As a tumultuous year winds down, Sanlam Private Wealth analysts look to the year ahead and choose the stocks they expect will offer the most value to investors.
In this article, we look at Pieter Fourie’s stock picks for the year ahead.
My selection of five top picks for 2017 includes two consumer staples businesses, an asset management business, a media company and a software company. All these businesses are well positioned for growth and trade on a combined free cash flow yield of 6.2% and return on invested capital of 39.7% based on consensus forecasts.
Pernod Ricard – This is the world’s second-largest wine and spirits company, with a strong portfolio of brands across the different key spirits categories. It’s the market leader in the Asian premium spirits segment, with a strong footprint in China and India. India remains a growth driver for the group, while China has slowed down since 2012 due to the anti-extravagance campaign.
Pernod’s share price has underperformed for a few years and appears attractive to us at 16 times earnings for next year. The company remains geared towards a wider recovery in liquor sales in Asia after a very subdued period over the past three years.
Nestlé – The company’s global reach and consistent organic growth is in many ways unrivalled. It has grown dividends per share by 8% compound over 25 years, and I feel it’s well positioned against competition. The company has struggled to perform over the past few years but I expect announced savings of at least 150 basis points in operating margin over the 2017–20 period, which will allow the company to compound cash operating earnings at a high single digit.
We model long-term growth in cash flow earnings of 5% per annum going forward, which should yield decent total returns after the most recent pull-back in the shares provides a more attractive entry point.
Aberdeen Asset Management – I still believe in Aberdeen’s robust investment process, and its longer term performance is testament to this. Even though the external environment is tough for the company today, it remains geared towards a general recovery in equity markets and emerging markets in particular. The stock is trading on 12 times earnings for next year and yields 5% at current levels. If equity markets continue to grind higher, Aberdeen should benefit from this by virtue of its positive operational gearing to higher equity markets.
Alphabet (Google) – I continue to recommend Google as a long-term core holding as it remains the dominant global search engine with more than 65% of search budgets in the US alone. The sub-industry is growing by more than 14% year on year for the foreseeable future and Google, as the undisputed leader in this segment, is well positioned to capture a disproportionate share of this growth – fuelled by mobile – at a time when competitors are languishing. The company is trading on a free cash flow yield of 5% while the operating free cash flow will continue to grow at least 12% per annum for the next three years. The company also boasts net cash of US$80 billion by year end.
Oracle – The company’s free cash flow yield of 7.5% remains attractive versus its peer group. The investment community continues to question Oracle’s ability to successfully negotiate the strategic move away from on-premises software solutions towards a subscription-based cloud software solution for its customers.
I believe shares should react favourably as cloud numbers continue to be better than expected and as the legacy business performs in line with broader market expectations. Oracle’s management remains confident that software as a service can continue to grow comfortably at a rate above 50% for the foreseeable future to compensate for the loss of revenue on its legacy business as the company continues to integrate acquisitions completed over the past few years.
Pieter Fourie is Head of Global Equities at Sanlam Private Wealth UK