Turning Market Sell Offs Into Opportunity: Undervalued Stocks May 2025

As we move through the second quarter of 2025, it’s clear the market environment remains challenging. The ASX 200 Index has pulled back by 3.02% over the past three months amid ongoing inflation concerns, trade uncertainties, and global economic headwinds. Yet, our portfolios have continued to outperform significantly. Over the past 12 months, our aggregated portfolio delivered a 19% annualised return, well above the benchmark’s 5.85%. This is the result of focused stock selection, disciplined risk management, and a willingness to act decisively as market conditions evolve. How Our Proactive Risk Management on AGL Energy (ASX: AGL) Helped Members Avoid Drawdowns and Re-Enter at a Better Valuation One of the best examples of our active management approach is our handling of AGL Energy (ASX: AGL). When AGL traded at $11.46 in mid-January, we issued a “sell” call based on the escalating U.S.–China trade tensions that we believed would hurt energy sector sentiment and profitability. This was not an easy call at the time, but it turned out to be prescient—the stock fell to a low of $9.84 soon after. By acting early, we shielded our members from significant losses. We continued to monitor the situation closely and as trade tensions eased and AGL’s shift toward renewables became clearer, we upgraded the stock to a “buy.” The company’s 7 GW renewable energy development pipeline, investments in battery storage, and digital energy initiatives like Kaluza gave us confidence that the long-term story remained intact. AGL’s FY25 half-year results showed revenue growth of 15.3% to $7.132 billion but a decline in underlying NPAT to $373 million, pressured by higher fuel costs and margin compression. Statutory NPAT dropped further to $97 million. The interim dividend was reduced to 23.0 cps. Despite these challenges, customer services grew 1.0% to 4.528 million and churn remained below market average. Our approach with AGL highlights the value of not only identifying good companies but knowing when to exit and re-enter positions to protect capital and optimise returns. Why We Believe Perenti’s (ASX: PRN) Diversified Mining Services Model and Strong Cash Flow Continue to Support Outperformance Perenti (ASX: PRN) has been a standout performer in our portfolio, delivering a 43.08% gain over the past year. Trading at $1.395 currently, the company posted record revenue and increased its interim dividend from 2.0 cps to 3.0 cps in FY25 H1. Its diversified business model, spanning Contract Mining and Drilling Services—helped it navigate operational challenges in Botswana and Australia. The integration of DDH1 has established Perenti as one of the world’s largest drilling groups by metres drilled, driving cost and tax synergies. The company reaffirmed full-year guidance of $3.4–$3.6 billion in revenue and EBIT(A) of $325–$345 million, with free cash flow above $150 million. Share buybacks and debt reduction further underline financial discipline. We continue to see Perenti’s scale and diversification as key competitive advantages supporting sustainable growth. How Strategic Alliances and Favourable Weather Outcomes Propel IAG’s Strong Earnings and Upgraded Profit Guidance Insurance Australia Group (ASX: IAG) shares are up 40.82% over the past year, currently trading near $8.90. Its success stems from a combination of favourable natural perils experience—$900 million YTD April, $250 million better than expected—and transformative alliances with RAC and RACQ. These alliances are forecast to add $3 billion in gross written premiums and $300 million in insurance profit, driving double-digit EPS accretion. The company raised its FY25 profit guidance to $1.65–$1.85 billion from $1.4–$1.6 billion, with insurance margins expected at the high end of 16–18%. GWP growth reached approximately 5% for the 10 months to April 30. The ROE target was also upgraded to 15%. We believe IAG’s scale and strategic partnerships position it well for ongoing earnings growth. Why Qantas’ (ASX: QAN) Strong Loyalty Business and Fleet Renewal Program Are Key Drivers Behind Its Robust Financial Performance Qantas (ASX: QAN) has delivered a 61.65% return over the past 12 months and is up 19.8% since our recommendation. Currently priced at $9.99, the company posted FY25 H1 revenue of $12.13 billion and profit before tax of $1.39 billion, with NPAT at $923 million. Shareholders benefited from a $250 million dividend and a $150 million special dividend, both fully franked. The Loyalty division was particularly strong, generating $255 million in profit before tax and growing