Rudi’s View: How To Invest Allan’s $300k, Part 2

This story features COCHLEAR LIMITED, and other companies. For more info SHARE ANALYSIS: COH

By Rudi Filapek-Vandyck, Editor

Part Two of this week’s Weekly Insights should be read in conjunction with Part One, published on July 24th:
https://fnarena.com/index.php/2024/07/24/rudis-view-how-to-invest-allans-300k/

Dear Allan,

if one is an investor in Quality and Growth, as am I, there is always the danger of a brutal swing in market momentum to the other side where our portfolio has no exposure. The key reason for this happening is usually related to market positioning.

Lots of investors like to ‘hide’ in the Winners, while plenty of others like to curse the Winners and hide in the Laggards instead. Sometimes the Winners have been on a winning streak for too long and momentum reversal becomes the easiest way forward.

There have been multiple of such attempts over the past ten years or so, and when you’re in the midst of it happening it’s incredibly frustrating, but it’s always good to keep in mind these momentum switches have tended to be temporary phenomenons only. The longest duration I can remember was about four months, late in 2016.

Most investors don’t think in the same way as I do, but my view remains that, given the multiple strong megatrends at work in the current era, Growth and Quality are never going to remain out of favour for long. The post-GFC era thus far is proving exactly that.

Now that I’ve explained the basic pillars underneath my personal views and investment approach, let’s take a closer look into what I would do if I were in your position.

Healthcare & All-Weathers

The covid pandemic has thrown the healthcare sector into a multi-year bear market. Who would’ve thunk it? This is not an Australian phenomenon, it applies all around the globe, with a select group of exceptions like GLP-1 innovators Novo Nordisk and Eli Lilly.

Given the quality of companies in this sector, and ongoing robust growth profiles, this is not a sustainable set-back for this industry and recent price movements suggest the Quality Growth companies in the healthcare sector are coming back to life. This is extremely exciting, if you’re a similar enthusiast as I am for this type of companies.

My five cents worth is the Quality in healthcare will start performing first, and the rest might catch up at a delay. A lot will depend on corporate margins and profits, but it’s more than feasible, I think, the August reporting season locally might mark the turnaround for the likes of Cochlear ((COH)), CSL ((CSL)) and ResMed ((RMD)).

There’s a good argument to be made those share prices are performing already with CSL shares back at $310 and ResMed’s above $31. I’d definitely be looking to get on board this new uptrend (if I weren’t already). They all have pros and cons and ResMed’s threat from GLP-1s is probably the most obvious (I understand not everyone is comfortable with it).

If you’re the type that can only find comfort in buying into stocks that haven’t performed as yet, I’d suggest taking a look at Sonic Healthcare ((SHL)) and/or Ebos Group ((EBO)). Shares in Fisher & Paykel Healthcare ((FPH)) have rallied hard already and it’s everyone’s guess when Pro Medicus ((PME)) runs out of puff, so I’d keep both on my Wish List, for now.

On the more speculative side of the sector, assuming you have the stomach and the patience for it, Telix Pharmaceuticals ((TLX)) seems destined for wonderful things, and so does PolyNovo ((PNV)).

I am absolutely no fan of Ramsay Health Care ((RHC)) or Healius ((HLS)), no matter how cheap those share prices become. You’d know by now, I don’t engage in bottom-of-the-barrel fishing.

One extra thing you might take on board: when investing in a new exposure, you don’t have to move in with a full allocation immediately. Nobody likes to start off with a negative feeling, which is what happens when a share price weakens after we bought in. The alternative is to cut your average allocation into halves, thirds or even quarters.

If you start off with a small allocation, you’re on board, so step one is in the bag. If the share price does weaken, you have plenty of allocation left to improve on the situation. If the share price runs away from you, you’re already making a profit.

My research into All-Weather Stocks is not limited to the healthcare sector, of course, and I’d be giving the full list some serious consideration. Very bullish sentiment is once again building for Macquarie Group ((MQG)), for example.

The one caution I have relates to Seek ((SEK)), for which the end of negative newsflow may not yet be in sight. This probably also explains why the share price is hovering above $20.

Gen.Ai & Megatrends

Modern day Megatrends have more than proved their wealth creation capabilities, and no Megatrend is currently as dominant as is Gen.Ai. I sincerely think every serious investor has no choice but to get on board. The most obvious phase one beneficiaries on the ASX, Goodman Group ((GMG)) and NextDC ((NXT)), have -understandably- run extremely hard, but there should be a lot more upside in the years to follow.

