Rudi’s View: Peter’s Portfolio Reviewed

This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M

Peter's Portfolio Reviewed

By Rudi Filapek-Vandyck, Editor FNArena

Occasionally I am being asked to cast my eye over someone's investment portfolio and give my honest opinion.

Time and other constraints (no financial advice!) often prevent me from responding in-depth. This week I have decided to dig deeper and provide more colour in response to the latest request, and share my insights with a broader audience.

The portfolio in question contains the following stocks:

-a2 Milk ((A2M)),
-Audinate Group ((AD8))
-Amcor ((AMC))
-Ansell ((ANN))
-Bapcor ((BAP))
-Bigtincan Holdings ((BTH))
-Breville Group ((BRG))
-Catapult Group International ((CAT))
-Cochlear ((COH))
-CSL ((CSL))
-Goodman Group ((GMG))
-Kogan ((KGN))
-Megaport ((MP1))
-NextDC ((NXT))
-Pro Medicus ((PME))
-TechnologyOne ((TNE))
-Wesfarmers ((WES))
-Woolworths ((WOW)).

The General Framework

First up, when it comes to portfolio construction, I am a firm believer in creating a general framework with one eye on the immediate circumstances and one eye on the long-term. There's only so much we can confidently predict and/or anticipate, which is why a truly diversified selection of companies will prove its true value over time.

Having said so, investors should never be afraid to make changes. Things change. The world has been changing quite profoundly post-GFC. The past few years have seen multiple shocks to the global system that all had major impacts on trends and general market dynamics.

Don't believe for a second that this time is never different from the past. It has been different on every single occasion!

Whereas covid has had a significant impact on the world, and on markets, since 2020, investors must now consider whether the Russian invasion into Ukraine and the subsequent response from the Biden administration and its Western allies might not have an even greater impact in the months and years ahead.

Things to consider in the short to medium term:

-Is inflation near its peak and about to trend downwards? Hopefully the answer is 'yes', but we cannot be 100% certain.

-Will central bankers have to choose between taming inflation or keeping economic momentum in the positive? The Federal Reserve is behind the curve and needs to step on the accelerator. Historically, this is when bad things happen. Who knows how strong exactly the US economy remains in the face of aggressive tightening?

-Will there be a recession? The pressure is on for Emerging Economies, also not helped by a weakening Chinese economy and sanctions on Russia. But the most obvious pick for the next recession is Europe where economies broadly haven't grown post-GFC (and often for much longer), and household budgets already were under pressure from stagnant wages when confronted with rising food and commodity prices. Now a genuine energy crisis is piling on further pressure.

-Is Australia still the Lucky Country? In light of serious challenges for Europe, China and other parts of the world, and unanswered question marks about the trajectory in the US, it looks like Australia might yet again stand out in a positive light.

Inflation over here is still quite contained, the RBA is not in a hurry, the local housing market might be deflating, but that doesn't automatically translate into 'disaster', and the world is short crucial basic ingredients Terra Australis has in abundance; iron ore, copper, coal, nickel, uranium, the list goes on.

-Quo vadis the Aussie dollar? One additional complication is that when Australia truly stands out on the global scene, the Aussie dollar might grab the limelight and become a lot stronger.

Apart from one-eyed market sentiment which pushes investors into chasing the momentum of the day, the AUD is one key reason as to why a buoyant super-duper, never-ending party for commodities can easily become a big negative for most companies listed on the ASX. If the pressure doesn't show up in thinner margins, the currency might wreak havoc through the translation of foreign sales.

-The megatrends from yesteryear haven't gone missing, of course. It's just that, for the time being, general attention is focused elsewhere.

-What's the market impact from tightening liquidity? Having injected unprecedented, previously unimaginable liquidity into the global financial system, central bankers are now increasingly looking into how they can reduce it. This is in particular the case at the Federal Reserve.

We don't know exactly how this increased liquidity has impacted on assets and on markets, but if it has been a positive in the past, what then will be the consequences of reducing it? My suspicion is that the impact will be felt first through the more speculative segments, including crypto currencies & NFTs, and microcap stocks, but admittedly, I am simply sticking one wet finger into the air. We shall have to wait and see.

