We rarely see selloffs like the one that followed “liberation day”. April 3rd and 4th marked the worst two-day stretch for US equities since the pandemic. It’s exceeded by only a handful of events in the past century: Covid, the GFC, the 1987 crash, and the Great Depression. When even gold doesn’t look safe enough—it too was falling at the peak of the meltdown—you know the market is in full-blown panic.

Exhibit 1: Liberation day ranks amongst the worst selloffs on record

S&P 500 2-day price return

Source: Macrobond, Morningstar.

Howard Marks, cofounder of Oaktree Capital and an investor always worth listening to, released his latest memo, Nobody Knows (Yet Again), on 9 April. The title echoes a note he penned during the darkest days of the 2008 financial crisis, just after Lehman Brothers—a Wall Street titan—shocked the world by filing for bankruptcy. That collapse triggered a wave of failures and raised fears that the entire financial system might unravel. It felt like a “downward spiral without end”. No one knew whether it could be stopped. But in Marks’ view, we had to assume it would be.

Of course, he was right. Central banks and fiscal policy stepped in, stabilized the financial system, and markets eventually recovered. It was a painful shake out, but a finite one. And I think that’s the position we must take today. We don’t know how it all plays out—nobody does—but we’ve faced big shocks in the past. And while there’s been pain along the way, in the long-run, markets have recovered.

If we’re willing to assume this, then we should be looking for opportunities in these moments. Some investors just want cash and they’re willing to liquidate at almost any price, and that’s where rational investors can take advantage. As Buffett puts it “the stock market is a device for transferring money from the impatient to the patient”.

Marks concluded his latest memo in much the same way he did in 2008. I’ll quote in full:

“Everyone was happy to buy 18-24-36 months ago, when the horizon was cloudless and asset prices were sky-high. Now, with heretofore unimaginable risks on the table and priced in, it’s appropriate to sniff around for bargains: the babies that are being thrown out with the bath water. We’re on the case.”

In the spirit of Marks’ memo, let’s pick out a few babies from our Australian stock coverage.

Spotting attractive investments

First, how do we identify opportunities? It begins with our proprietary star rating system. We rate all stocks we cover on a scale from 1 to 5. Stocks we assign 1- and 2-star ratings are overvalued, in our opinion. If investors buy overvalued stocks, we expect they will earn a less-than-fair return. For context, we assume a ‘fair’ return for the average stock on the ASX is 9% per year, comprising both dividends and price appreciation.

We consider 3-star stocks fairly valued. Of course, we don’t know a business’s intrinsic value to the nearest cent, so we put a range around our estimates. We adjust this band based on the confidence we have in our forecasts – the predictability of cash flows, the chance of material value destruction, and so on. For a stock of ‘medium’ uncertainty, we set the band 10% either side of our fair value estimate. If shares trade in this range, it’s a 3-star stock.

Finally, and this is where things get interesting for investors, we have 4- and 5-star stocks. These are the most attractive on valuation grounds. For whatever reason—perhaps earnings are cyclically weak, or the sector is out of favour—the market underappreciates the long-run cash-generation potential of these businesses. But ultimately, fundamentals dictate stock prices, and the market should converge to fair value. If you can buy a stock when it’s undervalued, and hold on, we think you’ll be rewarded with a better-than-fair return.

The “Babies” thrown out with the bathwater

The big selloff means many stocks we cover are undervalued. In fact, more than half our list is 4- or 5-star rated, well above average. There are plenty of high-quality companies that looked undervalued before liberation day, and now, the discount is even larger. Our Best Ideas list is the place to go for these picks.

For this exercise, I’m narrowing in on a specific class of stocks: high-quality businesses that you couldn’t get at a discount before liberation day, but now screen as attractive. These are the babies thrown out with the bathwater—caught up in indiscriminate panic selling despite strong fundamentals. To identify them, I’m filtering for companies that were rated 1-, 2-, or 3-stars before liberation day but have since dropped into 4- or 5-star territory. We’ll give preference to businesses with economic moats.

Here are the picks.

BHP Group

BHP Group (ASX:BHP) shares have fallen 5% since liberation day. It’s easy to read Mr Market’s mind on this one. As the world’s largest iron ore miner, BHP is leveraged to China’s steel production and economic growth. If, as many surmise, tariffs put further pressure on China’s slowing economy, this is bad news for iron ore demand. Copper operations offer some commodity diversification but demand for the red metal is still very much tied to China, mostly in manufacturing and industrial uses.

