Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Fidelity International portfolio manager Kate Howitt reveals the 2 ASX shares to buy at the moment.
Hottest ASX shares
The Motley Fool: What are the 2 best stock buys right now?
Kate Howitt: The two I came up with were Evolution Mining Ltd (ASX: EVN) and Synlait Milk Ltd (ASX: SM1).
Evolution is a gold company. I put this in the category of buying umbrellas when it's not raining. Gold is one of those things that goes in and out of fashion kind of with how worried the investment community is. And when the investment community is worried, the gold price goes up and the gold stocks go on a tear and you sit there looking, thinking why don't I own more gold?
Buy umbrellas when it's not raining — buy gold when people are confident about the world and gold stocks are unloved, which is pretty much where they are now.
The big shift that came out of the pandemic is that every government in the world got comfortable with doing a lot of fiscal support. Even parties like our own Coalition, which is based on being the party of economic fiscal responsibility, turned the taps on. And that's going to be really hard to reverse.
That kind of generalised increase in money supply historically has always led to inflation, currency debasement, and in those environments, gold does well. So Evolution is a great operator in the Australian scene. They've proven themselves to be very, very good operators.
MF: I'm a long-suffering shareholder of A2 Milk Company Ltd (ASX: A2M), so please tell me a bit about Synlait.
KH: I think part of the argument for Synlait is it's diversified beyond A2. [Until now] it's kind of been seen as a derivative of A2 — A2 goes up, it goes up; A2 goes down, it goes down.
Ironically, it's been even worse for Synlait because they recognised the need to diversify away from A2. So they made some large investments in building new facilities. And they're kind of at the point of maximum financial stretch on those, but they haven't got the new non-A2 client volumes coming through those yet.
Then just while they're going through that process of stretching their own balance sheet to give them some further growth, they had this collapse in A2's volumes, on both the English language and the China label.
So they had excess supply that didn't go to A2, they had put that through to ingredients. The ingredients are lower margin, and it's sold in US dollars, not New Zealand dollars. So then the currency moved against them. It was almost a perfect storm.
They've gone through that now, and the market is just saying the China infant formula trade is over — there'll never be any more growth. We think they will be great — A2 is not their only client even for infant formula, they're diversifying beyond dairy.
So we think there's a potential, the kind of turnaround and bottoming that you've seen from Blackmores Limited (ASX: BKL) when it was very unloved, it was tied to old brands that no one was ever going to buy again.
Well, we've seen that, with a good management team, that company has started its turnaround process, and we think Synlait is going to follow in that direction.
