Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Eley Griffiths portfolio manager Nick Guidera explains why two mining companies and one tourism business are the best bets at the moment.
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The Motley Fool: What are the three best stock buys right now?
Nick Guidera: Monadelphous Group Ltd (ASX: MND) — we believe mining services have been in the wilderness for much of the past five years, impacted by slowing global growth, COVID, labour shortages, rampant cost inflation, and the power resting squarely with the miners. As such, we have seen consolidation amongst the players, and a number of companies go broke.
Monadelphous is considered one of the quality tier-one contractors that is regularly used by the major miners BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) to build new mines and infrastructure as well as maintain some of the existing plants. Commodity prices had a strong end to 2022, buoyed by a falling US dollar and the hope of China’s reopening demand. Higher commodity prices are incentivising the miners to embark on new capital projects to increase or replace production. Monadelphous, as one of the superior engineering firms, is well placed to benefit from a significant amount of new work in a more rational operating environment.
Iron ore prices have rallied from their lows of sub US$80 in late 2022 to a seven-month high a few days ago of US$127/tonne. Commodity traders are expecting that China’s reopening will follow a similar path to previous stimulus and be focused on property and infrastructure, which will ultimately require demand for steel and hence more iron ore.
While China’s reopening is expected to be choppy, and the outlook beyond [lunar] new year remains unknown, we remain constructive on the outlook for commodities and China’s end demand for iron ore into 2023.
Higher iron ore prices will mean stronger revenues and cash flow for iron ore miners. One notable small-cap pure play is Champion Iron Ltd (ASX: CIA). A low cost operator that produces a premium product, with an expanding production profile, [it’s] well placed to benefit from higher prices.
The third pick is Tourism Holdings Ltd (ASX: THL).
‘Van life’ is back in vogue, as travel resumes and a generation of people are keen to explore new destinations. New Zealand RV [recreational vehicle] manufacturing, rental, and retail business Tourism Holdings recently completed its merger with Apollo Tourism & Leisure and the new business was listed for the first time on the ASX, while maintaining its existing listing on the NZX.
The merger saw the two largest RV rental companies come together in Australia and New Zealand. The combined business owns and operates everything from the humble van to a six-berth driving hotel.
It has [a] global footprint with operations in North America and Europe, and local manufacturing to produce the best product for the local market, and a retail footprint to dispose of those vehicles at the end of life.
With any merger there are risks. However, with $27 to $31 million of recurring cash synergies by bringing the businesses together, there is also potential upside. With tourism seen for many as a non-discretionary spend nowadays, the more affordable option of a motorhome should be well placed to benefit from any consumers trading down.
