Top Stocks 2019: A Sharebuyer's Guide to Leading Australian Companies

By Martin Roth

The definitive guide for putting your money to work

Top Stocks 2019 is your trusted guide for smart investing in the Australian sharemarket. For over 25 years, market expert Martin Roth has shared advice on how to maximise your profits and grow your portfolio. An invaluable resource for all skill levels — from novice investor to professional trader — this book provides clear and accurate information to help you pick the best stocks and gain the greatest value for your money.

Now in its 25th edition, this bestselling guide includes over 100 charts and tables to allow quick reference to company data. Up-to-date information on company financials, business results and performance projections provides the tools you need to make informed and profitable stock decisions. Ignoring the hype, punditry and media noise surrounding the stock market, Martin Roth’s rigorous analysis of financial data delivers an accurate, real-world picture of each company’s outlook.

• Get expert opinions on Australia’s leading public companies
• Compare sales and profit data with in-depth analysis and expert interpretation
• See the latest financial rankings of top Australian companies
• Examine the debt levels, dividends, and overall outlook of companies to gain complete pictures of their real value

When it’s time to invest your hard-earned money, you need accurate and trusted guidance. Martin Roth’s proven methods have weathered market cycles, outlived fads and stood the test of time. In this latest edition, Top Stocks continues to provide you with everything you need to make wise decisions and put your money where it belongs.

• Language: English
• Publisher: Wiley
• Release date: Oct 17, 2018
• ISBN: 9780730363958

Martin Roth

Martin Roth is a veteran journalist and foreign correspondent who lived in Tokyo for seventeen years and whose reports from throughout Asia have appeared in leading publications around the world. He now lives with his family in Melbourne, Australia, where he enjoys walking his black Sarplaninac mountain sheepdog and drinking coffee in the city’s many wonderful cafés.

Book preview

Top Stocks

Twenty-Fifth Edition

2019

A Sharebuyer’s Guide to Leading Australian Companies

Martin Roth’s

The author and publisher would like to thank Alan Hull (author of Active Investing, Revised Edition, Trade My Way and Invest My Way; www.alanhull.com) for generating the five-year share-price charts.

This twenty-fifth edition first published in 2019 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

First edition published as Top Stocks by Wrightbooks in 1995

New edition published annually

© Martin Roth 2019

The moral rights of the author have been asserted

ISBN: 9780730363927 (pbk.)

9780730363958 (ebook)

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

Cover design: Wiley

Cover image: Financial Chart © monsitj / Getty Images

Charts created using TradeStation © TradeStation Technologies, Inc. 2001–2015. All rights reserved. No investment or trading advice, recommendation or opinions are being given or intended.

