Rudi’s View: Healthcare, Megatrends & FoMo

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

By Rudi Filapek-Vandyck, Editor

So far this year, ResMed ((RMD)) shares are down -4.4%, with Cochlear ((COH)) shares down -0.8% and CSL ((CSL)) scraping into positive territory to the tune of 1.2%

Doesn't sound like much? Always good to know the ASX200 is up 1.46% ex-dividends. Banks and technology stocks have been the flavour of the moment throughout the first five months, followed by utilities and REITs, and to a lesser extent discretionary retailers and gold producers.

Market strategists at Wilsons are making the call this week, and not for the first time, that Australian healthcare looks poised for market outperformance on a combination of attractive looking valuations and the prospect for above-average growth.

The sector generally is currently offering significantly more growth than the rest of the market generally, point out the strategists, while the average healthcare stock is trading below valuations seen over the past five years. Wilsons doesn't hesitate to use the label "compelling value".

Just to add a little more context to the broker's reasoning: while average EPS growth for the ASX200 is projected to be negative for the year ahead to the tune of -4%, the average growth forecast for the ASX300 Healthcare index is no less than 20%. The average PE multiple for the sector has fallen to 28x versus a five-year average of 33x.

Wilsons' Focus Portfolio is Overweight on Aussie healthcare through holdings in CSL, ResMed, and upcoming biotech Telix Pharmaceuticals ((TLX)).

Analysts at Janus Henderson took a longer view into the future and concluded the healthcare sector might well become one of the biggest users, and beneficiaries, of artificial intelligence within the decade ahead. Already, reports the asset manager, some Ai applications are having a meaningful impact on healthcare delivery and on the growth outlook of selected companies.

Janus Henderson has identified three areas that should have investors' attention:

-data building for drug discovery
-medical device use and imaging
-pre- and post-procedural assistance

In summary: Artificial intelligence (Ai) has enormous potential to improve healthcare delivery across the globe. To be continued, without any doubt.

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Damien Boey, Chief equity Strategist at Barrenjoey, warns investors not to get sucked into positive investor sentiment which seems to be directly connected with rallying bonds (lower yields).

The latest reason for bonds to rally has been a rather weak manufacturing survey released by the Institute of Supply Management, but Boey points at the finer details which revealed new orders have now fallen to a level that historically suggests material earnings downgrades are forthcoming.

Stocks rallying because bond yields are falling might therefore be no more than a simple head fake. Boey is of the view equities are not priced either for higher real yields or material earnings downgrades. Barrenjoey prefers the safer approach and advocates investment portfolios preference defensives.

With the context of Boey's general observation, it should also be noticed Macquarie's FOMO Meter, designed to measure equity market sentiment, rose to 1.21 at the end of May (0.68 in April) with Macquarie pointing at weaker data points, lower yields and higher liquidity.

When the FOMO Meter is greater than 1, the broker reports ASX forward returns tend to be below average the following year, suggesting risk of a correction. No surprise: Macquarie adds June is often a weaker month for ASX equity returns (broadly blamed on tax loss selling).

Nuveen's Chief Investment Officer, Saira Malik, agrees with adding a more defensive slant to equity portfolios, but she also looks beyond the many predictions of June potentially being a disappointing month.

Her advice: investors should focus on the historical performance for the three months ahead. Since 1994, S&P500 investment returns for the trio of June, July and August have been positive in 18 of the past 30 years, with a median gain of nearly 3%.

In Australia, Bell Potter's Richard Coppleson (The Coppo Report) this week released his own historical data analysis for the local market. According to his data, the three months ahead on average add 0.16%, 1.14% and 0.31% respectively, which doesn't quite match the US return, but is positive nevertheless.

If we were to rely on data going back 44 years, average returns become -0.67%, 2.07%, and 0.69%.

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Asset manager Amundi has a slightly different view on equity markets, suggesting too much too soon is expected from Ai, as any tangible benefits will take time to show up. In the meantime, a barbell strategy of Quality and Value, Defensives and Cyclicals, seems like the correct approach.

Amundi's stock pickers favour "good quality businesses" with "attractive valuations" that are driven by "secular themes".

In Europe, at the sector level, Amundi is positive on consumer staples (slightly less than before) and healthcare, while staying cautious on the technology sector. In the US and elsewhere the asset manager is cautious on cyclicals.

