Nearly all of the #1 stock picks are in the red for 2022... Here's why that could now change

December 2021 was a starkly different time from where we investors find ourselves now. Back then, Omicron had just hit the press, Australia's eastern coastline was being battered by a deluge of rain, and riskier assets (like growth stocks, cryptocurrencies and property markets) were still in vogue. 

Incredibly, it was also a time when the Reserve Bank of Australia assured the nation it would not increase the cash rate until 2024 when inflation would likely be within its 2-3% target range.  

Oh, how times have changed.

Unsurprisingly, many of the 18 fund managers featured in Livewire's 2022 Outlook Series named growth and tech businesses to outperform over the year ahead. They did not, with the worst stock on this list diving more than 80% since January 2022.

The total return of our fundie favourites now stands at -26.59% (inclusive of dividends, capital gains and currency movements), slightly better than the -30.99% total return that I revealed at the end of the first half. Only four of these stocks are still in the black. 

Given the calamity that we have witnessed this year, and the significant drawdown in our fundies' top stock picks, you may be surprised to learn that nearly all the fund managers featured in this series are still backing their highest-conviction holdings. 

In fact, now that many have re-rated (some worse than others), and the outlook for markets is seemingly improving (if only slightly), many believe the future for their stocks is far brighter over the next six to 12 months. 

So, without further ado, here are the #1 stock picks for 2022, from best to worst in performance (inclusive of dividends, capital gains and currency movements) as of the close of trade on November 30. 

Note: I want to thank the fund managers who shared their views in this piece – in the spirit of the 2022 Outlook Series – amid what continues to be a very challenging time for markets. In case it wasn't obvious, all of the fund managers on this list run diversified portfolios and do not solely invest in their #1 stock picks. 

Our featured experts include:

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

1. QBE Insurance Group (ASX: QBE)

• Fund manager: Hamish Carlisle, Merlon Capital
  
• YTD total return: 15.96%
  
• Still backing the stock: YES

It's probably no surprise that QBE Insurance was top of the pops, with insurance players tipped for a rise as soon as the RBA lifted rates back in May. 

That said, Merlon Capital's Carlisle is still excited for what's to come. 

"QBE has seen premium rates increase by around 8% over the year, which is above inflation in most classes of business, so underlying margins are expanding," he said.  

"Insurance accounting and some reserve top-ups, coinciding with the CEO transition and volatile claims, have masked the extent of improvement as far as reported earnings are concerned, but higher headline margins should emerge over time." 

Since Carlisle pitched the stock in December 2021, the running yield on QBE's US$26 billion investment portfolio has expanded from 0.7% to 3.9% today, providing further earnings upside. 

"These two themes – rising prices and rising interest rates – are very much in-line with our thinking and if anything we are surprised how little the stock has rallied," he added. 

"QBE remains a core holding in our funds.”

2. Novartis (SWX: NOVN)

• Fund manager: Chad Padowitz, Talaria Asset Management 
  
• YTD total return: 11.08%
• Still backing the stock: YES

Novartis is the best-performing global stock pick for 2022 and the second-best overall performer, after posting a total return of 11.62% for the first 11 months of the year. 

"Operationally the company has delivered in line with expectations and has made efforts to streamline the business throughout the year," Padowitz explained. 

"It sold its shares in Roche in late 2021 for approximately US$20 billion and has affected a US$15 billion buyback with the proceeds. This is meaningful when you consider Novartis’ market cap of US$200 billion." 

It has also committed to spin-off its generic pharmaceuticals business Sandoz, as well as other non-core operations, helping to streamline the core company, Padowitz added.

"The shares trade on a more than 7% free cash flow yield and a 4% dividend yield," he said. 

"Novartis' consistently strong free cash flow from its long-life patented portfolio alongside a large share buyback, effectively no debt balance sheet and compelling valuation, have enabled it to overcome equity market weakness." 

With this in mind, the team at Talaria has been increasing its exposure to the stock over the last few months. 

"We anticipate this to remain a core holding in our portfolio for 2023," Padowitz said. 

3. Visa (NYSE: V)

• Fund manager: Bob Desmond, Claremont Global 
  
• YTD total return: 5.30%
• Still backing the stock: YES

Desmond and the team at Claremont Global continue to back Visa and believe it is a clear winner in the digital economy and future payments ecosystem. 

It also recently produced a very solid annual result, reporting revenue growth of 22% and non-GAAP EPS growth of 27%, Desmond added. 

