Rudi's View | May 29 2024

It's Special vs Cheap, But Who's Most At Risk?

By Rudi Filapek-Vandyck, Editor

From the moment one starts looking for that 'special' corporate quality on the ASX, it is but a matter of time before the focus zooms in on IT services provider TechnologyOne ((TNE)).

Last week's interim financial update provided plenty of input as to why this Brisbane-headquartered, $5.7bn market capped member of the ASX100 is hands down one of the highest quality companies listed on the local exchange.

Rather than dissecting the finer details from the H1 financials, not necessarily all positive, I think it is of much greater importance to explain, in broad terms, what makes this local gem of such high quality.

It might help others, like you maybe (?), to understand what exactly makes this company so special, which might also help in discovering other 'special' companies or rejecting their claims to similar greatness.

An Exceptional Track Record, What Is The Secret Sauce?

In a world that is eagle-eyed focused on growth, TechOne's track record has been exceptionally consistent, growing earnings per share at around 15%, year-in, year-out. It was this consistency that attracted the attention of a short report in 2020, claiming management surely was cooking the books, because, well, no company is able to grow at such consistency for such a prolonged time.

Well, it's 2024 now, and TechOne's still doing it. That malicious short report is long forgotten about, and the share price recently rallied to a fresh all-time record high, intra-day, above $18. When the shorters stood ready to attack in 2020, the price temporarily sank below $8.

The share price, up from below 50c in 2004, is only what is visible to investors every day. The real story that lays underneath is the business approach that prioritises building close relationships with customers, and then making certain the service and products provided suit their needs.

In the fable of the hare and the tortoise, TechOne very much resembles the tortoise. Growing 15% per annum doesn't seem extremely appealing when others can do 100% and more, but can they do it consistently over two decades? TechOne has, and the market has increasingly been paying attention.

When a company grows at a pace of 15% per annum, it doubles in size in less than five years. By 2009, that share price was ready to surpass $1. By 2014 it was trading above $3. By 2019 the price was above $7. At last week's interim release, management gave indications growth is likely to accelerate in the coming years.

Analysts, or at least most of them, got the message and are now projecting 17% EPS growth for the years ahead. Some continue to see potential for further upside surprises, in particular since the UK business hasn't genuinely started contributing just yet. The magic ingredient of the TechOne business achievement is customers are increasingly happy to purchase more products from the same company.

What is usually pointed out about TechOne, including by myself, is its customers, mainly local governments and higher education institutions, are extremely "sticky" with last week's published churn percentage of 1.8% somewhat of a shock. History sees this percentage seldom rise above 1%. Don't worry, management is confident that number will be back below 1% shortly.

TechOne is far from the only company that can rely on customer loyalty, but it has been able to turn that loyalty into a sustainable platform for growth by selling existing customers more products. Not sustainable, I hear you say? Management remains confident there's still a lot more that can be achieved from the same database of prospects and existing customers.

Consistent Investing Builds Success

There's an easy argument to be made the real growth driver stems from the company investing circa one quarter of its revenues in new product development and improved services year-in, year-out. It's these new products that lift the take-up among existing customers.

It's not difficult to see here is a circle of trust at work and TechOne does enjoy a positive reputation in its core markets, also illustrated by the fact the company seems to have established itself as provider of the highest level of cybersecurity among ERP peers in Australia; not an unimportant halo to wear when dealing with government and local councils.

Rudi's View | May 15 2024

In this week's Weekly Insights:

-More Positives Than Negatives
-New Market Leadership?
-2024 The Year Of Gold Miners?
-All-Weathers Welcome Soul Pattinson
-Model Portfolios, Best Buys & Conviction Calls

By Rudi Filapek-Vandyck, Editor

More Positives Than Negatives

Judging from corporate updates, both internationally and locally, the general context has created a tricky framework for investors, as also yet again confirmed by Fletcher's Building's ((FBU)) disappointing trading update on Monday.

