Rudi’s View: Wesfarmers, WiseTech & Worley

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-In this week's Weekly Insights:

-Market Leadership Has Changed
-Conviction Calls & Best Ideas
-Research To Download
-FNArena Talks

By Rudi Filapek-Vandyck

Market Leadership Has Changed

Investors are being reminded a healthy bull market is broad-based, with most segments of the share market participating.

The message that is currently doing the rounds on US equities is the exact opposite, with plenty of research highlighting this year's gains for major US indices can be traced back to only ten companies.

It's one of the quirks of indices. In the US four large index constituents make up more than one fifth (20%-plus) of the S&P500. The three largest constituents of the Nasdaq make up 30% of that index. In Australia, BHP Group ((BHP)) alone makes up 11% of the ASX200. Add CommBank ((CBA)) and CSL ((CSL)) and we have a similar outcome.

But in Australia this year's gains cannot be ascribed to the top 20% with only shares in CSL posting gains up until the Easter long weekend. BHP is slightly in the minus (if we exclude the dividend paid) while CBA shares are down by -3.5%, which is not fully offset by its half-yearly dividend.

While the implications are that most of US equities, and thus most US investors are still finding the share market a rather tough experience in 2023, in Australia the situation looks a lot more comforting. Some 60% of the local Top20 is sitting on capital gains, which suggests a different underlying dynamic in the land Down Under.

Scrolling through the ASX200 thus far in 2023 (Easter weekend), market gains have been carried by gold miners and an elite collection of commodity exposures (selected lithium, BlueScope Steel ((BSL)) and some iron ore) while the insurance sector, including insurance brokers, features as a stand-out performer, as does the automotive sector through the likes of ARB Corp ((ARB)), Eagers Automotive ((APE)), and GUD Holdings ((GUD)).

Two other easily identifiable groups are some of last year's laggards bouncing back hard and your typical defensives in Coles Group ((COL)), Telstra ((TLS)), Transurban ((TCL)), Wesfarmers ((WES)) and Woolworths ((WOW)). We can add the local healthcare sector to this basket as well.

Examples of laggards that are experiencing their moment in the sun this year are Boral ((BLD)), Brambles ((BXB)), Codan ((CDA)) Fisher & Paykel Healthcare ((FPH)), James Hardie ((JHX)), NextDC ((NXT)) and Orora ((ORA)), but equally so the aforementioned GUD Holdings, BlueScope Steel, and most household names in the local healthcare sector.

Positive performances have equally come from the creme de la creme -French for the best among peers- inside the local technology sector. TechnologyOne ((TNE)) just posted a fresh all-time record high, would you believe, but so has WiseTech Global ((WTC)), while Altium ((ALU)) is now approaching its peak from late 2021 and Pro Medicus ((PME)) shares are not far off last year's record high.

I have no doubt, your typical value-investor is now scratching his/her head, unable to explain how/why.

That head scratching might well continue for longer since many of the High Quality operators on the ASX are noticeably back in favour this year, including all but two of the 14 stocks on my list of All-Weather Performers, and all but one of the stocks listed as Potential All-Weather Performers.

Two observations stand out and should be on investors' mind (IMHO):

1. Australia is not simply copying the USA, there is a definitive local flavour in this year's market
2. The swing towards Quality and Defensives, including the proven, reliable performers in high multiple-sectors

Contrary to what today's year-to-date gains suggest, investors locally are well aware of the risks that lay ahead. It's why they prefer QBE Insurance ((QBE)) over Westpac ((WBC)), Telstra over Vicinity Centres ((VCX)) and Aristocrat Leisure ((ALL)) over Pointsbet Holdings ((PBH)).

I think that's the real message to take away from the above.

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Paid subscribers have 24/7 access to a dedicated section on All-Weather Stocks on the FNArena website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Conviction Calls & Best Ideas

The first thing that catches the eye when checking upon Goldman Sachs's selection of Conviction Buys for Australian and New Zealand stocks is the damage that has been done to some of the inclusions, in particular Temple & Webster ((TPW)) and Omni Bridgeway ((OBL)).

The list also includes Elders ((ELD)), Lifestyle Communities ((LIC)), Qualitas ((QAL)) and Westpac for which share market momentum has equally not been positive.

