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Everybody Is Waiting…

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 18 2019

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

In this week's Weekly Insights:

-Everybody Is Waiting…
-No Weekly Insights Next Week
-CSL Challenge: Market Share & Margins

-Conviction Calls
-More Pain For Active Funds Managers
Rudi On TV
Rudi On Tour
-Rudi Talks

By Rudi Filapek-Vandyck, Editor FNArena

Everybody Is Waiting…

The concerns of the less-than-bullish investors and investment experts have been perfectly captured in the graphic below: global equities have de-coupled from underlying corporate earnings forecasts and the gap between rising share prices and tentatively recovering profit growth prospects has become quite large in 2019.

Australian investors have been equally enjoying the power of central bank support. Every time the RBA sends a signal it might be ready to lower the cash rate, Australian equities find more buyers lining up from the sidelines. As witnessed, again, on Tuesday when the minutes of the most recent RBA board gathering further fueled market speculation about an imminent rate cut.

Beyond the RBA again coming to the international central bank stimulus party, global equities remain supported by a general expectation that economic data in key regions, including Europe, China and the US, should soon start generating better looking trends of improvement. Further out, corporate profits in the US are still expected to bottom this quarter and next, and rise again in Q4.

Meanwhile, of course, many an institutional portfolio is holding an above average level of cash. So what happens when everyone is ready to jump in on the next sell down?

Yes, indeed, the market refuses to give in, instead making all the cash holders on the sidelines look foolish, and let them wait for longer than they thought feasible.

No Weekly Insights Next Week

Next week starts with an Easter holiday on the Monday (and, coincidentally, my birthday) so there will be no Weekly Insights. Next Edition is therefore scheduled for the final day of April, just before I leave for my next presentation in Melbourne.

CSL Challenge: Market Share & Margins

After having advocated for years that every investor with a long term outlook should have CSL shares in the portfolio, I launched the CSL Challenge at the beginning of calendar 2019. For more information: see the link at the bottom of this story.

ECP Asset Management, a long term shareholder in Australia's highest quality outperformer CSL ((CSL)), recently updated its thoughts and views on one of its substantial shareholdings as follows: "In CSL, we see a company that is organically growing the supply of plasma ahead of the industry, while in a supply constrained market.

"The company's sustainable competitive advantage is driven by its extensive suite of products that allows it to generate higher revenue per litre than its competitors, and is also the lowest cost producer, a powerful combination."

However, while such is an unquestionable positive assessment, it is also a longer term view and the share market doesn't do long term well, in particular not when something somewhere raises questions in the short term.

In the short term, market talk is all about "margin pressure" which first arose in late 2018, depressing the share price then, and it's now prominently present in the latest research reports, and subsequently (somewhat) depressing the share price this month. So how a serious issue is this "margin pressure" and should we, long term shareholders in the company, be worried?


For starters, CSL remains the international benchmark for an industry that continues to experience stronger demand than supply can satisfy. Not only does the company remain better placed than each of its competitors, it also remains the only supplier that is seriously investing in expanding its collection facilities, thus effectively increasing market share, further enhancing its international number one market positioning.

But we seem to have entered a phase whereby the investments in new collection centres are likely to have a slight negative impact on margins initially. On top of this comes the argument that as the US economy strengthens, collection centres such as CSL's need to offer higher rewards to continue attracting sufficient numbers of donors, which also exerts downward pressure on the average margin.

Healthcare analysts in Australia are now increasingly adjusting their numbers downwards, while readily acknowledging this is far from a fait accompli. For a complex business such as is CSL's, many other factors play a role, including new products and geographies, the mix in between various products (with general acknowledgment the high margin products are doing just fine) and management's drive to find cost efficiencies.

Most importantly, I think, is that CSL's specialised products, such as Hizentra for the treatment of Chronic Inflammatory Demyelinating Polyneuropathy (CIDP), are as yet unknown throughout most of the global health sector. So one big unknown remains how much more leverage/demand can be created by getting more people familiarised with this product and its advantages for treatment of CIDP.

The bottom line: even with downgrades in forecasts coming through, growth expectations -in constant currency terms (CSL reports in USD)- for earnings per share (EPS) for the foreseeable future (three years ahead and more) remain between high single digit and low double digit percentages in each year. Really, the differences between the various forecasts are not more than 2%-3% between low markers and the more bullish analysts; or between those who have downgraded as yet and those who have not.

Which makes this whole issue more like an exercise in hair splitting, really, even though short term traders and those who wish the CSL share to crash might still jump on board the bandwagon and try to create something important out of it. Apart from short term pressure on the share price, I very much doubt whether it'll turn out more than a tiny blip in an ongoing robust, long term uptrend for the shares.

