Rudi’s View: February 2024 Is A Blue Sky Affair

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

In this week's Weekly Insights:

-February 2024 Is A Blue Sky Affair
-Conviction Calls
-February Results – Stocks To Watch

By Rudi Filapek-Vandyck

February 2024 Is A Blue Sky Affair

Investor sentiment in early 2024 is probably best described as: good news is still good, of course, but bad news can be good too, as long as it is not too negative.

Investors in the local share market are once again reminded how powerful a driver general sentiment can be.

At face value, the ASX200 might only be up slightly year-to-date (up 0.7%), which seems rather disappointing when compared against the raging bull market that seems to be dominating indices in the USA, but underneath, at the individual stock level, the local February results season is basking in a generally supportive environment.

Early signs are companies are meeting or beating market expectations and, equally noteworthy, investors seem prepared to overlook short-term niggles and imperfections, instead focusing on better prospects ahead, and on getting on board once the results release is out of the way.

Results seasons in Australia have increasingly become a second-half (of the month) phenomenon and so the first twelve days of February only offer a brief snippet of what the rest of the season might have in store. But there's no room for debate the early signals look extremely supportive of an overall pro-risk taking environment.

Up until Friday, the FNArena Corporate Results Monitor had assessed 21 market updates and no fewer than 11 have beaten market forecasts with a further nine reporting in line. The one "miss" came from REA Group ((REA)) which on broad-based appreciation still released a "solid" performance, carried by "robust" growth and ongoing prospects of continued strong growth momentum ahead.

Most analysts covering the sector acknowledged operational momentum had actually surprised to the upside. The one blemish was management at Australia's number one property portal flagging there will be higher costs in the year ahead as the company spends more to solidify its future growth path.

Two things to keep in mind: share prices respond to how results compare to expectations, which is not necessarily a great indicator for what the future of a company looks like. Spending more means lower growth in profits which is often, though not always, taken as a negative by short-term minded traders.

As it happens, REA Group shares sold off on day one, rallied on the following day, and then retreated slightly on Monday for an overall relatively flat trajectory that has dominated the shares thus far in 2024. It is worth noting REA shares have almost doubled in price since mid-2022 and rallied circa 29% since late October.

Trading on forward-looking PE ratios of respectively 54x and 45x for this year and next, the average target price of $172.74 sits below today's share price. But as a high-multiple, market-leading quality growth company on the ASX, REA Group shares should benefit from RBA rate cuts and lower bond yields later in the year.

As such, REA Group shares might well be the poster child of current market sentiment, and indicative of what to expect, generally, from the coming three more weeks.

Share prices for all of AGL Energy ((AGL)), Audinate Group ((AD8)), Boral ((BLD)), Cettire ((CTT)), Champion Iron ((CIA)), Nick Scali ((NCK)), News Corp ((NWS)) and ResMed ((RMD)) -all having reported better-than-expected performances- went up as investors are keen to reward positive news.

Share prices might still go up even if market updates are not quite universally positive, or suffer a minor retreat only, which could have triggered a different outcome under less-rosy circumstances. Think Amcor ((AMC)) and Charter Hall Long WALE ((CLW)).

Underneath day to day share price moves, the ASX200 is pricing in 16x the average EPS forecast for the twelve months ahead, which is above the historical average of circa 14.5x, as also shown by the fact the average forward-looking dividend yield is now below 4% against a long-term average of circa 4.5%.

Industrials ex-Financials are on average trading on a forward PE of 22.5x.

Market consensus is positioned for negative EPS growth for the full financial year ending on June 30th. But the new trend is for less negative/upwardly revised forecasts, and that's another positive in a market looking for future optimism.

Another source to further stimulate that general optimism are stockbroker recommendations for individual stocks. Under more 'normal' conditions, and despite general misconception, the majority of stock ratings tends to sit on Neutral/Hold with Buy and Sell percentages fluctuating in line with moving share prices.

