MoneyTalks: Why this portfolio manager is bullish on the most shorted lithium stock on the ASX

MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.

Today we hear from Australian Ethical portfolio manager Mark Williams.

From an analyst sector perspective, Williams covers the telecommunications sector as well as several other sectors across industrials, like lithium.

He believes it’s going to be another year of uncertainty on the markets, but with the Fed Reserve indicating the pathway downwards for interest rates towards the end of 2023, growth sectors like healthcare and technology should see some positivity.

“It will be interesting to see if that plays out or not and if it does, there’s potential for growth sectors of the market – which have seen challenging times in the last year or two – to outperform again,” he says.

“On the resources front, lithium is an interesting one – in the short term, the spot price very much dictates sentiment but we’re pretty confident about the long-term demand thematic around the lithium batteries needed to power growth in EVs and general energy storage,” he says.

Top ASX picks

Pilbara Minerals (ASX:PLS)

Williams approaches the lithium market and opportunities in the sector by focusing on companies that are in production.

“It’s an important aspect to consider if you think about the type of cycle markets are in at the moment,” he says.

“Pilbara Minerals have been in production for a couple of years, and they’ve generated significant free cash flow, which means their balance sheet is strong as opposed to the likes of Liontown, for example, who are really struggling.

“When you’ve got lithium markets and spot prices failing dramatically, those that are either not quite in production or just getting to that point find themselves in a difficult situation,” he says.

NOW READ: Shorter’s fave Pilbara Minerals could dump dividend but shares optimism for long term lithium outlook

While their cash has come down, they’re still sitting with $2.1b on the balance sheet which gives them a lot of flexibility to manage this type of downturn, William adds.

“This is exactly what we saw in the last downturn in 2019 heading into early 2020 – just having that balance enabled them to get through and acquire the Altura business next door to them, which is now helping them build scale into the business,” he says.

“A strong balance sheet is key, and they’ve certainly got one of the strongest balance sheets in the market, their latest quarterly should remind people of those types of attributes.

“I think they’ve been prudent to talk about the dividend, but it looks like they’ll probably withhold the dividends for the first half just to preserve cash to make sure their balance sheet is strong, which I think is a very sensible thing to be doing in this type of market.”

Resmed (ASX:RMD)

Another stock at the larger end of town that Australian Ethical has invested in is ResMed within the healthcare sector.

“Towards the end of last year as these obesity products started to come into the consciousness of not just the public but investors and equity markets, we had the view that the potential outcome for Resmed could potentially be significantly negative, given there are sleep apnoea products selling in the market,” he says.

“The theory with obesity drugs is that if they are wildly successful and obesity levels drop broadly for the population, then there’ll be less sleep apnoea conditions in the market because sleep apnoea is quite often triggered by overweight or obesity.

“Resmed’s share price ended up being sold down quite aggressively but we’ve concluded that the impact was overstated and so we saw it as a good opportunity to get an exposure to it.”

Williams reckons there’s opportunity for a rebound as the market comes to appreciate that in the shorter term, these drugs aren’t having any impact on Resmed’s business because a lot of these obesity drugs are still in trial.

Gentrack (ASX:GTK)

Gentrack is a $600m small cap utility billing software company providing processes for energy companies like Energy Australia.

“We really like this stock, we’ve been in Gentrack for a couple of years, and they’ve got a new management team that has shaken up the organisation and have driven some pretty significant change through the business to the point where it’s now growing very strongly,” Williams says.

“They’ve got some good growth prospects over the next couple of years, they’ve won some big customers and done some pretty major contracts in the last little while, the last one being with Mercury in New Zealand.”