Here's how the #1 stock picks for 2022 are tracking

Well, folks, we've made it - and by that, I mean through the first quarter of 2022. It's been tough, tiresome, and damn it, sometimes terrifying, but at least the country's finest stockpickers (and their 18 stock picks) can help sail us through the stormy markets that conceivably lie ahead. Right? 

Wrong. Or at least for the first quarter of the year, that is. Our 18 fundie favourites delivered a total return (inclusive of dividends, capital gains and currency movements) of -3.15%. Of these 18 picks, 11 are currently in the red. 

The worst-performing Aussie stock in the first quarter was Raiz (ASX: RZI), cascading 41.97% in the first three months of the year. Meanwhile, the best performing Aussie fundie pick in this list was Sims (ASX: SGM), up 37.28% in the first quarter. 

For those that prefer some global flair, Novartis (SWX: NOVN) was the best performer with a return of 0.44% in the first quarter of 2022. Interestingly, all five other global stocks picked in this series are not doing quite so well. 

Nonetheless, they say a slow and steady approach wins the race. And while it takes a certain level of chutzpah to continue to back a company when it's down, all but one of the fund managers featured in the 2022 Outlook Series continue to back their high-conviction calls for the remaining three quarters of the year. 

Before you start blurting various four-letter expletives and give up on the market entirely, it's important to remember that investors' best returns are often made during periods of correction and crisis. 

In fact, recently, a very smart financial adviser alerted us to research from Bank of America on the perils of panic-selling and trying to time the market. 

The wealth manager found that if an investor, starting out in the year 1930, had missed the S&P 500's 10 best days each decade, their portfolio's total return would stand at 28%. Interestingly, if they had held steady through the ups and downs, this return would have been a nice 17,715%. 

So sit back, relax, and resist panic selling when you perhaps don't need to. We hope you enjoy this first-quarter update featuring 18 fundies' thoughts on their number one picks for 2022 - and why they are still backing these stocks over the year ahead. 

Our featured experts include:

• Anthony Aboud, Perpetual Asset Management
• Chad Padowitz, Talaria Asset Management
• Eleanor Swanson, Firetrail Investments
• Nick Griffin, Munro Partners
• Simon Shields, Monash Investors
• Richard Ivers, Prime Value Asset Management
• David Moberley, Paradice Investment Management
• Mark Landau, L1 Capital
• Hamish Carlisle, Merlon Capital
• Adrian Martuccio, Bell Asset Management
• Bob Desmond, Claremont Global
• Dean Fergie, Cyan Investment Management
• Matthew Kidman, Centennial Asset Management
• Nick Pashias, Antares Equities
• Steve Johnson, Forager Funds
• Steve Black, Pengana Capital Group
• Chris Demasi, Montaka Global Investments
• Michael Steele, Yarra Capital Management

First-quarter update, from best to worst

1. Sims (ASX: SGM)

• Fund manager: Nick Pashias, Antares Equities
• Q1 return: 37.28%

Sims is currently top of the leader board for our fundies' top picks. And while it has already had a stellar run in the first quarter of 2022, Pashias believes there could be further fuel in the tank for the recycled metals company's share price over the three quarters that lie ahead. 

"The Russia/Ukraine conflict has helped scrap prices rise - Russia and Ukraine are exporters of steel, iron ore and pig iron, so the loss of this supply has benefitted scrap," Pashias said. 

On its investor day, SGM was well received by the market, demonstrating it not only has strong operating momentum but also plays a significant role in the circular economy, he added. 

"The SGM result in February was also very strong, and pleasingly, cashflow was also very strong, which is something the market had been concerned about. So we still have conviction that there is more left in the stock."

2. Harvey Norman (ASX: HVY)

• Fund manager: Anthony Aboud, Perpetual Asset Management 
• Q1 return: 14.08%

Over the first quarter, Harvey Norman outperformed the market, with a return of 14.08% for the quarter (including dividends). 

"Its interim results beat expectations with pre-tax profit up 72% on two years ago and second-half revenue growth accelerating," Aboud said. 

"The only thing which has changed is the macro outlook. There is a growing consensus that discretionary retail is going to become more difficult over the next twelve months with higher interest rates, higher inflation and more money being spent on travel and experiences." 

While this may or may not come to pass, the market is already forecasting earnings to fall in FY23, with some analysts predicting a double-digit fall in earnings, he said. 

