ASX momentum stock picks

Note: These momentum stock recommendations are based off backtested results looking at a 3-5 day holding period with a 5% stop loss on every trade.

Mining
Source: Bloomberg

OZL – (Buy)

In valuation terms, Oz Minerals continues to trade as one of the cheapest stocks in the index and has also exhibited strong recent momentum. As a copper miner, the key driving factor of its returns for the rest of the year is whether China continues to stimulate its economy in the second half of the year as much as it did in the first half. And I would say there is a very good chance this happens; it is set to be a key beneficiary of the global turn towards fiscal stimulus that we are seeing.

A2M – (Buy)

A2 Milk has had an impressive twelve months and, after stabilising around the A$1.40 to A$1.60 level, it is now looking like it wants to break higher. The stock is now up 13% since June, and is being supported by rising global dairy prices. A2M continues to exhibit a dominant share of the foreign baby formula market in China, and Blackmores’ lack of success in breaking into the market so far shows the benefits of brand recognition and first mover advantage. These developments have seen a matured appreciation of A2M’s prospects among the investor community and appears to be supporting its steady rise.

Overall prospects for the ASX

After breaking above the 5600 level on 1 August, the ASX has struggled to regain its previous momentum. While the index is back above the 5500 level, it is very dependent on global market sentiment. With bond yields continuing at record lows, the comparatively higher yields on offer in equities, as well as their improved net present value from much lower discount rates, is likely to continue to see support for the index. As many countries around the world increasingly warm to the idea of fiscal stimulus, the heavy commodities weighting of the index is set to provide support.

Probably the biggest domestic risk to the outlook may be the possibility that further RBA rate cuts could see sentiment begin to turn on the banks, as lower rates further erode their net interest margins and possibly impact their dividends. Given their over 30% weighting on the index, this could be a bit of a concern.

Dividend Yield

This chart provides a pretty clear argument for why equities are set to continue to gain in the near term. The ASX currently has a dividend yield of 4.5%, but when franking credits and superannuation tax benefits are added, the grossed up yield of the index is 6%. In a world of negative interest rates in some parts of the world, this is very compelling. The yield premium to bonds and bank term deposits continues to hold up at high levels.

Top 15 Winners and Losers

The top returns of the past week have all been driven by strong earnings results.

NAME

5 Day

1 Month

YTD

NAME

5 Day

1 month

YTD

MESOBLAST LTD

58.2

45.3

-3.0

SPOTLESS GROUP H

-4.2

-3.0

6.5

ANSELL LTD

16.6

22.7

8.1

ALUMINA LTD

-4.4

-3.3

13.9

COMPUTERSHARE LT

13.9

8.1

-12.6

WESTERN AREAS LT

-4.4

17.6

25.5

JB HI-FI LTD

13.0

22.8

54.2

NORTHERN STAR RE

-4.5

-16.0

69.8

AUTOMOTIVE HOLDI

10.6

23.4

6.2

IOOF HOLDINGS LT

-4.5

9.2

-6.6

HARVEY NORMAN

9.5

15.5

26.3

TABCORP HLDGS

-4.7

5.8

4.0

ORORA LTD

9.0

9.0

34.7

FORTESCUE METALS

-4.9

14.1

137.4

CARSALES.COM LTD

8.2

7.0

14.6

INDEPENDENCE GRP

-5.0

9.3

56.7

COCHLEAR LTD

7.7

12.4

44.8

METCASH LTD

-5.6

2.0

26.3

OZ MINERALS LTD

7.6

14.2

70.6

SANDFIRE RESOURC

-6.1

-0.6

-4.4

NINE ENTERTAINME

6.5

1.0

-44.4

AGL ENERGY LTD

-7.0

-3.7

5.5

ALS LTD

5.7

12.4

51.5

MONADELPHOUS GRP

-8.5

37.8

64.4

NEWS CORP- CDI B

5.2

15.7

-5.2

AURIZON HOLDINGS

-8.7

-4.7

7.3

BLACKMORES LTD

5.2

19.3

-25.6

EVOLUTION MINING

-8.9

-8.6

84.2

FLIGHT CENTRE TR

5.1

11.4

-12.0

BLUESCOPE STEEL

-9.4

13.5

72.7

 

Sector Performance

There is quite a lot of sector rotation going on in the index at the moment. Safe-haven sectors like utilities and telecoms continue to see investors steadily selling out of them. Materials haven’t had a great month due to the US dollar rally, but their selloff in the past week was largely driven by China’s poor economic data on Friday.

Sector

5 day

1 Month Return

YTD Return

IT

6.0

6.5

2.0

Utilities

-4.1

-2.0

9.2

Healthcare

2.2

4.5

14.5

Industrials

0.1

2.5

13.3

Financials

0.1

2.4

-3.1

Consumer Staples

0.5

4.8

0.6

Telecoms

-2.0

-3.8

0.3

Materials

-1.1

-1.1

24.2

Consumer Disc.

1.3

6.9

13.1

Energy

0.6

2.2

7.0

ASX Index

0.0

2.0

4.6

 

Factor Performance

The key investment factors driving stock returns continue to be small caps and momentum, but quality is increasingly an important investment factor in Australia.

