Rudi’s View: Lend Lease, Cochlear And Janus Henderson

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In this week's Weekly Insights (this is Part Two):

–August Reporting Season Preview: Potential Beats & Misses
–Conviction Calls
-Goldman Sachs Initiates Healthcare
-Rudi Talks – Uncomfortable Truths About Investing
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Possibly the most important event this week, apart from Elon Musk also discovering the power of Twitter, is global asset allocators at Morgan Stanley starting to dial back a suggested Overweight position in global equities to Neutral. In Australia the suggestion is to move to Underweight Australian equities.

The move comes amidst similar suggestions expressed elsewhere and with quite a number of strategists and market analysts suggesting it seems rather unlikely the August reporting season in Australia will be strong enough to push main indices much beyond where they are.

See also the first part of Weekly Insights this week.

Returning to Morgan Stanley, its asset allocators suspect we are about to witness a switch into defensive mode and in today's context this means investors will move money out of what has worked to date (US equities, growth stocks, technology and small caps) and into what has not worked until recently. The latter implies equities outside the US should outperform Wall Street, but also that large caps are making a comeback, as should quality yield stocks.

In general terms, Morgan Stanley argues most of the strength that is on display via US corporate results has already been priced in and there is a fairly good chance US equities are experiencing a temporary high this season. Australia seems to be in a better position, still, but one wonders whether the overall situation for the ASX is really that different?

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Lend Lease ((LLC)) shares have risen some 28% since the start of calendar 2018, but they are still too cheap, say analysts at Goldman Sachs. The analysts calculate in comparison with historic valuations, Lend Lease should catch up a big chunk more relative to the broader market, but on top of this the analysts also believe consensus forecasts remain too low and are thus cum upgrades once the company releases its financial numbers this month.

Goldman Sachs has lifted its price target to $25.20 for the stock, and raised its recommendation to a Buy, including the idea in its Conviction List.

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Strategists at stockbroker Morgans have updated their list of High Conviction Stocks ahead of the August reporting season, which saw them adding Atlas Arteria ((ALX)), OZ Minerals ((OZL)) and Volpara Health Technologies ((VHT)).

The three newcomers join Suncorp ((SUN)), Westpac ((WBC)), PWR Holdings ((PWH)), CML Group ((CGR)) and Kina Securities ((KSL)).

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Portfolio managers at Wilsons have sold their position in Janus Henderson ((JHG)), explaining they have become worried that potential to outperform that was previously believed to be there, may not eventuate after all.

Sifting through the financial details of last week's FY18 release, Wilsons thinks the largest area of funds outflows is the one linked to financial advisors. As more low-cost passive strategies become available, the concern is net outflows can continue for multiple quarters, which is likely to prevent the share price from recovering from its post result disappointment punishment.

They also removed EclipX ((ECX)) from Wilsons' Core and Income Portfolios given this week's profit warning came out only two months after the company reaffirmed guidance. There is the added note that Wilsons analysts seem to have met company management in recent weeks and nothing seemed to point into the direction of a heavy miss for the full year's financial performance.

Similar to comments published by analysts at other brokerages, Wilsons analysts suggest management now has a credibility issue, with the market already questioning the quality of results at the time of the interim report release.

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"Whichever way you look at it, this market is sleepwalking into a tsunami of oversupply".

The above statement was made in a recent update on lithium by Macquarie.

Goldman Sachs Initiates Healthcare

By now you all know -you should know- healthcare has been the outperforming sector in the Australian share market over the past two decades, in particular post that bear market in 2008.

High quality healthcare stocks have been front and centre of my own All-Weather stocks research, see also dedicated section on the FNArena website, and with stocks like ResMed ((RMD)), CSL ((CSL)) and Cochlear ((COH)) trading near all-time highs, following yet another tremendous rally in respective share prices, investors could be forgiven to think one day this is all going to be over, and that one day might as well be tomorrow, or next week?

Not so if we can take guidance from recent research released by Goldman Sachs. Analysts Chris Cooper and Thomas Yeo have only just initiated coverage on the Australian healthcare sector, adding five stocks to the broker's equity universe locally. Only one of the five stocks has received a maiden Sell rating, and it is Ramsay Health Care ((RHC)), the worst performer over the past two years or so.

Both CSL and ResMed take off with a Buy rating and price targets of $231 and $16.70 respectively, indicating both Goldman Sachs analysts still see plenty of further upside stemming from premium returns and growth profiles that seem to stick with both market darlings. Goldman Sachs' research provides yet more fuel for the argument that because CSL and ResMed are so much better quality than their peers, both inside and outside the sector, that a large premium simply is justified.

Moreover, the research also suggests a large premium vis-a-vis foreign competitors is equally justified.

One of the financial metrics to prove this point comes with the acronym CROCI, which stands for cash return on capital invested. Average CROCI for the five healthcare companies in Australia is an estimated 24% for FY18 while the average for global peers is only 13-15%. Hence, the meaty premium awarded in Australia seems fully justified.

Both ResMed and CSL sit atop the local ladder, as you probably already guessed. Ramsay's CROCI is around the global average, locally surrounded by the likes of Ansell ((ANN)), Sonic Healthcare ((SHL)), Estia Health ((EHE)) and Healthscope ((HSO)).

Cochlear has the highest CROCI locally, at 31%, but the analysts think the share price is too high to warrant a fresh Buy rating. Goldman Sachs' price target for Cochlear is only $200. Fisher & Paykel Healthcare ((FPH)) too starts off with a Neutral rating, alongside a maiden price target of $13.40.

Goldman Sachs doesn't like hospitals much, illustrated by the fact Healthscope isn't even included. A price target of $49 for Ramsay (the lowest we've seen) explains the solitary Sell rating upon initiation.

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Analysts at Wilsons equally refreshed their insights into local healthcare stocks, resulting in an upgrade to Buy for ResMed with a 33% lift in price target to $16. Wilsons now believes the structural change this company has achieved in the US market is about to be replicated in other jurisdictions.

Also, a significant increase in the installed base of compliant AS10 patients, coupled with automated resupply solutions, is translating into a more durable and profitable product cycle for ResMed's AirFit20 mask range, predict the analysts.

To top it all off, there will be ongoing efficiencies from connected care, further adding to the company's sustainable growth profile.

Equally noteworthy, Wilsons has re-initiated coverage on Cochlear, after an absence of five years, with a price target of $225 accompanied by -of course- a fresh Buy rating.

The analysts seem convinced Cochlear has provided itself with technological advantages which are poised to drive further market share gains. They are equally positive about the structural focus on adult recipients, while anticipating accelerating excess cash returns.

The forecast is for 12% EPS CAGR over the next three years. If achieved, Wilsons thinks the share price could be as high as $267 by then.

Rudi Talks – Uncomfortable Truths About Investing

Having freshly returned from presentations on the Gold Coast and in Canberra, I can report a recording of my seminar to members of the ASA has been added to the FNArena Talks section of the website. It shows one hour of introduction, slides, conversation and questions around the main themes that have characterised both share market dynamics and my personal analysis over the past five years.

Not everybody is going to like my analyses, conclusions and observations, which is why the title reads "Uncomfortable Truths About Investing In The Australian Share Market".

Here's a direct link to the recording: https://bit.ly/2Oc5w02 (or visit FNArena Talks)

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 10.30am Skype-link to discuss broker calls
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October

(This story was written on Monday 6th and Wednesday 8th August 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. This is Part Two).

(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. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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(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. 

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