Rudi Interviewed: Megatrends A Go-Go

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In late January, I participated in Tech2024, a series of expert interviews on the outlook for technology companies in the year ahead, and beyond. The video of that interview can be viewed at https://ausbiz.com.au/ (sign up and logging in is required).

In addition, I can be followed on the AusbizTV platform via https://ausbiz.co/RudiFV

Below is a curated transcript of that 13 minutes interview.

Interviewer Danielle Ecuyer: My next guest says not all tech companies are good investments, and not all beneficiaries are labeled tech. For more Rudi Filapek-Vandyck from FNArena joins me now. Rudi, it's really great to have you here. I like to ask the guests to explain what is the process that you go through for stock selection?

Rudi Filapek-Vandyck: In my case it's probably a little bit different from most other people. I like to own stocks that can be kept in portfolio for longer than next week, or next month, hopefully for the next number of years. So for me, it's very important that I look at the prospective growth of companies. And I find that more important than a cheap looking valuation in the short term.

Interviewer: Okay. So within the context of that, you published a book in 2015, which is a great book, and it certainly opened my eyes about this whole concept of megatrends, growth and technology. So just share some insights that you established then.

Rudi: I've been writing about this since 2015. And I think too many people are too busy with valuation on a micro-scale: whether a stock is cheap or not; whether interest rates go up or down; and whether markets have a correction or not; or are they in a bubble?

I think the most important message for investors today, as it was in 2015, is that we are going through a period of technological innovation that is pretty much unprecedented in history. We have, however, one potential precedent: the 1920s. What we remember about the 1920s is what happened next in the 1930s. But the 1920s itself were absolutely fabulous for equity investors.

Society changed. Innovation changes society, and that means you actually create megatrends. Megatrends are new developments in society that will support companies that are riding the wave of that trend for many, many years on end. Most industrials and other companies have a few good years but then growth peters out. If you successfully identify megatrends, and you successfully pick the quality companies inside those trends, you can keep those companies in portfolio for multiple years on end.

If people go back to 2015, they can clearly see that has been the case for more than just a few companies. Yes, shares move up and down with interest rates, currencies and because of other influences, but at the end of the day, share prices move from the bottom left corner on price charts to the top right hand corner, and that's exactly what you want as an investor.

For me, that's the type of company you want to own as a long term investor who doesn't want to switch every five minutes into a new discovery.

Interviewer: Your point about labeling is really interesting. As a classic example, people look at secular themes from the top down, like clean energy. They say, wow, this is off to the races, and they dive into an ETF and then they discover all is not necessarily rosy. Does the same thing apply with technology?

Rudi: Absolutely. We are going to look back in 10 years time, to today or to 2015, and we'll conclude why didn't we see these developments coming? Why haven't we been more exposed to this? What is happening, essentially, is the technological innovation is coming through. As a first result, the stock exchange in Australia has changed, a lot. The ASX used to be all about financials and resources, and a little bit of industrials on top. Now we have a lot more technology on the stock exchange, and those who complain we don't have technology should open their eyes.

The other thing, of course, is we get these mega-trends, because of the process I just explained, and it's not just technology companies that are benefiting from those megatrends. Another observation to make is: don't get too bogged down in labeling. Technology is fast becoming a fact of life for most companies, even those who are far, far away from what we would regard as being a technology company.

It doesn't turn these companies into technology companies. I do remember, a few years ago, we had this public discussion whether Domino's Pizza ((DMP)) was a technology company or a pizza deliverer. As it turned out, Domino's was a pizza deliverer trading on a technology company's PE ratios – it's not quite the same.

I do think it's symptomatic of what is happening: technology becomes ever more increasingly important for all businesses. If you want to have a long term investment strategy, and you incorporate mega-trends, don't get bogged down simply on a company carrying the label of technology.

One company I have owned for many, many years is NextDC ((NXT)). Officially, it's a technology stock, in practice it's not. Nevertheless, I like it because it's carried by one of the strongest megatrends in the market. Another example is Goodman Group ((GMG)). Most people would regard Goodman Group a REIT, or a property developer, which, of course, it is, but Goodman is benefiting from one of the strongest megatrends globally.

That gives you an idea you don't have to stick with the stocks that officially have a technology label. Also, biotechnology has 'technology' in its name and it too is technology. One of the industries to look at, of course, is healthcare. Many companies are labeled as healthcare, but in practice, they often are technology.

