Rudi’s Comprehensive February 2024 Review

Feature Stories | Mar 27 2024

A compilation of stories relating to the February 2024 corporate reporting season in Australia, including FNArena’s final balance for the season.

Content (in chronological order of publication):

-Healthcare, REITs, Uranium & Banks
-Rudi Interviewed: Megatrends A Go-Go
-February Trepidation
-February Trepidation, Part Two
-February 2024 Is A Blue Sky Affair
-Conviction Calls
-February Results – Stocks To Watch

-Rudi Interviewed: Ongoing Potential In Technology & Growth
-More Winne
rs Than Losers In Mid-February 
-Quality (And The Lack Thereof)

-February Opportunities
Week 3: Not As Good, But Not Bad
-Investing Is About The Future
-All-Weather Model Portfolio

-Conviction Calls
-Healthcare Under The Scanner

-February 2024; The Final Verdict
-M&A Is Back (With A Vengeance)
-Conviction Calls
-Selective Opportunities Among Discounted REITs
-Conviction Calls & Best Buys
-Facts & Fiction About Gold

-Risk-On Bubble & Mid-Caps Outperformance

By Rudi Filapek-Vandyck

Healthcare, REITs, Uranium & Banks

Never underestimate the power of sentiment, or the attraction of rising prices. And with US equity indices setting fresh all-time records, the economics team at National Australia Bank summed it up nicely on Tuesday morning, Sydney time:

Don't stop me, 'Cause I'm having a good time, Having a good time. (Queen)

However, there's also danger in simply assuming the share market's current run is purely sentiment-driven with little else supporting it otherwise. This week's strategy update from Canaccord Genuity's chief investment officer in Australia, Tony Brennan, is a case in point.

As the risk for a hard landing in the US, and with it a severe correction in global equities, has diminished, Brennan's preferred asset allocation has increased exposure to shares, while reducing the weights of cash and bonds in the model portfolio. If there is weakness on the horizon, as expected by some, Brennan will be looking to further allocate funds to equities.

In a macro-sense, the recommended weight for equities in the model portfolio is now Neutral (was Underweight) and if there is a correction coming, exact timing unknown of course, that allocation is likely to shift to Overweight.

Have share markets now received the proverbial get out of jail card? Definitely not, says Brennan, but risks have diminished and this needs to be accounted for. This is also why the allocation shift has only moved to Neutral.

It is still plausible the US economy is due for weakness and the same goes for corporate earnings, but markets are forward-looking argues Brennan, and support will be found in the prospect for interest rate cuts at some point thus year. Canaccord Genuity therefore suggests any corrections on the horizon are likely to be of a mild character as lower interest rates support valuations, a recovery in economic momentum and in corporate profits.

Within this context, US equity strategist Mike Wilson at Morgan Stanley offered the following observation:

"While lower-quality cyclicals outperformed during the final two months of 2023, we believe this was mainly driven by short-covering and performance-chasing into year-end rather than a more sustainable change in leadership based on a full reset in the cycle.

"So far in 2024 the laggards of 2023 are back to lagging and the winners are back to winning. When in doubt, it pays to go with the highest probability winner. In this case, it's high-quality growth."

The Healthcare Come-Back

In Australia, the sector that is increasingly being nominated for a comeback in 2024 is healthcare. It would definitely fit the "high-quality growth" label Mike Wilson is referring to.

This week's sector update by analysts at RBC Capital added yet more fuel to the healthcare-is-poised narrative that has been creeping into investors' group think. On RBC Capital's assessment, top line growth is back, while costs are being controlled, and upcoming competitive risks are much better understood.

RBC Capital is certainly not the first with its sector call. Cochlear ((COH)) shares are now trading above $300. CSL ((CSL)) shares have once again crossed the $290 mark and gone are the days of seeing ResMed ((RMD)) shares languishing around $21 on GLP-1 hysteria.

Cochlear, whose valuation is deemed unjustifiable by all and sundry, is expected to release a smashing interim result in February, if RBC Capital's prediction proves correct, while ResMed is expected to disappoint. We will know on Thursday when the CPAP manufacturer releases December quarter financials and unofficially opens corporate results season in Australia.

RBC Capital's sector update did lead to a number of upgrades and downgrades in ratings, with both Cochlear and Fisher & Paykel Healthcare ((FPH)) downgraded to Underperform because of too-high valuations. Both are also nominated as the least preferred exposures, for now.

Capitol Health ((CAJ)) was downgraded to Neutral on a rising share price. Too early to get overly excited, suggests the report.

