Lex Hall: Hi, I'm Lex Hall for Morningstar. Today, I'm joined by a Max Cappetta. He oversees the Redpoint Industrials SMA strategy. He is going to talk about a few of the top picks that he's got his eye on for 2021.

Good day again, Max.

Max Cappetta: Hi, Lex. Good to be with you again.

Hall: Now, the first name on the list is a household name. It's JB Hi-Fi. Tell us what you're seeing for this powerhouse retailer this year.

Cappetta: Yeah, Lex, JB Hi-Fi has certainly had a fantastic year and I think they're really positioning themselves as one of the retail powerhouses here in Australia. While there has been unprecedented fiscal stimulus, which has supported spending overall and people are being cooped up at home and so, therefore, their revenues have certainly grown as a consequence. I think that probably underlies some of the success over the last really five years that the company has had, which I think goes back to their purchase of The Good Guys a few years ago and how they've been able to integrate that. And now, more recently, what we've seen is the fact that initially we saw their valuation actually being held back because of concerns about Amazon entering the Australian marketplace. And so, I think what JB Hi-Fi have done very successfully is sort of really positioned themselves, not just as the bricks and mortar type retail store, but also gone head-to-head with Amazon in the clicks and order type space over the internet as well.

Now, pleasingly, what we saw when we did a review of the portfolio back in March, we looked very closely at which stocks we felt were actually going to be able to trade profitably through a lockdown type phase and we did actually increase our position in JB Hi-Fi as the stock had gone from $45 and then back to our entry price at $35. And what's been pleasing about that is not only has the stock then obviously rebounded back to its all-time highs around $50, but they actually doubled their final dividend in August up to $0.90. And our expectations and forecast for 2021 is that the stock is most likely going to pay around $2 in dividends over the course of the year with a fully franked dividend with a full tax credit attached to it. So, that delivers about a 5.7% yield on our original purchase price, but still about a 4% yield at its current price.

Hall: Next name on the list is Goodman Group, another strong Australian company.

Cappetta: Yeah, look, again, Goodman has been a stock that we've held from day one, so for over six years and it has developed fantastic growth. They've got a great pipeline of development as well as management. Its domestic property and global property has delivered very consistent cash flow. Quite pleasingly over this COVID period the fact that they've got a great exposure in the industrial and warehousing space has obviously supported them and they have great capability to support that online shopping transition.

What we see is that that very high-quality business, it currently at the moment is probably starting to trade at elevated valuations. Some of that may be warranted because of that global perspective, that global diversification that they have. We are looking at Charter Hall, for example, as being a potential opportunity in the year ahead. They do offer a higher dividend yield. However, Charter Hall is really only domestically focused in Australia with a very small New Zealand exposure.

So, there's a couple of opportunities there in that property market, and we're also looking more closely at the shopping centers. So, again, as things like lockdown is relaxed, people are out back in the marketplace, then we see some of those retail outlets, say, for example, Vicinity and Scentre Group becoming more attractive.

Hall: And while I've got you on that Max, I'm just curious on your thoughts about the future of offices going forward. Do you think – people are starting to go back to the office now but there were fears there that, Oh, this is it; we won't go to the office again. And suddenly, industrial landlords were having to rethink their models. Have those fears sort of dissipated a bit?

Cappetta: Look, possibly to a degree. As you can see, I'm in the office. I'll be honest. It is my first day in the office for this calendar year and I have been at work for the entire calendar year. Our team is just now starting to come back into the office.

And I think what's happened and what I've heard people saying – this is maybe less of an investment insight – but there is a collective knowledge that gets shared within an office environment that maybe when we are disconnected gets lost. So, I think, from a human perspective, there's probably always going to be a need to actually have that central area to be able to congregate together and to share ideas in a very quick and seamless way.

Hall: All right. Final name on the list is plumbing supplier among other things, Reliance Worldwide.

Cappetta: Yeah, Reliance is an interesting stock that we've just recently taken a position in. The stock was first listed a few years back and had quite a successful run before having a few hiccups, particularly with their U.S. operations. What we've seen this time around is that within our quality metrics, when we look at a company's growth, we're not just necessarily looking at their headline growth, but we also want to see that while there's growth in revenue that that is growing faster than their input costs, where there's growth in cash flow that's growing faster than their debt costs, et cetera. And that's what sets up stocks for positive surprise on earnings as opposed to negative surprise.

What we had for Reliance World in the past was that we saw that their growth was actually not good-quality growth. However, this time around, we're seeing that there is that quality behind their growth, and we think that with the European markets in particular coming out of a COVID lockdown over the course of the next year that they are really well placed to be able to benefit from the stimulus that will happen, infrastructure spending and other development where their plumbing supplies will be front and center and in demand.