Rudi Interviewed: Ongoing Potential In Technology & Growth

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It has become the 'unofficial' tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from the pre-February results season interview that took place on February 7. The video is available on Livewire and on YouTube.

Interviewer Ally Selby: Hello and welcome to Livewire's newest series Views from the Top – a series dedicated to bringing you the best of the best ideas and insights from those at the top of their game. Today we're very lucky to be joined by FNArena's Rudi Filapek-Vandyck for a deep dive into the reporting season and what you can expect. Thank you so much for joining us today, Rudi.

Rudi Filapek-Vandyck: It's a pleasure.

Interviewer: You told me I would be surprised by what you have to say today – so I am both excited and nervous, but let's get straight into it. The big picture – the market is looking through all the headwinds that we're seeing right now and betting big on rate cuts in 2024. Is there anything wrong with sticking to consensus?

Rudi: It's not necessarily wrong, but we have been here before, just a short memory back – February last year and August last year. In both cases, the setup was basically the same. We get a big rally leading into the reporting season and then, of course, the reporting season turns out to not be good enough to sustain the share prices and then we erase all the gains we had. And then the process starts again.

It's not inconceivable we will have a similar process. We have rallied on macro considerations. There's not an upgrade cycle happening in economies or profits, but there are two things I think that are different now. One is the carrot of interest rate cuts. Whether that is short-term or medium-term, the carrot is there and I think that will, to a certain extent, support share prices.

The other thing is that – while it's very early days – we've actually made a good entrance into the reporting season. The reporting season starts really slowly and gradually in Australia. So we have a very small sample, but the early signs are there that companies are tending to do better than forecast or at least meet expectations. So far so good. Again, it's a small sample, but at least we've had a good start.

Interviewer: Okay, we'll get into some of that granular detail later on. I want to talk about what you expect going forward. We saw value being tipped as the area of the market that would outperform in 2023. It didn't. Growth and momentum outperformed instead. What can investors expect this year and did that surprise you?

Rudi: In my view, and that's probably a little bit different from the majority of experts, we're going through quite an exceptional era of technological innovation. I've made the comparison a number of times in the past. The best comparison we have is the 1920s.

The 1920s were a great era of technological innovation. It also meant it was a great era to be a shareholder in the share market. And a lot of companies, of course, had tremendous growth on the back of new developments that were essentially reshaping society, and the share market and economies too.

We are going through a similar phase now. As a consequence, high growth driven by megatrends and technological innovation is not going to go away. So this whole discussion about whether we should go into value, which basically is either cyclicals or old economy companies, or high growth companies that promise the future, I think this whole discussion is a bit warped.

On occasion, we will see the pendulum swing between those two extremes in the share market. But I think on average, longer-term, sustainably, I think you can't ignore the fact that we are going through this tremendously exciting time. Technology should be on everyone's radar. Those companies will continue to perform and they will never be priced at nine times next year's profits.

Interviewer: Another area of the market that everyone says investors should be looking at right now are small caps. Do you agree with that?

Rudi: It's a universal forecast, small caps, and it's not such a difficult one. We've had two years of a tremendous bear market for small caps and you don't have to be a genius to work out at some stage that corrects itself. So small caps, yes. Other universal forecasts are the comeback of REITs, yes. The comeback of healthcare, yes – in particular quality healthcare. The comeback of small-cap resources and the comeback of emerging markets.

All those forecasts are probably correct, but they won't be universal.

I think the mistake investors will make is thinking that by default there are only gains to be made in small caps. Or that there are only gains to be made in REITs. Or that there are only gains to be made in healthcare stocks. That will not prove to be the case.

I think investors should be selective. The most important thing to add is that there's still a lot of growth and upside to be had out of large caps, out of growth stocks, out of technology, and that will not disappear. So I think the best strategy for this year is diversification across all those themes, not just picking one of them because, again, it won't be universal and it won't be all at the same time, every single time throughout the year.

Interviewer:  If it's not universal, which companies do you think will outperform then within those sectors?

Rudi: Well, I just mentioned healthcare. Healthcare is always on my radar. I think we've already seen that with ResMed ((RMD))…

Interviewer: But that's also been a consensus call…

Rudi: Well, if it was that easy, we don't want to pay a dollar for everyone who was not in ResMed. CSL ((CSL)) is also making a comeback – it's visual on price charts – it's above $300 now. The market is also preparing for a very strong result in Cochlear ((COH)).

Outside of that sector, we have the REITs. The last three months or so have already seen some share prices move there. The market leader is Goodman Group ((GMG)); this company continues to perform. Again, expectations remain positive.

If you go to small caps, we have the laggards, the ones that haven't performed or maybe a little bit and that's where everyone's attention will go, of course. Looking through all the forecasts ahead of February, companies that are often mentioned are the travel industry – like Corporate Travel ((CTD)) and Webjet ((WEB)). A company that is definitely often mentioned is Hansen Technologies ((HSN)). Everyone sees that as a quality company with its share price not moving.

We just mentioned ResMed; my candidate for the next ResMed-like recovery might be IDP Education ((IEL)). At the moment the market is very unsure about how to deal with the uncertainty and once the situation becomes clearer, I think that could potentially lead to the next rebound, though not necessarily in February. It might require more time.