The above list is incomplete, and not without contradictions, but such is life as an investor. Equity markets don't seem too worried just yet about the risks that lay ahead, but as we all know, that can change pretty quickly (see the first weeks of the calendar year, for example).

The Individual Stocks

With all of the above in mind, now let's have a look at the individual portfolio constituents.

-The a2 Milk Company

Since co-listing on the ASX in 2015, a2 Milk has literally changed people's lives. That's but the logical result when a share price appreciates from an initial 56c to a peak of nearly $20 by mid-2020 when covid had investors running for apparent safe-havens. The demise in the share price since has been nothing but brutal. In 2022, a2 Milk shares are oscillating around the $5 mark, and there doesn't appear to be much life left (at the moment) in the former market darling.

Obviously, too many investors are in the same position in that they refused to acknowledge the general context has changed for a2 Milk. Many have now been left to ponder why they didn't sell when the share price was at a much higher price level.

Always easier to draw conclusions in hindsight, but the -75% fall in the share price has laid bare two major barriers most investors need to overcome (and many never do): to acknowledge when a good news story changes into failure and disappointment, and knowing when to sell.

I think we all want to prevent ending up in a situation where the losses are so large, it literally causes a headache simply thinking about it. It can be done. Draw a line in the sand beforehand, be it at -15%, or -20%, or -30%; it doesn't matter where precisely, but set your ultimate limit for instant capital loss, and stick by it.

I often recall my personal experience with Slater & Gordon ((SGH)) whose shares I sold at a loss, but at least I did not stick around to see the share price ultimately sink by -96%!

Having said so, what should one do when still holding a2 Milk shares today?

Risk hasn't evaporated, and things can still deteriorate further. But there is equally upside potential from a management team that is all too aware that shareholders are, and have been, suffering. Maybe they'll sell some assets? Maybe a larger international competitor might have a go at buying the lot? Maybe things can finally improve operationally?

Whatever the decision at this point, it has to be made with patience in mind, and with the understanding that more bad news can still be next. Then there's that other major error too many investors make: anchoring their view on the share price from the past. a2 Milk is not going back to its glory days anytime soon, if ever. That pretty much is a guarantee I am willing to provide (do the maths!).

What not to do? Anchor your mind on $10, or $15, or $20 or wherever the share price has been. Start from a clean slate. Today's journey starts at $5.

Alternatively, and I can confirm this from personal experiences, don't underestimate the relief that kicks in once you got rid of that blatant failure in your portfolio. It's almost like you teared down walls, opened up all the windows and gave your mind the opportunity to broaden its scope again, free from long-lasting, debilitating shackles.

Taking a much broader vision, as an investor, we simply have to be mindful of the fact that most companies cannot continue performing over a long period of time. There's literally no value in getting stuck in the past; mentally, financially, or otherwise.

-Audinate Group

Audinate Group is one highly promising local technology developer whose growth outlook has been seriously impacted by two major events since its IPO in late 2016. First came covid, closing down all stadiums and outdoor venues. Next came a global shortage in semi-conductors ("chips").

For a company that is potentially developing the next global standard for wireless -"point-to-point"- audio-visual equipment and network-infrastructure, both major events have created major bumps in the road. No wonder, the share price has now given up all gains that were made since 2020.

Come to think of it, that is not too bad a result, in the bigger scheme of things. Other technology companies that are equally not profitable have seen their shares fall by -75% over the past six months or so. For Audinate shares the losses are, thus far, less than -40%. Ok, that is still a big loss, but it does signal investors still believe in the growth story and in the company's potential.

The main problem investors, and management at the company, are facing is that nobody knows when exactly that global shortage will be resolved. Here too, it turns out, the war in Ukraine has had an unforeseen negative impact. Judging from ResMed's recent indications, it appears chip shortages are still getting worse in the short term. This is a problem that is completely outside the control of the companies concerned.

Patience seems like the best remedy here. Or to summarise Audinate's predicament in a buddhist manner: shit happens, what do you do?

-Amcor

Packaging giant Amcor is one of the truly international operators on the ASX though, ironically, since the spin-off of Orora ((ORA)) in December 2013, it no longer has any operations in Australia or New Zealand. Amcor's second-life glory days started with the acquisition of Alcan Packaging from a debt-ridden Rio Tinto during the tumultuous GFC-period.

