Buy Hold Sell: 6 stocks that could surprise in 2024

Ally Selby: Hey, how are you doing? Welcome to the last episode of Buy Hold Sell for 2023. I'm Ally Selby, and today we have a very special episode for you. We've asked our guests to bring along three of their highest conviction picks for the year ahead. These are stocks that they believe could surprise investors in 2024. Plus, because I love a little bit of drama, we're also asking them to analyse each other's highest conviction stock picks. To do that, we're joined by Hugh Dive from Atlas Funds Management and David Wilson from First Sentier. 

Okay, David, we're going to start with you. It's one of your top picks for 2024. It's Aristocrat Leisure. Why are you buying that stock?

Aristocrat Leisure (ASX: ALL)

David Wilson (BUY): We think the stock is cheap for the amount of growth that we think you're going to be getting over the next three to five years. The PE is under 20x. You've got a great US gaming operations business. It continues to take market share. It's gone from 18% to 25% quickly, and we still think that momentum is there. We think their digital business, which has been flat over the last year or two, has the opportunity to grow. We're not certain when that actually starts to take place, but as and when it does, we think that will greatly assist the share price. Plus, they're going to complete the NeoGames acquisition in the first half of calendar year '24, and we think that gives them another opportunity to grow. At the same time, you've got a great balance sheet. The company continues to buy back stock, so we think this is a stock really well positioned for calendar year '24.

Ally Selby: Aristocrat really hit the jackpot in 2023. Its share price is up 30%. What are your thoughts on Aristocrat, Hugh? Is it a buy, hold, or sell?

Hugh Dive (SELL): We'd look at it as a sell. I mean, it's done very well. It's a great Australian success story. As David talked about, there's great market penetration. But looking at the social casinos, where you're playing the games on your phone, that is a fiendish business, but just the regulatory risks are to be very, very concerned about. That's currently around 30% of their revenue. A wonderful business where you play on this and you can never win, so it falls outside the Interactive Gaming Act. I think the regulatory risks aren't really being priced in on that, and it looks to be a prime area to be regulated and have some quite adverse regulatory findings….I think coming soon. People under 18 can't download these games and the risks are there, so it’s probably a little bit high. But a great story, but a little bit too expensive given those risks.

Woodside Energy Group (ASX: WDS)

Ally Selby: Okay. Let's move on to one of your top stocks. It's Woodside Energy Group. Why are you backing that stock over the year ahead?

Hugh Dive (BUY): Woodside's had a bit of a tough year. They've had falling oil prices. They've had the spectre of the merger with Santos (ASX: STO), which I really don't like as a Woodside shareholder. But ultimately, they have a range of great projects coming on. They've made out like bandits from the BHP petroleum acquisition. They've suddenly got these wonderful assets in the Gulf of Mexico, North West Shelf. They're the operator, the lowest cost producer in Australia, with a barrel of oil cost of $8.50. Three great growth projects on the road. Trion in the Gulf of Mexico, Scarborough off the North West Shelf, and then Senegal Sangomar in Senegal coming on there.

Really well-run company. We see the oil price as being artificially low. It doesn't account for the levels of political risk, particularly in the Middle East. If the Strait of Hormuz is shut off, suddenly the Qataris are taken out of the market and those Australian-producing LNG assets off the North West Shelf are going to be very, very valuable. We've already seen LNG prices recover in the last week when the Houthis in Yemen seized an LNG vessel. I think they're poised to have a very good 2024.

Ally Selby: Okay. Over to you, David. As Hugh mentioned there, it didn't have a really great 2023. Its share price was down around 15% after a stellar 2022. What's ahead for Woodside? Is it a buy, hold, or sell?

David Wilson (HOLD): For us, it's a hold. You're right, it had a stellar '22 and therefore it was probably tougher for it in 2023. And we're pretty neutral on it. We think it's trading at about valuation. It's still got some risk in terms of actually getting approvals for Scarborough, so there's still some volatility around that. The balance sheet's in pretty good order. We agree with Hugh that the oil price is actually quite low and moderated, so for us, it's a hold.

Santos (ASX: STO)

Ally Selby: Next up we have Woodside's potential bride-to-be in Santos. Why are you buying that stock and what do you think of that potential merger?

David Wilson (BUY): Well, we'd be a really willing bride as owners of Santos shares. If Woodside wants to pay a large premium, I'm more than happy for that to happen. So, that's not really why we've owned the stock, but it's certainly an appeal now that's come into the stock over the last little while. We think that what we're going to see from Santos over the next three or four years is their projects come along in Barossa, in PNG, and in Alaska, that the cashflow is going to come through very quickly over the next three or four years, and the company will de-gear very quickly to the point where Woodside is at the moment. So, we think it's actually quite an attractive growth story over those three or four years and a de-gearing story as well in the context of the lower oil price.

Ally Selby: On the back of that merger announcement, the share price popped around 7%, which was great for me because I own Santos, what about you?

Hugh Dive (SELL): It fell for Woodside shareholders. So, I think Woodside shareholders have be taken to that wedding with the shotgun at their back. Ultimately, Santos is an inferior suite of assets. Whilst the Papua New Guinea assets are great, they're not the operator, they're just a shareholder there. The rest of the assets, their fields in the Cooper Basin, we see the stuff there in Gladstone, they're ultimately in decline. There's a lesser suite of assets. I think the only way this merger goes ahead is at a level, a premium that's probably unacceptable for David. Ultimately, we wouldn't want to own Santos when you could own Woodside, a far better stock, better suite of assets, better growth projects and lower debt, lower cost of oil.

