Rudi’s View: Is Buy The Dip Changing Markets?

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In today’s Weekly Insights:

-Is Buy The Dip Changing Markets?
-Compare The Pair: Expensive Versus Cheap

By Rudi Filapek-Vandyck, Editor

Is Buy The Dip Changing Markets?

Whenever something happens to financial markets, analysts and market participants often seek guidance from the past in order to assess what might plausibly follow next.

But, of course, the past does not always provide us with an accurate blueprint for the future. Investing is not that easy or straightforward.

One case in point could be this year’s rapid sell-off in response to President Trump’s US import tariff announcements earlier.

History shows equity markets tend to revisit the initial bottom before embarking on a new, sustainable uptrend.

Indeed, recent research by Longview Economics again confirms out of the 15 sharp pullbacks in the S&P500 between 1978-2018 no less than 13 of these saw the index put in a recovery rally, followed by another sell-off to revisit the prior low, before recovering more convincingly.

Longview’s analysis concentrated on pullbacks of at least -10% so this year’s sell-off would fit in with the historical pattern. Except for the fact indices have thus far only moved into one direction, and that is as far remote from their April low as possible.

This raises the obvious question: can history be our guide? Should investors expect another deep sell-off to similar magnitude as happened earlier?

Answering the question is no longer as straightforward as might previously seemed the case (apart from the fact that history is never a one-on-one for the future and there were two exceptions in Longview’s data-analysis).

Observation number one is that share market recoveries seem to be happening at much faster speed than in the past.

As also pointed out by other market observers, share markets in 2025 have pretty much made up for all previous losses in circa 1.5 months. This is one of the fastest recoveries in history. But wait, there is more…

Since covid hit the world in 2020, share market sell-offs are no longer adhering to their historical pattern. The one key change, or so it appears, is recovery rallies are no longer followed by a deep pullback to re-test the previous bottom.

The March 2020 sell-off did not see a subsequent retest of the bottom, and neither did the Yen carry trade-inspired turmoil that hit markets in August last year.

Longview argues share market pullbacks in 2022 should be seen as part of a cyclical bear market, thus not representative of general trends and context in 2025.

Have markets fundamentally changed in their response to risk-off sell downs?

There are probably multiple reasons as to why this could be the case (assuming no economic recessions are on the horizon).

My own favourite explanation would be that passive investing and buy-the-dip money inflows might by now be large and influential enough to move markets higher ahead of active managers who are still largely biding time on the sideline.

As with every other interpretation of changing market behaviour, time will tell.

(None of this means markets will only move into one direction from here onwards, in particular not when economic data start showing weakness).

Compare The Pair: Expensive Versus Cheap

Ever walked into your local supermarket to find heavily discounted strawberries on prominent display while farther down the aisle you pay double the price for a similar looking bucket?

If you do fall for the extra-advantageous offering, you’ll find there’s not much healthy life left in those cheaply-priced berries. You better start eating them now!

On more than just a few occasions, the offerings put forward by the share market are made up of similar underlying characteristics, which is why buying the ‘cheaper’ looking option available is not always the best decision for an investor to make.

Recently my mind wandered off to private hospital operator Healthscope, whose valuation discount between 2014 (ASX re-listing) and 2019 (acquisition by private equity) vis a vis the much larger Ramsay Health Care ((RHC)) was often touted as a signal that investors had been under-appreciating Healthscope’s true potential.

Since then, Ramsay Health Care has had its own struggles and today’s share price is reflective of that reality. But fully privatised Healthscope might be on the verge of collapsing under $1.6bn in debt, leaving its ASX-listed landlord unable to collect current and outstanding rent payments.

I cannot help but think that relative valuation discount would have only grown larger had Healthscope remained a publicly listed company.

A similar observation can be made regarding Ainsworth Game Technology ((AGI)) which since 2002 has presented itself as the cheaper-priced alternative for multinational Aristocrat Leisure ((ALL)), but seldom has this resulted in higher investment rewards for those taking the leap.

It certainly never resulted in sustainably higher rewards as that share price has effectively known one direction only –southwards– since 2013. Similar as with Healthscope six years ago, Ainsworth Game Technology is likely to be privatised and de-listed later this year, as suitor/majority shareholder Novomatic has finally bitten the bullet.

US-headquartered Light & Wonder ((LNW)) also trades on lower multiples than Aristocrat, while offering higher growth potential given a smaller size and post corporate re-invention, but reality on the share market has proved noticeably more challenging. Post sell-off, the shares are still up some 30% since early 2023 but shares in Aristocrat have doubled.