While I am at it, I thought I'll provide some background behind short term issues and question marks for other high quality healthcare stocks on the ASX:

-ResMed ((RMD)): while question marks remains about management's newly chosen strategy to expand into SaaS and out-of-hospital care through acquisitions, there remain plenty of analysts who remain convinced the best strategy will prove to grant management the benefit of the doubt. Stockbroker Morgans, for instance, has kept the stock stoically as one of its Conviction Buys. ResMed is scheduled to release Q3 results on May 3, Australian time.

-Cochlear ((COH)): long running concerns about a constantly elevated valuation have been replaced with concerns about the company's competitive edge now competing companies seem to have momentum on their side. It is now up to management at Cochlear to formulate an effective response. And what-do-you-know, this morning the company announced in a release to the ASX "the launch of the Nucleus Profile Plus Series cochlear implant,designed for routine 1.5 and 3 Tesla magnetic resonance imaging scans without the need to remove the internal magnet".

One thing you can always count on with quality companies such as these, they seldom let their clients and shareholders down for long. It'll still be a few quarters before this new product gathers all the required licenses and approvals, and market traction, but the response is in the pipeline.

-Ramsay Health Care ((RHC)): only Blind Freddy has missed the share price recovery and subsequent stabilisation for private hospitals operator Ramsay Health Care, despite the threat of a Labor government post May keeping a tight lid on health insurance cost inflation, which also makes life more difficult for private hospitals in Australia. But signs of increasing improvement in operational dynamics in Europe is feeding into growing optimism that better times lay ahead after a few truly challenging years for the former market darling. To put things in perspective: we are still talking 2%-3% potential to the upside, but sometimes little things can have large impacts, and Ramsay Health Care's prospects could be on the rise again, which is supporting the share price.

A few weeks ago I invited readers of Weekly Insights to share their experiences as a CSL shareholder and we received truly amazing, wonderful, touching and surprising responses. I'll put them together in a follow-up story in the not too distant future. Plus an update shall follow about who will be the lucky receiver of a nice bottle of wine via Australia Post.

The FNArena/Vested Equities All-Weather Model Portfolio holds shares in all four companies mentioned.

To find out more about the CSL Challenge:

Conviction Calls

Model portfolio managers at stockbroker Morgans have elected to reduce exposure to Wesfarmers ((WES)) while increasing exposure to Woolworths ((WOW)). At the same time, portfolio weighting for Cleanaway Waste Management ((CWY)) has been slightly reduced as well.

The portfolio managers communicated their moves as maintaining discipline at times when the overall share market is potentially stretched.

Following the same mantra, the broker's Growth Model Portfolio has trimmed exposures to BHP Group ((BHP)) and to Rio Tinto ((RIO)) while selling out of Computershare ((CPU)). This portfolio holds "higher than usual cash, ready to deploy into upcoming opportunities".

Elsewhere, the Cross Asset Income Model Portfolio has further trimmed ownership of Transurban ((TCL)) shares.

More Pain For Active Funds Managers

Anecdotal observations suggest 2019 is not the ideal hunting ground for active funds managers looking to beat their benchmarks without counting on pure plain luck or taking on excessive risk.

A recent update on domestic funds managers data by JP Morgan (data available up until the February reporting season) suggests few institutions are believers in sustainable upside for Australian banks, still, but they also started reducing overweight positions in resources, while average cash positions remain on the rise.

More interesting, perhaps, is JP Morgan's analysis into how domestic funds managers tend to perform in each of the corporate results reporting seasons of August and February. Analysing data for the past five years, JP Morgan analysts conclude more managers are able to outperform each year in August, but not so in February.

This, of course, raises a few questions such as: what is so different about February that makes outperformance too much of an ask for most?

JP Morgan's analysis suggests the Value style of investing performs better in August, not so in February. But then the Growth segment of the share market displays a similar pattern, albeit with smaller losses in February. Small cap managers in particular would find Februaries hard to outperform in, concludes the analysis, with higher volatility in stocks ex-50 and ex-100 likely to blame.

For those interested in the statistical numbers: only 44% of funds managers on average manages to outperform benchmarks in February while in August that percentage rises to 60%. Within this context, February 2019 actually proved an above average positive month for the sector with just over 50% beating their benchmark. Among active managers researched by JP Morgan, 45% outperformed in February.

Rudi On TV
My weekly appearance on Your Money is now on Mondays, midday-2pm.

Rudi On Tour In 2019

-ASA Melbourne, May 1
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

Rudi Talks

Last week's audio interview about what's happening in the Australian share market:

(This story was written on Tuesday 16th April 2019. It was published on the day in the form of an email to paying subscribers, and will be again on Thursday as a story on the website).

(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: 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.) 

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