Rudi’s View: Shaky Sentiment Ahead Of Corporate Updates

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 17 2024

In this week's Weekly Insights:

-Shaky Sentiment Ahead Of Corporate Updates
-Everybody's A Gold Bull
-Best Buys & Conviction Calls

By Rudi Filapek-Vandyck, Editor

Shaky Sentiment Ahead Of Corporate Updates

Analysts at Morgan Stanley made a big hullabaloo about it, as would I if ever I came to walk in their shoes, with early market leadership in Generative AI now projected to result in Microsoft doubling its earnings per share by FY29.

Let's pause for a few seconds and think about this a little longer. Microsoft, one of the largest companies of our time, generating some US$244bn in annual revenues, of which US$107bn ends up as operating income, with free cash flow estimated in excess of US$63bn, is set to double its profits for shareholders over the next five years.

For the mathematically gifted among us, doubling profits in five years requires a cumulative annual growth rate (CAGR) of circa 14.87% per year. Morgan Stanley's recently updated projections are actually above that with revenues expected to grow at a CAGR of 14% and EPS at 16% per annum.

Hence, to be precise about this: Microsoft is projected to MORE than double its EPS in the next five years.

There are multiple reasons why I bring this up.

With bond yields rethinking the pace and starting date for Fed rate cuts, and geopolitical tensions lifting, the natural response from most investors is to sell exposure to equity markets that are being perceived as too 'expensive'.

It's good to be reminded that if the above projections prove accurate in the years ahead, Microsoft shares will be trending a whole lot higher than where they are today.

No doubt, were Risk-Off sentiment to dominate in the days or even weeks ahead, Microsoft shares will likely weaken, maybe even weaken a lot, but should this be our only and key focus? The world will be a very dark place for this company to not grow at all from here onward.

In Australia, analysts at Macquarie recently published similar forecasts for leading biotech CSL ((CSL)) with a five-year EPS CAGR projection of 15% per annum which, you guessed it already, implies that company's EPS should more than double by FY29. Little surprise thus, Macquarie thinks CSL's share price could well reach $500 in three years' time from around $280 now.

To the sceptics out there, would it really be such a great disaster if these companies only grew by, say, 12% per annum? Or if those anticipated rate cuts come in fewer doses and later than expected? When a fresh growth driver announces itself, investors tend to significantly underestimate the impact on well-positioned beneficiaries.

We all get drawn in by risks and developments in the here and now, but keeping a broad perspective is imperative if our aim is to be a successful investor long term.

These projections equally shine a light on the ongoing opportunities that remain with large cap companies, both in the US as on the ASX. This equally serves as a timely reminder when all and sundry are looking for the next ten-bagger in the small cap space.

It is also one key reason as to why I am not joining the chorus of nervous nellies on the sidelines who keep using terms such as 'bubble' and 'excessively priced equities'. Putting a valuation on listed companies goes well beyond referencing a generic PE ratio.

In Australia, mid-cap IT services provider TechnologyOne ((TNE)) has managed to double in size every five years for circa two decades now. I remember back in 2022, one fund manager published an extensive expose as to why, at $10, there was no chance in hell investors would see a profitable return from their shares.

The arguments put forward read very convincingly.

That share price surpassed the $17 mark last month; 70% above where any further upside was considered negligible. Management at TechOne continues to express confidence the business will yet again double over five years.

Has there been volatility in the share price in between? You bet! But volatility, no matter how scary in the short term, is beyond anyone's control and ultimately it is just that. It is also what provides the better entry points for those investors not yet on board or that like to top up their exposure.

Aussie Banks - The Debate Is Raging

Having said all of the above, investors should never be afraid to question the appropriateness of share prices and asset valuations. Plenty of examples around of share prices that once were trading on much higher levels, never to be seen again.

The key debate in Australia is once again surrounding the local banks. With share prices rallying by double digit percentages, and CommBank ((CBA)) shares posting an all-time record high above $120, the public debate is yet again zooming in on bank share prices and whether the sector's de-coupling from wobbly-looking fundamentals is a bridge too far, or doesn't have to be.

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