Only a fool prints predictions for the share market in the year ahead, so I’m happy to offer up 5 stocks I think might do well in 2019, but with a couple of caveats.
First we need to acknowledge short-term share market movements are driven by sentiment and unknown future factors more than anything else.
For example everything every market participant collectively knows currently about future risks (e.g. Brexit, U.S. government shutdown) is already priced into the valuations of stocks and equity markets.
Tomorrow’s share prices represent unknown future events so short-term price movements are impossible to know, while as an investor you should try to tune out the noise of the 24-hour news cycle to focus on strong businesses and their valuations.
The ASX currently has around 2,200 companies listed with probably only around 100 or so of them potentially “investment grade” (depending on your point of view) in that they boast consistent profitability and strong long-term prospects among many other necessary qualities.
That’s not to say you cannot make good profits buying lower-quality companies, it’s just that over longer time periods the odds are far more in your favour if you only buy high-quality companies.
However, no company is a buy at any price as one of the commonest investing mistakes is paying too much for a fast-growing or popular company. In other words you need to be careful you’re not paying a high price for a cheery consensus as Warren Buffett warns against doing.
So let’s take a look at five high-quality companies on the ASX and consider whether their valuations make them worth buying.
Commonwealth Bank of Australia (ASX: CBA) had a shocking 2018 on the back of regulatory scandals and cracks in Australia’s residential property markets. However, this remains Australia’s best quality bank with the best long-term track record of earnings and dividend growth. Patient investors might get to buy CBA shares a little cheaper than the $72.50 they sell for today.
Cochlear Ltd (ASX: COH) is a company I’ve covered a lot in the past due to its market-leading hearing aid technologies giving it pricing power, a moat, and huge global addressable markets to sell into. It’s a quality business, but for me the valuation at 41x trailing earnings with a forecast of 8%-12% profit growth in FY 2019 doesn’t add up. This stock is one for the watch list but I’m not a buyer at today’s prices.
Magellan Financial Group Ltd (ASX: MFG) is a international equities fund manager I’ve also covered regularly over the past years. It’s founder led, has no debt, and boasts a consistent track record of strong net fund inflows in the retail and institutional space. This is partly because it invests heavily in retail distribution and institutional business development staffing, unlike Platinum Asset Management for example that largely outsources these functions. At $23.58 Magellan ticks the boxes and looks a buy to me.
Fisher & Paykel Healthcare (ASX: FPH) is a sleep apnea treatment business that has an excellent medium-term track record of growth. Like rival ResMed Inc. it boasts a moat, and large global addressable markets to sell its products into, with it already operating in more than 120 countries. The company looks to have a bright future and at $12.44 the stock is selling at a steep discount to prices just a couple of months ago.
ASX Limited (ASX: ASX) is another business that falls into the “investment grade” bucket due to its virtual monopoly on equities and derivatives trading in Australia. It’s also a capital light business that requires little reinvestment which means it can pay healthy dividends from its reliable cash flows. Investors need to be careful on valuation though, with it on 25x trailing earnings at $61.72 per share.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia owns shares of ASX Limited and Platinum Investment Management Limited. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. 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.