How and when you get on board, assuming you currently are not, is more of a personal choice. Do you wait for the pullback that eventually will happen, or do you take a small bite and observe further developments?

Other beneficiaries include Macquarie Technology ((MAQ)), Infratil ((IFT)), Global Data Centre Group ((GDC)) and Southern Cross Electrical Engineering ((SXE)). There will be many others as this process will migrate into phase two, and three, etc.

Download FNArena’s Special Report on Investing in Gen.Ai, the Fourth Industrial Revolution and make sure this exciting new development holds no obvious secrets from you. Make sure you keep reading and following what comes next.

My five cents worth is those who sell the new revolution to small businesses and consumers will be outed as the next obvious beneficiaries in the not too distant future. Think JB Hi-Fi ((JBH)), but also Wesfarmers ((WES)), Dicker Data ((DDR)) and Data#3 ((DTL)).

The aforementioned healthcare sector looks like an obvious beneficiary from Ai, but it’ll be a number of years still before any material benefits show up on bottom lines. Unless things move quicker than anticipated, of course.

Equally important: there will be hiccups. This is a long-term phenomenon. Better to treat it as such.

Small Caps

Small caps do not by definition offer higher returns. Some small caps do, but it’s a lot harder to identify those than one is made to believe. I don’t specifically focus on small caps, because I like to identify sustainable growers and All-Weathers and part of that assessment includes a successful track record.

Unless you’re looking for a quick pounce-and-run type of investment style, I like to focus on smaller capitalised companies that come with a lot of promise under the belt and a proven track record. Names that come to mind include Breville Group ((BRG)), Steadfast Group ((SDF)) and PWR Holdings ((PWH)).

Again, share prices in strong performers have already outperformed this year, but there’s no question there’s a lot more growth on the horizon for the likes of Life360 ((360)), Hub24 ((HUB)) and Netwealth Group ((NWL)).

Among this year’s laggards I still very much like Audinate Group ((AD8)), while I also continue to believe IDP Education ((IEL)) will come good.

A Punt For The Punters

If you are a true Australian, you obviously like to include the occasional higher-risk punt. After all, pulling it off successfully is what makes investing fun, no matter what the left hand side of the brain tells us!

However, if you’re the kind of person that feels the adrenaline pumping before you jump off that bridge or off the roof of a 14 floors tower, you’re way, way, way out of my league.

One wild water rafting trip on a sunny day is more than sufficient for my little heart. I seem to have a natural dislike of losing money for frivolous reasons, including inside a casino.

Hence, for more risky positioning with potentially much higher rewards, my attention would go out to smaller cap resources, with each of gold, uranium and lithium to be put under the microscope. The FNArena-Vested Equities All-Weather Model Portfolio prefers to have exposure to gold, not to gold producers, and that has worked out well over the years past.

But a time will come when those lagging producers will outperform in significant fashion.

Uranium is back in a multi-year uptrend. You’re not noticing it thus far in 2024 because the price of uranium is deflating somewhat after that strong rally from last year. But this will reverse in due course, plus companies like Paladin Energy ((PDN)) and Boss Energy ((BOE)) will soon ramp up the volumes (fingers crossed they do not encounter too many operational challenges).

The really big rewards will come when lithium reverts back to its prior uptrend. Admittedly, that might still take a while as the industry is moving through a period of too much optimism with too much production available while demand is no longer growing.

In all three cases, I’d recommend you try to identify the higher quality exposures with less risk of painful failures. FNArena’s Stock Analysis might be the ideal starting point.

Equally important: in all three cases I’d highly recommend smaller proportions in allocations.

One important consideration to make is whether putting all of the $300k in the share market is the best strategy long term. Diversification outside of equities is probably worthwhile exploring, including credit (corporate bonds), government bonds, unlisted alternatives and even real assets. (You can add cryptos to that as well).

ETFs are a viable option as well, including for foreign equities, but never forget rule number one: do your homework first! ETFs can also be used for a lower-risk exposure to the three commodities mentioned.

A man has to know his limits and for those alternatives I suggest you best seek advice elsewhere. I nevertheless enjoyed this little exercise, and I hope you get lots and lots of “inspiration” out of it.

From next week onwards, FNArena will shift into corporate earnings mode. There are multiple reasons to suspect this year’s August results might prove more important than in previous years. More to follow next week (and beyond)!

(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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