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

CONTENTS

Preface

Introduction

Part I The companies

1300SMILES Limited

Accent Group Limited

Adelaide Brighton Limited

AGL Energy Limited

ALS Limited

AMA Group Limited

Australia and New Zealand Banking Group Limited

ARB Corporation Limited

ASX Limited

AUB Group Limited

Bank of Queensland Limited

Beach Energy Limited

BHP Billiton Limited

Blackmores Limited

Breville Group Limited

Brickworks Limited

Caltex Australia Limited

Capilano Honey Limited

Cedar Woods Properties Limited

Cochlear Limited

Codan Limited

Collection House Limited

Collins Foods Limited

Commonwealth Bank of Australia

Corporate Travel Management Limited

Credit Corp Group Limited

CSR Limited

CVC Limited

Data#3 Limited

DWS Limited

Event Hospitality and Entertainment Limited

Evolution Mining Limited

Flight Centre Travel Group Limited

G8 Education Limited

GR Engineering Services Limited

GUD Holdings Limited

GWA Group Limited

Harvey Norman Holdings Limited

Infomedia Limited

Insurance Australia Group Limited

Integrated Research Limited

IOOF Holdings Limited

IRESS Limited

JB Hi-Fi Limited

Jumbo Interactive Limited

Lendlease Group

Macquarie Group Limited

Magellan Financial Group Limited

McMillan Shakespeare Limited

Mineral Resources Limited

MNF Group Limited

Monadelphous Group Limited

Money3 Corporation Limited

Mortgage Choice Limited

MyState Limited

National Australia Bank Limited

NIB Holdings Limited

Nick Scali Limited

Northern Star Resources Limited

Objective Corporation Limited

OFX Group Limited

Orica Limited

Pacific Energy Limited

Pendal Group Limited

Perpetual Limited

Platinum Asset Management Limited

Pro Medicus Limited

REA Group Limited

Reece Limited

Rio Tinto Limited

Ruralco Holdings Limited

Sandfire Resources NL

SeaLink Travel Group Limited

Seek Limited

Servcorp Limited

Sigma Healthcare Limited

Sonic Healthcare Limited

Southern Cross Media Group Limited

Super Retail Group Limited

Technology One Limited

Treasury Wine Estates Limited

Villa World Limited

Virtus Health Limited

Vita Group Limited

Webjet Limited

Wellcom Group Limited

Wesfarmers Limited

Westpac Banking Corporation

PART II The tables

Table A

Table B

Table C

Table D

Table E

Table F

Table G

Table H

Table I

Table J

Table K

Table L

Table M

Table N

Table O

Table P

Table Q

Table R

Table S

End User License Agreement

Preface

This latest edition of Top Stocks arrives at a time when many investors are concerned about the direction of the stock market. Reasons for a potential fall — possibly a big fall — seem to abound.

Political instability is on the rise and trade wars could be looming. There are renewed concerns about the Euro and about Brexit. House prices are falling in Sydney and Melbourne. Interest rates might start to rise. There are fears that the US, or indeed the whole world, could fall into recession.

Top Stocks is written for times such as these, when the future is cloudy. Because, no matter the direction of the stock market, numerous fine companies continue to emerge in Australia, offering investors great potential. Top Stocks 2019 showcases many such companies.

They are often smaller to medium-sized corporations. Some will be unfamiliar to investors. But all meet the stringent Top Stocks criteria, including solid profits and moderate debt levels.

Of course, such stocks could not withstand the tidal wave of a substantial market sell-off. They too would be affected. But they should be affected less. And if they are good companies they will continue to thrive and to pay dividends. And they will bounce back faster than many others.

This is the 25th annual edition of Top Stocks, and guiding investors towards value stocks has been one of the paramount aims of the book from the very first edition. Indeed, one of the rationales for the book has always been to highlight the truth that Australia boasts many excellent companies that enjoy high profits — and growing profits — regardless of the direction of the markets. Despite the title, Top Stocks is actually a book about companies.

Right from the start it has been an attempt to help investors find the best public companies in Australia, using strict criteria. These criteria are explained fully later. But, in essence, all companies in the book must have been publicly listed for at least five years and must have been making a profit and paying a dividend for each of those five years. They must also meet tough benchmarks of profitability and debt levels. It is completely objective. The author’s own personal views count for nothing. In addition, share prices have never been relevant.

Of the 95 companies in Top Stocks 2019 — four more than in last year’s edition — fully 74 reported a higher after-tax profit in the latest financial year (June 2018 for most of them), including 44 that achieved double-digit profit growth. In addition, 71 achieved higher earnings per share and 69 paid a higher dividend.

And though, as I wrote above, share prices are not relevant for selection to Top Stocks, more than half the companies in the book have provided investor returns — share price appreciation plus dividends — of an average of at least 10 per cent per year over a five-year period.

Australian companies with ­overseas activities

Each year I try to identify trends among the companies of Top Stocks. As this book was being written the dollar was weakening. This will benefit exporters and companies with extensive overseas business.

Investors have on occasion been sceptical about Australian companies taking a big plunge into offshore activity, believing that such moves have a high chance of failure. These doubts have sometimes proven correct. Some local corporations, successful at home, have done poorly abroad. Look at Wesfarmers and its disastrous Bunnings UK venture. But others have performed very well, including some that are in Top Stocks.

For investors interested in this theme, here are companies in Top Stocks 2019 that generate a substantial amount of their revenues abroad. Do note, however, that this does not automatically mean they are beneficiaries of a weaker dollar. Some have in place a hedging program — or some other arrangement — that limits the potential gains from a weak dollar.

ALS provides laboratory analysis services around the world, with nearly 70 per cent of revenues from abroad.

Altium is a high-tech company that conducts most of its activities overseas.

Ansell is a global leader in safety and healthcare products, with 85 per cent of sales overseas.

ARB exports its automotive accessories to more than 100 countries, with overseas business accounting for more than a quarter of total sales.

BHP Billiton is a huge diversified resources company with activities and sales around the world.

Blackmores has a growing business selling its healthcare products to Asia, and this business now represents around 40 per cent of company turnover.

Breville Group sells its home appliances in more than 65 countries, with foreign revenues now comprising about 80 per cent of the total.

