Firetrail's two ASX high conviction stocks with huge share price potential

“The measure of intelligence is the ability to change.” - Albert Einstein

They say the only constant in this world is change. At any moment, a black swan event could challenge your investing thesis - and the companies that make up your thinking. 

There's a reason why even the world's greatest investors cut their losses - when the facts change, so must your investments.

Being flexible has to be one of Blake Henricks' golden rules of investing. As deputy PM and portfolio manager of the Firetrail Australian High Conviction Fund, he and the team seek to find 25 of the best ideas in the ASX equity universe. But high conviction means high conviction - it's not a one-way growth train or a one-way quality train. Rather, it's an ever-changing process that makes reallocations when the time is right.

In this virtual roadshow presentation, Blake will share his thesis for being flexible - in particular, why you should never be wed to a particular style of investing. 

Using this thesis, he will then share three ASX names that could provide more earnings upside and potential than the standard go-to options in the growth area of the market. 

Finally, he will let us in on the two brightest ideas in Firetrail's value wheelhouse - including one name that could provide 50%+ upside to its share price. 

Don't live by one motto

Blake argues that style biases are a dangerous thing. While you may have a soft side for one investment philosophy or another, styles can underperform for extended periods of time.

The best way to show that is this collection of charts - note the multi-year runs of underperformance for each time and each style.

If you have been only buying "quality" stocks, your portfolio could have underperformed for eight straight years from 2016. Indeed, the same can be said for value and growth-exclusive strategies.

More recently, growth areas of the market have been in a structural underperformance period versus value rivals since November 2020 (timed around the announcement of the COVID-19 vaccine). This underperformance has been exacerbated since the re-rate of January 2022. So is it time to go all-in?

Blake argues the recent sell-off has created opportunities but not all are created equal.

Not all growth plays have tech in their name

Blake and his team like to think of investable opportunities as being on a spectrum - how does valuation stack up against earnings growth? If you like, it's a measure of what you're paying versus what you end up getting.

The perfect bear case for this structure is economically sensitive stocks. For instance, while the Commonwealth Bank (ASX:CBA) has de-rated significantly, its earnings growth is still so low as it deals with strengthening margin pressures. 

CBA does not feature in Firetrail's High Conviction Fund at all.

In total contrast, two other stocks that present far better buying opportunities are Aristocrat (ASX:ALL) and James Hardie (ASX:JHX). 

The first of these picks is purely a risk-reward play. While trading on a similar P/E to CBA, it could net three times the potential earnings growth. The latter of these picks has been a victim of the cyclical slowdown in the US housing market. However, Blake thinks that there is a much greater opportunity for market share growth. 

After all, market share doesn't disappear just purely because the economy is slowing.

On the more defensive end, Blake is backing Resmed (ASX:RMD) over Woolworths (ASX:WOW). Although Resmed is slightly more expensive than Woolworths, the core product is on line for significant growth over a multi-year period. Much like James Hardie, Firetrail believes the pipeline for market share wins will not go away just because we are seeing through the other side of the pandemic. 

Having said this, Resmed's exposure to the global semiconductor chip crisis is a concern - but not nearly as much as main rival Phillips' ongoing product recall.

Value is a whole different argument

The biggest position in Firetrail's Australian High Conviction Fund is exposure to the energy sector - but not through the electric vehicle thematic. 

To illustrate why, Blake takes the case study of Norway - where EV adoption is very strong but oil demand continues to remain robust. 

In the last six months, an extra complication has been thrown into the fire - a global supply-side crunch for oil. Data from 2021 showed that energy companies were now investing just half of the global oil CAPEX of 2014 levels. 

Blake believes we won't see a rebound on this measure for some time yet. Part of the story is to do with the ever-present ESG narrative (and the push thereafter to renewables) but part of it is also simply capital allocation - energy companies are preferring to elect for share buybacks rather than reinvestment leaving ageing oil fields in its wake.

Best of all, energy equities continue to lag higher energy prices!

All in all, it explains why one of Blake's largest overweight positions in the fund is Santos (ASX:STO). As crude oil prices continue to remain high, all this share price can do is keep climbing. As for why this company over the others, Blake notes top brass has a new capital management policy which could see billions returned to shareholders.

In the real estate space, Lendlease (ASX:LLC) has long been considered the ugly duckling just going by share prices. In comparison to its competitors (and even the broader ASX 200), it has delivered negative returns and over the last 10 years, the share price has actually remained relatively flat. But Blake sees it differently - calling it "one of Australia's best exports".

The company's specialisation in urbanising projects gives them a unique edge in a world where more people want a friendly work-life balance. The company also won the $20 billion global scout to win the rights to build Google's new San Francisco headquarters. Google is just one part of what Blake sees as a $100 billion pipeline of opportunity.

So is unloved a good thing? Blake and the team see more than 50% upside to its current share price.

Conclusion

Summing it all up, the answer to the perfect investment strategy is not one route over another. Being nimble, Blake says, is the best way to run a solid return-making portfolio. For growth in a beaten-down environment, look for specific companies that give a high risk-reward possibility. For value in a value winners' environment, know what you're paying for companies that have what it takes to deliver their earnings growth.

Discover more about high conviction investing

Firetrail Investments is an investment management boutique that specialises in high conviction investing. They build concentrated portfolios of their best ideas, to generate outstanding long-term performance for their clients. Click here to find out more.

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