Australian Clinical Labs ((ACL)) and Regis Healthcare ((REG)) have both been upgraded to Outperform and elevated to sector favourites, alongside Ramsay Health Care ((RHC)) and Sonic Healthcare ((SHL)).

The CSL Excitement

Competitive pressures from GLP1's and elsewhere are better understood and they arguably won't make a dent in growth numbers for the likes of ResMed and CSL in the short term, but RBC Capital seems less confident about any impact longer term.

No such considerations were in play when healthcare analysts at Wilsons updated on CSL this week. In anticipation of positive AEGIS-II Phase III trial data, of which public release is believed to be "imminent", Wilsons added 18% to its price target, now at $352.64. Given where CSL shares are trading at (see above), the broker's rating remains Overweight.

An 18% increase for potentially positive trial data might seem like a fat finger error, but analysts and company management have been talking about the underlying product, CSL112, for years now.

It has been touted CSL's next blockbuster development. As Wilsons reminded investors this week: the best part of $1bn has been invested in this 18,200-patient study that, if all goes according to plan, will prove CSL112 cuts the risk of a secondary, and often fatal, cardiac event for patients that have had their first heart attack.

Assuming all goes to plan, Wilsons estimates peak sales of US$2.3bn annually for CSL in the US and the European market. At peak, CSL112 will represent 12% of group EBIT and 20% of free cash flow. In its own right, a successful CSL112 could be worth $131 per share unrisked to CSL shareholders.

It's not difficult to see the big impact from a positive trial outcome (and getting excited about it in advance).

REITS & Banks

Similar to healthcare, REITs and small cap companies generally are widely considered but logical hunting grounds for the year ahead but in all cases the same warning applies: there will still be winners and losers inside sectors that have lagged the broader market in 2022 and 2023.

Real estate analysts at Citi, in a preview to the February reporting season, have nominated their sector favourites in National Storage REIT ((NSR)), Ingenia Communities Group ((INA)), and, still, Goodman Group ((GMG)).

Candidates for a negative surprise in February include Mirvac Group ((MGR)), Charter Hall ((CHC)), Charter Hall Long WALE REIT ((CLW)), and GPT Group ((GPT)).

In contrast, sentiment and forecasts for Australian banks are skewed to a negative outcome in FY24, also because share prices continue to defy gravity. CommBank ((CBA)) shares surged to a new record high this week. Did I mention "sentiment" and the attraction of rising share prices earlier?

Last week I wrote the following on basis of early-year sector assessments from Citi and Morgan Stanley:

(For those who pay attention to these things, my story was subsequently picked up and republished by the business section of The Australian newspaper).

This week banking analysts at Goldman Sachs and Macquarie have essentially doubled down on the same warning that share prices might be too high, too early on too much optimism.

Uranium & Small Caps

In the materials space, combining mining and energy, lots of doubt has crept in as far as the outlook goes for crude oil prices in 2024 and beyond, but support for higher-for-longer iron ore prices has only further grown, in blatant contrast to what has happened to share prices of BHP Group ((BHP)) and Rio Tinto ((RIO)).

Among public admissions on X (formerly Twitter) some portfolios are sitting on losses of -75%, Australian investors have yet again learned a harsh lesson about commodities and cyclicality through a general de-rating of the lithium space. But there's always hope, and a fresh opportunity, as also illustrated by Tuesday's review of the uranium sector by Shaw and Partners.

The market remains structurally under-supplied, find the analysts, and it's difficult to see what will stop the price of uranium from rising further. Shaw can see a price of US$150/lb on the horizon, though not necessarily tomorrow or even this year. Spot uranium peaked at US$136/138 in the prior bull market that ended in 2007.

The price subsequently bottomed out around US$20/lb as Fukushima happened and has more than doubled over the year past to now beyond US$100/lb. Projecting a higher price for uranium has had a significant impact on Shaw's forecasts and valuations for ASX-listed (soon to be) producers and would-be producers.

Paladin Energy ((PDN)) remains the broker's preferred exposure, although it is by no means the "cheapest" in the sector. Paladin will be restarting production at Langer Heinrich (Namibia) shortly.

Shaw and Partners cover six uranium-related stocks listed on the ASX and only one is not rated as Buy; Boss Energy ((BOE)). The broker thinks those shares are already overvalued, that's why.

The other four companies are Silex Systems ((SLX)), Peninsula Energy ((PEN)), Lotus Resources ((LOT)), and Bannerman Energy ((BMN)).

Returning to the aforementioned Small Caps Bear Market (let's acknowledge it has been brutal), in December Shaw and Partners released its 10 Best Ideas to benefit from small caps' revival in 2024.

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