Not since the depths of the pandemic has our biggest miner looked genuinely undervalued. The post-pandemic commodity price boom lit a fire under BHP shares, sending them well above our estimate of fair value. But for the first time in years, we believe the balance of risk and reward has shifted in investors’ favour.

That’s not to say we’re bullish on the outlook for iron ore. We expect Chinese steel production to fall gradually over the next decade, reflecting demographic drag, slower urbanisation, and diminishing returns on infrastructure spending. But every asset, even those facing structural decline, has a fair price. And today, we think the market is too pessimistic on BHP’s long-run earnings outlook.

While we don’t award BHP a moat, it is a high-quality iron ore miner. Its Pilbara iron ore mines have long lives, with cash costs in or around the lowest quartile of the cost curve.

ANZ Group

As a bellwether for Australia’s economy and equity market, ANZ Group (ASX:ANZ) shares are down 6% since liberation day. Amongst the major banks, ANZ has been the weakest performer of the past 12 months, with shares weighed down by the bond trading scandal and the costs of the Suncorp (ASX:SUN) integration. It’s now a four-star stock, and the only major bank at a discount.

We think the market is underestimating ANZ’s earnings resilience and overreacting to near-term uncertainties. While execution risks remain, they are now well known and largely priced in. Meanwhile, process investments and a new core banking platform should improve ANZ’s competitive position in home lending, where it has recently underperformed relative to peers. These investments may take time to bear fruit, but they set the stage for improved operating efficiency, higher returns on equity, and more durable earnings growth.

Crucially, ANZ still benefits from the structural advantages that underpin the major banks’ wide moats: a sticky deposit base, strong capital buffers, and a dominant position in a highly regulated market. A fully franked dividend yield above 5% also looks attractive, especially compared to more expensive peers like CBA.

Ansell

Of all Australian healthcare names we cover, Ansell (ASX:ANN) looks most directly exposed to tariffs. Shares have been hammered, down 15% since 2 April. We can understand the knee-jerk reaction: roughly half Ansell’s earnings come from the sale of protective gloves in North America, most of which are manufactured in Malaysia, Sri Lanka, and Thailand. These three countries were hit with some of the most punitive tariff hikes, averaging 35%. And although this has since been wound back to 10%, the suspension is only due to last 90 days.

But this is where Ansell’s competitive advantages come into play. A narrow-moat business, Ansell owns several of the largest and most reputable protective glove brands. In highly skilled industries, where the right brand is the difference between being protected from injury or not, and quality and fit matter, it’s hard for new entrants to chip away at incumbents like Ansell. When safety or employee satisfaction is at stake, there is little incentive to switch manufacturers to save a sliver of the cost base.

Ansell plans to immediately and fully pass on the cost of tariffs to customers. We think it has the pricing power to do so. Most competitors also source from Southeast Asia, so Ansell is not at a relative cost disadvantage. We forecast modestly softer demand from price increases, but it’s essentially immaterial. Shares now trade in 4-star territory.

IRESS

It’s not immediately obvious why IRESS (ASX:IRE) has underperformed since liberation day. Perhaps it has been caught up in the broad-stroke bearishness surrounding the technology sector. Or perhaps, as a provider of software to wealth managers and stockbrokers, the market is concerned about the financial health of its customer base.

Regardless of the rationale, we believe the selloff is unwarranted. Iress is a narrow-moat business with entrenched market share, particularly in Australian wealth management, where it services around two-thirds of the market by volume. Its products are deeply embedded in client workflows, giving rise to high switching costs, especially in regulated environments where consistency, compliance, and integration matter.

The company has cleaned house. Noncore assets have been sold, the balance sheet has materially improved, and dividends have been reinstated. Capital expenditure, while tracking above our prior expectations, is long overdue following years of underinvestment. These funds are being directed toward tangible growth initiatives, including digital advice tools and expanded cross-sell modules, which should enhance product utility and client retention.

In our view, the market is too focused on short-term expenditure and overlooking the improving fundamentals, recurring revenue base, and strategic positioning of the business. At current prices, we think the upside outweighs the risk.