"This was driven by payments volume growth of 15% and a strong recovery in cross-border of 49%, as borders re-opened and travel resumed," he said. 

"This time last year, earnings calls were driven by analyst fears of disruption by fintechs, Amazon (fee disagreements) and high incentive payments as a per cent of revenue. Since then, fintechs are finding life much more difficult as markets are much more focused on profits and have seen large falls in their valuations (and a rise in the cost of capital)." 

Over the last 11 months, Visa has resolved its dispute with Amazon and incentives have been steady. As such, Claremont Global has not changed its view on the stock. 

"At a current valuation of 25 times consensus next twelve-month earnings – the multiple is 5% below its 10-year average and it remains a core holding in the portfolio," Desmond said. 

4. EQT Holdings (ASX: EQT)

• Fund manager: Richard Ivers, Prime Value 
  
• YTD total return: 1.38%
• Still backing the stock: YES

Like the aforementioned fund managers, Ivers and the Prime Value team remain positive on the outlook for EQT Holdings, revealing they have increased their position size in 2022. 

"The earnings quality of trustee businesses is under-appreciated by equity markets as highlighted by the recent takeover offer for Perpetual, EQT’s largest competitor," Ivers explained. 

"The recurring and long duration of the trustee earnings stream makes it a very valuable asset." 

In August, EQT announced the takeover of AET from Insignia for $135 million, which Ivers believes will generate "upside to synergy targets with additional benefits from scale." 

"Its balance sheet is strong enabling further accretive acquisitions to be undertaken should the opportunity arise," he said. 

"We believe the PE multiple of 16 times FY24 looks particularly attractive with earnings growth driven by organic growth, efficiencies from current cost investment and AET acquisition." 

5. Hansen Technologies (ASX: HSN)

• Fund manager: Steve Black, Pengana 
  
• YTD total return: -0.72%
• Still backing the stock: YES

Black and his team are also still invested in Hansen Technologies and revealed that it remains one of the highest-conviction holdings in the fund.

"Trading comments from the company’s recent AGM continue to support our investment thesis," he said, arguing the stock remains as attractive as it did a year ago. 

Why? Well, he points to five key reasons: 

1. HSN boasts recurring income streams from customers operating in recession-proof industries (energy, water and communications). 
2. They rarely lose customers as their billing solutions software is integrated within their customers' IT departments.
3. HSN has low gearing with a 20-year history of accretive acquisitions.
4. It is a founder-led business. Andrew Hansen has run HSN for over 20 years and management is very focused on the long term. 
5. Over the last 13 years, the company’s earnings per share have increased by an average of 15% per annum. 

Despite these five key attributes, the company trades on a 2024 PE ratio of around 18 times, Black said, by virtue of low levels of broker coverage and thus awareness of the stock.

6. Harvey Norman (ASX: HVN)

• Fund manager: Anthony Aboud, Perpetual Asset Management 
  
• YTD total return: -3.12%
• Still backing the stock: YES

For Aboud, Harvey Norman is the perfect example of a company that "has done everything right, but the stock de-rated" anyway thanks to the deteriorating macro outlook. 

Since Aboud recommended HVN in December 2021, the company delivered an FY22 EPS which was 20% above market expectations, with EPS expectations for FY23 5% higher than consensus forecasts in December 2021. 

So, why has the stock performance been poor? It all comes down to the economy, he said.  

"The macro outlook has deteriorated which has created perceived headwinds for all discretionary retailers with HVN being no exception," Aboud explained.  

"With the RBA cash rate increasing from 0.1% to 2.85% in less than a year this should eat into household disposable income over time. We are also seeing elevated inventory throughout the system which is typically a lead indicator for margin compression." 

If the macro outlook worsens, this will obviously create headwinds for HVN. However, Aboud and his team believe the market is already pricing in EPS falls of 30% over the next two years. 

"The company is still trading on an 11 times PE and 7% fully franked dividend yield with far and away the strongest balance sheet in the sector," he said. 

"We believe that HVN is well positioned for any downturn. While the share price will be volatile, we still see value and believe the company is well-positioned to take advantage of opportunities to increase market share from competitor failures in the case of a protracted downturn."

While HVN is in the red, Aboud did correctly predict one thing: The death of the 60/40 portfolio (60% stocks, 40% bonds). 

"With interest rates spiking, the bond market has collapsed as has the stock market. While the market is whipping around, the 60/40 portfolio is down around 15% calendar year to date, which would make it one of the worst performances in the last century," he added. 