It's not as if management and shareholders look over their shoulders feeling lots of excitement, but on Monday the shares dived yet another -10% for a total loss in capital since August 2021 in excess of -60%. The fact the New Zealand builder regularly pays out a dividend hardly compensates for the suffering endured.

Last week offered similar experiences from Sims ((SGM)), GrainCorp ((GNC)), Baby Bunting ((BBN)), Lindsay Australia ((LAU)), and Tourism Holdings ((THL)), among others.

Yet, the impact on consensus profit forecasts in Australia has almost been negligible. That's because for every disappointing market update there seems to be another one that manages to surprise on the upside. Think of REA Group ((REA)), Orica ((ORI)), and AGL Energy ((AGL)), but also Westpac ((WBC)) and National Australia Bank ((NAB)), and others.

The out-of-season results reporting in Australia is about to hit the accelerate button with companies including CSR ((CSR)), Aristocrat Leisure ((ALL)), and Incitec Pivot ((IPL)) scheduled to release operational financials this week, followed by ALS Ltd ((ALQ)), Elders ((ELD)), James Hardie ((JHX)), Nufarm ((NUF)), TechnologyOne ((TNE)), Webjet ((WEB)), and Xero ((XRO)), among others, before the end of the month.

Add-in the fact Australian companies are increasingly updating through quarterly trading updates and there's a fair argument to be made investors locally nowadays are subjected to semi-quarterly reporting seasons a la Wall Street.

Face value experiences to date are mixed at best, see also the examples mentioned, but analysts and market strategists, both here and in the USA, are nevertheless of the view things are looking better than previously forecast.

Earnings forecasts in the US have risen as a result of March quarterly corporate updates. The underlying picture in Australia remains more volatile, also because mining operations and agricultural businesses have been impacted by bad weather, but so far it appears the balance is tilted towards more positives than negatives.

On Morgan Stanley's assessment, consensus is still forecasting average EPS to fall for the ASX200 by -6.8% for FY24, then to rise by 4.7% and by 4.6% in respectively FY25 and FY26. These numbers have only changed minimally over recent weeks.

While concerns over inflation, bond yields and delayed interest rate cuts, in combination with markets trading on above-average multiples, are dominating sentiment and financial news headlines, corporate updates have likely contributed to the cautiously optimistic tone that has returned post April's correction (if we can call it that).

Analysts at Macquarie have come to the same conclusion having witnessed 114 companies presenting and updating over three days the week prior (7-9 May) at the Macquarie Australia Conference. This year marks the 26th edition of what has arguably become Australia's most important corporate event.

Retail proved the stand-out negative surprise of this year's conference, suggest Macquarie analysts, as market updates from the likes of JB Hi-Fi ((JBH)), Temple & Webster ((TPW)), Endeavour Group ((EDV)), Super Retail ((SUL)), Coles Group ((COL)) and Vicinity Centres ((VCX)) either implied market forecasts won't be met, or confirmed Australian households are spending less or buying cheaper alternatives.

But net-net this year's conference was positive, concludes Macquarie, with companies including AGL Energy, HMC Capital ((HMC)), AUB Group ((AUB)), and Medibank Private ((MPL)) lifting their guidance, while trading updates from the likes of PolyNovo ((PNV)), Pinnacle Investment Management ((PNI)) and Regis Healthcare ((REG)) proved better-than-expected.

Macquarie's forecast is for the net positive trend for Australian companies, that looks to have started in the last AGM season in late 2023, to continue into the August results season. Daily evidence suggests, however, there remains plenty of room for disappointments, reflective of the polarised dynamics that nowadays characterise the global economic picture.

As far as the outlook for the share market goes, I am still siding with the optimists, as I have since October last year, though I also believe investors should be prepared for a lot more volatility.

Anticipating exactly where the next corporate disappointment might come from is a mug's game, so it's probably best portfolios have exposure to companies that should perform well medium-to-longer term, irrespective of the potential for an unexpected short-term set-back.

