter outlook from FY18 onwards with Morgans tipping the company to capture a greater share of customer spend.
Other key growth factors include partnering OEMs on high performance and low volume production run vehicles, increased presence and entry into adjacent markets and opportunities in new technology vehicles made by Tesla and Google.
The broker has a price target of $3.10 per share.
Fourth in line is CML Group Ltd (ASX: CML). The small business financing solutions provider is not only trading on an undemanding valuation of around 12 times on Morgans’ FY19 forecast price-earnings (P/E), but could deliver better-than-expected earnings growth thanks to recent acquisitions.
Morgans has a price target of $0.63 a share.
Last is Suncorp Group Ltd (ASX: SUN). Morgans is expecting the banking and insurance group to post a solid result for the second half of FY18 thanks to its strong reinsurance protections.
The stock is also trading at a discount to its rival Insurance Australia Group Ltd (ASX: IAG), and that means there is a re-rating opportunity for Suncorp if management can deliver on its FY19 targets.
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Motley Fool contributor Brendon Lau owns shares of Westpac Banking. The Motley Fool Australia owns shares of Insurance Australia Group Limited. 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 Scott Phillips.