Top ten ASX stocks of 2021: A rising tide lifts boats of all shapes and sizes
Four of the names remain fairly valued or better despite the stock market success.
Mentioned: Coast Entertainment Holdings Ltd (CEH), ARB Corp Ltd (ARB), Arena REIT (ARF), AUB Group Ltd (AUB), Graincorp Ltd (GNC), New Hope Corp Ltd (NHC), South32 Ltd (S32), Seven West Media Ltd (SWM), WiseTech Global Ltd (WTC)
What unites a media conglomerate, theme park operator and grain logistics company? They’re among the top 10 performing ASX stocks of 2021 under Morningstar analyst coverage, showering investors with returns more than three times the index.
Seven West Media (ASX: SWM), Ardent Leisure Group (ASX: ALG), owner of Dreamworld, and GrainCorp (ASX: GNC) earned their place in the top ten with returns ranging between 95% and 101%.
They were joined by a motley crew of success stories drawn from all corners of the ASX. Real estate trust Arena REIT (ASX: ARF) rubbed shoulders with 4x4 accessory manufacturer and distributor ARB Corp (ASX: ARB).
The list reflects many of the big themes of the year: the end of lockdowns and release of “pent up” demand, booming commodity markets and enthusiasm for all things technology.
In a year where the benchmark S&P/ASX 200 Total Return index returned 17%, the top ten stocks posted total returns north of 60%.
But success does not always beget success and stellar performance has pushed six of the names into overvalued territory, meaning Morningstar analysts expect share prices to fall. ARB Corp is now the third most overvalued stock under coverage after a 72.6% run-up last year.
Pinnacle Investment Management topped the list, more than doubling investor money with a mouth-watering 123% return. The firm provides funding, distribution and support services to boutique managers.
Morningstar initiated coverage on the narrow moat firm in May 2021, with equity analyst Shaun Ler noting a “track record of superior execution". Seven months and one share price run later, Ler argues a repeat performance is unlikely.
“Pinnacle has momentum on its side, but the good news, option value from growth and optimism have likely been more than priced in,” says Ler.
“Not all boutiques are equal and some are falling behind. As such it's hard to imagine the historically strong share price performance will repeat.”
Shares closed Wednesday at $15.75, a 19% premium to the Morningstar fair value of $13.20.
Graincorp shareholders are giving thanks after a year of good weather helped deliver a 101% return. The commodity business owns grain storage and logistics up and down the eastern seaboard, where favourable conditions delivered record harvests. Morningstar equity analyst Angus Hewitt expects good weather to persist for some months but warns the sun will not always shine so bright.
“Bumper years are not the norm…while grain volumes can fluctuate from year to year, over the long run, GrainCorp’s value hinges on a normalised growing year—which won’t be as lucrative,” says Hewitt.
Shares closed Wednesday at $8.44, a 56% premium to fair value of $5.40.
Seven West Media jumped as investors cheered its tie-up with regional player Prime Media. Share leapt over 30% in the days after Seven made its $121 million offer. The November bid was the second in nearly two years. The acquisition was completed on 31 December. The media group has also benefited from the post-pandemic rebound in advertising revenue, says Morningstar director of equity research Brian Han.
Ardent Leisure was another beneficiary of the economic recovery. Investors piled into the theme park and entertainment centre owner betting consumers would be itching to leave the home. Shares notched a 95% return, but Han is keeping his optimism in check for now.
“We are hesitant to adopt the market's current ultra-bullish view on Ardent's sustainable earnings power until we see the details of the reported numbers over the next few months,” he says.
Ardent closed Wednesday at $1.37, a 44% premium to the fair value of $0.95.
Opportunities remain at the winner's table
While strong performance carried much of the list into overvalued territory, four stocks remain fairly valued or better in the wake of their double-digit runups.
Eponymous member of the WAAAXs , WiseTech Global (ASX: WTC), coal miner New Hope (ASX: NHC), insurance group AUB (ASX: AUB) and BHP-spinoff South32 (ASX: S32) are options for investors looking to buy into 2021’s success stories without paying a premium.
New Hope is the only undervalued name on the list, trading at a 20% discount to fair value as of Wednesday. The miner owes its 65% return in 2021 to surging coal prices, which tripled between February and October as supply outages overseas ran up against booming Chinese energy demand.
Markets haven’t fully factored in how growing energy demand in Asia will support high-quality thermal coal producers like New Hope for years, says Morningstar director of equity research Johannes Faul.
Both WiseTech Global and AUB Group come with the security of Morningstar narrow economic moats, which analysts award to companies forecast to maintain their competitive edge for a decade.
The technology firm posted a total return of 90%, while AUB notched 62%.