I'd be inclined to think my recent writings offer plenty of background and ideas:

-https://fnarena.com/index.php/2024/05/09/rudis-view-arcadium-lithium-goodman-group-paladin-pexa-treasury-wine/

-https://fnarena.com/index.php/2024/05/08/rudis-view-opportunity-in-data-centres/

-https://fnarena.com/index.php/2024/05/01/rudis-view-quality-reigns-and-how-to-identify-it/

FNArena's Corporate Results Monitor only covers actual financial results, and we do our best to keep up with the pace throughout the rest of the month: https://fnarena.com/index.php/reporting_season/

At the macro-level, I remain of the view that the prospect of interest rate cuts, delayed or otherwise, remains a positive carrot for markets, unless economies stumble into recessions.

Below are some of the more interesting views and research updates I came across recently. Things to consider?

Rudi's View | May 09 2024

By Rudi Filapek-Vandyck, Editor

Best Buys & Conviction Calls

As promised in Monday's Weekly Insights, below are the latest Model Portfolio changes observed. But first, let's have a look at Jarden's best ideas among ASX-listed smaller cap companies ("Emerging Companies").

Jarden's Top Pick remains Temple & Webster ((TPW)), regardless of the shares having rallied already.

Other Key Picks are:

-Lovisa Holdings ((LOV))
-Siteminder ((SDR))
-Nick Scali ((NCK))
-Universal Store Holdings ((UNI))

In extension, specific sector analysts have highlighted their specific convictions for:

-Inghams Group ((ING))
-Light & Wonder ((LNW))
-NRW Holdings ((NWH))
-Telix Pharmaceuticals ((TLX))
-Regis Healthcare ((REG))
-National Storage ((NSR))
-Ingenia Communities Group ((INA))
-Karoon Energy ((KAR))
-Capricorn Metals ((CMM))
-Domain Holdings Australia ((DHG))
-Pepper Money ((PPM))

Rudi's View | May 08 2024

Opportunity In Data Centres

By Rudi Filapek-Vandyck

The concept confounds many an investor, and market commentators too; from the moment the market understands there's a whole lotta growth up for grabs on the horizon, share prices move to above market-average multiples which, at face value, makes the stocks in question look 'expensive'.

But are they really? Is the opportunity already gone?

In many cases the answer is: no, the opportunity is still there. If the promised growth comes through, and management executes on the opportunities available, there's often plenty of room left for upside surprises, which, when looking back withhindsight, only makes that share price from the past, 'bloated' though it may have looked in-the-moment, actually a cheap 'bargain'.

One such prime example from the recent past has been delivered by healthcare imaging services provider, Pro Medicus ((PME)) whose share price has been trading on forward-looking multiples above 100x. But as the emerging global leader in its field added new contract after new contract, it forcedanalysts to regularly upgrade already bullish forecasts, with forward-valuations and price targets rising further on the back of it.

In simple terms: Pro Medicus shares looked 'expensive' back in 2020, when the price crossed the $30 mark. Last week they surged above $110. And while most analysts have valuations that are well-below that price level, Macquarie believes they are being too conservative. AI and new services and customers are still on the horizon. Macquarie has set a price target of $120. For now.

Goldman Sachs sits on $134.

In investment terms, Pro Medicus shares gained 52.8% in 2020, followed by 82.8% in 2021, then retreated -13.4% in 2022, only to advance a further 77.2% in 2023 and, thus far in 2024, another 15%. That's one helluva return for a stock that along the way attracted comments ranging from 'absolutely crazy', to 'bubble', to 'egregiously overvalued'.

For good measure: nothing from the past four years indicates this company will not encounter a growth hiccup at some stage, or worse, and its shares might well come back down to earth if that happens. But shouldn't investors equally be aware that such concerns, and calls of 'the next example of irrational exuberance', have been expressed way too liberally, and way, way too early?

For all we know, this company is nowhere near to about to run out of growth. Certainly, management at the helm thinks so. Thus far any weakness in the share price has been but an opportunity to get on board.

