The sharp about-face with regard to Australian interest rates means a key tailwind for domestic cyclical stocks has been removed, according to the analysts at Wilsons Advisory.
With that in mind, they've examined which stocks have healthy offshore earnings and identified two that they see as providing good value at the moment.
In terms of Australian stocks, the Wilsons team notes that companies in the retail, media, consumer services, building materials, and capital goods sectors tend to underperform in the lead-up to interest rate rises, which some experts suggest may occur as soon as February.
The Wilsons team go on to say:
As such, we recommend steering clear of domestic cyclicals at this juncture. In this environment, our preference within the industrial (non-resources) cyclicals category is towards offshore earners – particularly companies with material US-based earnings – where macro dynamics are more supportive of cyclicals.
With the US Federal Reserve still likely to cut rates, rather than increase them as our central bank is likely to, "the US economy provides a broadly supportive backdrop for US-exposed cyclicals''.
Wilsons said they put a filter on ASX-listed companies looking for strong market positions, high returns on invested capital, and genuine structural growth stories, and came up with two stock picks which they say "offer attractive double-digit earnings growth prospects and trade at compelling valuations following recent share price weakness''.
Image source: Getty Images
Aristocrat Leisure Ltd (ASX: ALL)
With Aristocrat shares falling about 30% since early this year after two "underwhelming" profit results, Wilsons says the stock is looking like good value at the moment.
And despite being sold off after the most recent full year results in November, Wilsons said there was still "plenty to like" in the numbers.
As they said:
Headline EBITA was 2% ahead of consensus, the group returned to double-digit earnings growth in the second half, and game performance continues to track well. We view the recent share price weakness as overdone given our thesis remains intact and we remain confident the business is well placed to deliver double digit earnings growth over the medium and long-term.
Wilsons does not have a price target on the shares, but says Aristocrat's valuation at current levels is looking cheap compared with its historical performance against the ASX All Industrials Index.
In our view, at current levels the market undervalues Aristocrat, given its above-market (mid-teens) medium term earnings per share growth outlook and the quality of the business as a global market leader with a top-quartile return on invested capital and a durable competitive moat. Accordingly, with our investment thesis intact and the US macro-backdrop increasingly supportive, recent share price weakness presents an attractive buying opportunity.
CAR Group Ltd (ASX: CAR)
Shares in CAR Group have fallen about 25% since the company reported its full-year result in August, Wilsons said, "despite delivering a solid outcome featuring double-digit EBITDA growth in line with expectations''.
The Wilsons team say the share price falls largely reflect a broad de-rating across technology shares, and there are also some concerns about AI-disruption, "specifically the risk that AI agent-led discovery could reduce site traffic – have weighed on the online classifieds sector more broadly''.
We view these concerns as largely sentiment-driven and overblown given CAR's firmly entrenched competitive moat. Importantly, our investment thesis remains intact, with CAR Group remaining in a fundamentally strong position. We remain confident the group will deliver mid-teens earnings per share growth over the medium-term.
The Wilsons team says the company's Australian Carsales business provides "a steady ballast" for the group, while its international businesses were key to the growth outlook.
These businesses operate in large, structurally growing online classifieds markets that are significantly underpenetrated relative to Carsales, with penetration rates in the low to mid-single digits, supporting a long runway for growth.
Wilsons says CAR Group's valuation on a price-to-earnings (P/E) basis is currently below its five and 10-year averages, and "accordingly, with its earnings growth outlook remaining attractive, CAR's undemanding valuation offers an attractive buying opportunity''.
