This year has seen investors sell off a wide array of ASX shares. Yet, amid the sell-off, one fund manager has named some businesses it thinks are opportunities.
L1 Capital is a fund manager that operates the listed investment company (LIC) L1 Long Short Fund Ltd (ASX: LSF).
The fund manager thinks the recent market sell-off is presenting some "exceptional opportunities". At present, its median portfolio investment now has a projected FY23 price/earnings (P/E) ratio of 9.7 times, according to its monthly update for September.
L1 said:
While these periods of heightened market volatility can be unnerving, we continue to believe that taking a 2-year view and focusing on enduring investment fundamentals (cash flows, industry structure, management, operating trends and balance sheet) will deliver strong absolute and relative returns.
We continue to find both safety and value in low P/E stocks with undergeared balance sheets and strong cashflow generation. In contrast, we believe high P/E stocks and 'expensive defensives' look crowded, risky and unappealing.
What are some examples of the ASX shares L1 is talking about?
The fund manager also outlined some of the companies in its portfolio.
Here are three of the names the fund manager noted:
BlueScope Steel Limited (ASX: BSL)
BlueScope is a steelmaking business in Australia and the US. Steel 'spreads' have been falling, but are still "healthy" and starting to "stabilise as the arbitrage on importing steel has now largely been eroded", according to L1 Capital.
The fund manager pointed to the positives of BlueScope's plan to grow its US operations with the company planning a capacity expansion. It also noted the acquisition of the US's second-largest metal coating/painting company Coil Coatings and the establishment of BlueScope Recycling from its acquisition of the MetalX recycling business.
The fund manager pointed out that it has a "strong net cash balance sheet", so its share buyback is expected to continue, as well as investment in the US and Australian businesses.
L1 said that BlueScope is valued at just six times FY23's consensus estimated earnings. 'Consensus' means the collective average of different expert projections. The fund manager thinks the market is "significantly" undervaluing the business.
Sandfire Resources Ltd (ASX: SFR)
L1 pointed out copper prices are under pressure because of a weaker global economic backdrop. That's despite the physical copper market continuing to remain "tight". The fund manager attributes the supply issues to ongoing production challenges in Chile, the number one global producer. This ASX share has seen a decline over the past few months. Indeed, the Sandfire Resources share price is down 30% over the last six months.
In February, Sandfire completed the "transformational" acquisition of the MATSA mine in the south of Spain and is currently developing the Motheo copper mine in Botswana.
L1 said:
We believe the commencement of Motheo production in FY24 will deliver a step-change in free cash flow for the company as capital expenditure declines and the operating cash flow from the mine expands. We see compelling value upside in Sandfire with the company currently trading at a discount to the acquisition price of MATSA alone, before factoring in any value for its other mining assets, including Motheo.
James Hardie Industries plc (ASX: JHX)
Another pick was this ASX building materials company that also has a big presence in the US. L1 describes it as the US market leader in fibre cement siding.
The fund manager attributed its recent share price decline to the expectation that US housing demand is going to drop because of higher interest rates.
Around 65% of the group's revenue comes from repair and remodelling, while 35% is from new housing.
L1 is confident in James Hardie's ability to continue to grow market share "for many years to come".
The fund manager said about the ASX share:
We believe the market correction has provided us the opportunity to invest in a very high-quality company with a decade of structural growth ahead of it at a very attractive valuation. James Hardie currently trades on a FY23 consensus P/E of only ~13x relative to its long-term average of 20x-25x. While we expect US housing starts to be negatively impacted by the steep rise in interest rates, at this valuation, we believe the market is implicitly assuming a ~40% decline in James Hardie earnings. This would be a similar impact to what the company suffered during the GFC, however, the business mix at that time was much more cyclical, with a ~60-65% skew to new housing.
