Rudi’s View: Ten Highflyers With More Upside Potential

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In this week’s Weekly Insights:

-Ten Highflyers With More Upside Potential
-FNArena Talks
-All-Weather Research: Post-August Changes
-FNArena on Saturday

By Rudi Filapek-Vandyck, Editor

Ten Highflyers With More Upside Potential

Almost thirty years of closely following financial markets has guided me to one all-important share market observation: there’s no such thing as ‘the investor’.

Sure, it remains important to distinguish those with a limited, short-term, higher-risk attitude in markets –the traders– from those who chop and change less and keep an eye on the longer term potential, or at least are trying to do exactly that.

But when it comes to identifying the latter market participants, the investors, it’s equally all-important to realise this is by no means an homogeneous group.

Using a very broad brush and no nuances or room for further details, what is commonly referred to as ‘the investor’ essentially consists of two opposing strategies and philosophies: there’s your typical ‘value’ investor and then there’s the ‘growth’ investor.

Both invest in the same market and call themselves investors, not traders, but that’s mostly where the comparison ends. So, in order to become successful as an investor in the share market, it’s important we know where we ‘belong’ ourselves, lest we get confused by trying to mix and mingle what are two very different ways to read and decipher markets and all their idiosyncratic intricacies.

If you happen to be a typical ‘value’ investor, you’re probably enjoying the revival of mining stocks this month, keeping your fingers crossed authorities in Beijing will continue to stimulate and revive the moribund Chinese economy.

This should support further upside for companies including BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue ((FMG)), but equally so for the likes of ALS Ltd ((ALQ)), Austin Engineering ((ANG)), Imdex ((IMD)), Orica ((ORI)) and dozens of smaller-cap names across the mining and related industries.

Up until not that long ago, you were feeling a little bit frustrated because long-held positions in the likes of Aurizon Holdings ((AZJ)) and Dexus ((DXS)) are yet to deliver, and some of the more risky punts in Healius ((HLS)), Insignia Financial ((IFL)) and the lithium sector have been truly gut-wrenching. At least most coal producers pay out an outsized dividend while the banks have truly surprised friends and foes over the year past.

Naturally, also, your other key worry is the potential for economic recession in the US and globally, but hopefully Chinese stimulus and interest rate cuts from central banks around the world (ex-Australia) will keep economic growth in the positive.

If, on the other hand, you’re more affiliated with investing in your typical growth companies, your portfolio might have taken a few hits recently, but you’re not genuinely worried given returns from holdings in Pro Medicus ((PME)), WiseTech Global ((WTC)), Goodman Group ((GMG)), Hub24 ((HUB)), Xero ((XRO)), Life360 ((360)) and TechnologyOne ((TNE)), among many others, have been truly a finger-licking delight.

Equally noteworthy: many disciples of the ‘value’ church are worried markets are repeating the bubble mistakes from the past. Who knows what might provide the spark that initiates the next share market correction from current exuberant investor optimism?

Surely, this cannot continue indefinitely?

It’s worth noting those with a habit of owning quality sustainable growth businesses seem noticeably more relaxed about the world, the status and outlook for financial markets.

If you happen to play the market with a ferocious appetite for risk, you’re probably smiling right now. You just quadrupled your position in a company most market participants didn’t know was listed (or even existed). You simply do not care about any of the above, underneath or beyond; there’s always something that’s moving, and that’s where you live and breathe.

For most institutional investors who often operate under a specific, pre-defined mandate, the distinction between the various ‘religions’ is never in question, but most retail portfolios might own a cross-over combination of stocks on both sides of the divide.

Here the challenge is knowing when to listen to our inner ‘value’ voice and when to ignore it. This in particular becomes more pertinent when those quality growers in the portfolio have already delivered such wonderful returns.

Our inner ‘value’ voice tells us nobody has ever regretted pocketing profits made but on the flipside lives the eternal regret of selling out too soon and missing out on much larger gains.

So this week, to assist all of you with at least some ‘growth’ in the portfolio (or the ongoing desire to add more of it), I decided to zoom in on some of the optimistic views and scenarios out there.

Whereas your typical ‘value’ approach starts with a view that all exciting business stories must come unstuck at some point, the heart of the optimist beats inside the body of the growth investor who has plenty of personal anecdotes to prove success often equals staying with the winning trend.

It just so happens my personal radar has spotted exactly ten examples worth highlighting (in alphabetical order).

Aristocrat Leisure ((ALL))

Shares in global gaming royalty Aristocrat Leisure are not everyone’s cup of tea, but what cannot be denied is their phenomenal return over the past twelve years which, at more than 28% CAGR per annum, is both hard to beat and incredibly hard to ignore.

Now with a market cap in excess of $36bn, Aristocrat is one of the largest companies on the local bourse, and growing at double-digit speed year-in, year-out.