Since the covid-pandemic in 2020, however, the largest percentage sits firmly in Buy and equivalent ratings, while overall Sell ratings remain low by historical standards. Highly concentrated momentum among large caps and a savage bear market for small caps can serve as an explanation.

In 2024 this means there are plenty of Buy ratings to choose from for investors looking to re-allocate some of their cash on the sideline.

FNArena's Corporate Results Monitor: https://fnarena.com/index.php/reporting_season/

Conviction Calls

RBC Capital's two top pick favourites among small caps on the ASX are Life360 ((360)) and Accent Group ((AX1)).

****

Small-cap analysts at Jarden have nominated Temple & Webster ((TPW)) as their key pick ahead of results this month.

Jarden equally likes Lovisa Holdings ((LOV)), Universal Store Holdings ((UNI)), Data#3 ((DTL)) and Dicker Data ((DDR)).

Both EVT Ltd ((EVT)) and ReadyTech Holdings ((RDY)) carry short-term risk of disappointment, but both are positively rated for longer-term potential.

Jarden simply cannot get excited about Kogan ((KGN)). Amazon and Temu will eat Ruslan Kogan's breakfast, lunch and dinner over time, of that Jarden analysts remain convinced.

****

Analysts at Morgan Stanley lined up their small cap candidates for major surprises and disappointments this month.

Have been identified for a positive announcement:

-Dicker Data
-Jumbo Interactive ((JIN))
-Lovisa Holdings
-Premier Investments ((PMV))
-SG Fleet ((SGF))

Had been nominated for disappointment:

-Bapcor ((BAP)), which has been confirmed since. Note: no share price weakness has ensued (quite the opposite).

February Results – Stocks To Watch

Healthcare is back, at least such is one conclusion to draw from Q2 results released by ResMed ((RMD)) and an upgrade to guidance by Cochlear ((COH)).

Sector-leader CSL ((CSL)) released a disappointing trial update for its long-awaited CSL112 product under development on Monday, but most sector analysts expect robust growth numbers when the company updates on its six-monthly performance on Tuesday (tomorrow).

Sector analysts at Citi are equally optimistic about potential margin increase for Ramsay Health Care ((RHC)).

The analysts have more reservations about what to expect from the likes of Healius ((HLS)), Sonic Healthcare ((SHL)), Integral Diagnostics ((IDX)) and Australian Clinical Labs ((ACL)) this month.

Nanosonics ((NAN)) remains Sell-rated, as are Cochlear and Pro Medicus ((PME)) but the latter two are purely valuation related.

Sector analysts at Evans and Partners had singled out Cochlear for a positive surprise and that was truly delivered. The same analysts are preparing for negative surprises from Ansell ((ANN)), Ramsay Health Care, and Healius.

Evans and Partners has Speculative Buy ratings on small caps 4D Medical ((4DX)), Nova Eye ((EYE)), Neuren Pharmaceuticals ((NEU)), and PYC Therapeutics ((PYC)). Opthea ((OPT)) is viewed negatively.

Goldman Sachs has kept Sonic Healthcare on Sell, with Neutral ratings for the other pathology operators, arguing risk for short-term disappointment remains high.

Macquarie has Outperform ratings for CSL (sector favourite), Capitol Health ((CAJ)), Integral Diagnostics, Monash IVF ((MVF)), PolyNovo ((PNV)), Regis Healthcare ((REG)), and ResMed.

Morgan Stanley has Overweight ratings for CSL, Sonic Healthcare, and EBOS Group ((EBO)) with negative outlooks for Healius and Integral Diagnostics.

Negative surprises on costs could well see companies such as Healius and Ramsay Health Care disappoint this season, warns Morgan Stanley.

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The interest rate cycle is turning, assure real estate analysts at Citi, and this will translate into renewed investor interest for REITs.

Citi sticks with a preference for structural earnings growth, supported by improving demand, tailwinds to operational growth, and relatively muted impact from finance costs.

Citi's sector favourites are Goodman Group ((GMG)), National Storage ((NSR)), Lifestyle Communities ((LIC)), Ingenia Communities Group ((INA)) and Stockland ((SGP)).

