Fund manager L1 Capital has picked out two strong S&P/ASX 200 Index (ASX: XJO) share performers that it thinks can do well.
L1 has said it's cautious about the outlook for the stock market because of the looming impact of "significant interest rate hikes, weakness in leading economic indicators, gradually increasing pressure on corporate earnings and lingering tail risk from geopolitical tensions".
That said, the fund manager has identified "numerous mispriced stocks" that it believes will deliver "attractive long-term returns" for investors.
L1 Capital revealed two ASX 200 shares that it thinks will continue to do well.
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Allkem Ltd (ASX: AKE)
Allkem is one of the largest lithium miners on the ASX. The Allkem share price jumped around 20% in May, as we can see on the chart below.
L1 explained the rise was due to the announcement of the all-stock "merger of equals" with Livent with the aim of creating a "leading, global, integrated lithium chemicals producer". The fund manager said the combined business is predicted to be the third-largest lithium producer in the world by 2027. It's expected to have a production capacity of around 250kt per annum of lithium carbonate equivalent.
One of the benefits of the merger is the expected cost synergies of around US$125 million per year and a one-time capital expenditure saving of around US$200 million.
L1 notes that Livent management will lead the combined entity, which will have a primary listing in the US. The fund manager believes the ASX 200 lithium share could attract a higher valuation multiple in line with US peers such as Albemarle.
James Hardie Industries plc (ASX: JHX)
The James Hardie share price was another leading performer in May after rising by 13%, as we can see on the chart below.
L1 noted the ASX 200 share rose after revealing FY24 first-quarter earnings guidance that was well above market expectations.
The fund manager noted there "continues to be uncertainty in terms of the impact that rising interest rates will have on housing, and on repair and remodel demand".
But L1 believes the company has provided confidence it can "maintain strong margins even allowing for a sharp decline in fibre cement volumes". It added:
This is driven by its more resilient end-market exposure, the benefits of its product mix shifting towards higher-margin products and its proactive cost management program. We continue to believe James Hardie is well placed to manage through the current period of softer demand and thereafter, to continue to grow at an above-market rate for many years to come.