Amcor has a stated target of providing shareholders with a 10% annual return, which is not always possible, of course, but a steadily growing dividend (yield above 4%) is a great place to start from. On outdated sector-qualifications, Amcor is part of the Materials sector, side by side with BHP Group et al, but take it from me, Amcor is a solid, international, defensive growth company whose accumen has usually been underestimated.

There is a lot more technology and innovation going on in the global packaging industry than most of us appreciate. Amcor works with/for the largest consumer-oriented multinationals of our time. From drink bottles to pre-packaged food and medicines; it all requires a flimsy wrap, or more.

Amcor is part of my selection of All-Weather Performers on the ASX. I consider it typically a stock to own for the long time, Warren Buffet-style. Yes, the industry is not without its challenges (no industry is). Yes, given its international character there is always a problem somewhere, if not in Venezuela, then in Russia or the Ukraine. Yes, it nowadays reports in USD, which makes it vulnerable to AUD-appreciation. No, there is no franking on the dividend. And its contracts typically allow for cost inflation pass-through with a delay.

But every time the world turns cautious and seeks protection, investors know where and how to find Amcor. Should prove resilient during times of economic distress.

-Ansell

Ansell is what is left on the ASX from the old Pacific Dunlop conglomerate. The company has gone through significant changes since it changed name in 2002. Traditionally, Ansell is put in the same basket as CSL, ResMed et al, but only half (roughly) of its latex-related products are sold into the healthcare sector; the other half consists of selling gloves and other protective gear to manufacturers, professional cleaners, builders, chemical companies, and even the mining and oil & gas industries.

Ansell shares many similar characteristics with Amcor; lots of products and customers spread out over many geographies, stable margins, an under-appreciated innovation drive, a long history of delivering shareholder value, etc… Though the key difference between the two is equally important: Ansell is much smaller than Amcor (US$2bn in annual sales and $3.3bn in market cap versus US$12bn and $23bn respectively) plus it has exposure to direct-to-households channels, which makes it more vulnerable to competition from cheap alternatives.

The latter also means Ansell is less protected against rising input prices. Occasionally, these greater vulnerabilities show up, and 2021/22 is one prime example of this. In 2020, Ansell was revered as a prime beneficiary of the global pandemic. Today, the shares represent "deep value", which is quite the extraordinary turnaround in market perception and treatment.

Six months may seem like a long time on the share market, it's next to nothing when running a business and trying to solve problems. Ansell has disappointed in two results seasons in a row. Can management start anew in August? No guarantees are available, but what we do know is this company has an excellent longer-term track record and today's share price valuation looks severely undercooked.

All that is required, possibly, is some good news and an indication of a successful turnaround.

-Bapcor

Autoparts distributor Bapcor listed as Burson Group on the ASX in 2014. Thanks to my research into All-Weather Performers, I was able to relatively quickly identify this business as being extremely resilient, which it has proven to be. The FNArena/Vested Equities All-Weather Model Portfolio seldom welcomes a recent IPO, instead preferring to wait 3-4 years in order to gauge a new business's true colours, but an exception was made for Burson/Bapcor.

Throughout numerous market tribulations, this has proved a great decision with the share price reaching an all-time high last year above $8, roughly 2.5x times up from the early days on the ASX. But Bapcor is no longer included in the Model Portfolio.

Over the years that Bapcor was in the Portfolio, it had become obvious the company's long-term risk profile is changing, because of the accelerating advent of electric vehicles. But when the news broke of a serious rift between the CEO and the company's board, leading to the abrupt retirement of CEO/MD Darryl Abotomey, the company's short-term profile suddenly became a lot riskier too.

This is why Bapcor shares are no longer in the All-Weather Model Portfolio.

-Bigtincan Holdings

IT services provider Bigtincan Holdings has been a victim of a change in general market sentiment with its share price halving (-50%) in less than seven months. Admittedly, soon after listing on the ASX in 2016 it had quickly become one of the beneficiaries during a time when everything 'software' and 'technology' looked sexy and extremely attractive to investors riding positive market momentum for tomorrow's new economy representatives.

