Five stocks to watch this reporting season: Lincoln Indicators report

Law firm Slater & Gordon, Ardent Leisure Group and Sirtex Medical are three of the top small and mid-cap stocks to watch in the February reporting season, according to sharemarket analysts Lincoln Indicators.

Also on the Lincoln list are footwear retail group RCG Corporation, which operates The Athlete’s Foot, and Western Australian copper mining corporation Sandfire Resources.

Lincoln Indicators chief executive officer Elio D’Amato said the outlook for 2014 follows a year in which investors began “wary of the market”. However, as confidence grew, he said they “automatically reached for safe investments and household names like BHP and CSL”.

“As a result, the low-hanging fruit has all been picked. It will now be more of a skill to identify the opportunities in the smaller end of the market, which can still offer bang for buck.”

Lincoln reports that over the last 12 months, the top 20 companies have risen by 13.2%, while the S&P/ASX Small Ordinaries was down 7.3%. However it predicts that small and mid-cap businesses may have a change in fortune this year, suggesting that a cheaper share price is an added bonus.

“The rules of the market dictate that investors pay more for quality, or take a risk on something cheaper,” said D’Amato.

“It’s about finding a balance and using our methodology, we’ve found a few stocks that are considerably cheaper, while offering strong returns.”

D’Amato said sectors such as healthcare, niche retail businesses and some parts of the mining industry such as iron ore and copper could do well.

Retail, which has struggled in general over recent years, could see some recovery, he said.

“In general, we expect the retail sector to report well. The industry will continue to recover with interest rates at historic lows and signs of a pick-up in consumer spending. However, investors need to focus on those companies that have invested and have clear growth strategies,” said D’Amato.

While the mining boom may have passed, there is still potential in mining stocks, the research finds.

“With low expectations, there is an opportunity for investors to be pleasantly surprised. We recommend keeping an eye on iron ore for raw numbers and copper for outlook.”

D’Amato said that regardless of performance in February reports, investors should look at the fundamentals of companies, the quality of the business and its financial health.

“Finally, maintain a diversified portfolio so you won’t be demoralised if one particular company dramatically dips.”

Lincoln Indicators’ five companies to watch this reporting season:

1. Slater & Gordon Limited: Personal legal services firm in Australia and UK.

   Lincoln thinks it will do well as it has “revolutionised and cornered personal legal services in Australia”. The risks include litigation success rates and regulatory changes.

2. Ardent Leisure Group: Owns and operates Dreamworld, WhiteWater World, Goodlife Health Clubs and US-based family entertainment centres.

   Lincoln reports that there has been strong growth in health clubs and US entertainment centres, and its theme park division is expected to benefit from the $15 million Theme Park Capital campaign launched by the Queensland Government. Risks include economic downturn and underperformance of Marina and Bowling divisions.

3. Sirtex Medical Limited: Biotechnology company.

   Lincoln thinks the potential of its products and the lower dollar could see it shine overseas. Risks could be if there is a delay in its SIRFLOX clinical study results release.

4. RCG Corporation: Specialty footwear retailer.

   Lincoln expects its new brands, Sperry Top Sider and Saucony, will contribute immediately to sales. A risk could be if the relationship with RCG and its brand licensor were to sour.

5. Sandfire Resources: Copper miner, DeGrussa project, WA.

   Lincoln thinks strengthening copper prices could help the business, as well as a ramp up of its processing plant. Risks could be operational issues.