Rudi Interviewed: Turning Laggards Into Winners

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It has become the ‘unofficial’ tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from the pre-February results season interview that took place on February 11. The video is available on Livewire and on YouTube.

Sarah Allen: Hello and welcome to one of Livewire’s favourite reporting season traditions. Today, I’m joined by Rudi Filapek-Vandyck from FNArena to talk all things reporting season.

Rudi, thank you so much for joining us today. The share market’s been at near record highs of late. What are the big opportunities or risks that you’re seeing this reporting season?

Rudi Filapek-Vandyck: Each reporting season has its own character and this reporting season has a very particular character, which is probably going to surprise a lot of people.

Recently, I was walking around and I saw a religious statement that said: hope never disappoints.

I don’t want to drag this into some religious corner or anything, but I do remember it because I thought that’s a very nice summary of what February is going to offer us.

Another way of looking at it is: how do we turn yesterday’s laggards and losers into winners?

That’s definitely what’s on investors’ mind right now.  What I mean to say is: we’ve had a share market now for two years that has, at face value, performed quite well, but it was carried by about 40% of the market.

So there’s 60% that hasn’t performed over the past two years, at least. What 2025 might bring is that we pull in at least a big part of that 60% to perform this year.

And there are a few reasons why that’s on investors’ mind. First, we haven’t seen any earnings growth in Australia for three years and counting.

The way the share market works, on a very simple comparison of what were you doing last year and what are you doing this year, that means the longer it lasts, the easier the comparison becomes for that 60% that hasn’t performed.

All you need is two bad years and now a little bit of a better year, and wow, we’re in for growth!

So that’s one component, but equally important is there is growing confidence that earnings in Australia have bottomed and that we will see better times ahead.

That’s already being reflected in forecasts. Forecasts are on the rise, which hasn’t been the case for quite a while.

From the US, we are seeing the earnings base is broadening and the gap between the winners and the laggards is narrowing.

Then, of course, we have one big trigger in Australia: the RBA is going to cut interest rates, and that’s going to keep optimism high.

We always tend to look at the numbers, valuations, forecasts, targets, ratings, you name it, but I think market sentiment, investor sentiment, is the all-important factor here.

Those elements I’ve just summed up, we’ve seen that in January already, they’re already changing the mindset of the average investor.

We’re now looking at company reports and market updates with a positive mindset.

If I look at what we’ve seen so far, reports by Amcor ((AMC)), for example, market updates by Incitec Pivot ((IPL)) and by Seven West Media ((SWNM)): those are not necessarily great reports, but with a positive mindset, they’re good enough to get on board.

That’s what we see in this reporting season, and I’m assuming we will see a lot more of that in reporting season and outside of it.

Investors are now taking a different view on reports with the aim of: can I get on board or not? Is it worth it?

That’s going to be the big difference between August last year and February this year.

Last year August was completely different. There was no confidence. There was no optimism, or very, very little optimism.

We had the usual suspects performing very, very well, and the other 60% a little bit wishy-washy.

Investors had no appetite to go outside of the winner’s circle, and that’s why the momentum trade last year was so strong.

2024 was a year of momentum trade. If you were on a good ticket, it just kept going. If you weren’t there, a lot of investors got frustrated last year.

I suspect that’s going to change this year.

Now, how are we going to respond to that as an investor? That’s the $64m question, of course.

It’s very interesting, I think, because it’s not that straightforward. It basically depends on what type of investor you are and what’s your strategy? What are you interested in?

There is a possibility that the winners from last year, the REAs ((REA))), the Car Groups ((CAR)), Goodman Groups ((GMG)), NextDCs ((NXT)) and others, that they might hit a ceiling for the time being.

They’ve done very well for two years. None of them are cheap. They might perform in line with expectations, maybe a little bit better, maybe a little bit worse. There may not be that much momentum behind those stocks for the time being.

Now, depending on the type of investor you are, are you now going to say goodbye to those stocks? Are you going to jump on some of the laggards instead? Or are you taking on, temporarily, some underperformance with a longer-term view?

Or even better: you have cash available, and you hope some of them are actually going to sell off.

Notice, for example, very good results by ResMed ((RMD)) but the share price is weaker. Slightly disappointing results by Car Group, and share price is weaker.

If you’re a particular type of investor, which I am very much aligned to, that’s not cause for jubilation or to cry out: see I told you, they were too expensive!

It’s the opposite: I have cash available, maybe I should add some of those in my portfolio?

That is the proposition, I think, that 2025 is more likely than not going to put forward to investors. It’s a completely different dynamic. So, everything will be different this year.

Interviewer: Speaking of some of those companies that have had really high valuations, but also still performance: the big banks. Most of the banks report out of season, but we do have Commonwealth Bank ((CBA)) and Bendigo and Adelaide Bank ((BEN)) coming up. Let’s cut to the chase: Can they continue to deliver?