There's also the other side of the small caps and I just mentioned growth, technology, and megatrends. There's quite a group of relatively small-cap companies that already have performed. I think the mistake investors could make is thinking they're done with their growth because they still have a lot of growth in front of them. Obvious candidates, as far as I'm concerned, are NextDC ((NXT)) and Macquarie Technology ((MAQ)).

Depending on where you put exactly your demarcation between a small cap or a mid-cap, I also think Steadfast Group ((SDF)) and AUB Group ((AUB)) – the insurance brokers – look very good, still.

Then you have the financial platform operators, Hub24 ((HUB)) and Netwealth Group ((NWL)). The mistake investors could make is thinking, because these have all performed to date, there won't be anything coming beyond what already is in the share price. I think that would be a mistake.

Interviewer: You talked before about share prices not performing as expected post a company beating or missing expectations last year. What can investors expect this year?

Rudi: That is the big unknown. Because we are trying, as a community of investors, to look beyond the short term. We are looking forward to better times ahead, in the second half and in 2025. That's the big question.

Admittedly, we've seen, for example, with a disappointing market update by Bapcor ((BAP)) that the share price did not fall, it actually went up. So that could be good news.

I still think we will see some fireworks here and there. And for that reason, I think it's only smart to have a little bit of cash on the sidelines. If I can go back to last year, both ResMed and WiseTech Global's ((WTC)) share prices sold off quite heavily. I bought both. We will see more opportunities coming up this year. You don't know in advance which ones. So the best strategy is to have some cash and if it happens, buy and be comfortable.

Interviewer: We'll get to your cash holding a little bit later on. I know it's a spicy subject. Where are our expectations too high right now? Where could we see some of those fireworks?

Rudi: How long is a piece of string? We will have to find out, and as I said, we don't know how the market is going to respond to disappointments and surprises, but as an investor you have to know your strategy. Is your strategy to sit in undervalued assets and then wait for them to get to fair value? Or, in my case, are you comfortable holding companies that have many years of growth ahead of them and even if they dip or fall in price after the results, it doesn't bother you?

For example, two of my favourite stocks would be TechnologyOne ((TNE)), which is not reporting this month, and REA Group ((REA)), which does report in February. Often what happens is share prices fall after the companies report results. For me, that's never a problem. If I don't have enough shares, I buy more. If you look back 12 months later, the share price is higher.

So how you respond to that is basically defined by the type of investor you are and what exactly your strategy is. My strategy definitely is that I will keep my eyes open for those structural growth companies. If they do dip in share price, I might consider buying more shares or, if I don't own them, I might actually buy the shares.

Interviewer: You talked about having a little bit of powder on the side just in case any companies sell off on the day. Last August, and I think also last February, you told us you were holding 18% cash, which is quite a lot of cash. How much cash are you holding today and have you put any of that money to work?

Rudi: So, last year I was pretty confident, don't ask me why, but I was pretty confident those rallies we saw each time leading into a reporting season would prove futile – that those rallies were basically running on fumes and it would not be sustained. Twice I was correct. But the second time, after August, I started looking differently at the market and I decided to use some of that cash.

From memory, I've been buying shares in WiseTech Global, REA Group, Hub24, ResMed and Goodman Group; pretty much the companies I mentioned earlier. So I've been putting some money to work. I basically halved my cash level, it's around 9% now.

Is that a lot? Well, if you consider that I own about 20 stocks in my portfolio, 9% is two times five percent, four and a half, to be more precise. It can also be three times three.

So is it a lot? It's not, because I would still have to be selective in how to allocate that money assuming I'm going to allocate it in full after this reporting season. That may not necessarily be the case, I can be patient.

I do think the overall environment, at least for the time being, has changed. I think the bias is now less to the downside than it was last year. Even though last year the real downside didn't come through, except for some individual companies. As long as you can avoid the real disasters, and you can be confident in using share price weakness, like, for example, with ResMed and WiseTech Global, I think you're doing quite a good job in allocating your capital.

Interviewer: Okay. Last question for you today, Rudi. We like to ask all our guests what's something they've learned in their years in markets or from those connections they've made after decades working in similar roles. What's your view from the top?

Rudi: I learned a lot over the past two years or so from the share prices of CSL and ResMed. Both did not perform for a while. What I noticed is so many people are focused on price and on charts. When you are only focused on price action and on charts, you never get to the bottom of what a company consists of, what makes a company tick.

Unless you get to that point, you'll find it very difficult to understand why ResMed at $21 is an excellent opportunity. Or that CSL at $248 or however low it was, even at $260 or $280, is an excellent opportunity. The charts will not tell you that – the price action will not tell you that.

You have to try to get to the bottom of what makes a company. Sometimes the fundamentals of a company longer-term and the share price action diverge. At that point, it is very important to understand the fundamentals of a company. I've learned from the past few years there are so many people who are being led by price action and by charts. They literally don't understand the company. You have to question if you are an investor or a trader, whether that is the right way of approaching the share market.

Interviewer: Okay, well I've absolutely adored this chat today. Rudi, thank you so much for your time.

(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. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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