All the tailwinds that helped ASX shares the past couple of years are disappearing, so investors need to be careful which stocks they buy into.
That's the opinion of Alphinity client portfolio manager Elfreda Jonker, who said we've now entered the part of the cycle known as a "stock pickers' market".
"Over the last 12 months, the Australian equity market has been supported by a strong cyclical earnings recovery, unprecedented fiscal support and an extraordinarily high level of liquidity in the global financial system," she wrote on the Alphinity blog.
"These supporting factors are progressively being priced in, removed, or becoming more fragile."
In such an environment, Jonker presented 3 ASX shares that her team has "high conviction" faith in:
A global health problem has ironically resulted in less hospitalisations
According to Jonker, private health insurer Medibank Private Ltd (ASX: MPL) has become "the best manager of claim costs in the industry through the use of its scale and data".
Like most health insurers, it has benefitted from the COVID-19 pandemic resulting in lower rates of hospital treatments to pay out.
"The company has taken conservative provisions for COVID and is now giving back to customers via lower prices/free coverage days, cementing its recent brand improvement and return to customer number growth," said Jonker.
"Medibank has big plans to grow its in-home care and become a more holistic health business, which we believe is likely underappreciated over [the] long term."
She added that Medibank is "very well capitalised".
"[Medibank] is likely to put some gearing into the business, freeing up equity for capital management or acquisitions."
Medibank shares were trading at $3.59 on early Monday morning, which is more than 18% up for the year.
ASX share that benefits from both the pandemic and re-opening
Among retailers, the Alphinity team has high conviction for Super Retail Group Ltd (ASX: SUL).
Jonker reckons its brands like Supercheap Auto, BCF and Rebel Sport are both COVID beneficiaries and recovery winners.
"The company has managed its inventory well despite many supply chain challenges and is well placed for a reopening of the economy later in the year," she said.
"Cost management has also been good, benefiting somewhat from lower rent with many landlords under pressure."
Super Retail's capital position is such that it's able to hand out a 7.4% dividend yield currently.
But according to Jonker, it's still holding onto plenty of excess cash to re-invest into the business.
"Its recently released FY21 results were ahead of market expectations and it has subsequently enjoyed earnings upgrades for FY22 and FY23," she said.
"We see scope for further upgrades over the course of the year as better trading conditions and a strong online strategy more than offset any reopening pressure."
Super Retail shares were trading at $12.06 on Monday morning, which is up 9.8% for the year.
Good to have control of your own prices
There are 3 factors driving the good fortunes behind construction materials provider James Hardie Industries plc (ASX: JHX).
"The company has been benefiting from the current environment of low interest rates, strong home prices and consumer working pattern shifts – all of which are supportive of large home repair/remodel projects," said Jonker.
"The company is uniquely positioned to capitalise on strong market conditions with new production capacity coming on at the same time competitors are capacity constrained."
She liked that James Hardie has shifted to a "value-led" strategy, allowing it to increase prices for its products.
"In addition, it is launching new products that will increase its total addressable market," said Jonker.
"Margins continue to surprise positively given both volume and pricing growth despite continued investment in future growth initiatives."
The potential risk to James Hardie is a rise in US interest rates killing off the housing boom in that country.
James Hardie stocks were going for $52.92 on Monday morning, which is a tidy 37.2% gain for the year thus far.