Rudi: I think the answer is yes. A lot has been written about and said, in particular about Commonwealth Bank, but let’s start with the basics.

Banks are not in a fantastic place. They are not a screaming buy. They’re not growing very strongly. They’re basically holding their turf, not doing too badly, keeping the financial metrics intact.

And with the exception of maybe a Bank of Queensland ((BOQ)), not too many disappointments or disasters are happening. So that’s a very safe course, but the shares are in demand.

I think there are two elements too many commentators and too many investors do not understand about the banks.

One element is the international aspect. That’s why I’m not negative about the sector.

As the Editor of FNArena, I’m little bit privileged. I do get a lot of research from research houses internationally.

The dynamics internationally are still to the extent that the finance sector, banks in particular, often are being put forward as one of the outperformers for 2025, internationally.

If that is correct, international banks don’t have to be the number one sector, but if they keep performing internationally, there’s no way Australian banks are going to sell off.

That’s just plain logic. For the same reason, if the Nasdaq keeps up in the US, we won’t see a big draw down in local technology stocks. That’s just how these things work.

The other element, which is equally important, is often missed by people who only look at banks in an isolated case.

You look at Commonwealth Bank in an isolated Commonwealth Bank case, and you look at valuation, prospects, growth, etc and you probably conclude the shares are extremely overvalued. There’s no one who will deny this.

But I already figured out 10 years ago that’s not how you look at Commonwealth Bank.

Commonwealth Bank is at arm’s length the best bank in Australia. There are many ways to illustrate that.

By default, the market puts a premium on Commonwealth Bank in comparison to the sector.

So, the way you should look at Commonwealth Bank is through that premium versus the sector.

Hence, Commonwealth Bank shares at $150, or at $160, or whatever, in isolation looks very expensive, but you need to see it in comparison to the other banks.

If shares in other banks keep rising, Commonwealth Bank will keep its premium. The sector needs to fall as a whole, for Commonwealth Bank shares to come down as well. And that obviously isn’t happening.

 It’s a bit of a long explanation, but I wouldn’t necessarily expect the banks are going to shoot the lights out. I don’t think they’re in for full disaster either.

I think they probably will do relatively well, and for a lot of investors, as we know, the banks offer dividends and franking, and they just love it.

Interviewer: Turning more broadly, which stocks and sectors are on your watch list this season?

Rudi: Some of the stocks I just mentioned, they’re very much either in my portfolio or on my wish list.

But two sectors have caught my attention this season, because the expectations are so polarised. So, it becomes a case of winners and losers inside the same sector.

The two sectors are healthcare and telecommunication.

Healthcare used to be, pre-covid, the best performing sector in Australia. I even learned recently that, at that time, this was the only sector in Australia that would outperform its peers internationally.

Five years post covid and those times are over. Covid is really weighing on that sector. We can see that from share prices of Ramsay Health Care ((RHC)), Sonic Healthcare ((SHL)), Healius ((HLS)), even CSL ((CSL)) and Cochlear ((COH); it’s all not quite the same as it used to be.

We still have very good performing companies in that sector. Telix Pharmaceuticals ((TLX)) is one of them, as is Pro Medicus ((PME)), although you can argue whether that’s more of a technology stock, and ResMed; I’m still a big fan of ResMed.

So, there is still quality and performance in there.

What I noticed recently is when analysts put forward their potential surprises for the season, they’ve often put forward two of the smaller stocks in healthcare and both are worth considering.

One is Australian Clinical Labs ((ACL)), the other is Integral Diagnostics ((IDX)), which is a merger company.

It seems to be that pre-results confidence is high both will come out with good results and share prices should respond positively.

Full disclosure: I am a shareholder in Integral Diagnostics. I think that’s probably a multi-year growth story emerging.

Telecommunication is equally polarised. For those who think that, for example, shares in TPG Telecom ((TPG)) are finally due for a rebound, that’s not the view of analysts who still think there’s more bad news forthcoming.

But here’s the takeaway: analysts also thought that was the case for Domino’s Pizza ((DMP)), and all it took for Domino’s was to announce restructuring, with less costs and closing down of outlets.

TPG could announce something similar. They are also in negotiations to sell some of their assets. It’s not necessarily bad news only.

The discussion about Telstra ((TLS)) is whether it will increase its dividend and whether it can. Apparently, they’re running into limits on their franking credits, and that might be a problem.

The one telecommunication company that’s being put forward as potentially shooting the lights out this year is Superloop ((SLC)), and that company has been on a tear for quite a while.

I guess, for investors, there’s also a message in here that just because a company has performed, it doesn’t mean this is the end of performance just yet.

Interviewer: You’ve mentioned a few growth names. Where are you seeing the best opportunities for growth?

Rudi: The best opportunities are in quality growth; companies that have a runway that is longer than just two or three years.

I already mentioned REA. There’s no end to that road. Yes, they will acquire more business at some point. They probably have another go in the UK, if they find a new CEO anytime soon.