Factor

5 day

1 Month Return

YTD Return

Value

-0.5

3.8

11.3

Risk Weighted

0.5

3.7

17.4

ESG

-0.6

3.7

7.6

Momentum

1.4

2.9

23.8

Quality

1.3

3.8

15.9

High Yield

-2.1

1.2

7.2

Minimum Volatility

0.2

3.4

16.3

Small Caps

1.4

4.0

24.6

Infrastructure

-0.9

0.8

16.5

MSCI Australia

-0.2

3.5

11.9

 

Top Yielding Stocks

Since yield is such a major driver of equities at the moment, I’ve ranked the top 20 stocks in the index according to shareholder yield. Shareholder yield is a much better metric than dividend yield because it is a much more encompassing measure of how cash is being returned to investors. Shareholder yield calculates both dividend payouts and stocks buybacks. The top 20 stocks in the ASX by shareholder yield have a lot of well-known names, including RIO, BHP, Qantas and AGL Energy.

Stock Name

Shareholder Yield

Free Cash Flow Yield

BENDIGO AND ADEL

27.6

5.5

GWA GROUP LTD

27.4

4.3

CIMIC GROUP LTD

25.3

7.9

METCASH LTD

24.0

8.8

NINE ENTERTAINME

18.4

16.8

QANTAS AIRWAYS

17.6

16.8

ORICA LTD

17.6

5.2

GENWORTH MORTGAG

17.2

7.7

SEVEN WEST MEDIA

16.0

15.1

WESTERN AREAS LT

14.6

6.4

RIO TINTO LTD

13.2

6.9

ASALEO CARE LTD

12.5

11.8

FAIRFAX MEDIA LT

12.0

1.4

MONADELPHOUS GRP

11.6

10.2

TATTS GROUP LTD

10.9

6.9

AGL ENERGY LTD

9.9

5.0

PROGRAMMED MAINT

9.8

12.5

BHP BILLITON LTD

9.7

5.7

PACT GROUP HOLDI

9.5

11.7

SCENTRE GROUP

9.2

2.3

 

Valuation Screens

This is Tobias Carlisle’s “Acquirer’s Multiple” value screen, which is a firm’s enterprise value divided by its earnings (EBITDA), minus capital expenditure. There is a clear presence of resources names, such as Monadelphous, Sandfire and Oz Minerals. But recent earnings disappointers, Seven West Media, Metcash and Flight Centre, also make an appearance. A number of these also have very attractive shareholder yields.

Stock Ticker

EV (A$mn)

EBITDA-Capex

Acquirer's Multiple Score

MONADELPHOUS GROUP LTD

833.0

164.5

5.1

AUSTAL LTD

383.1

67.9

5.6

SEVEN WEST MEDIA LTD

1918.6

319.7

6.0

METCASH LTD

2190.9

330.0

6.6

SANDFIRE RESOURCES NL

871.6

126.2

6.9

FLIGHT CENTRE TRAVEL GROUP L

2478.2

340.4

7.3

DOWNER EDI LTD

2440.5

332.2

7.3

WESTERN AREAS LTD

732.7

95.6

7.7

MCMILLAN SHAKESPEARE LTD

1448.5

184.8

7.8

OZ MINERALS LTD

1514.6

187.3

8.1

 

Short Positions

The top five stocks with the largest amount of short positions as a percentage of their total float are unchanged from the previous week. But the short percentage in TPG has continued to tick up, seeing it surpass Cover-More Group. Some of the short positions in Monadelphous, which was ranked eighth last week, have closed out as the stock dipped briefly last week and this has seen it drop out of the top ten. Both Bellamy’s and Corporate Travel have both seen their short position percentages steadily creep up.

Name

Percentage of Float

Short Interest Ratio

FLIGHT CENTRE TR

24.3

20.1

MYOB GROUP LTD

21.6

20.8

WORLEYPARSONS

20.1

14.6

MYER HOLDINGS

16.5

22.9

METCASH LTD

13.6

48.3

TPG TELECOM LTD

13.1

21.3

COVER-MORE GROUP

12.5

15.1

WESTERN AREAS LT

12.1

8.5

BELLAMY'S AUSTRA

11.8

12.5

CORPORATE TRAVEL

11.2

17.9

 

Momentum Stock Picks

Note: These momentum stock recommendations are based off backtested results looking at a 3-5 day holding period with a 5% stop loss on every trade.

OZL – (Buy)

In valuation terms, Oz Minerals continues to trade as one of the cheapest stocks in the index and has also exhibited strong recent momentum. As a copper miner, the key driving factor of its returns for the rest of the year is whether China continues to stimulate its economy in the second half of the year as much as it did in the first half. And I would say there is a very good chance this happens; it is set to be a key beneficiary of the global turn towards fiscal stimulus that we are seeing.

A2M – (Buy)

A2 Milk has had an impressive twelve months and, after stabilising around the A$1.40 to A$1.60 level, it is now looking like it wants to break higher. The stock is now up 13% since June, and is being supported by rising global dairy prices. A2M continues to exhibit a dominant share of the foreign baby formula market in China, and Blackmores’ lack of success in breaking into the market so far shows the benefits of brand recognition and first mover advantage. These developments have seen a matured appreciation of A2M’s prospects among the investor community and appears to be supporting its steady rise.

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