Much better performances have been posted by Fisher & Paykel Healthcare, Iluka Resources ((ILU)), Qantas Airways ((QAN)), REA Group ((REA)), Rio Tinto ((RIO)), Webjet ((WEB)), Woolworths Group, and Xero ((XRO)).

The broker's selection of 14 companies last changed in early March when Rio Tinto was added.

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Stock pickers at UBS are clearly singing from a different song sheet. They also have a broader selection, both positive and negative.

Starting with the smallest selection first, UBS's list of Least Preferred stocks no longer includes Endeavour Group ((EDV)) and InvoCare ((IVC)) but Harvey Norman ((HVN)) was added to Bega Cheese ((BGA)), National Australia Bank ((NAB)), Pilbara Minerals ((PLS)), Pinnacle Investment Managers ((PNI)) and Vicinity Centres.

The much larger selection of Most Preferred stocks now includes APA Group ((APA)), TPG Telecom ((TPG)) and WiseTech Global, while ANZ Bank ((ANZ)) and Telstra have disappeared.

Remaining Most Preferred: IGO Ltd ((IGO)), Orica ((ORI)), Santos ((STO)), South32 ((S32)), Netwealth Group ((NWL)), QBE Insurance, Steadfast Group ((SDF)), Suncorp Group ((SUN)), Aristocrat Leisure, Amcor ((AMC)), IDP Education ((IEL)), Qantas Airways, Seek ((SEK)), Seven Group Holdings ((SVW)), Transurban, Treasury Wine Estates ((TWE)), Wesfarmers, and Worley ((WOR)).

It is UBS strategists' view that successful investing in 2023 will be all about selecting the right stocks, and much less about being on the right side of macro momentum.

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UBS has also compiled a short list of 10 companies "to own for the long run".

These ten are:

-BHP Group
-CommBank ((CBA))
-IDP Education
-REA Group
-Suncorp Group
-Transurban
-The Lottery Corp ((TLC))
-Wesfarmers
-Worley
-WiseTech Global

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Strategists at Wilsons think investors should position portfolios towards Non-Cyclical Growth, which is a fancy term for 'Defensive Growth', otherwise known as All-Weather Performers. Wilsons particularly likes Macquarie Group ((MQG)), IDP Education, Goodman Group ((GMG)) and Qantas.

For this reason, Wilsons also likes local healthcare stocks, in particular CSL, ResMed ((RMD)) and Telix Pharmaceuticals ((TLX)).

Wilsons' Model Portfolio equally includes some cyclical growth names such as Nine Entertainment ((NEC)), Domain Holdings Australia ((DHG)) and James Hardie ((JHX)), with Macquarie also put in this basket.

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Morgan Stanley's Australia Macro+ Focus List currently comprises of the following ten inclusions:

-Aristocrat Leisure
-CSL
-Goodman Group
-IDP Education
-Macquarie Group
-Northern Star Resources ((NST))
-Rio Tinto
-Suncorp Group
-Telstra
-Treasury Wine Estates

More Conviction Calls and Best Ideas:

—https://www.fnarena.com/index.php/2023/03/17/rudis-view-dominos-pizza-newcrest-qantas/

–https://www.fnarena.com/index.php/2023/02/10/rudis-view-aub-group-endeavour-lottery-corp-suncorp/

–https://www.fnarena.com/index.php/2023/02/03/rudis-view-csl-mineral-resources-ridley-readytech/

Research To Download

Independent Investment Research (IIR) on:

-Small Cap Industrials in March: https://www.fnarena.com/index.php/download-article/?n=51AD1F79-D712-7EF5-FEC509C33D0A161A

-Biotech in March: https://www.fnarena.com/index.php/download-article/?n=51B758E3-E38B-0BB1-D327AD9E5B6F889C

FNArena Talks

A recording of my recent presentation to members of the Australian Investors Association (AIA) is available via the FNArena Talks section on the website:

https://www.fnarena.com/index.php/analysis-data/fnarena-talks/

In addition, my latest interview by Peter Switzer is available via YouTube:

https://www.youtube.com/watch?v=2I853N3Bu38

(My appearance is after circa 14 minutes)

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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