Growth will be hard to come by in the new financial year given the global economic outlook and I suspect the August reporting season could be a pretty ugly affair if earnings reality doesn’t match up with lofty valuations.
This leads me to believe that the strategy to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index should be focused on avoiding the disasters instead of trying to pick the winners.
Don’t count on interest rate cuts to make up for the lack of earnings growth either. Looser monetary settings are stimulatory for equities and worked a charm in the past. But back then, the market wasn’t trading at multi-year highs (in the case of the ASX) or near record highs (in the case of the US stock benchmarks).
Investors looking for growth will have a much shallower pool of stocks to choose from, in my view, although there are a handful of ASX stocks that I think are very likely to report a bigger profit in FY20.
This is primarily because growth has been just about locked-in from recent acquisitions. Unless something totally unexpected happens, these three stocks will be able to deliver growth even amid a broader economic slowdown.
Packaged for growth
The first of my conviction growth candidates is packaging group AMCOR PLC/IDR UNRESTR (ASX: AMC), which bought US-based Bemis Company, Inc. to become a global leader in consumer packaging.
Management is forecasting double-digit earnings per share accretion from the merger and is targeting cost savings of US$180 million on an annualised basis.
I find its geographical reach appealing as I favour large cap ASX stocks that make a significant proportion of their income from overseas markets.
While the stock can’t be regarded as a bargain after the AMCOR share price rallied 23% since the start of calendar 2019, it doesn’t look expensive to me given its double-digital earnings growth profile.
Engineering an earnings boost
Another stock that is expected to deliver a nice earnings boost is oil and gas engineering group Worleyparsons Limited (ASX: WOR) as it beds down its US$3.2 billion ($4.55 billion) acquisition of Jacobs ECR.
The transaction will give Worley a large foothold in the US oil market where there’s a strong pipeline of work from the shale producers who are winning market share from traditional oil majors like OPEC and Russia.
The oil price may have pulled back recently but activity in the industry is unlikely to slow – and even if it did, the oil price will jump higher due to lower production volumes. Both outcomes are positive for Worley.
Merger of mines
The SFR share price crashed on the news while the MOD share price surged, which is quite typical, but broker reaction to the merger has been positive with JP Morgan upgrading the stock to “overweight” from “neutral” with an $8 per share price target.
Meanwhile, Shaw and Partners said it liked the deal on first glance and kept its “buy” rating on Sandfire. Sandfire is the second cheapest miner under its coverage and it has a price target of $9 a share.
Investors may need to wait till FY21 for the earnings increase from the acquisition to flow through given the timing of the deal.
But there are other ASX growth stocks that you should also be putting on your watchlist, according to the experts at the Motley Fool.
Follow the link below to find out what other high-growth names you should be watching in FY20.