Cochlear derives about 90 per cent of the sales for its ear implants from overseas customers.

Codan sells its metal detectors and high-frequency radios to more than 150 countries, representing 85 per cent of company turnover.

Corporate Travel Management derives more than 70 per cent of its revenues from overseas activities.

Evolution Mining sells its gold on the international market.

Flight Centre gets around 45 per cent of its income from its overseas branches.

Hansen Technologies is rapidly expanding its billing services overseas, and this business now represents more than 80 per cent of total income.

Harvey Norman reported in its June 2018 financial results that 22 per cent of its profits derived from its 89 overseas stores. It plans 18 more offshore stores over two years.

Infomedia has most sales of its electronic car parts catalogues outside Australia.

Integrated Research’s specialised performance monitoring software is mainly sold abroad.

IRESS derives more than half its revenues for its financial software from overseas buyers.

Lendlease is a property development and management giant that operates around the world, with about 40 per cent of its revenues coming from outside Australia.

Macquarie Group has banking operations in 25 countries, and international business accounts for around two-thirds of total income.

Mineral Resources is a big iron ore exporter that derives much of its income from abroad.

Northern Star Resources is a major gold producer, with the international gold price determining its sales prices.

Pro Medicus sells medical imaging software, with more than three-quarters of revenues coming from abroad.

Rio Tinto is a major global supplier of minerals.

Sandfire Resources sells its copper on the international market.

Seek, Australia’s online jobseeker leader, is seeing much of its growth coming from its overseas businesses, which now represent around 60 per cent of total company turnover.

Servcorp, the serviced office space provider, does more than two-thirds of its business offshore.

Sonic Healthcare’s fast-growing overseas pathology businesses now account for nearly 60 per cent of total revenues.

Treasury Wine Estates markets its wines around the world, with overseas sales accounting for more than 55 per cent of company revenues.

Webjet is now a leader in the international hotel bed intermediary market, with a substantial amount of its revenues coming from overseas.

Wellcom Group’s corporate design services are enjoying increasing demand outside Australia, with more than a third of total revenues coming from overseas business.

Money management companies

Another trend that has been growing is the rise of listed financial advisers and fund managers. Several, like Perpetual, have been in the book for many years. But others, like CVC and Fiducian Group, are new.

These companies are beneficiaries of the huge — and steadily growing — pool of superannuation money in Australia. Nevertheless, it must be recognised that their fortunes are linked to the financial markets. Their profits will take a hit if the markets fall badly. But they should also recover quickly once investors become active again.

Money management companies

High-tech companies

It was back in Top Stocks 2011 that I first alerted readers to the phenomenon of a growing number of high-tech companies making it into the book. Ten years earlier only one technology company — Computershare — had been in Top Stocks. But since 2011 a dozen or so have regularly made it.

The information technology sector represents only around 2.5 per cent of market capitalisation in Australia (in the US it is about 38 per cent), yet some of these companies have been outstanding performers. In mid September 2018 Australia’s information technology sector was up 35 per cent from a year earlier.

They are generally small companies and it can sometimes be difficult for outsiders to understand just how they make their money. In addition, some are on high price/earnings ratios with low dividend yields. Thus, many investors avoid them.

But technology has infiltrated virtually every facet of our lives, and the best of these companies are set to grow. It is worth taking the time to learn more about them.

Information technology companies

Another trend, an unfortunate one perhaps, is highlighted by the return to the book this year of two debt collection agencies, Collection House and Credit Corp Group. Both these companies could see business expand if the economy starts to falter and borrowers become increasingly unable to repay their debts.

Consumer lending companies too, like Money3, could see demand for their services grow if the economy starts to weaken, although they could also find borrowers struggling to repay. But note the comment of Money3 management that, in the event of a recession, the major lenders, such as the big banks, might tighten their credit controls, thus generating new business opportunities for the smaller lenders.

High dividend yields

With interest rates remaining low, many investors have been seeking stocks offering high dividend yields. These are still a worthy target, as they should offer a degree of protection if the market is falling.

Five years ago, in Top Stocks 2014, with investors looking for smaller companies with high dividend yields, I published a list of smaller companies from the book — a market capitalisation of below $450 million — with a dividend yield of at least 5 per cent.

There were 22 such companies in Top Stocks 2014. In Top Stocks 2015 the number fell to 15, with 16 in Top Stocks 2016, 11 in Top Stocks 2017 and just six last year. This year there are 10.