At face value, Bigtincan has a few obvious disadvantages inside the new market context of 2022 triggered by rapidly rising global bond yields: it is not profitable, and profitability looks a few years out at best, its market cap is only $450m with annual sales but a tiny $44m, while negative cash flow only further reduces the investment appeal.

Outside of the occasional rally, which is part and parcel of being publicly listed, it may well take a long time before this company lands back on the radar of the broader investment community (if at all). The days when carrying a 'technology' tag was sufficient to see share prices flying higher are well and truly behind us. Instead, investors are now demanding positive cash generation as a minimum requirement, and Bigtincan does not meet the benchmark.

-Breville Group

Multinational manufacturer and marketer of home appliances Breville Group has been one of the more silent performers on the ASX post-GFC with its share price appreciating more than seven fold over the past fourteen years. Once the company's growth profile got more broadly recognised in about 2018, the share price appreciation accelerated noticeably.

Take a look into the future that is coming towards us and what we see is direct communication between ourselves, our home appliances and the outside world. What if our fridge would signal the local supermarket when the household is running out of milk, which then promptly is delivered to our front door? No more sudden visits at the eleventh hour to save our Sunday morning cuppa experience!

Breville Group is very much part of that future, though it's early days as yet. Positioned as a mid-market player in between cheap-and-nasty and pricey luxurious, Breville is still expanding its international network, which still leaves a lot of growth up for grabs for many more years to come.

The key offsets to that ongoing growth potential are international competitors, such as De'Longhi and Philips, and, naturally, consumer sentiment and household spending. One of the key risks today is Europe facing an economic recession, which seems but a plausible outcome within the current context. But even in better placed economies, such as the US and Australia, consumer spending might well shift away from goods to services, post-lockdowns, which can easily impact on the short-to-medium term pace of growth.

Analysts covering the company believe Breville Group can withstand the negatives from reduced consumer spending through successfully extending its products reach into new geographical markets. This might well prove the case, but the share market in 2022 is not one that takes a positive view first and then waits to see whether that decision is correct.

Breville's share price has thus fallen from $33 in August last year to circa $25 this month. A relatively high PE ratio, typical for a successful growth story as has been Breville's, has not helped either.

Viewed from a broader angle, it can be argued Breville Group trades like your typical consumer-oriented stock, a la JB Hi-Fi and Super Retail, and history for all those stocks shows occasional volatility can be high, as has been proven yet again by Breville since August last year.

It is difficult to see how this success story would be finished right here, right now. It most likely has a lot further to go, but question marks about inventory, supply chains and consumer spending are likely to keep the buyers at bay for the time being.

-Catapult Group International

Catapult Group International offers market-leading technology for a targeted audience; professional athletes. The company initially generated a lot of media attention, and investor enthusiasm, after listing on the ASX in late 2014, but that all changed from mid-2016 onwards when the shares peaked at $4 – a level not witnessed since.

Similar to earlier mentioned Audinate Group, covid has seriously impacted on Catapult's growth plans, and similar as with Bigtincan Holdings, Catapult is not yet profitable, though it has started to report positive operational cash flow. Another positive is that subscription and recurring revenues now represent 86% of annual revenues.

As a non-profitable, technology-driven, small-cap, promising growth company, Catapult shares have nearly halved in a matter of weeks since January, and that was off a level that was pretty much half the peak share price back in 2016. Investors who like to adhere to the narrative that small cap companies by default generate higher returns than large cap companies, pay attention.

Given the trend in revenues and positive cash flow, one would have to assume investors will be looking to get back on board, on the condition that management continues to execute well. Offsetting this optimism is the observation this still is a company with a market cap of $300m only, and not included in the ASX200 or ASX300.

Catapult shares are currently part of the All Ordinaries, as well as the All-Technologies index.

-Cochlear

The aforementioned Ansell is not the only remnant of the once glorious Pacific Dunlop on the ASX today. Cochlear too was once part of the same conglomerate. It was spun-off as a separate entity in the early 1990s.

Cochlear is part of the trio that made the healthcare sector the best performing sector on the ASX over the past two decades. Unlike CSL and ResMed though, there are more questions creeping in about Cochlear's true underlying pace of growth.