Never ask a barber whether you need a haircut. Never ask a value investor whether to invest into the next emerging growth opportunity.

Data Centres Are In Strong Demand

A similar dilemma has opened up with the emergence of generative artificial intelligence ('GenAI'), mostly in the US, and in the slipstream of the next tech (r)evolution, the surging demand for data centres.

Already, fund managers have been taking profits on their Goodman Group ((GMG)) shares that have appreciated by 45.7% in 2023, and by a further 33.6% in the first three months of 2024. Shares in NextDC ((NXT)) have gained 52.7% and 29.6% respectively and have been described as 'overvalued'.

But what if both companies are still only at the early stage of a strong demand growth period that has many more years to run? Might those elevated valuations in the here and now mirror Pro Medicus shares from years past?

A fresh research update by analysts at Morgan Stanley is certainly challenging all who are questioning the ongoing opportunity on offer.

With the local market for data centres to more than double by 2030 (150% projected growth), it's rather difficult not to expect a whole lot more upside for companies leveraged to that demand, assuming, of course, management teams execute and the global landscape does not come irrepairably unstuck, like through war or much higher bond yields.

Three things make this research exercise unique:

-it incorporates the latest updates and insights from US companies, today's heartland of GenAI and data centres

-the research is a deep, multi-disciplinary collaboration between analysts across technology, media and telcos (TMT), REITs, Utilities & Sustainability, and Mining/Resources sectors

-the research is uniquely focused on the Australian market

Let's start with the basic outcomes. Morgan Stanley's 12-month price target for data centres operator NextDC has been raised by 13% to $20 (Monday's share price $17), while the target for Goodman Group has lifted to $35.30 ($33.94 on Monday). The target for Macquarie Technology ((MAQ)) is $100 ($84 on Monday).

Supporting these upgrades is US feedback that growth in AI and GenAI, and the associated rapid rise in demand for computing power, is accelerating. This, in return, boosts demand for data centre capacity. Conclusion: a golden period has opened up for companies such as the three mentioned. Those worried about capacity catching up will have to wait many more years, all else remaining equal.

Not many investors would be aware, but Australia already is a global Top Five data centres hub, with capacity similar to London, but lagging the US, Europe, the Data Centre Alley of North Virginia, and Beijing/Shanghai.

Morgan Stanley's current projections imply additional investments made in new data centres will total between $21bn-$28bn over the next eight years, providing companies with an incremental revenue opportunity of $5.6bn-$8.4bn per annum. These numbers, states the report, could well prove conservative.

Rudi's View | May 01 2024

In this week's Weekly Insights:

-Quality Reigns, And How To Identify It
-Macquarie's ASX Quality Compounders

By Rudi Filapek-Vandyck, Editor

Quality Reigns, And How To Identify It

I used to think investors' biggest challenge was related to a cheaper share price not always presenting a better opportunity, or that built-in urge we all have to be part of the next share market rally -FOMO! by any other name- but as my experiences grow, and my daily observations accumulate, I am now of the view the biggest challenge is coping with change.

Given we are experiencing a once-in-a-lifetime period of innovative disruptions and technological breakthroughs, adapting to change may well become the all-important factor that separates the Winners from Losers, both in the real economy as among listed equities, but equally so for those investing in them.

GenAI and GLP-1s are now on everyone's radar given a strong presence among share market winners, but very few are equally aware about the small revolution that has taken place over the past two decades in terms of how to 'value' those companies and their brethren operating in cybersecurity, online retailing, and capital-light software and technology services generally.

Admittedly, in a market dominated by banks and resources companies, and with a large swathe of investors solely focused on franked dividends, there's never been too much urgency to catch up on modern day methodologies to value young-and-upcoming, fresh, modern-day business models. But even the ASX is changing noticeably.

According to my quick analysis, six of the ASX Top20 companies are now consistently trading on above-average PE ratios, while that number grows to eleven if I expand the focus to the ASX50.

