Our market may be down but it’s not out. I believe this pullback is exactly what our market needs to recharge before staging an end-of-year rally that should last through to early 2019.
The S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index closed 0.8% lower at 6,126 on Tuesday – its lowest in three and a half months. I believe it’s vulnerable to test the psychologically important 6,000 mark in the coming weeks.
Investors should be looking to buy the dip though and if you are wondering which large cap stocks to back for the expected Santa Rally, Morgans has picked three that it believes represents the best risk-adjusted returns over the next 12-months and where it has a high level of confidence in the companies meeting earnings expectations.
The first is copper miner OZ Minerals Limited (ASX: OZL). Its share price hasn’t performed well with the stock gaining 3% over the past six months compared to the 21% rally by BHP Billiton Limited (ASX: BHP) and a 6% gain by the S&P/ASX 100 (Index:^ATOI) (ASX: XTO).
But copper is one of the broker’s favourite commodities due to the electrification of the modern world and the miner has a strong balance sheet and low-cost structure that will provide good downside protection if the volatile copper price was to fall.
“We think that recent price weakness has been driven by macro-economic uncertainties, which we think can pass in time,” said Morgans who has a $10.63 price target on the stock.
“We think OZL’s counter-cyclical growth strategy will be rewarded as the Carrapateena development project is gradually de-risked in the coming 1-2 years, and can justify valuations closer to $12.50ps [per share] upon successful commissioning.”
The second ASX 100 stock on the high-conviction buy list is plumbing solutions group Reliance Worldwide Corporation Ltd (ASX: RWC). The stock is another favourite of mine thanks to its innovative “SharkBite” product and its large exposure to the rising US dollar.
“RWC holds the #1 market position in a number of product categories and is the clear market leader in the US with 80% market share (on a volume basis) in the residential PTC fittings category,” noted Morgans, who has a price target of $6.25 on the stock.
“PTC fittings penetration in the US is only >10% and given its strong value proposition we believe there is still a lot of potential for further penetration of the category over the long term.”
Finally, Morgans added Westpac Banking Corp (ASX: WBC) to the list of must-buys. I will admit I am not a fan of the stock due to the challenges facing the banking sector even though I have a small position in Westpac in my portfolio.
However, the broker thinks Westpac is a relatively low risk and cheap stock to own. The bank also stands to benefit the most from any increase in investor home loan mortgage rates and will have little trouble meeting capital adequacy requirements imposed by our banking regulators.
Morgans has a $34.50 per share price target on Westpac.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Reliance Worldwide Limited, and 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 Scott Phillips.