its member base to 17 million. The fleet renewal program added 11 new aircraft during the half, positioning the airline for improved efficiency and enhanced customer experience in coming years. Qantas’ diversified earnings base and ongoing investments underpin our positive outlook. How Orica’s (ASX: ORI) Transition to Technology-Driven Solutions and Strong Earnings Growth Support Its Market Position Orica (ASX: ORI) shares have increased 12.5% year-to-date and trade near $18.49. The company delivered a 40% increase in underlying NPAT before significant items—reaching $250.8 million in FY25 H1, and EBIT grew 34% to $472.3 million. Return on Net Assets improved to 12.9%, and the interim dividend rose 32% to 25.0 cps. While Orica reported a statutory net loss of $89 million after $339.8 million in significant items, we remain confident in the underlying strength of the business. The recommencement of a $400 million buyback program demonstrates management’s commitment to shareholder returns and confidence in future cash flow generation. Orica’s growing focus on technology solutions enhances its competitive positioning and margin potential. Why Tower’s (ASX: TWR) Disciplined Underwriting and Upgraded Earnings Guidance Reflect Operational Improvement Tower (ASX: TWR) has returned 8.26% year-to-date and 83.92% over the past 12 months, currently trading at $1.315. The company upgraded its FY25 underlying NPAT guidance to $70–$80 million, up from $60–$70 million, reflecting better-than-expected claims experience and favourable weather. While gross written premium growth guidance was revised downward to mid-single digits due to increased competition, Tower’s focus on lower-risk policies and improved risk selection is helping to drive profitability. The management expense ratio guidance was also adjusted to below 31% due to strategic investments. We see Tower’s disciplined approach and targeted investments as laying a solid foundation for future growth. How BlueScope Steel’s Strong Australian Operations and Cost Initiatives Help Offset Global Market Challenges BlueScope shares are up 27.72% year-to-date and 12.65% over 12 months, trading at $23.87. The company reported $309 million in underlying EBIT and $176 million in underlying NPAT for FY25 H1, with a fully franked interim dividend of 30.0 cps. Australian operations performed strongly, with EBIT up 10% to $131.2 million compared to 2H FY24. COLORBOND® sales rose 9%. Meanwhile, the North Star U.S. facility faced softer spreads, but BlueScope is proactively executing a $200 million cost and productivity program to defend margins. Return on Invested Capital was 8.1%, supported by a healthy balance sheet with a net cash position. Portfolio Overview and How We Are Positioning for the Months Ahead Amidst a Shifting Economic Landscape Source: Investor Pulse, Portfolio Breakdown (2025) The Growth Portfolio gained 6.05% over the last three months, outperforming the ASX 200’s 3.02% decline. The Income Portfolio slightly outperformed the benchmark while delivering attractive yield. The Mining Portfolio rose 1.6% over the past month, despite a 2.4% decline in the broader market. Looking ahead, the Reserve Bank of Australia is widely expected to cut rates to between 3.60% and 3.85%. Inflation is moderating, with trimmed mean CPI at 2.9% and consumer expectations steady around 4%. GDP growth forecasts for FY25 range between 1.6% and 2.0%. Commodity markets show mixed signals: iron ore prices are softening toward US$86/t, thermal coal remains stable, and crude oil prices face downside risks. In this environment, we are focused on companies with strong fundamentals, pricing power, resilient cash flows, and capital discipline. Our conviction is that this approach will continue to protect capital and uncover opportunities. Final Reflections on How Our Active, Research-Driven Process Is Delivering Value for Members Through Uncertain Markets This past year has reaffirmed the power of active management. We don’t just pick stocks; we actively monitor, manage, and adjust positions to protect capital and capture upside. Our timely exit and re-entry into AGL is a perfect example of how discipline and flexibility add value. Coupled with strong holdings like Perenti, IAG, Qantas, and Tower, our portfolios are positioned to navigate whatever challenges and opportunities lie ahead. We remain focused on delivering long-term growth while managing risk thoughtfully. Thank you for placing your trust in us as we continue this journey together. If you have any questions or would like to speak with our team of experts, feel free to reach out via the Chatbox in the member’s area.