Those questions will remain unanswered for now, because covid and lockdowns have had a significant negative impact on Cochlear's business. Today's investment proposition is thus very much linked to the re-opening theme, as it is for Ramsay Health Care and a number of other healthcare companies, even though the sector label 'healthcare' and a high PE ratio are not the characteristics most momentum-following market participants will be looking for.

As a global market leader, Cochlear equally suffers when the AUD is in fashion, even though the company still reports in local currency. Most of its revenues are nevertheless derived internationally.

The interim report release in February has injected renewed confidence into analysts' and investors' mindset to anticipate ongoing improvement for Cochlear's business as societies adjust and adopt a post-pandemic 'normal'. It's probably a fair statement to make that, for the next 2-3 years, Cochlear is but an obvious re-opening beneficiary.

-CSL

CSL remains one of the highest quality, high achievers on the ASX but even the most glamorous success story needs to take a break every so now and then. It happens to the very best and in CSL's case, covid has disrupted US plasma collection, and thus kept the share price under a cloud over the past two years.

Similar to a number of other ASX-listed healthcare companies, CSL is now part of the so-called re-opening trade. With plasma collection data indicating volumes are recovering from virus-interruption, common sense suggests CSL's operations are now in full recovery mode, and that share price, AUD permitting, should respond accordingly.

But what is more interesting, in my personal assessment, is the recent acquisition of Vifor takes Australia's number one biotech into new product territories, outside of its two core competencies of plasma and vaccines. One of the speculations doing the rounds is that CSL might be anticipating future disruptions to its two key businesses (there are new technologies popping up every year) and that Vifor is now adding extra growth optionalities in case such disruption might occur.

CSL has been part of my All-Weather Performers from day one and the Vifor acquisition, when placed in the above framework, once again bears all the hallmarks of a great business led by quality management. I'd simply add: investors take note. CSL's track record suggests Vifor's contribution will likely surprise to the upside in the coming years.

-Goodman Group

I have watched the transformation of Goodman Group, nowadays included in the ASX Top20, from a debt-overloaded property developer that almost went bankrupt during the GFC into a successful fund manager and one of the world's prominent designers & developers of modern warehouses.

Those two key characteristics have turned the company into a mega-trends beneficiary, and the subsequent re-rating of the company's share market valuation means Goodman Group shares are no longer attractive for your traditional yield-seekers. Goodman Group is priced as a growth company these days, which makes it vulnerable to rising bond yields, as it traditionally always has been.

Common sense says the present double-digit percentage pace in annual growth, reliable and dependable as it has been, will reduce to the high single digits that used to be more common over many years prior, but who's to say this will be a problem? For as long as mega-trends continue, and Goodman management keeps its eye on the ball and its finger on the industry's pulse, it's hard to see the underlying uptrend not be extended, beyond the occasional hiccup, with the latter probably related to surging bond yields.

-Kogan

It's hard not to mention the importance of 'governance' and the treatment of ordinary shareholders when writing about online shopping platform Kogan. On the one hand, we have a great coming-of-age story led by a young entrepreneur who, at the age of 23, started this business in his parents' Melbourne garage in 2006.

On the flipside we have a business that has received fines for misleading its customers while management has been accused of releasing press releases to prop up the share price so that directors, including founder Ruslan Kogan himself, can offload equity at a more favourable price (only to be rewarded with additional free stock options).

Of course, when the times are good and get-me-in-too momentum is strong and positive, many an investor doesn't care about such dark spots. There's money to be made! And Kogan shares, just like so many other online retailers, found themselves in an operational sweetspot when covid necessitated lockdowns in 2020, but that narrative has turned sour by now.

Kogan shares peaked in 2020 near $25; they are trading above $5 in 2022. Bloated inventories and ongoing margin pressure have quickly pulled investor enthusiasm back to earth. Contrary to, for example, CSL or Goodman Group, I have yet to spot any signals of a quality, long-term achiever. Can leopards truly change their spots?

When it comes to applying ESG filters, I find most attention tends to go to the E (environment) and the S (social) but I recommend investors not to lose sight of the G (governance).

