10 stocks driving L1 Capital’s returns (including 5 ASX names)

The L1 Capital Long Short Fund Monthly Class has returned 20% p.a. net of fees between its September 2014 inception and 30 April 2024 – versus a return of 7.6% from the ASX200AI. These strong, long term returns have been generated through a bottom up, value-orientated, often contrarian approach.   

The strength and resilience of the US economy has been the biggest surprise for financial markets in recent times, said L1 Capital’s Head of Research Amar Naik in an investor webinar last week. He also called out recent improvements in Europe and particularly the UK.

Australia has been largely “middle of the pack” with GDP growth below the long-term trend but relatively resilient, underpinned by the strength of our labour market and assisted by commodity prices. But there are two key reasons L1 believes Australia remains well supported from here:

• Surging migration: “It's growing at its strongest pace since the 1950s and that likely supports growth for the next few years,” Naik says.
• Commodity prices: “They've remained solid, particularly oil, gold and copper”

Naik also highlighted China as a positive: “More recently, they've pivoted stimulus to resolve the housing oversupply issue…For the first time since the real estate downturn began, we've seen top officials look to directly address issues in the housing market.”

On the long side of L1’s portfolio, the fund is “more biased to low PE stocks that are quality companies with good growth outlooks.”

“And if you look at where low PE stocks today trade versus history, they continue to be at a discount to the market relative to their long-term average. So, we are still finding a rich opportunity set for stocks out there,” Naik said.

Joint Managing Director and Co-Chief Investment Officer Rafi Lamm highlighted the following key themes and stocks that L1 believes offer compelling, asymmetric risk-reward.

Arcadium Lithium (ASX: LTM)

“Arcadian lithium has suffered as Australian investors have exited the stock following the merger with Livent, falling lithium prices and a deferral of some growth projects,” Lamm said.

“More broadly, however, we remain positive about Arcadian lithium's prospects over the medium term.”

In infrastructure, Lamm noted many companies have lagged due to pressure from rising interest rates. This has created opportunities to buy “high quality, monopoly-like assets at a discount,” including Fraport and AGL.

Fraport (ETR: FRA)

He highlighted Fraport, one of the leading players in the global airport business, whose key asset is Frankfurt Airport. “They're currently in the final stages of constructing the new 4 billion Euro third terminal in Frankfurt, as well as a new terminal in Lima.”

AGL Energy (ASX: AGL)

Lamm believes AGL will be a long-term beneficiary of strong long-term demand for electricity, with its lowest cost base-load generation in NSW and Victoria.

“After a modest forecast dip in FY 25, strong medium term free cash flow will enable solid dividends as well as a substantial investment in energy transition,” he said.

CRH (NYSE: CRH)

The largest building products company in North America, CRH shifted its primary share market listing to the NYSE from the LSE. “This has led to a partial closing of the valuation gap to well-known USA peers…CRH, however, is still only trading on a PE of around 15 times,” Lamm said. At the same time, it is benefitting from massive US government funding of infrastructure projects.

Flutter (NYSE: FLUT)

Also the largest in its space, Flutter holds a 53% share of the US sports betting market – which is tipped to more than double to around $40 billion by 2030.

“We expect a near term positive inflexion in USA profitability as a result of years of heavy investment. We think the stock is cheap trading on around 23 times FY 25 earnings, despite our expectation of circa 30% per annum EPS growth for the next few years,” Lamm said.

Tesco (LSE: TSCO)

The number one operator of UK supermarkets, Tesco holds a stable market share of approximately 27%.

“They have a strong balance sheet including a massive property portfolio [and] the current management team is highly disciplined and shareholder friendly,” Lamm said.

“It is trading on only 12 times with large buybacks underway and we expect it to continue over the medium term.”

Bluescope Steel (ASX: BSL)

Noting recent weakness in BlueScope shares, Lamm believes this is “normal in a cyclical industry [and] is likely to recover in time.

“Copper demand is likely to be stronger for longer despite a weak global economy, with continued emerging market structural growth joined by recent strength from the global energy transition.”

Lamm also discussed copper and gold, where he emphasises the strong ongoing demand for gold from Chinese consumers along with central banks: “Chinese and many other emerging market central banks have been consistent buyers of gold in recent years, but remain very underweight versus key Western counterparts like the Fed.”

He believes this demand for gold will continue to grow “over the short, medium and long-term.”

Some ways L1 is investing in copper and gold include:

Teck Resources (NYSE: TECK)

“A highly strategic business trading at a discount to pure-play copper peers. We believe it retains substantial strategic attraction.”

Westgold Resources (ASX: WGX)

A WA gold miner producing around 250,000 ounces per annum, with production expected to grow to over 400,000 ounces per annum following the completion of a merger with Canadian miner Karora in the coming months. “Management has successfully turned around the company over the last two years and is now focused on generating strong cash flows…We expect the large discount to Aussie peers to close as management continues to deliver solid operating performance in the quarters ahead,” Lamm said.

In Uranium, Lamm singles out NexGen Energy, a Canadian miner that owns the world’s largest high-grade, undeveloped uranium project.

NexGen Energy (ASX: NXG)

“NexGen is set to produce around 30 million pounds per annum of uranium at low cash costs resulting in around 3.4 billion Canadian EBITDA per annum at an assumed $100 uranium price,” he says.

Lamm sees NexGen’s exploration and development potential of other highly prospective tenements as a “huge free option not embedded in the stock today.”

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