Rudi’s View: The Importance Of ‘Quality’ Growth

Rudi's View | Nov 21 2024

By Rudi Filapek-Vandyck, Editor

With year-end approaching for what has been, on most accounts, a positively surprising 2024 overall, strategists at Wilsons explained this week why their Focus Portfolio retains an "overarching bias" towards Quality stocks on the ASX.

Historically, explains Wilsons, higher-quality businesses generate higher returns. Among the criteria used to define what is a higher-quality company is Return on Equity (ROE).

When deciding which cyclicals to add, the focus does not waver from that higher-quality requirement.

To quote the strategists directly: "Given cyclicals are, to some extent, exposed to the ebb and flow of the economic cycle, quality is a particularly important consideration, which is why the portfolio's cyclical exposures are principally concentrated among quality cyclicals - that is, cyclicals with quality attributes and attractive bottom-up structural growth stories."

Wilsons focus reminded me about one observation made on social media recently which I intend to fully incorporate into my own analyses and writings from now onwards:

One often made mistake by investors is to buy into a low-quality business during great economic times. (They often won't notice their mistake until economic momentum deteriorates, of course).

Wilsons Focus Portfolio owns relatively large exposures to Aristocrat Leisure ((ALL)) and James Hardie ((JHX)), both considered high-quality cyclicals.

The FNArena-Vested Equities All-Weather Model Portfolio does not include highly cyclical businesses in its mandate, but the Portfolio has owned shares in Aristocrat almost since Day One.

We think Aristocrat Leisure's business is not half as cyclical as is James Hardie's and challenge anyone to locate 'the cycle' on a backward-looking price chart for the past decade or so in Aristocrat shares.

Of course, the shares still move in line with market sentiment and contrary to bond yields and so forth.

Wilsons has grabbed the opportunity to once again explain why its Focus Portfolio is so keen on exposure to one of the "highest quality businesses on the ASX", in reference to Aristocrat Leisure.

Let's move straight to the key points:

-The company significantly outspends its competitors on R&D
-The company continuously grabs more market share

To complement these points, Wilsons adds a largely recurring revenue profile, a high degree of pricing power, and successful new product development.

James Hardie, on the other hand, also offers a high degree of pricing power, alongside a track record of above-system growth, with attractive margins on top.

James Hardie is also leveraged to the US housing construction cycle, where it generates some 75% of sales.

Wilsons argues a cyclical recovery is in the making, plus James Hardie's structural growth story remains intact.

Both companies released their respective FY24 and 2Q25 results last week and it is Wilsons' assessment that both market updates reaffirmed why these are two of the highest quality businesses on the local bourse.