The local market's sweet spot, companies ranked between 51 and 100 on market cap, offers plenty of growth achievers on higher multiples that look poised to develop into potential ASX50 members in the decade ahead.

But the likes of Car Group ((CAR)), Pro Medicus ((PME)), WiseTech Global ((WTC)) and Xero ((XRO)) do not only provide investors the opportunity to outperform the local benchmark, their ascendancy is also impacting on traditional measurements to determine whether the local share market as a whole is 'expensive' or not.

Simply put: drawing a straightforward comparison with how the index traded in the past should no longer cut it, if ever that was the case given BHP Group's ((BHP)) heavy weighting today.

Even if we ignore the counter-cyclical PE formation for Australia's largest index weight (high in downturns, low when the sun shines), the elevation of the likes of CSL ((CSL)), Goodman Group ((GMG)), Macquarie Group ((MQG)) et al means the average PE ratio for the Australian share market has by default increased vis a vis the lower references from the past.

So where exactly is today's 'equilibrium' in between undervalued and overheated? Since no such research has been conducted to date (not to my knowledge), we do not know the answer, other than it will be higher than the market's long-term average which is usually placed below 15x times forward earnings per share (EPS) projections.

The current average has already been impacted as the prior corresponding average was long quoted as 14.4x previously. My 'hunch' is today's number might be closer to 16x. Post August weakness, and the recent return of buyers, the average PE ratio for the ASX200 is now a smidgen above 16x.

My 'hunch' might not be too far off, or so it seems. Early conclusion: don't jump to the 'market is overheated' conclusion too quickly; the past does not offer apples with apples comparison (at least not on this widely used market valuation metric).

The same principle also applies to overseas indices, of course.

Value Versus Quality

A much more important change has taken place for investors' ability to identify winners and losers on the market. Still, the large majority thinks of low PEs when looking for opportunities, but there's a growing mountain of evidence suggesting low PEs have no predictive powers when attempting to find tomorrow's winners (beyond that brief rally).

Instead, achieving oversized investment returns over the past decade or so has been closely linked to High PE achievers such as the ones mentioned earlier. So, are we experiencing the next bubble waiting to burst? Is the late Benjamin Graham ringing alarm bells from his grave?

Hardly. Today's scholars will tell us the legendary Graham was much more flexible than his value-seeking disciples tend to be. What usually is ignored when investors base their investment philosophy on the principles explained and documented in The Intelligent Investor is that Graham never simply focused on buying 'cheap' assets - he'd also apply a quality filter.

'Quality', rather than 'Growth' or 'Value', has increasingly captured institutional investors' attention amidst changing market dynamics. There's one easily identifiable reason for this: those portfolios that own a variety of high PE achievers, be they on the ASX or on Wall Street, have significantly outperformed portfolios that stuck with AMP Ltd ((AMP)), Healius ((HLS)), Aurizon Holdings ((AZJ)) and other low PE 'value' opportunities.

Yes, indeed, share market dynamics have changed, posing enormous challenges for those investors not willing or unable to adapt. That sound you're hearing in the background is from Charles Darwin's grave.

The discovery of 'Quality' as a major defining factor has not happened overnight. Most indices and data providers, including MSCI and S&P, have compiled their own indices and stock selections representing 'Quality' and in most cases the outperformance of Quality over broader benchmarks looks pretty straightforward.

As we're talking about stocks trading on above-average PE ratios, times of significant bond yield resets are not favourable, but outside of 2022 and comparable periods, Quality indices typically outperform during tough times, either economically or because of elevated risks, and during times when 'Growth' outperforms 'Value', when 'Momentum' trades dominate, and when bond yields embark on a downtrend.

Most importantly; unlike 'Value' and 'Growth' which each tend to have specific periods of (out)performance, Quality works under most circumstances, most of the times. It's not difficult to see the attraction for investment portfolios that like to stay with the winners and avoid as much as possible the losers, without having to churn excessively.

