Wilsons equity strategist Rob Crookston is a happy man.
Despite the turbulence in the general market, many of his team's S&P/ASX 200 Index (ASX: XJO) holdings in the focus portfolio enjoyed earnings upgrades in recent times.
Like a proud father, he's especially pleased with four shares in particular: Telix Pharmaceuticals Ltd (ASX: TLX), Xero Limited (ASX: XRO), James Hardie Industries plc (ASX: JHX) and Aristocrat Leisure Limited (ASX: ALL).
The Wilsons team is confident this is just the start of a special run for this group.
"We believe that these companies are entering earnings upgrade cycles and maintain a positive outlook for them," Crookston said in a memo to clients.
A quick pivot from loss-maker to 'highly profitable business'
Telix has had an unbelievable 2023, with its share price gaining almost 70% so far.
Crookston attributes this to a change of era for the pharmaceutical business.
"Telix Pharmaceuticals has quickly evolved from a loss-making clinical-stage biotech to a soon-to-be (come the FY23 full year result) highly profitable business."
Its prostate cancer diagnostic agent Illucix was released in the United States market last year and has since enjoyed "rapid commercial success".
"The earnings upgrades have been driven by both Illucix's market share gains and subsequent improvements to terminal market share assumptions for Illucix, as well as gradual increases to estimates regarding the size of the PSMA imaging total addressable market (TAM)."
Crookston's team sees "ample scope" for Telix to continue growing its earnings both from Illucix and other cancer products in its pipeline.
Pulling off a tricky balancing act
Accounting software maker Xero was punished by the market 18 months ago for being one of those grow-at-all-costs businesses.
But now, with a new chief executive at the helm, there is a new priority on earnings and cash flow through reforms such as "steady" price rises.
"The [annual] results indicated progress in achieving a balance between growth and earnings, as evidenced by the pre-announced cost base adjustment through staff count reduction," said Crookston.
"This strategic move aligns with the goal of optimising the cost structure while pursuing growth opportunities."
Like Telix, the Xero share price has shot up this year. The stock now trades almost 60% higher than it did at the start of 2023.
Crookston believes the New Zealand company still has "several key levers" it could pull to keep the earnings growth going.
"Currently, approximately 80% of Xero's costs are attributed to growth-related expenses. As the business matures and reaches a more stable state, these costs are likely to decrease substantially, improving margins," he said.
"The consensus estimate for ARPU [average revenue per user] growth appears conservative, failing to fully capture the potential revenue uplift from the expanded suite of offerings."
There is still much scope for Xero to grow in the United Kingdom, Europe and the US.
"Despite its substantial growth and success in its home market of New Zealand and Australia, there is still ample room for subscriber expansion in these regions, providing upside to consensus."
This business has hit 'the end of the downgrade cycle'
With the prospect of interest rate hikes ceasing, the Wilsons team has declared "the end of the downgrade cycle" for construction materials provider James Hardie.
"After three downgrades (and a slight miss) to James Hardie's FY23 guidance, we think investors are starting to look through the immediate headwinds, focusing on the structural tailwinds for James Hardie."
Indeed, investors have already bid up the share price to the tune of 48% year to date.
"The rising popularity of fibre cement sidings in housing construction at the expense of timber and other 'traditional' materials has proved to be a game-changer, enabling the company to take market share in the US building materials market."
The Wilsons team observed that the sentiment in the US housing market was "improving", and the volume of building permits recovering.
"These factors collectively indicate a positive cyclical trend in the US housing market, which bodes well for James Hardie."
Fires burning for gambling behemoth
Poker machine giant Aristocrat has "new growth opportunities" galore, according to the Wilsons analysts.
"With the recent acquisition of NeoGames SA (NASDAQ: NGMS) for $1.8 billion, Aristocrat signalled its intent to move into the online real money gaming (RMG) market," said Crookston.
"Consensus for online RMG is effectively zero, providing another avenue for earnings upgrades in the next 12 months."
His team thinks this grossly underestimates the potential of RMG, especially through its Anaxi brand.
Crookston cited how Aristocrat previously expanded its Pixel United mobile gaming business.
"Aristocrat managed to grow the revenues of Pixel United from nothing to $2.4 billion in a comparable global market," he said.
"Therefore, if Aristocrat successfully executes its plans for Anaxi in line with our expectations, we anticipate significant earnings upgrades in the coming years."
The Aristocrat share price has gained more than 24% year to date.