Interviewer: I think that's such an important point that you draw out and it's particularly relevant with artificial intelligence, now it is being rolled out across so many different industries. So by definition, if investors just look at the big names in AI, they may be missing a whole lot of other opportunities.

Rudi: Absolutely. At the very beginning, it means a lot of companies will have to make lots of investments. What you see in the first phase is the so called pick and shovel providers for the industry are the initial beneficiaries. Later onwards, it's going to define the winners from the losers in every single sector. So quality and the ability to invest become increasingly important.

The other thing, of course, is that while we don't have an Nvidia on the Australian stock market, if you look into the finer details there's this relatively small cap stock, Dicker Data ((DDR)), that happens to be the exclusive distributor of those chips in Australia. So we do have Nvidia on the local stock exchange.

Interviewer: Let's throw some names out there, something like Car Group ((CAR)) by way of example. People would have thought, oh, it's just an online portal to sell cars, but maybe REA Group ((REA)) and Car Group are two great examples of there's a lot more going on beneath the hood?

Rudi: I've been doing the megatrend technology approach now for quite a while. The three of Seek ((SEK)), Car Group and REA Group were always on my radar. They are the so-called previous wave of technology stocks on the ASX. What is important here is that the winner takes all and there's a flywheel effect that benefits those companies. When you are the market leader, you can do a lot more than number two and three in the same sector.

We're now coming into a new wave of technology stocks, and we have new names coming up. Nevertheless, another example is TechnologyOne ((TNE)) and that's still one of the best performers on the stock exchange.

Companies that are maturing more recently in Australia include the likes of Altium ((ALU)) and WiseTech Global ((WTC)). We also have, in the healthcare sector, Pro Medicus ((PME)). The reason why I mention those stocks is because I believe these are amongst the highest quality, best performers we have on the stock exchange.

Two things you need to remember here: if you're constantly reading the Intelligent Investor by Benjamin Graham, you will never invest in those stocks. You cannot value them on the same principles as you do with banks, resources and your traditional industrials. That's number one.

The other element is these stocks usually outperform expectations, and they have been so far. So what's the best strategy to get on board? In my view, if you own them already, by all means, don't get too bogged down about the short term and stay on board. If you don't own them, do what I do: You wait for a significant correction to come through.

For example, for reasons I won't explain here, I did no longer own shares in WiseTech Global. To my delight, last August the market sold out of the stock. Guess who was buying? I think that's the strategy investors should have. Once you're on board, you just wake up with a smile every day and worry less. I mean, yes, the 1920s ultimately ended with the 1930s, but that's a worry, I believe, we might have to revisit later on. It's little bit too early for that at this stage.

Interviewer: I asked a previous guest the same question: Do investors underestimate the strength and longevity of secular trends?

Rudi: Yes, people don't understand a megatrend makes it so much easier for a decent quality management at a decent quality company to create shareholder value, and to continue creating shareholder value over multiple years. It's very difficult for your standard company to do that. Usually, what you see in practice, is companies do it for a few years, or sometimes even less, and then growth becomes more difficult to achieve. When you have a megatrend just carrying you along, it makes the task a lot easier. And I mean: a lot easier.

But, of course, you still have to distinguish quality from the lesser quality ones because, ultimately, quality will drive you through the good times and the bad times. It's particularly in the bad times when the difference becomes very, very visible in portfolios.

Interviewer: Unfortunately, one last question: Australians love their dividends. They love their yield. It's quite bizarre there's been so much investment moving into big tech in the US that doesn't pay dividends. Investors buy it for growth. Yet, for some reason, there seems to be this mental block here in Australia. How do investors get over that hump?

Rudi: They have to realise that even with dividends -and I write about this on a regular basis- even with dividends, it still remains important that the company grows. There are plenty of examples out there of companies that pay dividends and grow and thus will trade on higher multiples and therefore not offer you the same yield as another company.

But if you keep the shares for years, you actually end up with a higher total return and often also with a higher income from dividends as well, because those dividends grow faster. There are technology stocks that pay dividends. Apple pays dividends. Microsoft does. In Australia, the likes of TechnologyOne; they do pay dividends. You just have to combine that with a not overly overpriced share price, and still with growth underneath.

Interviewer: Fantastic Rudi, as always wonderful analysis. Very insightful. Thank you so much for joining Tech 2024.

(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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