The problem is, however, there is no universal concept or definition of what defines a Quality company, as also illustrated by the observation that all Quality indices and selections available are based on different filters and methodologies.

Rudi's View | Apr 24 2024

In this week's Weekly Insights:

-A Market Narrative Delayed
-Conviction Calls & Best Buys
-Rudi Unplugged - The Video

By Rudi Filapek-Vandyck, Editor

A Market Narrative Delayed

Four months ago, the outlook for equities and bond markets looked as straight as an arrow: inflation was decelerating and the Federal Reserve and other central banks were preparing for rate cuts later in the year.

That's all investors needed, and wanted, to know.

Suddenly, and noticeably, the narrative has changed in April. And share markets the world around have given up most, if not all of their gains year-to-date in three weeks of trading. On Friday, the main indices in Australia dipped into the negative, ex-dividends, for the running calendar year thus far. The Nasdaq, can you believe it, has only 1.80% left from January 1st.

While the downsloping trajectory for inflation was never going to be a straight line, equity markets only paid attention when the US bond market forced them to. It is easy to blame Mr Bond for the removal of most share market gains from the prior three months, though the risk of an all-out war in the Middle East has made market participants more risk-averse too.

Rising bond yields in response to higher-than-predicted inflation readings in the US have equally swung market momentum in equities back in favour of resources and other more cheaply-priced cyclicals, while the same combination is not favourable for smaller-cap companies generally.

The latter is an important observation at a time when all and sundry seem to be focused on finding the next ten bagger among cheaply priced, lagging, small cap stocks both in Australia and in the US.

As also highlighted during a presentation by JP Morgan strategists in Sydney last week, smaller cap companies in general suffer more when the cost of capital remains high. And while economic forecasts are being upgraded for key economies following on from the latest statistics -a positive both for cyclicals and small caps- history suggests what really puts a rocket under share prices for small caps are interest rate cuts and falling bond yields.

According to the latest switch in market narrative, inspired by moves in government bonds, there's no longer any prospect for imminent rate cuts. There may not even be one single cut in 2024.

While we can never be 100% certain about what might be revealed in the next set of economic statistics, history equally shows it is dangerous to extrapolate first quarter data and trends into the rest of the year, and beyond. For what it's worth: I personally still believe the most likely scenario remains for lower inflation ahead, but also for slower growth, and the longer bond yields remain high, and central bankers on hold, the more likely this scenario will play out.

It's the timing of things that is much more difficult to predict.

So, with the major indices in Australia down more than -4% so far in April, and indices in the US down by between -4.5%-6.7%, should investors be fearfull of something more sinister brewing for financial markets this year?

The big unknown remains the situation in the Middle East, which understandably has made investors more cautious. Once upon a time, all it took was the assassination of Archduke Franz Ferdinand in Sarajevo to start a global war that predominantly debilitated countries in Europe. Let's hope the current conflict is not our era's trigger point for something similar. At least both Iran and Israel seem to be messaging they're happy to show off their hairy chests, with little desire for substantially more.

As far as the script for the remainder of 2024 goes, more delays in seeing inflation in the US fall have certainly the capacity to unsettle markets, in particular if US bonds would give up on the prospect of Fed rate cuts. Add sluggish economic growth and the worst of all scenarios could play on investors' mind: stagflation.

In the same breath, all it takes is one favourable inflation reading and the general market mood could well switch to positive yet again.

Modeling US equities

Probably fair to say, general uncertainty and volatility in market moves are but par for the course for the time being. And while debates among investors will continue unabated, strategists at RBC Capital have tried to model a variety in outcomes this year, and what they could mean for the S&P500 index.

In case of one lonely Fed rate cut, delivered late in the year at the December meeting, the RBC Capital modeling shows -all else remaining equal- the S&P500 could well finish the year between 5050 and 5200, also depending on what exactly happens to corporate earnings.

The index closed a little below 5000 on Friday.