Those familiar poker machines that populate large corners of global casinos as well as local pubs and clubs in Australia are now complemented with a digital business. The combination has proven extremely favourable for shareholders.

But everything has a price, surely?

Of course, but UBS analysts have just returned from a visit to the USA. Their confidence in Aristocrat’s fortune has only increased further. More US states are opening up to allow online gaming and this, naturally, opens up even more growth avenues for Aristocrat.

On the potential upside surprises to be delivered in the years ahead, UBS has lifted its twelve months price target to a market topping $63.50 which suggests more room that can be justified for an already buoyant share price.

Brambles ((BXB))

To state that Brambles has had a number of difficult years is not doing justice to the challenges that weighed on the pallet company’s performance, but things have improved, noticeably, and market enthusiasm is definitely making a come-back.

Brambles was once a blue chip one simply had to have in portfolio, but three-four periods of subpar performances have changed investor’s perception and dragged down long-term performance numbers.

The shares have doubled in price since early 2022. Confidence is back for management and analysts to project double-digit percentage growth ahead for the years ahead. Management is using modern technology, including AI, to optimise and streamline operations while better servicing customers.

Ord Minnett’s price target of $20.80 is the current high-marker on optimism those in-house initiatives will pay off in the years to come.

Car Group ((CAR))

Car Group is the prior Carsales.com.au renamed. While its local platform in Australia remains the dominant market leader for those looking to sell second hand vehicles, smart international investments are increasingly adding to the company’s growth potential.

Shares in Car Group have returned over 17% CAGR per annum post 2012, and there remains plenty to be excited about for the years ahead.

Plenty of target prices that are situated above today’s share price, but Goldman Sachs is the current high-marker at $40.90, suggesting double-digit percentage further upside, even after this year’s strong performance already.

Cochlear ((COH))

Australia’s leading global cochlear implant company, Cochlear, features prominently in John Addis’ freshly published book How not to lose $1 million as one of investments at Intelligent Investor that was sold way too early.

Cochlear has developed into the CommBank of the local healthcare sector; always trading at a premium, and still generating solid returns for those who understand a premium valuation does not by default translate into disaster and dismal returns.

Management first upgraded FY24 guidance and then followed up with a disappointing subdued outlook for FY25. No surprise thus, the share price has weakened noticeably from the dizzying levels witnessed earlier in the year, but Cochlear shares can still show off with a CAGR return of more than 17% per annum over the decade past.

One of the company’s supporters who is not swayed by any of this year’s set-back is Wilsons, which is keeping a market-beating price target of $345 on ongoing confidence the future looks favourable, spectacular and robust, as has been the past.

Macquarie Group ((MQG))

What is Macquarie’s secret? Maybe it can best be summarised as never change a winning formula.

All those who have been closely following the Millionaire’s Factory throughout the post-GFC years know this institution is so much more than simply one of the largest asset managers globally.

The share price got thrashed during the GFC bottoming not that far off from $10 but today’s price is closer to $230 for an annual CAGR return in excess of 19%, dividends not included.

Even on today’s lofty PE multiple, the implied forward-looking yield is still 4% before franking. Macquarie is, of course, a true champion in asset recycling, i.e. buying assets now and on-selling them at much higher values later on. Plus: this is THE beneficiary locally if forecasts for an uptick in global corporate actions (IPOs, M&A) prove accurate.

Morgan Stanley’s unwavering confidence has resulted in a price target of $250.

Pro Medicus ((PME))

Some are calling Pro Medicus the highest quality company on the ASX. Such views are often expressed in line with the share price performance, which has been phenomenal, no discussion about it.

Even as late as 2018, the shares were still trading below $10. Indeed. Difficult to envisage such level when the shares are flying towards $174 to date for a return in excess of 2000% over the past six years.

Pro Medicus has developed into the global leader in digital imaging for medical scans in hospitals and that extended runway of growth seems to have a long chapter ahead, still.

What could possibly go wrong? That’s your inner ‘value’ voice speaking; you better tune in with the ‘growth’ voice inside your brain.

Most price targets are sitting well below today’s share price, but Goldman Sachs disagrees and stands out with a target of $193. That target, explains the broker, is justified by the revenue/margin outlook, unique cloud offering, and ongoing significant long-term growth opportunity.

ResMed ((RMD))

Remember when Ozempic was wiping out ResMed’s business because the world had finally discovered an easy solution to obesity?

I do. And boy, am I glad I stuck to my faith and even purchased additional exposure when fear and conspiracies (including hedge funds) were weighing down on the share price.

Similar as with Cochlear, ResMed remains the global leader in a segment that remains well-supported for many more years to come. Given long-lasting problems for key competitor Philips, it is likely ResMed can look forward to permanent market share increase, even if a dip is likely upon Philips’ US market return.