For the February results season generally, it is likely rising debt costs and lower asset values will continue to dominate how investors view the sector.

Citi's nominations for potential negative newsflow include Mirvac ((MGR)), Charter Hall ((CHC)), Charter Hall Long WALE REIT ((CLW)) and GPT Group ((GPT)).

Charter Hall Long WALE REIT already reported and its future now remains closely linked to management's ability to sell a further -$500m in assets.

Sector analysts at Barrenjoey believe AREITs are now more properly valued. The sector still trades some -17% below Net Tangible Assets (NTA), but there's still a correction in asset values taking place, and earnings and dividend growth generally look constrained for the next 1-2 years.

Preferred large cap exposures are Goodman Group, Stockland, and Scentre Group ((SCG)).

Over at Evans and Partners, the preference goes out to specialist REITs with the top three favourites: Arena REIT ((ARF)), RAM Essential Services Property Fund ((REP)), and Waypoint REIT ((WPR)).

Sector preferences at Macquarie reside with Charter Hall, GPT, Goodman Group, Qualitas ((QAL)) and Arena REIT.

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The in-house forecast at Citi is that the next broad-based recovery for base metals won't announce itself until the closing quarter of calendar 2024.

For the Australian share market this means iron ore is to remain in focus throughout most of the year (if we exclude ultra-specialised, mini-cap segments such as uranium and lithium).

Rio Tinto ((RIO)) is the broker's preferred exposure.

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When it comes to local gambling ("gaming") companies, analysts at Evans and Partners stick with preference for Aristocrat Leisure ((ALL)) first, second choice Light & Wonder ((LNW)). Aristocrat does not report this month.

With Sky City ((SKC)) having updated not that long ago, no major disasters are anticipated when the casino operator reports.

The Lotteries Corp ((TLC)), on the other hand, might not quite be able to meet market forecasts, but Evans and Partners is forecasting a much better second half.

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In a preview to February results, analysts at Wilsons are anticipating strong results with potential for upside surprise from Pinnacle Investment Management ((PNI)) -since confirmed- EQT Holdings ((EQT)), Pro Medicus, NextDC ((NXT)), Corporate Travel Management ((CTD)), Monash IVF, Avita Medical ((AVH)), and Autosports Group ((ASG)).

Wilsons identified Strike Energy ((STX)) and a2 Milk ((A2M)) for potential downside risks.

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To expect strong results from insurers and from insurance brokers appears to be a universal forecast from analysts covering both sectors. As far as I can tell, QBE Insurance ((QBE)) and AUB Group ((AUB)) are the two most nominated favourites.

Unrelated, but there also is a general consensus Qantas Airways ((QAN)) shares are severely under-priced.

While optimism is certainly on the rise for companies dependent on consumer spending, especially post market updates by Nick Scali and JB Hi-Fi ((JBH)), there remains scepticism in other corners about the outlook for spending later in the year, and whether recent strength can be relied upon further out.

Analysts at Wilsons have identified Accent Group and Baby Bunting ((BBN)) as two key opportunities, while also retaining a positive outlook for Adairs ((ADH)), Harvey Norman ((HVN)), The Reject Shop ((TRS)), and KMD Group ((KMD)).

Recent Updates:

–https://fnarena.com/index.php/2024/02/08/rudis-view-corporate-travel-hansen-iph-nextdc-macquarie-technology/

–https://fnarena.com/index.php/2024/02/07/rudis-view-february-trepidation/

–https://fnarena.com/index.php/2024/02/05/rudi-interviewed-megatrends-a-go-go/

–https://fnarena.com/index.php/2024/01/24/rudis-view-healthcare-reits-uranium-banks/

–https://fnarena.com/index.php/2024/01/15/rudis-view-boss-energy-mineral-resources-tpg-telecom-resmed-wisetech-global/

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(This story was written on Monday, 12th February, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday 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: contact us via the direct messaging system on the website).

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