We are moving into a more trying period for stocks as the easy gains in FY18 won’t be present in this new financial year.
If that isn’t enough to test investors, growing global macro headwinds will make things even more challenging for your share portfolio to outperform.
You can blame it on US President Donald Trump’s trade tantrum, falling domestic property prices, higher cost of debt with less cash sloshing around the financial system or record high Australian household debt. Take your pick!
Regardless, generating profit growth won’t be an easy ask in this environment, particularly given the large cloud of uncertainty that hangs over many industries.
This means some of our best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in FY18 could struggle to get ahead this year as investors fret over their ability to keep growing profits to justify their valuations.
You can probably count the likes of travel agent Flight Centre Travel Group Ltd (ASX: FLT), online real estate classifieds operator REA Group Limited (ASX: REA) and alcoholic beverage supplier Treasury Wine Estates Ltd (ASX: TWE) on that list.
In this environment, stocks with relatively little earnings uncertainty are likely to outperform, in my view. There aren’t many that could qualify to be in this category but those exposed to infrastructure building in this country will be among the luckier ones.
Both the federal and state governments have really ramped up infrastructure spending after neglecting this area for years. The pipeline of work has swelled and that is great news for the likes of Downer EDI Limited (ASX: DOW).
First is its exposure to improving mining capex. Mining companies are ramping up construction work on mines with Macquarie Group Ltd (ASX: MQG) noting that Downer has secured three new mining contract wins recently.
This includes the $660 million Carrapateena contract, the $400 million Gruyere gold project, and the $600 million mining services contract to BHP Billiton Limited’s (ASX: BHP) joint venture coal mine.
Given the relatively high fixed cost in the business, any increase in workload should lead to higher margins.
Yes, I know Cimic also has exposure to mining capex but the other thing I like about Downer (that’s absent from Cimic) is valuation support.
Downer’s share price is cheap as it is on a FY19 consensus price-earnings multiple of 13 times, or around an 18% discount to the ASX 200.
Its P/E is particularly attractive given that Downer is forecast to increase its underlying earnings per share (EPS) by 19% in FY19.
This makes Downer a strong buy in my books.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended REA 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.