4 quality, undervalued ASX 200 shares in an earnings upgrade cycle revealed: fund manager

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Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part two of this edition, we’re joined by Andrew Martin, principal of Alphinity Investment Management. The Alphinity Concentrated Australian Share Fund has delivered an annual return of 7.6% after fees over the past five years.

The Motley Fool: In part one of our interview yesterday we talked about some of your best calls in 2022. Do you have any regrets over the past year, things that with 20:20 hindsight you wish you had or maybe hadn’t done in the investment markets?

Andrew Martin: We had some exposure to lithium through IGO Ltd (ASX: IGO). But in hindsight, I wish we had more exposure to it lithium stocks. Our exposure has done incredibly well. And some of these stocks are so large now that if you don’t have a position it can really hurt you. Where they go from now is another question.

The other one would be, in hindsight, exposure to rising interest rates. I always thought they were going up, but they have gone up much faster and harder than the market expected.

So, a company like Computershare Limited (ASX: CPU), which has got real exposure to rising short-term rates, has done very well. We don’t own that one. We find it a bit risky when it’s just picking macro things like rates going up, we prefer it to be more operationally focused. But with hindsight, we’d potentially take a position in something like that, given the exposure it gets to rising rates.

MF: You still hold IGO shares today. What’s your outlook for this ASX 200 lithium stock?

A.M.: Lithium, as a commodity, is still doing very well. One of the reasons we were there is the markets were taking time to catch up with that story, as in what they expect the lithium price to be going forward.

It always tempers things a little bit when they’ve done so well. We can’t have the same conviction we had six months ago, given how well they’ve done everything.

The outlook for lithium is still positive, and hence we still have an exposure.

But, like everything, we don’t want to buy companies just because they have exposure to lithium. We want more to the story. We like IGO as a business and their strategy.

MF: When we spoke back in September 2021, you stressed the importance of earnings and investing in quality, undervalued companies in an earnings upgrade cycle. Which ASX 200 shares fit that bill today?

A.M.: In this kind of market there are always those kinds of companies.

Qantas Airways Limited (ASX: QAN) is one of those. We’ve seen some really good earnings upgrades come through.

People have been grumbling about them, lost bags and delays and what have you. But the reality is that pricing is going up, there’s very strong demand domestically and offshore. And there’s just not a lot of capacity around. So they are able to generate very good profits, and very good cash flow which rapidly improves the quality of the balance sheet.

I think the ASX 200 banks are sitting in this space as well. In this reporting season, we’re still seeing earnings upgrades for the banks. They have very strong balance sheets at the moment; great capital; great provisioning positions.

We prefer National Australia Bank Ltd (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA). They are not the cheapest banks, but we think from a performance perspective they are doing better than the other banks.

And another one is Steadfast Group Ltd (ASX: SDF), an insurance broking business.

They’re in a great market environment at the moment, where insurance premiums are going up. And they can be taking a commission and fee off the back of that. They’re also buying up small stakes in broking businesses and building out their network. And they’re in a very consistent upgrade cycle. It’s a very strong quality business with a very strong quality management team as well.

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Tune in tomorrow for part three of our interview with Andrew Martin. If you missed part one, just click here.

(You can find out more about Alphinity’s Australian, Global, and Sustainable funds here.)

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