"We believe that HVN remains a good investment. With a PE of 10.5 times, an ungeared balance sheet, $3.5 billion in sought after property, a strong market position, well-diversified supply chains and growth from expansion in global markets," Aboud said. 

"We believe that HVN is in a strong position with a stellar balance sheet (as mentioned above, $3.5 billion of property and virtually no net debt), growth from international markets, and great retailers with a strong market position and well developed and diversified supply chains."

3. Hansen Technologies (ASX: HSN) 

• Fund manager: Steve Black, Pengana Capital Group 
• Q1 return: 8.88%

Black said his enthusiasm towards Hansen remains intact - and it's no surprise. Hansen Technologies was the third-best performer on our fundies' tip list. 

"In a soft market, Hansen’s price has traded up on the back of solid half-year result, where profit improved 13%. They also announced in March an important US$25 million multi-year contract with Exelon Corporation," he said. 

"For a business with largely recurring earnings that trades on a PE of only 18 times next year's earnings, Hansen remains a high conviction holding for our fund." 

4. Equity Trustees (ASX: EQT)

• Fund manager: Richard Ivers, Prime Value Asset Management 
• Q1 return: 6.43%

Similarly, Ivers continues to back Equity Trustees for the three quarters ahead, with the stock returning 6.43% while the S&P/ASX 300 dropped 1.28% during the first quarter. 

"EQT reported a strong first half result in February with underlying NPAT +19%," Ivers said. 

The stock has performed well in a very tough market for small-cap industrials, he added. 

"We continue to like the business, expecting ongoing organic earnings growth plus the potential for acquisitions including AET which IOOF recently indicated it may divest." 

5. QBE Insurance Group (ASX: QBE) 

• Fund manager: Hamish Carlisle, Merlon Capital
• Q1 return: 3.07%

Carlisle continues to back his top stock, QBE Insurance, after it returned more than 3% during the quarter. 

“We saw some reserve strengthening during the December half which is fairly typical under a new CEO," he said.

"The underlying margin continued to improve, premium inflation remains very strong and there are further tailwinds from rising interest rates.”

6. Novartis (SWX: NOVN) 

• Fund manager: Chad Padowitz, Talaria Asset Management
• Q1 return: 0.44%

Novartis has lifted 0.44% in Aussie dollars in the first quarter of 2022, or up 5.42% in CHF (including a dividend of 4%). 

"In the CHF equivalent, it has outperformed the MSCI World and S&P 500 indices by 9.81% and 9.47% respectively," Padowitz said. 

"We are still confident in Novartis. We believe that is well placed to perform in the current environment of slowing growth and persistent inflation." 

7. Visa (NYSE: V) 

• Fund manager: Bob Desmond, Claremont Global
• Q1 return: -0.56%

In an irrefutably tough market, Visa has performed well year-to-date compared to the overall market, Desmond said. 

"Q1 revenues were up 25% versus a high-teens guide, helped by a strong recovery in cross-border and services revenue," he said.

The payments giant has also resolved its issues with Amazon and the market's concerns over disruption risks appear to have lessoned, Desmond added. 

"The company currently trades for 27 times the next twelve-month consensus earnings, which we believe is a fair price for the depth of their competitive advantage and the mid-teens earnings growth we expect over the medium term," he said. 

8. EML Payments (ASX: EML) 

• Fund manager: -6.81%
• Q1 return: Simon Shields, Monash Investors

After a tough first quarter, Monash Investors has decided to exit its position in EML Payments. 

"We have a strike system here at Monash - the result in February missed the mark, and we didn't see the rebound that we were hoping for in gross volumes printed," Monash's Shane Fitzgerald said. 

"While the company had flagged higher costs, the costs were higher than the market was expecting." 

After this disappointing result in February, Monash noticed a spike in the short interest on the stock. 

"That was the second strike for this stock. Better to shoot first, and ask questions later. With both of those issues occurring so close to each other, back to back, we decided to exit the position (this was about a month ago)," Fitzgerald said. 

"This doesn't mean we won't own the stock again. We are waiting for the next data point or result to see how the company is tracking. We will also be watching to see whether concerns over the earnings power of the business and whatever is prompting the short interest in the stock to be remediated." 

9. IDP Education (ASX: IEL)

• Fund manager: David Moberley, Paradice Investment Management
• Q1 return: -8.46%

Like other growth stocks, IDP Education has been caught up in the relatively recent sell-off of high PE names. Even with its share price down more than 8% in the first quarter (and nearly 22% year to date), it is still trading on a PE of 128.4 times. 

