3 ASX shares to buy for instant diversification
Ask a fund manager
The Motley Fool talks to fund managers so you can understand how the professionals think. In this issue, Montgomery Fund’s portfolio manager Joseph Kim shares how he sees value buying across many ASX sectors.
The furry fool: How would you describe your fund to a potential client?
Joseph Kim: We are a well-diversified quality portfolio with a valuable lens.
MV: What are your two greatest interests?
JK: Are Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) at this time.
MV: What are your two largest active holdings?
JK: Our largest active positions at the moment are Sydney Airport Holdings Pty Ltd (ASX: SYD) and Reliance Worldwide Corporation Ltd (ASX: RWC).
So [Reliance] is a global manufacturer of sanitary ware. Their main market is in the US, but they also have branches in Australia and Europe. Their signature product is something called push-to-connect. If your pipe bursts, you can quickly fix it – you have this copper fitting, you put it in between and you snap both ends of the pipe together. And you have a seamlessly waterproof fixture, which doesn’t require a plumber to come in to solder or crimp.
In the US you can do your own plumbing… They have a dominant market position – it’s called SharkBite. And the brand is synonymous with this push-to-connect product.
There is tremendous power in that brand name. And the penetration is still quite low. I think they have about 15% to 20% penetration over solder, over shrinkage. You have this huge market share potential over time because the plumbers use it and they recognize the time saving benefits.
MV: What do you think of Sydney Airport after the recent takeover bid?
JK: If you look at where the stock price is trading, it is trading below the bid price. I think without that offer there…it’s likely the stock price will be lower than where it is now.
So you have to keep that in mind, but I think there’s an expectation that many of these big super-funds have longer term horizons. They don’t invest for 6 to 12 months, they invest for 20 to 30 years and you match your liability flow. If you’re a super fund, it’s not about, “Well, what’s my percentage return over a period of time?” You have to pay your super obligations and you adjust the term.
In our game you have this moving benchmark that you are trying to beat – so sometimes you have to think about… what is an investment idea that is going to win in the short term.
But these guys say, “Well, in 10 years I’ll have this liability. And what’s a reliable income stream that I can count on to provide that income stream?”
So you have this difference in duration. That’s all to say, look, there’s an expectation of a higher bid, I’d say. We’ll see how that plays out.
Obviously if no higher bid comes the stock price will probably fall from where it is, I’m not sure how much. But it’s still an extremely high quality asset and I think globally, if we look at the global experience with COVID in general, we accept that we will come out of this with widespread vaccination. From that perspective, there is a clear long-term value.
Hottest ASX Stocks
MV: What are the 2 best stock buys right now?
JK: The two best purchases? So I actually struggled with this. One of them started very well, that’s the problem.
We bought Resmed CDI (ASX: RMD) for this wider Royal Philips NV to remind. So I’m not sure how much more upside there is in the near term.
We got in there, the wider recall came out and so we did really well. It is clear that the market is well aware of this.
I’m not saying we’re going to sell Resmed because we think there’s a huge opportunity for them to capture 20% market share in the future. I think that’s what most people expect. It’s a quality business, we want to see the revenues come in and as they bring in and grab even more market share, it becomes even more valuable.
So one of the companies I wrote about is a little gold mine called Capricorn Metals Ltd (ASX: CMM). It’s actually gotten a little out of hand since I wrote about it, but again this is one of those 6, 12 month investment horizons where they’re just putting this new mine in WA called Karlawinda into operation.
The management team is top notch. So the boys are ex-Regis Resources Limited (ASX: RRL). If you look at what Regis did from 2010 to 2013, 2014, they’ve done a great job of generating shareholder value. In general, there were lower quality gold deposits, but they are very cheap operators. It’s very cost oriented, it’s a huge amount of skin in the game.
These guys have done it in the past. It is a relatively low risk project. It’s not that dependent on the gold price, but in terms of the investment thesis, it’s quite a revaluation story because once they’re fully operational, it looks very cheap. It will generate significant cash flows.
MV: Since Resmed has already gone up, is there another ‘buy’ you want to mention?
JK: Look, there’s one I really like called this little company Codan Limited (ASX: CDA). I’m a big fan of those. Now we have to wait for the next catalyst.
Let’s say it has a bit more integration risk because they bought a few companies in the last 6 months. But if they can get those acquisitions right, let them hum, yes, there is a small benefit.
They have this metal detecting division, which is growing extremely well. they have seen [a] decrease in volume, they have been able to push through price increases and are the number 1 player. Their products have better reviews than competitors. They just got into the recreational side of things. So more coins, et cetera.
They’re doing really well. The communications department, which has generally been a bit small, have just gone out and bought two companies to complement their existing business at a reasonable price – meaning if they execute some of their goals, you’re looking at a much bigger, more valuable business in the next 6 to 12 months.
We won’t know for a while because they are just demolishing those companies. But it’s one that I think is definitely worth checking out.