Bargain hunters sniff out cash cows

Where are the cash-flow rich, dividend paying companies with balance sheets that can handle this crisis?

Macquarie has tipped FMG to rebound faster as China recovers from peak virus impact. Picture: Bloomberg

Greed returned with gusto to the local market with two “up” days in row this week — not to mention a massive surge late on Wednesday.

Will it extend further?

Despite Washington’s $US2 trillion “coronavirus stimulus”, US futures suggest it may be difficult to follow on immediately from Wall Street’s double-digit gains midweek.

But it does give investors a useful glimpse into how this market may ultimately recover. Where will the bargain hunters start? Where are the cash-flow rich, dividend paying companies with balance sheets that can handle this crisis?

Macquarie Equities is among the broking firms urgently running the numbers and pointing to “offshore earners” among leading industrials, property, software and financial service companies that “will be among the first to rebound when the market recovers”.

Of course, management at the market’s top stocks won’t be waiting patiently for money to flow their way. Capital raising and rights issues will come first as the most highly regarded stocks race each other to shore up their positions.

Cochlear has fired the starter’s gun with an $880m institutional raising at a 17 per cent discount to a stock that has already dropped from $240 to $160 in a few weeks.

Here’s Macquarie’s 14 stocks in alphabetical order: Aristocrat, Amcor, Cochlear, Cleanaway, Fortescue, Goodman, Harvey Norman, Northern Star, Medibank, Pushpay, REA, Steadfast, Technology One and Transurban.

One thing to note about this exercise is that the broker asked the question sector by sector. In reality that means that sectors which are clearly in a deep struggle still have a best “pick” on the list.

For example, “recovery” may be a relative term for retail giant Harvey Norman. As Macquarie’s Ross Curran explains, at current levels the price of the stock regularly reflects only the value of the Harvey Norman properties - the business itself is barely priced into market valuations.

Curran says the property portfolio at HVN is worth $2.54. The stock closed Wednesday at $2.77, up from $2.61 a day earlier.

The list is also deeply conservative as you might expect from an investment bank in the middle of an economic crisis.

A software pick is Technology One, one of the great survivors from the dot.com era — not Altium, Appen or Nearmap. Technology One’s 99 per cent customer retention rate and a net cash position of $100m would have made the difference here.

Similarly, analyst Hayden Bairstow’s observation that “China is already recovering from the peak impact of COVID-19” is the obvious catalyst put forward for selecting Fortescue, which is still enjoying a $US80-plus per tonne iron ore price coupled with strong cash flow and long dated debt.

With a strong balance sheet putting Cochlear on the list - and the broker forecasting that most procedures will be delayed but not cancelled - its planned raising should be successful.

Two property related stocks grace the list with REA tagged as “a quality name with scope for long-term earnings growth at a reasonable price”.

Similarly, the recently restructured Goodman industrial property group, which now has a gearing ratio of just 10 per cent, is seen as “the top property name to buy due to favourable structural tailwinds”.

The unexpected member of the selection is Pushpay, which “develops online giving and engagements platforms for the faith sector”. With a market capitalisation of less than $1bn, the stock would be the minnow of the list but “giving to religion is relatively recession proof” says the broker.