Rudi's View | Apr 10 2024

In this week's Weekly Insights:

-Lessons & Observations From ASX All-Weathers
-Conviction Calls & Best Buys
-June Index Rebalancing

By Rudi Filapek-Vandyck, Editor

Lessons & Observations From ASX All-Weathers

The Global Financial Crisis of late 2007-March 2009 changed my life as an investor.

Those who have remained with us since no doubt still remember how FNArena rose above the parapet, declaring what was to unfold next was not your garden variety share market correction.

Sell the banks was not a popular opinion back then, but it proved extremely prescient, as was sell China (oil and gas and the miners) later in the same year of 2008.

For more reflections on what happened back then: https://fnarena.com/index.php/2018/10/03/rudis-view-ten-years-on-the-world-is-still-turning/

But what really (and truly) enlightened my understanding of how financial markets operate was the change in focus in my own research and market observations that started during those dour times.

It all began by asking that all-crucial question: why is it certain companies seem better suited to weather the darkest of times for your average stockmarket investor, while so many other share prices fall by -40%, -50%, -80%, and more?

This new journey eventually led to the concept of All-Weather Performers on the ASX; a small selection of companies that are, simply put, of a much higher level of corporate quality than your standard ASX listing, and thus exceptionally well-equipped to create shareholder value and benefits over an elongated period of time, irrespective of the ups and downs in the economy, interest rates, and bond yields along the way.

To your average value investor, and that's the large majority in Australia, be they retail or institutional, my quest looked incredibly silly. We all know successful investing starts with buying low and selling high, right? As if I could possibly identify something that hadn't already been considered and dismissed by the historic greats in the industry!

Yet, here we are, 1.5 decades later and the All-Weather Model Portfolio, which is based upon my specific research, has generated in excess of 10% per annum before fees since inception in early 2015. Over the past three years, total return pre-fees has been 13.84% on average, for the past twelve months up until March 31st that percentage is 19.17%.



Admittedly, the Model Portfolio doesn't run multiple billions of dollars, which might have played to its benefit at certain times, but in the same vein, the strategy is very much Buy-and-Hold, which underpins the validity of the research and the specific companies selected.

Not About The Share Price

Let's be frank about this: it only takes one brief look at price charts for the likes of Aristocrat Leisure ((ALL)), Car Group ((CAR)) and REA Group ((REA)) to know owning these stocks has been extremely beneficial over the decade past.

And while the contribution from the likes of CSL ((CSL)) and ResMed ((RMD)) on balance has been non-existent post 2020, theirs was a completely different story in the years prior.

The noticeable loss of upward momentum for healthcare stocks generally, in underlying trend terms, has triggered the obvious questions from subscribers and investors alike whether such companies should remain in my selection and whether others with better recent performances should not be included instead?

To me, this simply highlights how much investor perceptions, and views, are being influenced by recent share price moves. Prior to 2021, virtually nobody dared to question the proven quality and track record of CSL. Three years of a less stellar trend on price charts later and general appreciation has deflated substantially.

This is an important observation for what makes an All-Weather Performer is not what happens to a company's share price, it's about what management achieves operationally. Difficult to understand it may be, but both do not by definition always run parallel to each other.

Divergences do occur, and they happen quite regularly because sentiment is all-important in the short term, and market influences are many.

Some companies have strong growth in the here and now. Others grow strongly over a number of years. But to be labeled an All-Weather Performer, it requires that extra level of 'special'; a moat, a defensible number one market position, a customer base that is sticky and growing naturally, the ability to find new growth time and again.

Needless to say, the list of true All-Weathers in Australia is a rather limited selection, and it hasn't changed much or often since I embarked on my research. Equally important; the concept of finding All-Weathers is easily discredited in case of too many disappointments or errors, so it's vital not to include any accidental performer less they undermine the quality of the core selection.

However, we are living through tumultuous times, with technologies and innovations disrupting moats and status quos. This not only increases the risks for All-Weathers, it also creates a whole new battery of high-quality, strong growing, emerging new market leaders.