Whenever someone posts a table of the best long-term performers on Wall Street, ResMed’s US stock features on it. From the depth of the Ozempic-driven sell-offs mid last year, the shares have now rallied 66%.

Part of market enthusiasm is linked to management’s promise margins will continue to increase. Wilsons believes management is able to outperform market expectations, and has thus set a market-beating price target of $40.25, implying that 66% can still rise to above 80% in the months ahead.

How’s that for a turn of events?

TechnologyOne ((TNE))

When management promises 15%-16% growth on average per annum, this implies the company doubles in size every five years. TechnologyOne has done better than that since 2004.

2024 in particular has been spectacular for loyal shareholders. The shares entered the calendar year around $16 and are nine months later trading around $24. That’s 50% for those not that proficient with numbers!

Past performances have proved exceptionally resilient and predictable, but never spectacular and this is why TechOne is constantly under-appreciated by analysts and investors. This is the tortoise of the local technology sector.

TechOne did not report financials in August, but UBS saw enough evidence elsewhere to predict the upcoming FY24 release, and the years beyond, will yet again offer robust growth numbers on expanded margins, as promised by management at the helm.

UBS’s price target of $26.20 implies there’s plenty of good news still in store, even after such a stellar share price rally.

Xero ((XRO))

We like to include Xero in our local basket of technology winners that are conquering the world by stealth, and the accountancy software provider in the cloud is part of that small selection, but we have to remain honest: Xero was born across the ditch, in New Zealand.

Now operating from a number one position on both sides of the Tasman, Xero has positioned itself as the number two in the UK and is working on achieving similar success in the USA, where market dynamics are a whole lot different, and thus more challenging.

But new management at the firm is confident and analysts have been convinced, also noting early signs of on-the-ground progress.

Goldman Sachs sees an additional opportunity opening up in Canada and has lifted its price target to $201, more than 34% above today’s share price.

Numbers nine and ten (and more) are inside the local collection of major Gen.Ai beneficiaries on the ASX, including Goodman Group, NextDC and Macquarie Technology, for which not one, but most price targets suggest a lot more upside should remain on offer because of strong demand for, and investments in, data centres globally.

Readers familiar with my personal research into All-Weather Performers know all of the companies mentioned are part of my curated lists and/or currently owned by the FNArena-Vested Equities All-Weather Model Portfolio.

My personal research revolves around identifying the highest quality companies on the ASX, which is not a pure growth strategy, but it leans a lot closer towards it, far, far away from your typical ‘value’ oriented strategies.

Paying subscribers have 24/7 access to my curated lists via a dedicated section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

FNArena Talks

Danielle Ecuyer has interviewed global liquidity expert Michaell Howell. Highly recommended for everyone with even a slight interest in the macro forces that impact on financial markets:

https://www.youtube.com/watch?v=KsCf0E0m8OU&t=1987s

Your editor interviewed by Paul Rickard about post-August observations and conclusions: https://www.youtube.com/watch?v=eJwTscS9YuM&t=30s

All-Weather Research: Post-August Changes

Quite a few analysts will tell investors the share market is under-pricing the potential for online jobs platform operator Seek ((SEK)), and that may well prove the case come 2025, but this does not negate the observation this company has essentially stood still for most of the decade past, while being forced to make material investments along the way.

Seek’s track record in profitability looks more like that of a highly cyclical mining stock than it does emulate either REA Group’s or Car Group’s; two references with whom it casually is measured against.

If anyone wants to criticise me in that a company like Seek should have been removed from my select list of All-Weather Performers on the ASX, you can and I have little defense to offer. Post August, which was yet again disappointing for Seek shareholders, I have decided to remove the stock from my selection.

One other change I made is to include SiteMinder ((SDR)) in my curated selection of Emerging New Business Models, which is my way of signalling here’s an interesting, highly promising developing business that should be on investors’ radar.

SiteMinder joins the likes of NextDC, Webjet ((WEB)) and Life360 that have been part of that selection for a longer while.

Paying subscribers have 24/7 access to my curated lists via the dedicated All-Weathers section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

FNArena on Saturday

Many among you would have noticed, but last weekend FNArena added a new weekly compilation email, FNArena on Saturday.

The idea is to provide an additional opportunity to catch up with the better content stories FNArena produced throughout the week and that may have escaped attention while you were busy keeping up with life elsewhere.

As per always: all feedback is welcome and appreciated: editor@fnarena.com

FNArena On Tour

Dani and myself will perform as a surprise double act on the Gold Coast on Wednesday this week on invitation of local members of the Australian Shareholders Association (ASA).

The event is scheduled for 1:30pm on Wednesday 2nd October at the Mermaid Beach Hotel by Nightcap Plus (one hour plus tea/coffee break plus more). We’ll share our personal insights and market observations with plenty of Q&A opportunity afterwards.

This week’s Weekly Insights has been written from a hotel room nearby.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 30th September, 2024. 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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