-Megaport

The world is generating more and more data; it's one of today's undisputed mega-trends. Megaport is the intermediary that connects businesses to data centres via its propietary network-as-a-service (NaaS) offering. The company was founded by Bevan Slattery, local royalty when it comes to investments in telecom and technology following success stories including Pipe Networks, NextDC, Cloudscene and Superloop.

One would be inclined to think the combination of all of the above would guarantee success for Megaport and for its loyal shareholders, which still includes Slattery, but investor appetite has made a big switch in 2022 as rising bond yields and high inflation now require businesses to be profitable, or at least cash flow positive.

Megaport is still in the investment phase and thus neither profitable or generating excess cash out of its day-to-day operations. For the time being, this is a big no-no (double negative). Thus the share price is trading well below broker targets, and well below the levels witnessed last year.

Given the ongoing need for significant investments, as Megaport builds and extends its international platform, and the current mood in financial markets, with a preference for commodities and cyclicals, it remains anyone's guess as to when exactly a company such as Megaport can come back into investor favour.

The safest prediction, no doubt, is that patience will re required.

-NextDC

NextDC is also part of the ever-more-data mega-trend, being the largest local owner and operator of 'neutral' data centres. Apart from Bevan Slattery, NextDC shares with Megaport the fact it is not yet profitable as investments need to be made first in building those data centres, after which clients and sales can follow. NextDC has expanded its plans and footprint multiple times over the years past.

It's a mega-trend, remember? Demand simply keeps running ahead of capacity and availability.

Strictly taken, and I keep repeating this, NextDC might be included in the local All-Technologies index, but it is essentially an infrastructure play, similar to Transurban and Atlas Arteria today – or the NBN if it ever lists on the ASX. In many years from today, NextDC shares will be priced off the forward yield on offer, though, admittedly, this still is a long while off.

The key difference between NextDC and the likes of Megaport is it generates plenty of cash off existing contracts, and there remains plenty of capacity, including data centres under development, to keep this growth story going. The main threat for operators such as NextDC comes in the form of pricing pressure through competition, but with demand growing as strongly as it has, this does not look like an imminent threat.

NextDC shares are equally trading well below consensus target and the near-$14 peak from mid-last year. A stabilisation in bond yields, along with investors becoming more comfortable with the outlook for inflation, might be required before the share price can resume its prior uptrend. The exact timing of this remains anyone's guess.

-Pro Medicus

Pro Medicus offers all the ingredients of a long-term, international success story a la ResMed, Cochlear and Fisher & Paykel Healthcare. It is the global market leader, with the most advanced technology, in a young and unfolding new development inside the global healthcare sector.

Equally important; its contracts are with quality operators, for multiple years and provide excellent visibility. Last week, Pro Medicus announced an 8-year, $32m per annum deal with Inova Health in Northern Virginia, USA. The company has also announced a share buyback over the coming twelve months.

Of all the analysts who cover this company, not one doubts the quality or the growth prospects for Pro Medicus, which cast a dark shadow over most ASX-listed peers on a longer-term horizon. There is, however, a 'but'… and that is the share price valuation.

Even after pulling back from $66-plus, the Pro Medicus share price valuation remains rich on traditional metrics with a price-earnings ratio of 90x-plus. But then again, high quality technology with such a long runway for growth, underpinned by great visibility and recurring income should probably not be measured against the same benchmarks as, say, Healius or Virtus Health.

It is anyone's guess as to when exactly the pre-2022 uptrend can sustainably resume for Pro Medicus shares, but an already high valuation will certainly keep a lid on any rallies while the market's focus is on bond yields, central banks tightening and, potentially, an economic recession.

The best remedy, from Pro Medicus shareholders' point of view, is for the company to continue announcing fresh contracts.

-TechnologyOne

Having survived the Nasdaq meltdown of March 2000, TechnologyOne has grown into one of the most consistent performers on the ASX. Average annual growth in earnings per share post-2004 is in the vicinity of 15%, which is impressive on its own account, and it comes with a high degree of forward visibility too.

Local and federal governments, healthcare providers, universities, and financial institutions; they all rely on the company's tools and services for business analytics, supply chain management, student management, support and training, and other business tasks. With client churn of less than 1%, it appears this is but one of the key ingredients underpinning the unusual solidity on display over such an extended period.

