Investors face a tricky backdrop as they head into 2025. Valuations are high in both Australia and the United States, the bull market is stretching into its third year, and the inauguration of Donald Trump looks set to turn geopolitical uncertainty up to 11.
With this in mind, we sought guidance from the fund managers who work with Future Generation, the philanthropy-focused investment firm that runs three strategies – the Future Generation Australia and Future Generation Global listed investment companies, and the newly established unlisted investment trust, Future Generation Women – that donate 1 per cent of their asset bases to charity each year.
Their mission? Deliver a stock pick that can work over a long-term horizon.
The new year offers plenty of potholes for investors, so we’re looking long term. Picture: David Rowe
Emma Fisher, Airlie Funds Management
At the end of 2023, sleep apnoea giant ResMed (ASX: RMD) was in the grips of a mass hysteria over the success of Ozempic and similar weight-loss drugs. The stock de-rated from a price-earnings ratio of 32 times to just 19 times at its nadir as investors bet GLP-1 drugs would “cure” obesity, a common condition of sleep apnoea sufferers. But Airlie’s Emma Fisher says physicians increasingly believe ResMed’s continuous positive airway pressure (CPAP) machines remain the gold standard for sleep apnoea and can work alongside GLP-1 drugs to help patients manage their weight.
ResMed shares are up 60 per cent, but Fisher sees more room to run. “I would note that at 24 times earnings, you’re paying less for ResMed than for the Commonwealth Bank. We consider this great value for a global leader with very little debt, generating over $US1 billion ($1.6 billion) annual free cash flow, growing at double digits with almost no competition.”
Julia Weng, Paradice Investment Management
US tech giant Block (NSYE: SQ and ASX: SQ2) is perhaps best known in Australia as the company that bought Afterpay. Paradice’s Julia Weng says its biggest recent success is the way it’s reined in costs, lifting earnings before interest and tax from a loss of about $US600 million in 2022 to an estimated profit of $US1 billion in 2024. “We expect 2025 to be about accelerating topline growth in conjunction with operating leverage. We think mid-teen gross profit growth and mid-20s profit margins are plausible, and at current valuation represents compelling risk/reward in our view,” Weng says.
Look for two areas of growth. Within the Square payments business, Block is making it easier to bring hospitality merchants on board. Within the Cash App division, which has 57 million monthly active users (about 20 per cent of the US population), Block is expanding through direct deposit incentives, loan products, and buy now, pay later. The cream on top is a $US3 billion buyback (representing about 5 per cent of market capitalisation).
David Allen, Plato Investment Management
Last September, when Qantas (ASX: QAN) was in the grips of a reputational crisis, David Allen of Plato was one of few prepared to swim against the tide, telling Chanticleer it was a “buy” due to its compelling valuation, structurally higher sales per employee post-COVID-19 (up about 40 per cent) and its dominance (65 per cent market share and growing) in domestic aviation.
It was an epic bet and a correct one. But despite Qantas shares surging 66 per cent to record levels, Allen sees more growth. “The recent exit of Rex from certain routes further solidifies Qantas’ market dominance, reinforcing our positive outlook.”
Vihari Ross, Antipodes
Tech giant Alphabet (NASDAQ: GOOG) might be a member of the magnificent seven, but the owner of Google and YouTube has only matched the S&P 500’s performance over the past year and lagged its mega-cap peers due to competition from ChatGPT and regulatory scrutiny. But Antipodes’ Vihari Ross points out Google’s global search share has only slightly declined to 90 per cent since ChatGPT’s launch and argues Alphabet is well-positioned for AI-enabled search; Google can draw on huge pools of data from Chrome, Gmail and YouTube, while Alphabet’s large language models rank ahead of those of OpenAI.
Ross concedes there is the chance regulators continue to nibble at Alphabet and other tech giants, but he argues the stock is attractively priced at just 17 times calendar 2026 earnings, with profits forecast to grow mid-teens per annum over the next three years.