Incitec Pivot (ASX: IPL)

Ally Selby: Okay. Next up we have your second pick. It's Incitec Pivot. Why are you backing that stock over the year ahead?

Hugh Dive (BUY): The sheer amount of corporate activity that's all going on there, or particular corporate action activity. They've sold Louisiana, so the cheque cleared I think about a week ago to CF Industries. So, I think in the next couple of days we're going to find out there's going to be a capital return there. Also, we see a significant buyback where they're buying back close to 16% of the share registry. If you buy that quantum of stock back, it's a good thing. Also, the third flank of that is that the fertiliser business is on the share box. There have been questions about the acquirer, getting through FIRB, but if that does get through, we'll see a substantial re-rating into a pure-play explosives play like Orica (ASX: ORI). So, just given the range of activities going forward, that's ultimately likely to put a fair bit of upward pressure underneath the share price.

Ally Selby: Okay. The share price hasn't performed very well in 2023. It was down around 23%. Over to you, David. Is it a buy, hold, or sell?

David Wilson (HOLD): For us, Incitec Pivot is actually a hold. In the case of Incitec Pivot, it's never a boring hold. It's a bit like a hose on a driveway sometimes, in terms of what's happening in the DAP price, the urea price and the ammonia price. And you've got a bit of a binary outcome at the moment around the sale of the fertiliser business. So, that seems to be taking longer. They're probably negotiating on price. But this has happened in a period where Phosphate Hill has continued to disappoint. And it is quite a troubled asset as well. At times it can earn a lot of money, but sometimes it really disappoints. And it's had quite a tough period of late, which may be hurting the sale process. I think the market has largely priced and factored in the buyback capital return that will take place. If you line up Incitec Pivot's valuation versus Orica's, and there are pluses and minuses in comparing the two explosive businesses that would be there in the event that the fertiliser business is sold, then the business is nearly equivalent valuations. So, for us, it's a hold.

James Hardie (ASX: JHX)

Ally Selby: Okay, last one for you today, it's James Hardie. It had an exceptional year in 2023. Its share price is up 90%. Why do you think it can do it again in 2024?

David Wilson (BUY): Well, it's also a little bit the reverse of Woodside because it didn't have an exceptional 2022, it had an exceptionally bad 2022, but a very good 2023 and we think that persists. This is a company that consistently gets a 30% return on invested capital. It has now 90% of the fibre cement market. Fibre cement as a product has gone from 10% to 20% of the US housing market. It's a great success story. They continue to take share and penetration in the Northeast of the US and also also the Midwest as well. So we think that the earnings are intact, and the multiple is not demanding, so we think that the stock is a buy.

Ally Selby: Over to you, Hugh. Is James Hardie a buy, hold, or sell?

Hugh Dive (HOLD): I think it'd be a very soft hold, Ally. I totally agree with David. It's been a wonderful Australian success story, growing heavily in the US. And this is the only building products company that has some meaningful intellectual property. If you look at the tile, brick and concrete merchants, the intellectual property hasn't changed since the time of the Romans, and that is reflected in the margins that James Hardie can earn, 30% versus 3-5% for the others. However, I think it's got a head over the top of its skis. Had a wonderful year. The outlook looks a little bit less clouded. I think the valuation doesn't justify the current price and there's potential for a bit of retracement, but I agree it's a very strong, very well-run company.

Bapcor (ASX: BAP)

Ally Selby: Okay. Last up for you today. Your pick is Bapcor. Why do you think that stock could surprise investors in 2024?

Hugh Dive (BUY): Well, as David talked about earlier, there was a bit of an event in October. They downgraded their earnings. For people who are not familiar, this is Australia's largest retailer of car parts. So, it is very boring - servicing cars for both trade and individuals. Well, looking ahead, there are very low expectations, but ultimately, what they sell is a lot of non-discretionary products. So, cars still crash, and cars need servicing. Electrical vehicle penetration will be positive with higher consumables. Looking ahead, we're seeing an increase in the age of Australia's vehicle fleet from like 10 years to over 11.5. That results in a lot more car servicing. Ultimately, people need to keep their wheels on the road and people will end up paying that. So, what we've seen is that move in that first quarter, more of a delay rather than a final impact. And I think it looks a very attractive way to get into a good little mid-cap at the moment.

Ally Selby: Okay. Over to you David. Its share price is down around 18% year-to-date. What do you think of Bapcor? Is it a buy, hold, or sell?

David Wilson (SELL): For us, Ally, it's a sell. We think that their market share is under pressure in their retail business. It is the number three player behind Supercheap Auto, which is a really well-run business, and Repco. And, in fact, we think that Bapcor is a well-run business, but we think their small and number three position in that part of the market is tougher. They've also put into the market expectations of a cost-out story over the next few years. Invariably, and doesn't matter whether you're Qantas, Telstra, BHP, NAB, whoever… generally cost-out stories disappoint in Australia. And we think there's every chance that Bapcor will also disappoint over the course of that time. So, for us, it's a sell.

Ally Selby: Okay. Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? I hope you have a wonderful holiday period and we'll see you again back in 2024.