Could these 13 “High Quality” stocks be the ideal addition to your ASX portfolio?

ASX 10 Out of 10: A Highlight on Quantitative Stock Analysis

Each month, Morgan Stanley’s team engages in rigorous quantitative analysis of numerous ASX-listed stocks, employing mathematical and statistical models to scrutinise financial data that guides investment choices. This analytical approach helps investors rank stocks based on various performance metrics such as return, value, quality, and momentum, enabling them to filter and select stocks meeting their specific criteria.

Morgan Stanley’s proprietary model, dubbed "MOST", has had an impressive year, yielding a notable 10.9% return by the end of April, a stark contrast to the ASX 200 benchmark, which only delivered 0.2%.

In their April report titled Stock Ideas – A "Quantamental Approach" (7 May), a particular selection of 13 ASX stocks drawn from the "High Quality Stocks Preferred by MOST and Morgan Stanley Fundamental Analysts" stood out, where each stock holds an "Overweight" rating from the firm.

The 13 Featured Stocks

Here are the stocks in alphabetical order:

1. Eagers Automotive (ASX: APE)

   • Industry: Consumer Discretionary (Automotive Retail)
   • Overview: Operates a network of car dealerships across Australia and New Zealand.

2. Accent Group (ASX: AX1)

   • Industry: Consumer Discretionary (Footwear and Apparel Retail)
   • Overview: Manages brands like The Athlete’s Foot and Platypus with stores in Australia and New Zealand.

3. Coles Group (ASX: COL)

   • Industry: Consumer Staples (Supermarket Retail)
   • Overview: Operates over 800 supermarkets and retail outlets, including Coles Express.

4. Dicker Data (ASX: DDR)

   • Industry: Information Technology (Hardware and Software Distribution)
   • Overview: Distributes IT products and solutions across Australia and New Zealand.

5. Data#3 (ASX: DTL)

   • Industry: Information Technology (IT Services)
   • Overview: Provides IT solutions, including cloud services and software licensing.

6. Endeavour Group (ASX: EDV)

   • Industry: Consumer Staples (Retail and Hospitality)
   • Overview: Operates liquor stores and hotels in Australia.

7. Fortescue Metals (ASX: FMG)

   • Industry: Materials (Mining)
   • Overview: Engages in iron ore mining in Western Australia and explores renewable energy projects.

8. IPH Limited (ASX: IPH)

   • Industry: Industrials (Intellectual Property Services)
   • Overview: Provides intellectual property services across Australia, New Zealand, and Asia.

9. Pro Medicus (ASX: PME)

   • Industry: Healthcare (IT Solutions)
   • Overview: Develops radiology imaging software solutions in Australia and the US.

10. Premier Investments (ASX: PMV)

    • Industry: Consumer Discretionary (Retail)
    • Overview: Owns brands including Smiggle and Just Jeans, operating domestically and internationally.

11. Redox (ASX: RDX)

    • Industry: Industrials (Chemical Distribution)
    • Overview: Supplies chemicals across various industries in Australia, New Zealand, and the USA.

12. Telstra Group (ASX: TLS)

    • Industry: Telecommunications
    • Overview: Offers telecommunications and technology services across Australia and internationally.
13. Woolworths Group (ASX: WOW)
    • Industry: Consumer Staples (Retail)
    • Overview: Operates supermarkets and liquor stores across Australia and New Zealand.

Portfolio Observations

A critical assessment reveals that this hypothetical portfolio covers only seven of the eleven major ASX sectors, lacking selections from Energy, Financials, Real Estate, and Utilities. With significant exposure to Consumer Discretionary and Staples (nearly half the stocks), it may encourage potential investors to consider diversification in these missing areas.

From a style perspective, the portfolio appears balanced, featuring both higher-yielding mature companies and lower-yielding growth stocks. Notable stable performers include Coles, Woolworths, and Telstra, offset by cyclical stocks like Eagers Automotive and Accent Group, which may be subject to market fluctuations.

Regarding income potential, with a grossed-up yield averaging 6.65% p.a., this collection leans heavily towards dividend-paying stocks. The only non-payer, Pro Medicus, exemplifies the trend of growth-oriented companies that reinvest profits rather than distribute them.

Conclusion: Is This the Ideal ASX Portfolio?

Identifying the “perfect” portfolio is subjective and often centres on individual financial goals and market conditions. While Morgan Stanley’s analysis provides a well-researched foundation, the true efficacy of this hypothetical portfolio lies in its alignment with investor objectives; thus, consulting with a financial advisor is recommended.

Ultimately, the allure of the proposed stocks will vary based on one’s confidence in Morgan Stanley’s quantitative insights and individual investment strategy.