For the first half of the financial year, IDP reported revenues of $397 million, up 47% compared to the same period in FY21. Earnings before interest and tax were up 61% to $77.9 million. Meanwhile, IELTS volumes also increased during the quarter, up 79%. 

David Moberley recently resigned from Paradice Investment Management after 10-years with the firm. Moberley formerly managed the firm's Equity Alpha Plus Fund. With this in mind, Paradice's Julia Weng has provided commentary on the stock. 

"IDP has been caught up in the 'growth' basket that has lagged more obvious inflationary hedges. However it has not wasted a crisis and continues to execute commendably against a tough backdrop of COVID impacted border disruptions," she said. 

"We think the August results will demonstrate the fruits of its labour. Over the last two years, IDP has significantly diversified its end markets, strengthen its tech platform and is likely to emerge a stronger competitor given the fragilities of smaller businesses with weaker balance sheets the pandemic has likely exposed." 

The firm continues to back IDP over the medium term given the strength of its business model, operating leverage, management strength and balance sheet, she added. 

10. Entain (LON: ENT) 

• Fund manager: Mark Landau, L1 Capital
• Q1 return: -8.55%

Landau is still positive on Entain, despite its negative return in the first quarter. 

"While we expect some negative headlines in May as the UK regulatory review is handed down, we believe the more important part of the story is how well Entain is doing in the US," he said.

"We believe the US market will grow massively over the next five years and, at maturity, will end up being more than five times the size of the UK market. Entain has established itself as a leading player in both sports betting and iGaming.”

11. Nvidia (NASDAQ: NVDA)

• Fund manager: Nick Griffin, Munro Partners
• Q1 return: -12.99%
  

Like many of the stocks on this list, Nvidia has been caught up in fears over the US Federal Reserves' monetary policy tightening. 

“The stock has sold off after a strong 2021. Despite this, we believe the structural trends driving Nvidia's earnings growth over the long term will continue to endure, and ultimately, their stock price will follow those earnings," Munro Partners said. 

Nvidia continues to enable the shift to accelerated computing, critical for artificial intelligence, which Munro Partners believes to be essential for the next era of growth for semiconductors. 

"In addition to the hardware chips being designed by Nvidia today, the company recently acknowledged that its long-term earnings opportunity will be driven by a software model which reinforced our conviction in the stock," the firm said. 

12. RPMGlobal Holdings (ASX: RUL) 

• Fund manager: Steve Johnson, Forager Funds
• Q1 return: -14.88%

Despite the negative return in the first quarter of the year, RPMGlobal remains one of Forager's largest investments.

"The company has been enhancing its software and advisory capabilities: integrating two acquired software modules, two acquired environmental consultancies and building five new products internally," Forager said. 

"In February RPM announced that annual recurring subscription revenue had climbed to $27.9 million, an increase of nearly 80% on the prior year and continuing the momentum from the last half." 

Its financial result for the first half was also impressive, Forager said. 

"The business remains very well capitalised, with more than $32m of cash on the balance sheet and more to come this half." 

13. Megaport (ASX: MP1) - picked by two fund managers

• Fund manager: Eleanor Swanson, Firetrail Investments and Michael Steele, Yarra Capital Management
• Q1 return: -27.29%

Swanson also continues to have high conviction in her Megaport investment thesis. 

"The main driver of Megaport's underperformance, in our view, has been interest rate rises and the impact a higher weighted average cost of capital has on the valuation of long duration growth companies," she said. 

"Despite the headwind rising interest rates pose to the technology sector, we continue to see material upside in Megaport."

In fact, Megaport generated 75% gross profit margins and 50% EBITDA margins in its recent 1H22 result, she said. 

"The ANZ business is more mature than Megaport’s businesses in Europe and North America. The underlying profitability of Megaport has increased our conviction in the stock’s potential to outperform over the medium term as the business continues to scale," she said. 

"Megaport is a high-quality technology company with recurring revenue, low customer churn and a significant lead over competitors. We continue to see upside in Megaport over the next 12mths and maintain a high level of conviction in our Megaport BUY thesis."

Meanwhile, Steele also believes Megaport is a "highly attractive investment opportunity". 

“The stock’s recent underperformance is consistent with the general market rotation away from growth companies – given the increase in long-dated interest rate expectations – and higher-than-expected costs as reported at the half-year result in February," he said. 