Ongoing strong growth for the years ahead seems all but secured as those sticky customers are being transferred into the cloud (SaaS), away from desk-operated software packages, which also translates into higher margins.

Similar to everything tech-related, TechOne shares have fallen from $13-plus to briefly below $10, but this is all about changing market dynamics and investor preferences. Eventually, the solidity and visibility, combined with margin expansion and steadily increasing dividends, will catch the market's attention again, as it always has.

I personally think of TechnologyOne as one of the most under-rated quality growth stocks on the ASX. This is probably related to the fact that, after all that growth that has accumulated since 2004, the company's market capitalisation is still only $3.5bn. Many high-flyers in the sector have seen their market cap shoot-up to much higher numbers, and then subsequently crash down to a smaller size.

There is a lot of comfort in the profile that TechnologyOne offers, as also on display on a long-term share price chart.

-Wesfarmers

The Wesfarmers conglomerate combines fertilisers with lithium, natural gas, industrial chemicals, and safety workwear but its main growth drivers have been consumer-oriented businesses through Coles (now mostly divested), Bunnings, Kmart, Target, Catch and the recently acquired Australian Pharmaceutical Industries.

If we forget about the shameful failure in the UK, Wesfarmers' track record for allocating capital and accumulating shareholder value throughout the cycles can only be praised, but it has been heavily supported by housing market strength in Australia, which may no longer provide the same support for Bunnings in the year(s) ahead.

Maybe this is where the API acquisition steps into the limelight?

The current market has a dislike for higher PE valuations, plus investors have become concerned about what a slowing housing market and consumer spending under pressure might look like. Such concern is now also reflected in a Wesfarmers share price trading well below the $66 peak from August last year.

Rising costs and supply chain hurdles add to the challenges for Wesfarmers management this year. If history can be relied upon, however, it would not seem wise to bet against management rising above those challenges. Maybe all shall be revealed in August?

-Woolworths

Management at Woolworths runs one of the most valuable franchises in the country. Woolworths is Australia's best-run supermarket operator, and this commands a premium valuation. Unfortunately, hubris hit the boardroom in 2014 and this resulted in a brief but painful experience for shareholders during which the share price almost halved over the following two years. That misguided hardware JV with Lowes has been dismantled, and now Endeavour Group ((EDV)) is trading on its own strength too.

Woolworths still owns discount department store Big W, but the key attraction now comes from the solidity and predictability of supermarket sales. Every well-diversified portfolio needs a backbone of lower-risk, dependable and reliable, defensive growth and Woolworths offers just that.

Which is also why Woolworths, as well as Wesfarmers, is included in my selection of All-Weather Performers on the ASX. These stocks do not necessarily perform every day or under all circumstances, but they tend to come out well given enough time. There's a long track record to support that statement.

Longer-term price charts tend to move from the bottom on the left to the top corner on the right.

Conclusion

In summary: A portfolio without banks and commodity producers was always primed for a tough time in 2022 as sharply higher bond yields and more hawkish central bankers have swiftly shifted market momentum out of technology, quality and defensives – stocks that were on the winning side previously.

While true quality companies will not remain out of favour forever, and there should always be room for truly defensive businesses in every long-term portfolio, the same cannot be said about the speculative exposures that have revealed their inner-vulnerability when the market tide turned.

In some cases the market preference has, temporarily, changed. In some case there has been a shift in risk profile, at least for the months ahead.

One of the most difficult decisions to make, for most investors, is to sell when the share price is at a much lower level than the original purchase price. I'd still be inclined to make changes, instead of hoping for miracles to happen. Successful investing includes learning from mistakes, and trying not to repeat them, rather than staying the course, no matter what.

The outlook for equities in the months ahead looks more uncertain than is currently suggested by daily price action, so I'd definitely not be afraid to carry a healthy dose of cash, which can also be put to work when market volatility offers up opportunities.

One alternative course of action could be in adding some exposure to (producers of) commodities. Even if this proves the wrong action at the wrong time later on, the rest of the portfolio should then start to shine, so one is effectively hedging against extended disappointment.

I hope all the above helps with making the necessary decisions.

(This story was written on Monday 11th April, 2022. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story 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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