Car Group; one of the great stories we have on the stock exchange. My experience is that if you’re part of the register, you are more likely to have a big smile on your face after a while.

You have to take the volatility on board. Not every year is a super year for those companies, but on average they’re up there, they grow and continue growing and that’s basically what you want being a long-term investor.

Interviewer: Are there any areas you steer clear off in the current season?

Rudi: I tend not to jump on when I suspect growth is more manufactured than real, or if it’s of low quality, and if the company itself is not that high in quality.

I have this special gene: if everyone’s making money out of something, I don’t need to be part of that.

Every once in a while, that gene kicks in. Whenever there’s disasters on the share market. I’m seldom there.

I like to make comparisons. For example, if I have a choice between Healius and Sonic Healthcare, I will never opt for Healius.

But in the current context, maybe it’s better to look at either Australian Clinical Labs or at Integral Diagnostics.

Otherwise, I own no banks outside of Macquarie Group ((MQG)), and no energy stocks.

With the added observation that when analysts make their forecasts for this season, Worley ((WOR)) sits high on everyone’s list, not just because of a potential not-as-bad-as-feared result, but there’s potential for a surprise on the margins, plus, apparently, since the last changes they made, cash is coming in.

Now everyone starts speculating what are they going to do? Share buyback? More dividends?

It will keep interest in the stock.

Interviewer: In the past, you had reasonably high cash balances. You went as high as 40% in 2022 and cash was at 18% in 2023. What are you holding at the moment?

Rudi: At the moment I have 12.5% in cash. But I think we need to add as well that I have about 5% or 6% in gold. I think that’s equally important.

I’ve been carrying gold for years. My principle is: everyone should own gold. If you ask how much? Well, it sort of depends: How worried are you about the world?

Back in 2020, I had, from memory, about 11% or 13% in gold. The world was closing down. It was looking very worrisome at the time.

On average I own about 5% or 6% in gold because I do think there are plenty of reasons to have some gold in your portfolio. You just don’t worry about the volatility.

If you want to do it in Aussie dollars, or US dollars, that’s by the by. The currency sometimes works against you or for you.

About that cash: I was prepared to see Trump go really nasty if the election went the other way last year. As it turned out, he won that election quite comfortably and he didn’t go nasty.

Subsequently, I’ve kept that cash just because I wasn’t quite sure what was going to happen.

You can now argue, with all-time highs for the market, or almost, this has been my mistake. Too cautious.

Maybe yes, maybe no. I’ve had two great years with the portfolio. I’m now underperforming but I don’t think that’s because I’m 12.5% in cash.

That is simply because the market is making a switch into the laggards and the losers from last year, and I’m simply, to a very large extent, not there.

Just a little bit; everyone has portfolio constituents that haven’t performed.

But the opportunities will come. They will come through volatility caused by Trump or otherwise, or they will come because of the results.

And as I said earlier, if some of those great growth, quality stocks we have on the stock exchange sell off, I’ll be buying.

That’s why I have some cash on the sidelines. Otherwise, I can’t do it.

Companies that I own now, Hub24 ((HUB)) and WiseTech Global ((WTC)); I bought them when they sold off. I did the same thing with ResMed about 15, 16 months ago

That’s why you have cash on the sidelines. It’s not necessarily a view that everything will fall apart. When opportunity comes along, it’s good to have a little bit on the sidelines.

For some people, 12.5% sounds like a lot, wow! But you find two or three stocks to put some money in and all of a sudden you already start wondering, like, ooh, do I have too much in the market?

Interviewer: Final question: if there was only one Aussie large cap and one small cap that hasn’t reported already that you could hold for the rest of the financial year, what would they be?

Rudi: I have a bad history with this as last time I picked CSL ((CSL)), although that was with a longer-term view in mind.

In the current context, I think I would pick NextDC, because I think it’s still not well understood by investors. Plus, I think this whole data centre growth story is definitely not near its end, and the share price is still lower than where it was late last year.

I’m very confident that’s still an ongoing growth story, and that share price should be a lot higher in years to come, whether that’s end of this year or the end of the following year, that’s by the by.

NextDC doesn’t pay a dividend, of course, and on paper there are no profits, but that’s the type of story we’re talking about.

I’m very confident in holding NextDC shares.

Interviewer: And the small cap?

Rudi: Well, how about we do Integral Diagnostics? I mentioned it earlier. I’m a shareholder. I think everyone should pay some attention.

It’s an interesting combination they’ve put together. The company seems to be in a segment of the market that seems to have the wind in the sails, or at least soon will be, and they’re not necessarily battling the headwinds that Healius has, or Ramsay Healthcare, or CSL, so they should be in a better place.

The share price is definitely not priced for it.

Interviewer: Thank you so much for sharing those tips and sharing your insights today, Rudi, a great repeat of the tradition.

(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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