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Former Chief Technical Strategist at HSBC Investment Bank, Robin Griffiths is now the Editor of The Adaptive Asset Allocation Report, and as such Griffiths pointed out to his subscribers 'Sell in May' only works when equities are in a Bear Phase.

He thinks equities currently are in a Bull Phase. Another reason not to stick to that script is because history shows Sell in May equally does not apply during US Presidential election years., which 2024 is.

The in-house model remains keen on gold. So is UBS. See The Broker Call Report on Wednesday (yesterday).

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The graphic below is courtesy of Nuveen.

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Wilsons' partner Craigs Investment Partners (also 50% owner) recently highlighted why its research, and asset allocations, remains wedded to the world's Megatrends; it's there where most of today's high quality, growth-oriented companies can be located and identified.

When in search for structural growth, Craigs has the following Megatrends in mind:

-Cloud transition
-Artificial intelligence (Ai)
-Digital economy
-Innovative healthcare
-Payments revolution
-Entertainment on demand
-The emerging Asian consumer

Think Alphabet, Amazon, Salesforce and Microsoft, but also L'Oreal, Mastercard, Nike, LVMH, Tencent, Nvidia, and Disney.

Following on from the recent March quarterly results in the US, Craigs observes Tech companies have yet again been responsible for the lion share of earnings upgrades, with demand for GenAi projected to lift Nvidia's data centre revenues to above US$100bn this financial year.

All of the world's leading cloud services providers, highlights Craigs, showed accelerating top line growth driven by traditional cloud migration and incremental GenAi related workloads.

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Ord Minnett recently revisited ASX-listed companies inside the discretionary retail sector, which has led to the broker expressing its preference for Webjet ((WEB)) -Top Pick!- as well as ARB Corp ((ARB)), Aristocrat Leisure ((ALL)), and Breville Group ((BRG)).

The broker sees risk building for Bapcor ((BAP)), JB Hi-Fi ((JBH)), and Wesfarmers ((WES)).

Model Portfolios, Best Ideas & Conviction Calls

Goldman Sachs's High Conviction calls for the Asia-Pacific region recently saw the inclusion of Qantas Airways ((QAN)) with the current valuation discount expected to narrow as earnings should sustainably grow at a faster pace than pre-covid and management will demonstrate willingness to distribute capital to shareholders while also renewing the airliner's fleet.

Only three other ASX-listed companies are included:

-Lynas Rare Earths ((LYC))
-Woolworths Group ((WOW))
-Xero ((XRO))

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Jarden's select list of preferred small cap stocks in Australia ("Emerging Companies key picks") has seen Dicker Data ((DDR)) being added, alongside Lovisa Holdings ((LOV)), Siteminder ((SDR)), Nick Scali ((NCK)), Universal Store Holdings ((UNI)), and Temple & Webster ((TPW)).

Other stocks that have the blessing, with conviction, of the broker's sector analysts:

-Telix Pharmaceuticals
-Regis Healthcare ((REG))
-Pepper Money ((PPM))
-Inghams Group ((ING))
-National Storage ((NSR))
-Ingenia Communities Group ((INA))
-Karoon Energy ((KAR))
-Domain Australia Holdings ((DHG))
-NRW Holdings ((NWH))

One stock has seemingly disappeared since the previous update one month ago: Capricorn Metals ((CMM)).

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Morningstar's Best Equity Ideas for ASX-listed stocks currently contains 14 inclusions. Morningstar's approach is traditionally centred around 'cheap value':

-TPG Telecom ((TPG))
-Domino's Pizza ((DMP))
-Bapcor ((BAP))
-a2 Milk Co ((A2M))
-Santos ((STO))
-AUB Group ((AUB))
-ASX Ltd ((ASX))
-Aurizon Holdings ((AZJ))
-Ventia Services ((VNT))
-Lendlease Group ((LLC))
-Pexa Group ((PXA))

As well as Fineos Corp ((FCL)), ResMed ((RMD)) and Newmont Corp ((NEM)) among international ideas.