Dividend yield: small companies

Who is Top Stocks written for?

Top Stocks is written for all those investors wishing to exercise a degree of control over their portfolios. It is for those just starting out as well as for those with plenty of experience but who still feel the need for some guidance through the thickets of nearly 2300 listed stocks.

It is not a how-to book. It does not give step-by-step instructions to ‘winning’ in the stock market. Rather, it is an independent and objective evaluation of leading companies, based on rigid criteria, with the intention of yielding a large selection of stocks that can become the starting point for investors wishing to do their own research.

A large amount of information is presented on each company, and another key feature of the book is that the data is presented in a common format, to allow readers to make easy comparisons between companies.

It is necessarily a conservative book. All stocks must have been listed for five years even to be considered for inclusion. It is especially suited to those seeking out value stocks for longer-term investment.

Yet, perhaps ironically, the book is also being used by short-term traders seeking a goodly selection of financially sound and reliable companies whose shares they can trade.

In addition, there are many regular readers who buy the book each year, and to them in particular I express my thanks.

What are the entry criteria?

The criteria for inclusion in Top Stocks are strict:

All companies must be included in the All Ordinaries Index, which comprises Australia’s 500 largest stocks (out of nearly 2300). The reason for excluding smaller companies is that there is often little investor information available on many of them, and some are so thinly traded as to be almost illiquid. In fact, the 500 All Ordinaries companies comprise, by market capitalisation, more than 95 per cent of the entire market.

It is necessary that all companies be publicly listed since at least the end of 2013, and have a five-year record of profits and dividend payouts each year.

All companies are required to post a return-on-equity ratio of at least 10 per cent in their latest financial year.

No company should have a debt-to-equity ratio of more than 70 per cent.

It must be stressed that share price performance is NOT one of the criteria for inclusion in this book. The purpose is to select companies with good profits and a strong balance sheet. These may not offer the spectacular share-price returns of a high-tech start-up or a promising lithium miner, but they should also present far less risk.

There are several notable exclusions. Listed managed investments — as defined by the ASX — are out, as these mainly buy other shares or investments. Examples are Australian Foundation Investment Company and all the real estate investment trusts.

A further exclusion are the foreign stocks listed on the ASX. There is sometimes a lack of information available about such companies. In addition, their stock prices tend to move on events and trends in their home countries, making it difficult at times for local investors to follow them.

It is surely a tribute to the strength and resilience of Australian corporations that once again, despite the volatility of recent years, so many companies have qualified for the book.

Changes to this edition

A total of 12 companies from Top Stocks 2018 have been omitted from this new edition.

One company, Sirtex Medical, was in the process of being acquired as this book was being published. (Sirtex did not pay a dividend during the latest financial year, so is also excluded for that reason.)

With interest rates remaining low some corporations expanded their borrowings, and five companies from Top Stocks 2018 saw their debt-to-equity ratio rise above the 70 per cent limit for this book:

Aristocrat Leisure

Carsales.com

Coca-Cola Amatil

Domino’s Pizza Enterprises

Retail Food Group

The remaining six excluded companies had return-on-equity ratios that fell below the required 10 per cent:

Blue Sky Alternative Investments

Fortescue Metals Group

GBST Holdings

MACA

Paragon Care

Sunland Group

There are 16 new companies in this book (although eight of them have appeared in earlier editions but were not in Top Stocks 2018).

An interesting returning company is Gold Coast property developer Villa World. It appeared in the very first edition of Top Stocks, published in 1995. Back then it was a star, having given investors a 42.8 per cent annual average return (share price plus dividends) over the previous five years. It was one of the top performers in the book.

In 1997 a survey in The Australian newspaper named Villa World as Australia’s top-performing stock over a 10-year period. According to the newspaper, a $5000 investment in the company in July 1987 would 10 years later be worth around $230 000, or an annual average increase of more than 46 per cent. This return came despite not only the stock market crash of October 1987 but also the severe housing industry downturn of the mid 1990s.

The new companies in this book are:

Brickworks

Collection House

Credit Corp Group

CVC*

Fiducian Group*

GUD Holdings

IOOF Holdings

Jumbo Interactive*

McMillan Shakespeare

OFX Group*

Ruralco Holdings

Sandfire Resources*

SeaLink Travel Group*

Treasury Wine Estates*

Villa World

Virtus Health*

Companies in every edition of Top Stocks

This is the 25th edition of Top Stocks. Just three companies