Rudi's View | Apr 04 2024

On March 20 and 21 FNArena Editor Rudi Filapek-Vandyck presented respectively to the CPA’s SMSF discussion group, online, and members and guests of the Australian Shareholders Association (ASA) in Sydney, in person on stage.

The video recording of the first presentation is available via the FNArena website and through Youtube: https://fnarena.com/index.php/fnarena-talks/2024/03/22/to-august-beyond/

To make the content of this presentation available to a wider audience, FNArena has decided to also publish a shortened, curated transcript, with limited illustrations from the slides used.

A full copy of the Powerpoint presentation slides is available for paying subscribers via the SPECIAL REPORTS section on the website.

Presentation: To August & Beyond, March 2024.

Welcome. With today's presentation I have tried to combine the short term with the long term.

This idea is also embedded in the title I have chosen. As investors in the share market, we always tell ourselves we are in this for the long term; we know investing is a marathon, rather than a short-term sprint.

In practice, we are constantly being influenced by the short term, also because of the sector and the media telling us all about the short term, what is happening, and what is not happening in the here and now.

Short Term: February Results

Let's start with the short term.

In Australia, we have two major corporate results seasons; in August and February, and a gaggle of companies reporting in between.

Last year, both February and August seasons proved quite disappointing. Twice the market rallied hard leading into each season, and twice results were simply not good enough and all those gains disappeared in full.

The situation at the start of February was not dissimilar. Again, we saw a big rally beforehand, but this time the gains have not disappeared.

Because expectations were low, the stats look ‘ok’. I think it’s probably correct to conclude the reporting season was ‘good enough’, I am not sure whether this also means it was ‘good’.

The macro-outlook has by now changed too.

As investors, we are now looking forward towards, hopefully, a trough in economic momentum, and we are in particular looking forward to central bankers cutting interest rates.

Consumer spending is hopefully holding up, that's the hope, and it is supporting the market broadly.

The big winner from the February reporting season is technology, and that was very much noticeable. We saw big spikes in share prices for some of the technology stocks. Some of those results proved absolutely mind blowing.

It didn't get that much coverage in the general media for the simple reason that technology is supposedly a US phenomenon.

But also, there are many more retailers and consumer-oriented companies listed on the ASX, that were equally meeting or beating expectations, so much more attention went to discretionary retailers.

Another factor is technology trading on above average PE multiples, and everybody, including the media, has a psychological problem with that.

Another sector that performed really well is building materials.

In general terms, the season was being saved by smaller cap companies, not so much the large caps.

The losers in February were the international cyclicals; mining and energy companies.

Those results generally were quite disappointing, and that translated into share prices going backwards. Both the energy and mining sector were at the bottom of performance tables over January and February.

Another sector that simply never seems to get it right is telecommunication, with exception, maybe, of a few small caps.

Plus the one sector that used to be a shoe-in for solid performances is healthcare and again, February did not deliver for healthcare.

Investors will have to be more patient when it comes to healthcare stocks.

The irony here is that what happens in February doesn't necessarily give us any guidance for what lays ahead.

For example, healthcare is seen as one the best performing sectors in terms of profit growth for the years ahead.

In terms of profits generally, the current forecast sees the average earnings per share (EPS) retreat by -5.5% in FY24. For FY25 consensus sees a positive gain of 4%.

The long-term average for Australia is positive growth of 5.5%, thus the general expectation is for below-average growth this year and in the next.

Needless to say, in a polarised market the outlook between sectors is very much diverse.

On the positive side, we find insurance, healthcare, and technology. On the negative side, we find commodities and the banks, for example.

All in all, it’s ‘good enough’ to retain an undercurrent of cautious optimism supporting the market.

The Broader Picture

Another observation is the index gained some 2% in total since the start of the year, some 0.80% all-in throughout February, but in the US gains are generally much higher.

And that difference in performance is not something that only happened this year.