7. Sims Limited (ASX: SGM)

• Fund manager: Nick Pashias, Antares Equities 
• YTD total return: -12.30%
• Still backing the stock: NO

It's been a slippery slope downwards for metals recycler Sims since late April this year, with Pashias and his team reducing their exposure to the stock in the March quarter. 

"We sold out completely during the June quarter," he said. 

"At the time, the stock had performed well however scrap prices had started to moderate having reached very high and unsustainable levels on the back of Russia invading Ukraine." 

More recently, the company has downgraded its earnings expectations given the global economic slowdown, he added. 

"With scrap prices and the share price falling, it might be time to dust off the model and take another look as we head into 2023," Pashias said. 

8. IDP Education (ASX: IEL)

• Fund manager: Julia Weng (on behalf of David Moberley), Paradice 
• YTD total return: -13.21%
• Still backing the stock: NO

Like Pashias, the Paradice team exited its position in IDP Education in the second quarter and remain uninvested. 

"We still think they are a really high-quality business," Weng said. 

"It boasts a very strong growth runway in the student placements business, it’s a global leader in this industry and it has a lot going for it as well. It acquired the British Council’s Indian testing business and has realised synergies ahead of market expectations." 

However, you can overpay for quality. And thus, timing is key. 

"We want to be confident that there’s not going to be an earnings miss, particularly given the combination of geopolitical and macroeconomic uncertainties at the moment - which would be a key influence on student volumes," Weng said. 

It also must grapple with a new CEO (starting in February), she noted. 

"We want to make sure that the transition goes smoothly. For a stock on these multiples, the execution needs to be as seamless as possible," Weng said.

"Valuation, in this current environment of rising bond yields, matters a lot. So we want to see that play out before we get the conviction to buy once again." 

9. RPMGlobal Holdings (ASX: RUL)

• Fund manager: Steve Johnson, Forager 
• YTD total return: -18.84%
• Still backing the stock: YES

Johnson believes RPMGlobal's share price has held up relatively well, given the poor performance of the majority of the tech sector.

"That’s because it’s been another good year of growth and our thesis - that the revenue growth was going to translate into profitability - continues to play out," he said. 

"RUL’s guidance for 2023 is for $11 million of additional subscription revenue, with more than 90% of that translating to incremental pre-tax earnings." 

RUL remains the largest investment in the Forager Australian Shares Fund, he revealed, and is unlikely to change "absent significant share price appreciation or a takeover offer, a scenario we think is looking increasingly likely," Johnson added. 

10. Entain (LON: ENT) 

• Fund manager: Mark Landau, L1 Capital 
• YTD total return: -20.54%
• Still backing the stock: YES

Like many of the stocks on this high-conviction list, Entain has also been negatively impacted by the sell-off. 

However, its share price depreciation came down to the de-rate in "online sports betting companies globally, delays in the announcement of the UK Gambling Review and headwinds from a consumer spending slowdown in the UK," Landau explained. 

"Our positive view on Entain (and Flutter - LON: FLTR) relates to their leading positions in the fast-growing US market, which is set to grow at 20% per annum (on average) for many years to come." 

The JV between MGM Resorts and Entain - BetMGM is the largest iGaming operator in the US and a top three player in US sports betting, Landau said. 

"We took advantage of the sell-off in the first half of the year as an opportunity to add to our position," he said. 

"We continue to believe Entain is extremely undervalued with the transition to profitability in the US in 2023 and bolt-on M&A accelerating the earnings growth profile of the business going forward." 

11. Nvidia Corporation (NASDAQ: NVDA)

• Fund manager: Nick Griffin, Munro Partners 
• YTD total return: -39.87%
• Still backing the stock: YES

Like many of the stocks on this list, Nvidia has had a difficult few months, with the share price diving nearly 40% since the beginning of the year. The company continues to manage a difficult period facing not only its consumer business but also fresh geopolitical restrictions on its ability to sell into China. 

"In the third quarter result, the company guided their next quarter revenues would be sequentially flat, implying no further downgrade to their consumer-facing gaming business, and no significant cut to their fast-growing data centre business," Griffin said. 

"As a result, we are starting to become more comfortable that the company has sufficiently reset expectations and are now looking to a recovery in the business in the next six to 12 months." 

Unsurprisingly then, Griffin and his team are still backing the stock, noting that its long-term investment thesis still remains robust. 