Tony Waters, QVG Capital
Wes Maas played professional rugby league before he started Maas Group (ASX: MGH) in 2002, and Tony Waters of QVG Capital reckons something of that ethos remains in the culture of the company, which operates more than 40 strategically located quarries across Australia. “It is low on ego and high on getting stuff done,” Waters says.
He sees a big year ahead as long-awaited renewable energy projects in the NSW Central West and Hunter regions get under way, and rate cuts eventually help residential development demand. “Improving business quality, earnings tailwinds and a forward price-to-earnings multiple less than the market all make Maas attractive.” The stock is up 20 per cent in the past year, but still off its 2021 highs.
Chanel Stuart-Findlay, Plato Investment Management
Shares in music streaming giant Spotify (NYSE: SPOT) are up 140 per cent in 2024, but Plato’s Chanel Stuart-Findlay sees the opportunity for more growth in the long term as the company makes good on its mission to “own your ears”.
Its September quarter results show the progress it’s making: it now has 640 million active users, including 252 million premium subscribers, up over 11 per cent year-on-year. More importantly, a surge in operating income to €454 million ($757 million) puts the company on track for its first full year of profitability, a milestone that has been long delayed by its “freemium” model. But better advertising monetisation, growth in areas such as video and audiobooks, and the best personalisation engine in the sector should drive long-term growth.
Oscar Oberg, Wilson Asset Management
Earlier in 2024, Paragon Care (ASX: PGC) merged with CH2, the fourth-largest distributor of pharmaceutical goods in Australia behind Sigma Healthcare, Wesfarmers-owned API and Symbion.
WAM’s Oscar Oberg says the founder-led business has gone from zero to just over 10 per cent market share in five years and can keep growing thanks to three factors. First, the merger of Chemist Warehouse and Sigma Healthcare will see independent pharmacies look for a new wholesaler, and Paragon is well-placed. Second, Paragon could service Chemist Warehouse as a reserve wholesaler in Australia and New Zealand. Third – and this is the big play, according to Oberg – Paragon Care is pushing hospitals to move towards a distribution model, away from a direct purchasing model, which Oberg says could help it win a greater share of the market.
The stock has more than doubled over the past year, but Oberg remains bullish. “We think, under the current strong management team, the shares could double over the medium to long term.”
Fleur Wright, Northcape Capital
Where there’s muck, there’s usually money. Northcape’s Fleur Wright sees Clean Harbors (NYSE: CLH), the largest hazardous waste disposal company in North America, growing its earnings at a compound annual growth rate of 13 per cent over the next decade. That’s due in no small part to its ability to raise prices by 5 per cent to 7 per cent each year, thanks to strong pricing power created by what she describes as “an irreplaceable network of waste assets with strict permitting and environmental laws that make it near impossible for anyone to replicate”.
Raphael Lamm, L1 Capital
Rising gold prices have been one of the big stories of global markets in the past few years, thanks to central bank gold buying, demand from retail inventors and concerns over growing US fiscal deficits and debt levels. West Australian miner Westgold Resources (ASX: WGX) has been a big winner, but L1’s Raphael Lamm believes the company is on the cusp of a major inflection point, as it builds scale and extends the life of its assets.
Westgold’s FY24 production of about 230,000 ounces is expected to grow towards 600,000 ounces after FY26, through both organic growth and the integration of its merger with Karora Resources, which was completed in August 2024.
“Westgold shares have roughly tripled since the start of 2023, but at today’s gold prices the company trades on a PE of only five times its FY26 financial year earnings, which compares very favourably to Australian gold peers.”
Nikki Thomas, Magellan
The potential for a significant pick-up in deal activity under Donald Trump’s presidency has Magellan’s Nikki Thomas excited about the prospects for Morgan Stanley (NYSE: MS) in 2025. Its large pile of excess capital should also see it benefit materially from any potential deregulation of the banking sector and broader economy under the new US administration.
Finally, Thomas has a watch on Morgan Stanley’s wealth division, which generates about 45 per cent of its revenue. “It has grown via excellent acquisitions and, as it continues to expand, has the potential to shift the balance toward higher recurring revenue streams, higher returns and improved pricing of its shares.”
This article was originally posted by The Australian Financial Review here.
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