A Look at The Australian Growth Portfolio — Aristocrat Leisure
The Australian Growth strategy seeks to find investment opportunities that combine quality, value and momentum factors in order to generate substantial and sustainable alpha. Aristocrat Leisure has been one such stock that has successfully combined these three characteristics delivering a return of 104.4% since the stock was added to the portfolio in 31/01/2017.
Whilst you may not know Aristocrat Leisure by name it's more than likely that you've seen and perhaps even used their products as Aristocrat is the second largest gambling machine manufacturer in the world and has a dominating market share here in Australia. Looking at the stock from a quality standpoint we can see significant and consistent improvement in earnings with total net profit rising from $186.4 million in 2015 to a current trailing twelve-month net profit figure of $502 million dollars. Drilling down past the headline figures Aristocrat continues to ooze quality with a return on capital of 15.5% meaning for every dollar of investor capital aristocrat is able to return 15.5 cents which is the 6th highest return on capital in the hotel and entertainment industry sector. Perhaps even more impressively Aristocrat also boasts a return on equity of 36.4% which is good for the 2nd highest return on equity figure in its sector and places it in the top 5% of all ASX listed companies. We also score Aristocrat highly on the more qualitative measures as we believe management has demonstrated a high level of competency particularly in its slew of acquisitions which started with the $1.3-billion-dollar purchase of Video Gaming Technologies in 2014 and more recently with its $990-million-dollar purchase of Big Fish Games to assist with its push into the ever growing social gaming market.
All of this however has not gone unnoticed by the market as Aristocrats share price has gained significant momentum rising more than 370% since the start of 2015. Interestingly there has been a definite consistency to Aristocrats share price gains with each and every calendar year seeing the stock finish higher and a more than 33% gain year to date. However, it's not just longer term momentum that Aristocrat has behind it as the shorter term momentum readings also prove positive with the stock trading 6% above its 50 day moving average and outperforming the market by 22% over the last 3 months (Relative Strength).
This recent strong price momentum has meant that the stock now trades at a relatively high P/E ratio of 23.4 on a forward-looking basis (Although the stock was more attractively priced when we opened our position in (Date)). Even still we don't necessarily view this poor valuation as a negative given that we already own the stock — Whilst pure value investors would be selling up or perhaps already have sold off their holdings as they deem Aristocrat to now be overvalued our focus on holding momentum stocks means we will continue to hold Aristocrat for as long as it remains in the strong uptrend that has been in place arguably since as far back as 2011. With the empirical evidence behind us supporting the fact that stocks like Aristocrat which have substantial price momentum behind them are more likely to continue to outperform we see Aristocrat hopefully continuing to add to the alpha generated by the Australian Growth Strategy.
For more information on the Australian Growth Strategy or for details on how to invest email us firstname.lastname@example.org
Sources - Stockopedia, Returns To Buying Winners And Selling Losers
Harbourside Capital Pty Ltd (ACN: 166 765 537) is a Corporate Authorised Representative (CAR No. 448907) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. All securities and financial products or instruments transactions involve risks. Past performance is not an indication of future performance.