"It's set to release a new suite of products in the first half of 2023, which should demonstrate the strong demand profile for what are some of the best chips in the world," Griffin said. 

"The company is, in our view, still the critical enabler of the shift to accelerated computing, something which has now been reinforced by the US government in their desire to prevent sales of the latest Nvidia technology to China.“

12. Envirosuite (ASX: EVS)

• Fund manager: Matthew Kidman, Centennial Asset Management 
• YTD total return: -40.91%
• Still backing the stock: YES

Kidman and his team have sold down their position in Envirosuite but still hold a small position, with the stock cascading more than 40% since the beginning of 2022. 

"Envirosuite has been a disappointing performer this year," Kidman conceded.  

"A combination of poor market conditions for growth stocks and slightly slower growth than expected from the company has kept the share price under pressure." 

Envirosuite operates within the growing segment of environmental improvement through technology, Kidman explained, and "should have a bright future". 

"The question that is unknown is how quickly it can get traction in the various commercial markets it operates in around the globe," he said. 

"If the company cannot successfully commercialise its technology in the coming year it should look to partner or sell its business to a business that already has the ability to distribute the product into global markets." 

13. Zebra Technologies (NASDAQ: ZBRA)

• Fund manager: Adrian Martuccio, Bell Asset Management 
• YTD total return: -50.51%
• Still backing the stock: YES

With many of its larger customers pulling back on spending as e-commerce decelerates,  inventory and logistics management supplier, Zebra Technologies, has seen its share price halve in just 11 months. 

"Customers still plan to increase digitisation and automation of their inventory and logistics management, but they will do this over a longer time period, so the conversion of sales has become elongated," Martuccio said. 

"Interestingly, due to a very tight labour market and ongoing wage inflation, small and medium-sized customers, which are often not as advanced in their upgrades, have continued to invest in Zebra’s products as a way to offset labour inflation." 

This means that overall sales will continue to grow this year, albeit only by around 1.5%, Martuccio said. Meanwhile, the company's cost headwinds (higher freight costs, semiconductor components) are alleviating, and with a market share of around 50% - crucial in an inflationary environment - Zebra expects margins to increase. 

"Not to underestimate the old adage of ‘reversion to the mean’, the pandemic period drove a lot of pull-forward demand, and this has definitely tapered off now," Martuccio said. 

"Slower demand in combination with high costs has meant we have reduced our earnings expectations for 2023 by nearly 20%." 

However, with Zebra now trading on a PE of 15 times, the company now looks attractive, he added. 

"We continue to hold Zebra in the portfolio and see over 50% upside once customer demand conditions normalise," Martuccio said. 

14. Megaport (ASX: MP1)

• Fund manager: Kyle Macintyre (on behalf of Eleanor Swanson), Firetrail Investments and Michael Steele, Yarra Capital Management 
• YTD total return: -64.49%
• Still backing the stock: YES

Both Firetrail and Yarra remain invested in Megaport, with both fund managers backing the stock as a highly attractive investment opportunity. 

"The share price has been negatively impacted by the general underperformance of technology companies – given the increase in long-dated interest rate expectations," Steele explained. 

"In addition, the company’s indirect sales channel and new products have taken longer to develop and require higher levels of investment." 

Despite that, industry feedback continues to support Steele and the Yarra team's thesis. 

"This is a significant global growth opportunity, particularly within the indirect sales channel and through new products, with profitability increasing significantly over time given the compelling product economics (including low churn and high gross margins)," he added. 

With the company suffering through short-term disruption from its shift to a third-party distribution model (via some of the world's largest B2B tech businesses - like Cisco), Macintyre and the Firetrail team still believe the future for the stock looks promising. 

"There is significant value in Megaport leveraging the sales resources of some of the largest technology companies in the world," Macintyre said. 

"We retain high conviction in the medium to longer-term outlook for Megaport and have added to our position in the past 6 months." 

This is despite the higher interest rate environment, which has seen the valuation of many growth companies - Megaport included - derate in recent months. 

"We believe higher growth companies like Megaport will provide attractive returns over the medium-term, particularly in a lower growth environment in CY23," Macintyre said.

"In our view, the key is to be selective and invest in higher quality growth companies like Megaport that can generate earnings and cashflow within the next few years."