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Morgan Stanley's Australia Macro+ Focus List contains the following 10 stocks:

-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-CSL ((CSL))
-Macquarie Group ((MQG))
-Origin Energy ((ORG))
-Paladin Energy ((PDN))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Treasury Wine Estates ((TWE))
-Woodside Energy ((WDS))

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Morgan Stanley's Macro+ Model Portfolio consists of the following 32 constituents:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank ((NAB))
-Westpac Bank ((WBC))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Suncorp Group ((SUN))
-Goodman Group ((GMG))
-Scentre Group ((SCG))
-Stockland ((SGP)
-Aristocrat Leisure
-Car Group ((CAR))
-Domino's Pizza ((DMP))
-The Lottery Corp ((TLC))
-Wesfarmers ((WES))
-James Hardie ((JHX))
-Orica ((ORI))
-Coles Group ((COL))
-Treasury Wine Estates ((TWE))
-CSL
-ResMed ((RMD))
-AGL Energy ((AGL))
-Origin Energy
-Telstra ((TLS))
-Transurban Group ((TCL))
-BHP Group ((BHP))
-Newmont Corp 
-Rio Tinto ((RIO))
-South32 ((S32))
-Paladin Energy ((PDN))
-Santos ((STO))
-Woodside Energy

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Wilsons' list of Highest Conviction Investment Ideas has seen the allocation increase to Woodside Energy, Xero ((XRO)) and Netwealth Group (NWL)).

Other Most Preferred Ideas are Aristocrat Leisure and Collins Foods ((CKF)).

More ideas come with "long term growth" profiles:

-Ridley Corp ((RIC))
-TechnologyOne ((TNE))
-Universal Stores ((UNI))
-ARB Corp ((ARB))
-Neuren Pharmaceuticals ((NEU))
-Pinnacle Investment Management ((PNI))

Among Resources stocks, there are two favoured ideas:

-Beach Energy ((BPT))
-Liontown Resources ((LTR))

And there's a Speculative basket too:

-Immutep ((IMM))
-Clarity Pharmaceuticals ((CU6))

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Wilsons' Focus Portfolio's largest overweight remains towards growth companies, including a large overweight to the healthcare sector. The largest underweight allocation remains for local banks. The Portfolio also holds a slight overweight allocation to resources, but this is due to "active positioning" in green metals and energy (underweight iron ore).

In terms of individual stocks, the Focus Portfolio encompasses the following:

Consumer Discretionary
Aristocrat Leisure, IDP Education ((IEL)), Lottery Corp ((TLC)), Collins Foods, Breville Group ((BRG)), Webjet ((WEB))

Energy
-Woodside Energy

Financials
-ANZ Bank, National Australia Bank, Westpac, Macquarie Group, Insurance Australia Group ((IAG)), Netwealth Group, Steadfast Group ((SDF))

Healthcare
-CSL, ResMed, Telix Pharmaceuticals ((TLX))

Industrials
-Worley ((WOR))

Information Technology
-Xero

Materials
-BHP Group ((BHP)), Amcor ((AMC)), Evolution Mining ((EVN)), Mineral Resources ((MIN)), Arcadium Lithium ((LTM)), Sandfire Resources ((SFR)), South32 ((S32))

Real Estate
-Goodman Group, HealthCo Healthcare & Wellness REIT ((HCW))

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Macquarie Wealth's recommended Growth Portfolio currently includes the following stocks:

-Goodman Group
-Seek ((SEK))
-Aristocrat leisure
-Northern Star ((NST))
-CSL
-Computershare ((CPU))
-NextDC ((NXT))
-The Lottery Corp
-Flight Centre ((FLT))
-Mineral Resources
-Cleanaway Waste Management ((CWY))
-Steadfast Group
-Arcadium Lithium
-ResMed
-Pexa Group
-Treasury Wine Estates
-Viva Energy ((VEA))

Macquarie Wealth's recommended Income Portfolio currently has the following composition:

-Suncorp Group
-Telstra
-National Australia Bank
-Westpac Bank
-ANZ Bank
-BHP Group
-CommBank
-Premier Investments ((PMV))
-Coles Group ((COL))
-Viva Energy ((VEA))
-Atlas Arteria ((ALX))
-Aurizon Holdings
-APA Group ((APA))
-GPT Group ((GPT))
-Deterra Royalties ((DRR))
-Metcash ((MTS))
-GUD Holdings ((GUD))
-Charter Hall Retail REIT ((CQR))
-Amcor

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Shaw and Partners Research Monitor for the June quarter shows the broker's ASX100 Large Caps Model Portfolio consists of the following ten members:

-Aristocrat Leisure
-Domino's Pizza
-Evolution Mining ((EVN))
-James Hardie Industries ((JHX))
-Pilbara Minerals ((PLS))
-Qantas Airways ((QAN))
-ResMed
-Suncorp Group
-Treasury Wine Estates
-Xero

Preferred exposures among 'emerging companies' (smaller caps) are:

-Abacus Storage King ((ASK))
-Bannerman Energy ((BMN))
-Black Cat Syndicate ((BC8))
-Global Lithium Resources ((GL1))
-Helloworld ((HLO))
-Metro Mining ((MMI))
-Retail Food Group ((RFG))
-Vista Group ((VGL))
-Tyro Payments ((TYR))
-Webjet

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Back in December, Bell Potter analysts released their stock picks for 2024, ranked by themes and market segments:

-For Listed Investment Companies (LICs); Australian Foundation Investment Company ((AFI)), Plato Income Maximiser ((PL8)), and MFF Capital Investments ((MFF))

-Agriculture & Fast Moving Consumer Goods; Bega Cheese ((BGA)), Rural Funds Group ((RFF)), and Elders ((ELD))

-Technology; Life360 ((360)), WiseTech Global, and Task Group ((TSK))

-Diversified Financials; Perpetual ((PPT)), Regal Partners ((RPL)), and PSC Insurance ((PSI))

-Real Estate; HMC Capital ((HMC)), Dexus Convenience Retail REIT ((DXC)), HealthCo Healthcare & Wellness REIT ((HCW))

-Retailers; Cettire ((CTT)), Propel Funeral Partners ((PFP)), and Accent Group ((AX1))

-Industrials; DroneShield ((DRO)), Austal ((ASB)), Corporate Travel Management ((CTD)), IDP Education, IPD Group ((IPG)), and The Environment Group ((EGL))

-Healthcare; Telix Pharmaceuticals, Cyclopharm ((CYC)), Clarity Pharmaceuticals ((CU6)), Clinuvel Pharmaceuticals ((CUV)), and Immutep ((IMM))

-Gold sector; Regis Resources ((RRL)), and Santana Minerals ((SMI))

-Base Metals; Aeris Resources ((AIS)), Nickel Industries ((NIC)), Mineral Resources, and IGO Ltd ((IGO))

-Strategic Minerals; Lynas Rare Earths ((LYC)), Talga Group ((TLG)), Liontown Resources ((LTR)), and Alpha HPA ((A4N))

-Energy; Boss Energy ((BOE)) and Strike Energy ((STX))

-Mining services providers; Chrysos Corp ((C79)), Matrix Composites & Engineering ((MCE)), and GenusPlus Group ((GNP))

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Also in December, Shaw and Partners released its 10 Best Ideas to benefit from the anticipated small caps' revival in 2024.

The selected ten:

-AIC Mines ((A1M))
-Austin Engineering ((ANG))
-FireFly Metals ((FFM)), previously AuTeco (AUT)
-Chrysos
-Gentrack Group ((GTK))
-Metro Mining ((MMI))
-MMA Offshore ((MRM))
-Peninsula Energy ((PEN))
-ReadyTech Holdings ((RDY))
-Silex Energy ((SLX))

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Macquarie's ASX Quality Compounders

The highest quality 'compounders' as identified by Macquarie quant research inside the ASX300:

-James Hardie
-Cochlear ((COH))
-REA Group
-TechnologyOne
-ResMed
-Data#3 ((DTL))
-Pro Medicus ((PME))
-Jumbo Interactive ((JIN))
-PWR Holdings ((PWH))
-Netwealth Group ((NWL))
-Aristocrat Leisure
-Spark New Zealand ((SPK))
-Codan ((CDA))
-Clinuvel Pharmacauticals ((CUV))
-Redox ((RDX))

Given Macquarie's research strong leaning on the past five years, with high barriers to match, the following 11 companies fell just outside the above list:

-Fisher & Paykel Healthcare ((FPH))
-Medibank Private ((MPL))
-Coles Group
-The Lottery Corp
-Lovisa Holdings ((LOV))
-CSL 
-IDP Education
-Pinnacle Investment Management ((PIN))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Johns Lyng ((JLG))

My research and All-Weather stock selections are 24/7 available for paying subscribers: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Weekly Insights this week: https://fnarena.com/index.php/2024/06/05/rudis-view-winners-are-winning-for-longer/

(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.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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