The big falls in leading stock prices during the December quarter provided opportunities for equity fund managers to pick up holdings for their portfolios at attractive valuations during the March quarter.
Australian equity manager DNR Capital has added Aristocrat Leisure to the portfolio of its Australian Equities High Conviction Fund.
The company makes electronic gaming machines, digital social games and casino management systems. It is a market leader.
Aristocrat’s share price fell from an all-time high of $32.98 at the end of July last year to a low of $20.95 at the end of December. Since then the stock has recovered and is trading in a range between $25 and $26.
According to DNR’s latest investor report, Aristocrat has strong market shares in both “land-based” and online casinos. “It defends its market position by making significant investments in game development. It is able to attract game developer talent. It also invests in marketing and distribution,” DNR says.
“This is difficult to replicate and should add value over time.”
It has strong return on equity and margin, which reflects its market position and ability to leverage its investments.
It has a strong balance sheet, which puts it in a good position, compared with its rivals, for further investment or acquisition.
The company faces regulatory risk, especially in the area of online gambling. Another risk is the maturing of the land-based market.
It is moving into adjacencies, such as more video based systems and digital social gaming, which is a big and growing sector.
After its performance fell below the index last year, DNR had a strong March quarter, with a return of 11.05 per cent. Its performance benchmark, the S&P/ASX 200 Accumulation index was up 10.8 per cent over the same period.
Since the Australian Equities High Conviction Fund was launched in June 2015 it has produced an average return of 8.2 per cent a year, compared with a return of 7.5 per cent for the index.
DNR says a key issue for markets is the recognition that interest rates are going to stay lower for longer.
It says stocks that will benefit in such an environment include defensives with good valuation support, such as Tabcorp Holdings, Aurizon and Brambles; quality growth stocks, such as SEEK, REA Group, Treasury Wine Estates and Aristocrat Leisure; and companies that can expect stimulus from lower rates, such as Macquarie Group, Lendlease and James Hardie Industries.