For good measure: Aristocrat has taken its smaller challenger to court, and won, which explains part of the discrepancy, but recent results also revealed there’s no escaping general industry challenges and investors are prepared to put more faith in Aristocrat’s decade-long track record that has made it one of the local success stories from the past ten years and beyond.

Staying with the pending de-listing theme, it looks like Domain Holdings Australia ((DHG)) too might soon change ownership and be de-listed from the ASX. Domain shares have consistently traded at a relative discount to industry leader REA Group ((REA)), reason enough for many to recommend its shares against a much more ‘expensively’ priced local market leader.

The reality? With a total return of circa 44% over the past seven years, Domain shares have not been able to keep up with the broader market (including dividends) while REA Group shares delivered home run after home run, rewarding loyal shareholders to the tune of 155% versus circa 85% for the ASX200 Accumulation index.

In similar vein, shares in the cheaper-priced Atlas Arteria ((ALX)) have returned about half as much as the much larger, more solid offering put forward by Transurban ((TCL)) over the decade past. Atlas Arteria is rumoured to have full take-over interest from IFM Investors which already owns 28% of its equity.

Constant take-over speculation equally surrounds investment platform operator Praemium ((PPS)), whose valuation –you probably guessed it already– forever shines brightly against the elevated multiples rewarded to much larger industry challengers Netwealth Group ((NWL)) and Hub24 ((HUB)).

Yet again, outside of brief periods when shares in Praemium out-rally their more ‘expensive’ looking peers, investors have done themselves no favours by switching out of Netwealth or Hub24 shares in favour of the industry laggard. Returns from both Netwealth and Hub24 shares have been nothing short of spectacular since 2020 and both are setting new all-time record highs in 2025.

If we broaden the focus, we might equally include Insignia Financial ((IFL)) and AMP Ltd ((AMP)). While not as single-focused as Netwealth and Hub24, both companies compete in the financial platforms sector with valuations that rank equally well below those of the two successful challengers.

You already know the outcome from any comparison in returns. Insignia shareholders might be keeping their fingers crossed for a positive outcome in take-over talks between the board and suitor CC Capital.

In case anyone wonders: buying the most ‘expensive’ stock in a given sector is not always a successful strategy. It hasn’t worked for supermarket operators where the most expensively priced market leader, Woolworths Group ((WOW)), has underperformed its smaller and cheaper-priced competitors Coles Group ((COL)) and Metcash ((MTS)).

In particular for Coles, the outperformance has coincided with a narrowing of the relative valuation gap since Woolworths lost its prior mojo. Equally telling: Endeavour Group ((EDV)) is also facing serious operational challenges since de-merging from Woolworths in mid-2021.

Similar as for the two platform challengers, any differences between ResMed ((RMD)) and Fisher & Paykel Healthcare ((FPH)) seem rather subjective. Both companies only compete in certain market segments, so are not 100% comparable, but both have significantly outperformed the broader market and much smaller competitors vying for their own share of sleep and breating solutions.

Both ResMed and Fisher & Paykel Healthcare, similar to Netwealth, Hub24 and most market leaders mentioned earlier, are also consistently trading on above-market average multiples/valuations.

Despite trading on richer valuations, in particular vis a vis direct competitors, it seems to me the list of richer-valued companies that outperform their ‘cheaper’ priced competitors over prolonged periods of time is much longer than the opposite.

Think also Sonic Healthcare ((SHL)) versus Healius ((HLS)) in pathology services, and Treasury Wine Estates ((TWE)) versus Australian Vintage ((AVG)) in wine, Medibank Private ((MPL)) versus nib Holdings ((NHF)) in private healthcare, Xero ((XRO)) versus Reckon ((RKN)) in accountancy software, and versus MYOB pre-delisting, and TechnologyOne ((TNE)) versus Objective Corp ((OCL)) in Enterprise Resource software.

This exercise is by no means advocating investors should no longer care about valuations, or forget about buying shares as cheaply as possible, as the share market will still push valuations too high and too low under opposing circumstances, but at the very least there should be questions asked as to why certain companies are more highly valued than others, rather than automatically choosing the more ‘attractive’ looking option.

To extra-illustrate that point, I have kept the most controversial sector for last: Australian banks.

Some sector analysts have started to anticipate cuts in dividends across the sector, as headwinds will only keep building. Guess which bank is not expected to reduce its payout to shareholders?

It’s the local market leader whose valuation and investment return has dwarfed the rest of the sector since the GFC, now 16 years ago.

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).

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(This story was written on Monday, 19th May 2025. 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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