"This increase in costs at the result does not change our positive long-term view given it reflected investment in new products and additional distribution capability. The phasing of this full-year cost investment was weighted to the first half result, meaning lower cost growth is expected going forward." 

With this in mind, Megaport's half-year result provided the Yarra team with confidence that the business is making progress in its efforts to scale, Steele said, with revenue up 42% year on year and gross profits up 69% over the same time period. 

14. Envirosuite (ASX: EVS) 

• Fund manager: Matthew Kidman, Centennial Asset Management
• Q1 return: -31.82%
  

Kidman recognises that Envirosuite’s share market performance has been disappointing in the first quarter of 2022. 

"In the main, this has been due to the wholesale sell-off of tech-related stocks and, in particular those that are not profitable at this stage," he said. 

"EVS operates in 15 countries and sells intelligence software in three categories – airports, mining and water. All of these sectors require solutions and accurate data for their various pollutants and efficiency levels. That leaves EVS in a sweet spot to grow its business."

Kidman also notes the business has a well-capitalised balance sheet and doesn't require any fresh capital other than if it decides to pursue acquisitions. 

"This should see the company head into profitability within the next 12 months," he said.

"Meanwhile, the company needs to show the market that it can continue to add long term contracts while constraining costs." 

Over the next few reporting periods, Kidman will be following this stock closely to see how it tracks. But with a market cap of $188 million and a growing footprint in various growing industries, he believes the business should be able to continue to grow during 2022. 

15. Zebra Technologies (NASDAQ: ZBRA)

• Fund manager: Adrian Martuccio, Bell Asset Management
• Q1 return: -32.58%

After an exceptional 2021, Zebra Technologies has had a tough first quarter with its share price coming under pressure in the face of rising inflation and interest rates, Martuccio said. 

"However, the business is performing strongly and the outlook is solid," he said. 

"The decline in share price in the near term is not representative of Zebra Technologies' strong fundamentals. Their year-end 2021 result beat expectations and the company raised their long-term sales growth expectations to 5%-7%." 

While they have called out some recent cost headwinds, management still expects to be able to increase their EBITDA margins to over 23% this year, Martuccio said.

"The secular growth story remains strong as their enterprise customers continue to digitise their inventory, supply chain and logistics networks," he said.

"The addressable market is around US$12 billion, so there remains a huge opportunity for Zebra Technologies to continue growing given their sales are under US$6 billion." 

He's also excited about Zebra's recent acquisition of a company that specialises in machine vision. 

"This should provide excellent synergies and help Zebra accelerate growth since their addressable market will grow by a further US$2 billion," he said. 

"At this juncture, there is a real disconnect between the quality fundamentals and the discount valuation with the 12-month forward price to earnings ratio now under 20 times." 

16. Spotify (NYSE: SPOT)

• Fund manager: Chris Demasi, Montaka Global Investments
• Q1 return: -37.40%

Spotify was down nearly 40% in the first quarter, as unprofitable growth and technology stocks were sold off sharply in the face of rising rates. 

"It’s more a reflection of near term macro posturing around interest rates rather than the future of Spotify’s business," Demasi said. 

"Spotify will reach a billion users in the coming years and monetize them in several new ways. So our thesis hasn’t changed and this is one to own for the long term. And recently, it's become a lot more attractive." 

17. Raiz (ASX: RZI)

• Fund manager: Dean Fergie, Cyan Investment Management
• Q1 return: -41.97%

Fergie's pick, Raiz, has been the worst performer on this list, but he still remains confident in his selection - particularly given the stock's recent share price weakness. 

"Whilst customer growth in Australia has slowed in the first quarter of 2022 due to recent market volatility (+0.5% to 293,000 active customers), this has more than been offset by continued growth in Asia which has enjoyed growth of more than 10% (to 335,000 active customers) over the same period," Fergie said. 

"We expect customer growth in Australia to re-accelerate as Raiz’s $8 million advertising and marketing deal with substantial shareholder Seven West Media (ASX: SWM) kicks off next month." 

He also pointed to good news out of Raiz's parent company, Acorns Grow, which recently raised US$300 million at a US$2 billion valuation. 

"As a comparison: this values Acorns Grow at approximately 16 times revenue and around US$440 per customer versus Raiz at approximately 5 times revenue and around US$115 per customer," he said. 

"Given the similarities and potential synergies between the businesses, some industry consolidation is certainly a near-term possibility."

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Don't forget to follow my colleagues Hans Lee and David Thornton for their coverage of readers' global and local stock picks in the first quarter of 2022. 

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