SHARES

Five top stocks for your buy list

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Despite the recent pullback in high-yielding blue chips such as the big banks and Telstra, investors who got in early to the yield rush have done nicely over the past few years. But what now?

Fortunately, a boom in one area of the market often produces disinterest in others. Right now, investors are placing a premium on yield at the expense of growth. On the basis that the best opportunities are the ones no one else is interested in, and sometimes actively loathe, here are five stocks on sale.

Computershare (ASX: CPU) is the world's largest global operator of share registries, operating in 20 countries.

global funds

It's a great Australian success story that even the company's own management believes is cheap. In August the company announced a share buyback while we added to our holdings in our growth and income portfolios. Growth has tailed off and the market is losing interest.

But on an 8% free-cash-flow yield, you don't really need any growth to justify a purchase, although with dominant market positions the world over you'll get that too.

GBST Holdings (GBT) is a locally based software business doing well overseas, providing software and services to the financial services industry in Australia, the UK and, to a lesser extent, Asia.

A few weeks ago the company warned that project delays were going to reduce profits by up to 25% this year, causing the share price to fall 30%. But investing is a marathon, not a sprint.

GBST remains well placed to benefit from long-term shifts in the distribution of wealth products, particularly in the UK. With a refocus on selling new products to existing customers, GBST has excellent long-term growth and cash-generation prospects.

A similar situation exists at Trade Me (TME), New Zealand's premier online classifieds site. So dominant is this business that it's like owning Carsales.com (CAR), Seek (SEK) and realestate.com.au (REA) rolled into one.

Best of all, it's trading well below our buy price. The reason, as chairman David Kirk explained at the recent AGM, is that "a lot of good work has been done without too much to show for it". Recent investment in new staff and product improvement initiatives mean the company's products are now much more competitive. The market is significantly under-estimating Trade Me's medium- to long-term potential, pricing it as ex-growth when it isn't.

Finally, two entirely different stocks to watch out for.

Despite one of the strongest brands in the funds management sector, Perpetual has been reporting net fund outflows recently (and also buying more stock in GBST, as it happens).

The company may not grow much this year but is well placed in a growing industry. Almost all its earnings come through as free cash, enabling a payout ratio of around 90% and an attractive fully franked dividend yield.

South32 (S32) is a different kettle of fish. Not only was it granted the smallest, least valuable bits of the BHP (BHP) empire, it also reported its maiden result on one of the worst trading days in half a decade. The share price plummeted and reaction ranged from disinterest to disappointment.

Such pessimism is baffling. It was an excellent result. You don't need to be bullish about commodities or mining to find this stock attractive. Industry profitability is clearly declining and will be doing so for years but universal neglect is creating bargains. South32 has a fine balance sheet, strong cash flows, promising dividends and increasing returns on capital. Moreover, it's trading at half its net tangible asset backing.

Disclosure: The Intelligent Investor Separately Managed Accounts own all of the shares mentioned in this article. Staff, including the author, own many of the stocks mentioned.

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James Lennon is a senior analyst at investment research and funds management house Fat Prophets. Receive a recent Fat Prophets Report.
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