12 stocks for the next selloff

In the first part of this collection, I asked three fund managers (below) whether they are bulls or bears when it comes to the reopening. In the second part they answered whether valuations are better or worse than they were a year ago, and where are they headed over the next 12 months

In this third and final part, an underplayed Aussie soft metal company (no, not the musical genre), a basket of defensives and a few US leaders in their respective fields are named as stocks our three fundies would buy in another downturn. That’s not to say any of them strongly anticipate another big leg down for financial markets.

Before we proceed, let’s reflect on what we’ve learned so far:

• They’re all reasonably optimistic on the market outlook – even if none are unreservedly bullish.
• Elston Asset Management's Bruce Williams is positive on the prospects for local names in travel and healthcare.
• Montaka Global Investment's Chris Demasi doesn’t like to make predictions, but after a twist of his arm, suggests cyclicals could re-rate.
• Datt Capital's Emanuel Datt holds a rather contrarian view on the sustainability of the commodities sector, which many regard as overheated, largely on the back of sky-high iron ore prices.

In this wire, they get down to brass tacks and name a few stocks that are on their watchlists. In most cases, they already own small parcels of the shares but would jump at the opportunity to buy more if prices pull back.

3 stocks with massive market growth potential

Chris Demasi, Montaka Global Investments

Salesforce is one of the companies I’d like to highlight. A customer relationship management software company, it’s about more than just software. It’s actually the backend platform for companies to run their CRM systems.

Over the long term, it can compound returns in the high teens on an average annual basis for a long time. That could see its share price double every three to five years for decades. It still only has around 20% of the very fragmented cloud software-as-a-service CRM market and is the leader in that space, despite competing against many homegrown systems. But Salesforce provides a more comprehensive solution that is also very sticky. We also like the recurring subscription fee model, which should continue to grow as it offers additional services and products to existing customers, with a very long runway ahead.

Blackstone is another company we like. This is a company we’ve spoken about on Livewire before. Though it’s known primarily for private equity deals – particularly leveraged buyouts – the company has become a much more comprehensive alternative asset and private market asset manager. That's important, because they can now do so much more for their clients, and their addressable market has swelled.

Private assets and private equity, in particular, are still only in single-digit percentages of the public equity markets in terms of asset allocation by large institutions. That has been changing rapidly over the last decade, but there's still a long way to go, as people understand not just the benefits of investing in market assets, but also the breadth of opportunities in the private market.

Away from the LBOs and the opportunistic funds, Blackstone is also offering core products. These are less exciting but much more stable and long term in nature. Having been able to repackage them, Blackstone is now offering them as solutions for two other big non-institutional markets, including insurance and retail. This has expanded its market opportunities from US$60 trillion to almost US$180 trillion dollars.

The firm currently manages around US$700 billion, with a “B”, but these markets they’re in now can grow to US$180 trillion, with a “T”. They’re competing alongside the likes of KKR and Carlisle – and we own them, too – it’s just that Blackstone’s not the pin-up model of the bunch.

And then there’s the online gambling company Flutter, whose main brand, FanDuel, is a category leader in the US, with a 45% share of those US states that have legalised online sports betting. FanDuel has won the six largest states that have opened so far and is very well positioned.

With 50 US states, that means the addressable market could grow from around $1 billion today to well over $30 billion over the next decade. Along with DraftKings, FanDuel is the dominant sports gambling platform in the US.

An underplayed soft metal stock

Emanuel Datt, Datt Capital

Market conditions currently are quite benign and I'm not expecting any huge downturn – though of course, you can never be absolutely certain. But if we were to see a sell-off, I’d stick to higher-quality commodity names, such as South32. It seems quite cheap, and we like that it produces a wide range of commodities, with good exposure to base metals, aluminium and many high-demand industrial commodities that we think the world is going to need for quite some time.

Metals X (ASX: MLX), which is one of only two listed tin producers globally, is another company I’d buy if we see a selloff. It’s a name we already hold, but we would add to that allocation.

The tin market is very likely in a long-term structural deficit, and there’s very little new supply coming on - there's only about three days’ worth of actual tin in the global market. So supply is just under severe distress.

I don’t think that’s something that has happened before, and tin is critical to so many of these newer technologies. For example, it is a critical component in soldering circuit boards, which is where most tin is consumed. Metals X is quite a unique proposition but is probably the best way for Australian investors to get exposure to almost 50% of what we consider one of the world's highest-quality assets.

It’s a critical component in devices such as iPhones, which generally have about 10 cents or 20 cents of tin in each mobile phone. There is strong potential for the tin price to at least double because there’s no other option for end-users. But tin is still a tiny cost component, so the price could even double and there would still be no attempt to find a substitute. So, it’s very niche but has the potential to be very lucrative if it all plays out as we expect.

We first encountered the company after noticing the supply and demand dynamics within the industry, having already been aware of Metals X and the Renison mine, which has been operating for more than 100 years but whose life is still being extended. The stock just looks like a real value play for us, with significant leverage to a much stronger tin price.

Defensives in Elston’s sights

Bruce Williams, Elston Asset Management

The opportunities will likely depend on what drives the sell-off and how it affects each company or sector – it’s all about the relative opportunities created. That said, areas we would be looking at include the following:

Banks – aided by an extremely strong property market, offset by the low-rate environment limiting NIM and also increased compliance costs following the Royal Commission. They are reasonably priced currently, given their growth profile but would provide an opportunity at lower levels.

High-quality cyclical growth companies - Those that don’t tend to sit in either the “growth” or “value” buckets but provide consistent returns due to their high degree of exposure to consumer staples, like Amcor (ASX: AMC) and Brambles (ASX: BXB).

Healthcare – CSL Limited (ASX: CSL), Cochlear (ASX: COH) and ResMed (ASX: RMD) are all extremely good companies. All have large market opportunities, hold strong and growing market share and are proactive in research and development to maintain their advantages. Any market-based opportunity to acquire these at a reasonable price should be taken.

Consumer staples – Woolworths, (ASX: WOW), Coles (ASX: COL) and Endeavour Group (ASX: EDV). All have very dominant market positions, operate at scale and are defensive by nature – a great combination in the current environment of uncertainty.

Each sell-off is different; the key is recognising the opportunity and having the courage to take advantage of it.

The wrap-up

After the doomsayers were left with egg on their faces last year, as the lightning sell-off was erroneously extrapolated into a deep and wide recession, it seems no one’s really expecting another market crash. But as the old saying goes, it’s the bullet you don’t see that gets you. Perhaps that’s why most commentators are even less committal than usual. But it was interesting to get a sneak peek at what the above fundies have on their watchlists of stocks they’d buy if (or when) prices take another dive.

Stay up to date with this series

Make sure you "FOLLOW" my profile to read the other entries of this series. In part one, the three fundies revealed whether they’re bulls or bears. And in part two, they each explained whether they regard stock prices as better or worse than a year ago and where they think valuations are headed in 12 months.