15. Spotify Technology (NASDAQ: SPOT)

• Fund manager: Chris Demasi, Montaka Global Investments 
• YTD total return: -65.22%
• Still backing the stock: YES

I read today that Spotify is one of the only companies that has been able to make tracking its customers' data not only fun - but actually celebrated. I am talking here about Spotify Wrapped, with members sharing their most-replayed songs of the year. 

"Despite Spotify’s role in the resurrection of music, which has seen it gain nearly half a billion monthly users, Spotify’s business is still only at break-even," Demasi said. 

"Many investors have been tuning out of Spotify, with its shares falling 75% from their peak in 2021." 

According to Demasi and the Montaka team, investors shouldn't focus on what the business can earn today. Instead, they should focus on what it can earn in the future - with Demasi pointing to four reasons why the stock can materially increase its earnings power in the years to come. 

1. Spotify’s strong platform is now complete - the platform prioritises the user experience,  automatically adapting to the user whether they enjoy listening to music, podcasts, or soon audiobooks. 
2. New verticals with higher margins and cross-selling opportunities - today, the platform offers music and podcasts and will soon include audiobooks, expected to carry gross margins north of 40%. 
3. Large advertising opportunity - while digital audio consumption has been on the rise for years, ad spend is still catching up to this growth. Currently, audio comprises around 23% share of time spent within media but captures just 5% of total ad spend. Only 14% of podcasts are currently monetised by Spotify. 
   
4. Highly margin accretive revenues from Marketplace - this is one of the most powerful, but perhaps least appreciated, margin drivers for Spotify over time. Marketplace gross profit grew eight times over the last four years. It contributed to approximately 6% of Spotify’s total gross profit in 2021.
   

"Over the last year or so, Spotify’s 400 million users have generated an average annual gross profit per user of around €7.50 or around €3 billion in gross profits," Demasi said, offset by around €3 billion in fixed costs. 

"By around 2030, Spotify will likely have around 1 billion users generating gross profits per user of around €14. That is annual gross profits of approximately €14 billion, a nearly five times increase." 

16. Raiz Invest (ASX: RZI)

• Fund manager: Dean Fergie, Cyan Investment Management 
• YTD total return: -76.90%
• Still backing the stock: YES

Despite the nearly 77% drop in Raiz Invest's share price for the year, Fergie and his team remain confident in the investment platform, revealing they have recently increased their shareholding. 

"More than anything, I think the stock price this year has been affected by the negative market sentiment toward fund managers - they’re almost the ultimate leveraged play on market direction," Fergie said.  

"This year we’ve seen the share prices of the larger Pinnacle (-40%), Magellan (-50%), Platinum (-35%) and Janus Henderson (-40%) all drop. And while Raiz’s share price has performed shockingly, their underlying FUM has been remarkably stable at around $1 billion through calendar 2022 – an outstanding performance given market volatility." 

Where the company has disappointed, however, is its spending on pursuing growth in Indonesia and Malaysia which has not resulted in material FUM from these jurisdictions, Fergie said. 

"This has been addressed with the appointment of a new chairman, ex-BOQ MD Stuart Grimshaw, and new managing director, Brendan Malone," he said. 

However, the challenge for RZI is rebooting its growth in Australia.

"With $12 million in cash and over 1.2 million domestic customer sign-ups (but only 290 thousand active accounts), there is ample opportunity for the business to refocus on the lucrative domestic market," Fergie said. 

"A market cap of circa $45 million means the market is valuing the business at (ex-cash) around $100 per active customer, making the business an attractive target for a large financial institution." 

17. EML Payments (ASX: EML)

• Fund manager: Simon Shields, Monash Investors
• YTD total return: -80.03%
• Still backing the stock: NO

Shields and the Monash team sold out of their position in EML Payments in the first quarter of the year and have since stopped covering the stock. At the time, the stock had drifted 6.81% into the red. It's now jumped off a cliff, down more than 80% for the year. Yikes. 

Livewire's 2023 Outlook Series is coming...

Ok, we get it. The stock picks for 2022 didn't perform as planned. And with many market participants proclaiming a new market era has begun, there's no time like the new year to dust off those crystal balls and take a look at how fund managers are tackling whatever may lay ahead. 

This year, we've wrangled together 16 of the best fund managers across Sydney and Melbourne for their worst calls from 2022, their outlook on 2023, and some bold calls that are sure to cause a stir. 

And of course, they will also be nominating their top stock picks for the year ahead. But is the defensive play a safer route? Or will the market take flight? You'll just have to patiently wait until January 2023 to find out.