Martin Roth - Top Stocks 2021: A Sharebuyer’s guide to Leading Australian Companies

MARTIN ROTHS

BEST - SELLING ANNUAL

TWENTY-SEVENTH EDITION

2021

The author and publisher would like to thank Alan Hull (author of Active Investing, Revised Edition, Trade My Way and Invest My Way; www.alanhull.com) for generating the fiveyear shareprice charts.

This twentyseventh edition first published in 2021 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in Adobe Garamond Pro Regular by 10/12 pt

First edition published as Top Stocks by Wrightbooks in 1995

New edition published annually

Martin Roth 2021

The moral rights of the author have been asserted

ISBN: 9780730385059 (pbk.)

9780730385035 (ebook)

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

Cover design: Wiley

Cover image: Stock market graph Yaran / Shutterstock

Charts created using MetaStock

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

During 2020 Australia entered its first recession in 29 years as the COVID19 pandemic crushed many businesses. Most will probably survive, but some will not. As the old stock market adage warns us, it is when the tide goes out that we learn who has been swimming naked.

But in fact, when the economic tide went out in 2020 it also revealed something else, something important that Australia boasts many companies of very high quality. These are companies that make solid profits year after year, that have just moderate levels of debt and that pay regular dividends to their shareholders. Most importantly for readers of this book, they are exactly the kinds of companies that are found in Top Stocks.

Using the same stringent criteria as in all previous editions, fully 90 companies have qualified this year. Twentyeight companies that were in Top Stocks 2020 failed to meet the benchmarks and were excluded from this latest edition. At the same time, 13 new companies entered the book.

Guiding investors towards value stocks has been one of the paramount aims of the book from the very first edition. Indeed, one rationale for the book has always been to highlight the truth that Australia boasts many excellent companies that continue to make good profits year after year regardless of the direction of the financial markets. Despite the title, Top Stocks is actually a book about companies.

Right from the start it has been an attempt to help investors find the best public companies in Australia, using strict criteria. These criteria are explained fully later. But, in essence, all companies in the book must have been publicly listed for at least five years and must have been making a profit and paying a dividend for each of those five years. They must also meet tough benchmarks of profitability and debt levels. It is completely objective. My own personal views count for nothing. In addition, share prices have never been relevant.

Of course, such stocks could not withstand the tidal wave of a substantial market selloff. They too would be affected, but they should be affected less. If they are good companies they will continue to thrive and to pay dividends. And they will bounce back faster than many others.

Of the 90 companies in Top Stocks 2021 15 fewer than in last year's edition fully 58 reported a higher aftertax profit in their latest full financial year (June 2020 for most of them). In addition, 54 recorded higher earnings per share and 42 paid a higher dividend.

And though, as I write above, share prices are not relevant for selection to Top Stocks, 55 of the companies in the book have provided investor returns share price appreciation plus dividends of an average of at least 10 per cent per year over a fiveyear period.

The year 2020 was like no other in the history of Top Stocks. It makes it difficult to assess each company's latest financial results and make predictions about the future. Certainly few of the companies in the book were prepared to give guidance on revenues and profits for the coming year.

A large number of the corporations saw their operations affected by the COVID19 pandemic. Some of them several retailers, for example actually benefited, but many suffered. Profits were down for some.

Consequently, many companies lowered their dividends. Even some companies whose businesses were going well decided to lower their dividend in order to bolster their finances, fearful of a worsening economy.

There were other twists. Many companies, with their businesses suffering, made oneoff impairment charges against these businesses. It meant that statutory profits and underlying profits differed for many of the companies in this book.

In addition, quite a few companies had capital raisings during the year often by selling more shares fearing that economic conditions might worsen, and wishing to shore up their finances. This had the effect of boosting the number of shares on issue, which lowered earningspershare figures.

But there was more. During 2020 a new accounting standard regarding leases, named AASB 16, came into effect. This lowered some companies' profits. It also sometimes had the effect of raising their finance charges and their amortisation charges.

Consequently, some companies in this book presented both preAASB 16 and postAASB 16 financial results.

As just one example, shoe retailer Accent Group announced that its June 2020 EBITDA (earnings before interest, taxation, depreciation and amortisation) figure was $121.7 million preAASB 16 and $203.4 million postAASB 16, a big difference.

Its EBIT (earnings before interest and taxation) figure was $87.2 million preAASB 16 and $94.8 million postAASB 16. Its aftertax profit was $58 million preAASB 16 and $55.7 million postAASB 16.

A particular attraction of Top Stocks is the manner in which the book each year places a spotlight on smaller, emerging companies that have just ascended into the rankings of the top 500 stocks, or that have only just been listed on the ASX for the required five years to make it into the book.

Here are three small companies in Top Stocks for the first time that show promise: