Bell Potter: 4 quality stocks now at a discount

The one silver lining to widespread market sell-offs is that quality companies can get caught in the crossfire.

With uncertainty the order of the day, the quest for quality takes centre stage. 

Bell Potter has released its pick of the best stock picks that it believes are now undervalued following the recent market turmoil.

Sentiment-driven selloffs can impact all stocks, meaning even high-quality, fundamentally sound businesses can experience valuation compression unrelated to their intrinsic worth. This creates valuable windows to buy quality stocks at more reasonable valuations.

While valuations have dropped, aggregate market earnings forecasts over the last 6 weeks remain strong, opening the door to buying opportunities.

Bell Potter’s “quality at a discount” screen searched for companies based on balance sheet strength, high and sustainable returns on equity and consistent profitability.

It then assesses their potential for growth, earnings momentum and looks for stocks with notable P/E compression over the last few weeks to produce a list of 20 quality mid- and large-cap companies that are well-positioned and likely undervalued.

Market volatility creates timely opportunities to acquire high-quality businesses at more attractive valuations. 

Bell Potter's quality stocks

Bell Potter's quality stock screen identified the following 20 mid- and large-cap stocks as those with solid growth and strong fundamentals that may have overcorrected in recent sell-offs.

We take a closer look at their 4 standout picks below.

REA Group (ASX: REA)

With its dominant position in Australia’s online property market, Bell Potter believes REA Group can achieve double-digit earnings growth through increased yields from price rises and premium products like Premiere+ and Lux.

REA is expected to improve its EBITDA margin to close to 70%, and with strong free cash flow, is forecasted to eliminate its debt and achieve a net cash position of $1 billion by FY27.

While it may face increased competition from rival Domain in the face of CoStar’s takeover bid, Bell Potter believes REA will remain the market leader for the foreseeable future.

Aristocrat (ASX: ALL )

With clear growth potential and strong financials, Bell Potter believes Aristocrat is now at an attractive entry following recent declines.

Despite recent concerns about lower US consumer sentiment and its impact on gaming stocks, analysis suggests a lack of correlation to gross gaming revenue (GGR) which is at near-record highs.

Aristocrat is projected to maintain a 25% return on equity and is expected to achieve double-digit EPSA growth in FY25 as it launches new products and grows its market share.

Resmed (ASX: RMD)

Medical stocks score highly on Bell Potter’s screen thanks to their resilience and profitability and could be well-positioned as defensive growth stocks in today’s macroeconomic environment.

Resmed has returned 12% p.a. EPS growth since 2014 and around a 25% return on equity, with a net cash position anticipated by the end of FY25.

While the introduction of GLP-1 weight loss drugs hit the stock in 2023, Bell Potter believes its drop to a 21x forward P/E overplays the risk. 

And with Resmed’s main rival Philips still unable to sell sleep apnoea devices in the US, it looks set to enjoy a near-monopoly in the space.

Telix Pharmaceuticals (ASX: TLX)

Specialist radiopharmaceutical company Telix has had a busy few years with new product launches and strategic acquisitions, helping it achieve a 44% EPS CAGR over the last 2 years.

With expanded distribution and aggressive investment, it’s also expected to produce strong earnings growth over the next few years.

At a forward P/E below 40x, it now represents a reasonable valuation according to Bell Potter.

 Would you buy these stocks? Let us know your thoughts in the comments below.