Investors Voice (IV) chats with Julia Lee, Chief Investment Officer, Burman Invest on three stocks to buy, three to avoid and those with strong income opportunities.

IV: Your top three stock picks and why?

Julia Lee: I like companies that can demonstrate that an upgrade cycle is underway.

QBE like other global insurers is strong premium growth. Premium growth is much greater than claims growth which means an increasing margin environment. Cost reductions together with an improving margin environment should see better earnings over the next few years.

Charter Hall has seen strong funds under management (FUM) growth over the last 12 months. Part of that has been the strong growth in value of industrial assets. This is likely to continue as the e-commerce sector continues to grow. The pipeline of projects has grown to a record amount and is driven by office and commercial projects.

This pipeline will power future growth for Charter Hall. With several funds outperforming, performance fees should boost performance over the next 6 -12 months. A combination of a growth in FUM, strong development pipeline, outperforming funds and rising asset values should underpin the share price.

Pilbara Minerals is a lithium miner. It offers exposure to brine in South America and spodumene production in Australia. The demand for lithium is growing rapidly due to the fast growth of Electric Vehicles (EV). Low supply compared to demand for lithium is expected to provide support for prices near term. Pilbara announced an increase in JORC resources at its Pilgangoora resource with a formal announcement around an ore estimate expected in October. With near term production growth on the cards, Pilbara is a key pick amongst the lithium miners. 

IV: Which stocks to avoid and why?

Julia Lee: I avoid companies where the share price may have fallen dramatically.

While to some, they may seem like value, usually the thesis and outlook for the company has changed. There is usually a very good reason for the fall. For that reason, stocks I would be avoiding include A2M (A2 Milk), APX (Appen) and MSB (Mesoblast). These are the three worst performing of the year and for different reasons.

For A2M, the opportunity to grow in China has changed dramatically. There is a preference for domestic brands instead of offshore.

For APX, it looks like the major tech companies are investing in their own AI driven data annotation segments. While APX should still find customers in this space, it will be more costly compared to acquiring large chunks of business from the top tier tech companies.

For MSB, it was up for potential commercialisation for three of its products but with all three falling over in the past year, it looks like shareholders will need to stump up more time and money before any success towards significant commercialisation.

IV: Where do you see strong income opportunities?

Julia Lee: When looking for income opportunities, it is important to look at earnings growth too. Some companies may offer an attractive yield but if the share price falls substantially, any income benefit may be outweighed by capital losses.

To mitigate this risk, companies offering earnings growth and a strong yield are usually ideal candidates for income.

Telstra was a standout this reporting season. It looks like mobile growth has bottomed and will be a key driver of earnings growth in the next few years. This should underpin dividends. The potential sale of assets also offers potential capital return and value realisation for shareholders. Given Telstra is the largest component in the telecom sector, the telecom sector looks good.

The other area is infrastructure such as TCL (Transurban Group), SYD (Sydney Airport Holdings) and AZJ (Aurizon Holdings). All are looking reasonable from a valuation perspective. With TCL and SYD, the key is yields recovering post pandemic.

IV: Any investment decisions you made (or did not make) in the last six months that you regret?

Julia Lee: I’m usually good at cutting losing positions relatively quickly so most of my regret has to do with cutting winning positions too quickly. IPH, FBU (Fletcher Building) and BLD (Boral) are stocks I wish I had held on for longer.