The last financial year started so promising but fizzled towards the end. The silver lining is that FY21 is likely to be better and here are some stocks to consider for your portfolio.
Why the optimism after the S&P/ASX 200 Index (Index:^AXJO) slumped by the worst in eight years? I think global markets have passed “peak” COVID-19 shock and things have to get very much worse to send it tanking to the bear market low of March.
But my increasing bias towards value stocks over growth has been derailed by what’s happening in my home state of Victoria.
Value vs. Growth
As Australia looked to have squashed the coronavirus-curve and was poised to reopen state borders, I believed investors would increasingly hunt for ASX shares that are lagging behind.
Growth stocks like Afterpay Ltd (ASX: APT), which typically trade at a hefty premium, were looking too expensive.
But threats of a second wave of COVID-19 infections mean the rotation towards value stocks is put on hold for now. I suspect we may have to wait till the end of calendar 2020 for things to change.
Expensive stocks looking “cheap”
This means it’s too early to be shedding or shunning growth stocks, although I am reluctant to touch Afterpay as its valuation seems a little too extreme.
This sounds like an oxy-moron, but there are better priced “expensive ASX stocks” to put on your watchlist.
One perennial favourite among mum and dad investors is Commonwealth Bank of Australia (ASX: CBA). The bank is the least favourite of the big four among brokers, but that’s due to its outperformance.
As I’ve mentioned before, high valuations won’t be the downfall of growth stocks. Investors are happy to pay for certainty in this environment and CBA is the best quality bank stock you can own.
Gold to keep shinning in FY21
Again, that’s due to valuation (the sector’s been running hot) and the rising Australian dollar. But the precious metal is the ultimate safe haven asset in my view and I think gold can climb to new records in FY21.
As long as the miners can avoid any production hiccups, I think these stocks will remain well supported.
Other growth stocks on my list
I would also put CSL Limited (ASX: CSL) on the list of growth stocks to own in FY21. Shares in the blood products developer may have softened towards the end of FY20 following its strong rally, but I think it will draw fresh support over the coming months for quality management and its defensive qualities.
Finally, the iron ore majors make up a major part of my portfolio and I expect them to keep outperforming in this new financial year.
They probably the only large cap growth stocks that aren’t trading at significant premiums – particularly if you believe the price for the commodity will hold around current levels in FY21.
The relatively bright outlook for the steel making ingredient and their robust balance sheets make them one of my favourite stocks to hold in the year ahead.
5 stocks under $5
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Brendon Lau owns shares of BHP Billiton Limited, Commonwealth Bank of Australia, Evolution Mining Limited, Newcrest Mining Limited, and Rio Tinto Ltd. Connect with me on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.
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