Justin Woerner

With miners leading the gains in this year’s interim earnings reports, many investors might be tempted to flock to mining stocks. However, award winning fund manager Hyperion Asset Management, warns investors that outperformance is driven by quality stocks not sectors.

“Market growth figures were strong, with sales, earnings per share (EPS) and dividends per share (DPS) growth for the market at a healthy 10%, 13.8% and 8.2% respectively. These figures were spurred by the big miners in particular (BHP and RIO), and it is clear that cost cutting continued to play a large part in earnings growth for this sector,” said Hyperion Portfolio Manager, Justin Woerner.

“Outside the mining sector, growth was more subdued, with Industrials ex Banks recording EPS growth of 2.3%. Ex-resources, overall the market recorded a more moderate sales growth of 6.4%, with an EPS and DPS growth of 5.2% and 5.6% respectively.”

While this might seem a strong incentive for investors to be overweight in mining stocks, Justin Woerner says there are plenty of opportunities for investors outside the mining sector.

“The long term experience of Hyperion’s portfolios and investors is that outperformance is driven by quality stocks, not sectors,” said Mr Woerner.

Mr Woerner went on to say that this is especially the case now that the much-predicted slowing of the mining boom is now a reality, leading investors to ask where the next growth stories are likely to come from.

“At Hyperion we think online stocks, such as REA and SEEK, will continue to grow, and we believe there is a strong outlook for non-bank financials.”

In the case of REA Group, the business continued to perform strongly, reporting a 37% increase in earnings. Australian revenue increased by 30% and ‘premium listing’ volume continued to grow despite a weak housing market, affirming REA’s strong value proposition.

Mr Woerner added, “REA’s market-leading Italian operation offers further growth opportunities once headwinds in Europe subside, and we expect that the business will be able to expand margins on top of growing revenue.”

As far as online job ad site SEEK is concerned, average yield per domestic job ad increased by 8% – offsetting an 11% decrease in the ad volume.

“This is pricing power in action,” explained Mr Woerner. “The business is also making inroads into the job placement market, traditionally the domain of competitor LinkedIn, and is realising growing revenue streams from its increasing global footprint. We believe SEEK is a low cost business leveraged to global growth and continues to offer a compelling value proposition. We are forecasting EPS growth in the mid- to high- teens over the next five years.”

While banks are historically popular within the financials sector, Hyperion believes that non-bank financials have a brighter outlook, especially those leveraged to the increasing equity market activity.

“Our portfolios are significantly underweight banks. We are forecasting long-term returns in low double digit territory due to tighter interest margins and the subdued credit growth environment,” said Mr Woerner.

“In non-bank financials, we like Henderson Group. The business’s long-term track record and management’s focus on customer service and performance is paying dividends by way of an increasingly strong brand presence and growing assets under management. We are forecasting strong EPS growth on the back of growing performance fee revenue and increasing inflows from the European and North American operations.”

Mr Woerner concluded, “This interim reporting season has been positive for the market and sets an expectation that the local market is in a good position to continue this growth throughout the remainder of the year. We urge investors to be sector agnostic and instead look for quality businesses leveraged to growth, with predictable and growing earnings streams. It’s these companies which will provide the next great opportunities to capture growth.”

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