Top Stocks 2017. Roth Martin

IN ROTH’S

      Top Stocks 2017

      The author and publisher would like to thank Alan Hull (author of Active Investing, Revised Edition, Trade My Way and Invest My Way;

      www.alanhull.com) for generating the five-year share-price charts.

      This twenty-third edition first published in 2017 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd

      42 McDougall Street, Milton Qld 4064

      Office also in Melbourne

      First edition published as Top Stocks by Wrightbooks in 1995

      New edition published annually

      © Martin Roth 2017

      The moral rights of the author have been asserted

      ISBN: 9780730330134 (pbk.)

      9780730330141 (ebook)

      All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

      Cover design: Wiley

      Cover image: Financial Chart © istockphoto.com/Petrovich9

      Charts created using TradeStation © TradeStation Technologies, Inc. All rights reserved. No investment or trading advice, recommendation or opinions are being given or intended.

      Disclaimer

      The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

      Preface

      The combination of low interest rates, political instability and an uncertain economic outlook has created a volatile environment for financial markets. Yet investors prepared to do their own research will readily find fine stocks with excellent prospects. Top Stocks 2017 showcases many of these companies.

      They are often smaller to medium-sized corporations. Some will be unfamiliar to investors. But all meet the stringent Top Stocks criteria, including solid profits and moderate debt levels.

      This is the 23rd edition of Top Stocks, and guiding investors towards value stocks has been one of the paramount aims of the book from the very first edition. Indeed, one of the rationales for the book has always been to highlight the truth that Australia boasts many excellent companies that enjoy high profits – and growing profits – regardless of the direction of the markets. Despite its title, Top Stocks is actually a book about companies.

      Right from the start it has been an attempt to help investors find the best public companies in Australia, using strict criteria. These criteria are explained fully later. But, in essence, all companies in the book must have been publicly listed for at least five years and must have been making a profit and paying a dividend for each of those five years. They must also meet tough benchmarks of profitability and debt levels. It is completely objective. My own personal views count for nothing. In addition, share prices have never been relevant.

      There was a time when investors needed to do little more than choose a sector that appeared to offer potential, knowing that most stocks in that sector would do well. This is a much riskier proposition today.

      Look at retailers. A blue chip like Woolworths, held by numerous small investors, many of whom would surely view it as a ‘safe' stock, reported a sharp decline in profits in its June 2016 accounts.

      Yet some smaller companies in the sector, such as shoe retailer RCG and mobile phones specialist Vita Group, have been recording big increases in their profits. It is important nowadays to look at individual companies, not just at sectors.

      Another example is the mining services sector, companies whose business is to provide support services to mining and energy companies. At the height of the mining boom there could be as many as a dozen of these companies in Top Stocks. But as the resources downturn has continued to bite the number has been steadily falling. In Top Stocks 2017 only Monadelphous remains from earlier editions of the book, along with Mineral Resources, which derives about a third of its revenues from mining services.

      But into this edition of the book comes a new entry, GR Engineering Services. At a time when other mining services companies have generally been seeing their profits still on the decline, GR Engineering reported an 18 per cent increase in revenues and a 50 per cent jump in its after-tax profit.

      Of the 90 companies in Top Stocks 2017 – four fewer than in last year's edition – fully 72 reported higher profits in the latest financial year (June 2016 for most of them), while 67 achieved higher earnings per share and 70 paid a higher dividend.

      Of the 72 companies reporting higher profits, 47 achieved double-digit profit growth, with five companies reporting a triple-digit increase. In addition, 47 of them saw profits growing at a faster rate than revenues, implying that their profit margins were expanding.

      And though, as I wrote above, share prices are not relevant for selection to Top Stocks, 75 of the 90 companies in the book have provided investor returns – share price appreciation plus dividends – of an average of at least 10 per cent per year over five years. In fact, 48 of these 75 companies have given an annual average return of over 20 per cent.

      And 12 of them – Altium, Corporate Travel Management, Domino's Pizza, G8 Education, Magellan Financial, MNF Group, Northern Star Resources, Objective Corporation, Pro Medicus, Prophecy International, Sirtex Medical and Vita Group – have provided an annual average return over five years of more than 50 per cent.

High-tech stocks

      Probably the biggest trend in Top Stocks in recent years has been the rise and rise of high-tech stocks. This is significant. The Information Technology sector represents only around 1 per cent of market capitalisation in Australia (compared with more than 30 per cent in the US). Yet fully 12 companies in the current edition of Top Stocks are in the Information Technology sector, up from 11 last year and nine the year before.

      They are generally small companies – though large enough to be in the All Ordinaries Index of Australia's 500 largest stocks – and it can sometimes be difficult for outsiders to understand just how they make their money. Thus, many investors avoid them.

      But technology is steadily infiltrating every facet of our lives, and the best of these companies are set to grow. It is worth taking the time to learn more about them.

      Increasingly they are selling what has come to be known as software as a service. This means they will often charge an initial fee and then a subscription, so they have a high degree of recurring revenue. It gives a degree of consistency and predictability to their earnings. They can also generate high profits from a relatively small increase in sales, given that they are dealing especially in software.

      Profit growth (and share price acceleration) for many of these companies has been outstanding. They are often on high price/earnings ratios, but that reflects the market's belief that high levels of growth will continue. They should be on the radar of all serious investors.

      Top Stocks 2017: information technology companies

Healthcare companies

      In past editions I have a number of times put the spotlight on the steady rise of the healthcare sector within the book. At one time the only healthcare-related company