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Is it time to start buying high quality, fundamentally sound companies?
With markets capitulating, cryptocurrencies sold off and the property market starting to dip, the widespread damage has been indiscriminate and unnerving. The ASX 200 Index is down 7 percent for the month and down 11 percent for the year to date. Many shares are now dipping below pre-pandemic levels but the market is still retaining the long term bull market trend.
We’re only halfway through the last month of the financial year, which means we’re not out of the woods yet. Tax-loss selling is a trend that occurs each June, which accelerates in the second half of the month. Investors accept the capital loss to offset capital gains. However, the selling pressure is usually focused on the worst-performing shares as they are sold down even further just before the end of the financial year.
No one is immune from this type of indiscriminate selling. Even the good guys get hurt. High quality companies including some of the best-in-breed names with rising earnings, were caught up in the bloodbath. Great Australian labels are among the hardest, CSL is down 14.41 percent for the year, Westpac Banking Corp (ASX:WBC) is down 28.25 percent and Wesfarmers (ASX:WES) is down 26.41 percent.
And that means, its bargain season.
Once the market weakness subsides, there could an opportunity to pick up some of the best-in-breed names at a discount. By July, the market may well have fully priced in forward-looking inflation and interest rates. Barring any other black swan events, July could be a great month for markets to recover as tax-loss buyback start to buy back. If history is anything to go by, over the last 7 years, there has only been one down year and six years of positive returns during July.
What high-quality companies are trading at big discount
Ignoring the share price, we selected companies with increasing earnings, a strong balance sheet and a focus on profitability, debt levels and dividends. Here are the parameters:
- Debt-to-Equity (D/E) ratio less than 70%
- Positive PE ratio but less then 30x
- Quick ratio greater than 1
- Market capitalisation $5bn
Here are the results after using a few ratios that filter through companies that are fundamentally sound.
It goes without saying that Australia is during another mining boom combined with soaring energy prices. Whilst all of the above-mentioned companies are showing excellent fundamentals, Sonic Healthcare (ASX:SHL) has been flagged among brokers as a top stock to own.,
Sonic is responsible for the provision of medical diagnostic services and the provision of administrative services and facilities to medical practitioners. Currently, there are 10 Buy recommendations 9 Holds and 1 Sell.
- Credit Suisse has an Outperform recommendation with a target price of $40.00. The broker highlights the fact that globally testing rates for coronavirus are still strong. As a result, earnings assumptions have been upped to account for stronger testing volumes, estimating this will add $1.1bn or 43% to FY21 EBITDA. It also expects more than a -$1bn reduction in net debt in FY21. Strong growth should keep the Australian business humming at 13% and the US business at 10 percent.
- Morgan Stanley has an Overweight recommendation with a target price of $40.00. Sonic is spending $585 million on acquisitions and joint ventures in H1 2022. The company’s base business revenue is rising, HY22 base revenue was up 4.3% year-on-year and up 2.5% compared to HY20.The market seems to have underappreciated this announcement. The team have a target price of $40, which is 20 percent above the current price.
All in all, the market hasn’t caught onto Sonic’s ambitious growth plans, yet, at least according to the research industry. The company has a robust foundation and is cashed up and ready to invest and expand.
