Tag Archives: All-Weather Stock

Premium ARB Corp Keeps Delivering The Goods

ARB Corp's third-quarter performance showcased why shares continue to trade at a premium to the Small Industrials Index.

-Analysts raise targets for ARB Corp post Q3 results
-Positive sales momentum across three key divisions
-The US strategy is improving, according to Citi
-Recent US investments performing well

 

By Mark Woodruff

To the avid observer, shares in ARB Corp ((ARB)) are trading at a noticeable premium to most small cap industrial companies in Australia, and they have been for the past decade. Analysts suggest ARB's recent market update provided yet more evidence as to why this relative valuation premium remains justified.

Management at the company is proud of regular investments made into R&D with analyst commentary post the recent trading update suggesting ARB Corp’s consistent valuation premium compared to the Small Industrials Index reflects a longstanding reputation for quality and innovation in four-wheel drive accessories.

The company continues to grow and diversifying its distribution footprint, most notably in the US, where sales returned to growth in the third quarter. This expansion is coupled with a bullish outlook from management on near-term trading conditions.

The combination of positive third quarter sales growth plus a positively trending order book suggests potential for growth in new business, according to Wilsons. This broker forecasts a further near-term acceleration in Export sales growth.

ARB Corp develops, manufactures, distributes, and retails four-wheel drive vehicle accessories, necessitating manufacturing and warehousing facilities in Australia and Thailand, and an ARB-branded retail store network in Australia. There is also third-party distribution in Australia, the US and numerous other export markets. The company's first retail outlet in Seattle is on course to open its doors for business in Q4 this calendar year.

Ord Minnett recently upgraded ARB to Buy from Accumulate following third quarter results, while, yesterday, Macquarie moved to a Neutral recommendation from Underperform.

Revenue in the third quarter rose by 6% compared to the previous corresponding period, as US sales grew in a flat market due to improved inventory, distribution, and a new eCommerce platform, explained management.

Momentum was positive across Australian Aftermarket, Export and OEM (the three key segments), with sales up on the previous corresponding period by 7%, 2% and 24%, respectively.

Reflecting the growing importance of the OEM division, the company has split in two the management structure in the US, with new heads of Aftermarket and OEM.

Sales in Australian Aftermarket for the quarter benefited from record new vehicle sales in FY24, and increased investment in the ARB store network, observed Ord Minnett. Additional staff were also employed to improve fitting capacity.

Improving new vehicle supply in the UK and Europe, and a return to sales growth in the US, lifted Export sales, explained the analysts, while OEM sales were boosted by purchases from both new and existing customers.

As third quarter trading was in line with Macquarie’s expectations, this broker’s upgraded rating was solely due to a change in valuation method to reflect the company’s consistent history of trading at a premium to the market.

The share price has traded at a 20% average premium to the Small Industrials Index over the last ten years, reflecting a quality business with offshore growth optionality, in the broker’s view.

Improved inventory, enhanced distribution through the Dallas distribution centre, and the addition of eCommerce combined to deliver third quarter growth, explained Macquarie. Longer-term growth options include the second quarter FY25 opening of the Seattle retail site, and new products which will be factory-fitted to Toyota Trailhunter models of the Tacoma and 4Runner.

ARB has a long and successful history of product development, noted Wilsons, and the current Old Man Emu (OME) MT-64 suspension product is looking promising, in the broker’s opinion.

Citi highlighted a greatly improved US strategy as management takes greater control over distribution, gains richer customer insights from its new website, and begins a promising partnership with Toyota.

US Investments

Talking of US strategy, Morgans noted both of ARB’s US investments, acquired in the 1H of FY24, are exceeding expectations.

Nacho LED (cutting-edge lighting solution) won its first major contract with US-based Fox Factory Holding Corp, and Off Road Warehouse (accessories) signed its eleventh site with further locations under review.

Management also highlighted various initiatives have been put in place to optimise the company’s Toyota USA brand association.

In a further potential accelerant for growth, Citi highlighted ARB’s balance sheet optionality to make further acquisitions.

Outlook

After Australian Aftermarket sales grew by 4.6% in the nine months to the end-of-March, Macquarie feels the division is well positioned for growth, with domestic vehicle supply trending positively, and given the ongoing rollout of new stores.

Fitter capacity is also on the improve, noted the broker, while the Ford Australia License Accessories by ARB (FLA) program remains a positive, with Ford websites promoting and offering an extensive range of the company’s products.

Ord Minnett also highlighted improving supply of new vehicles in Australia, along with upside from the accelerated investment in the ARB store network. It’s also felt the strong order book bodes well for ARB's Australian Aftermarket revenue growth in the second half.

The Export division is starting to trend positively, according to Morgan Stanley, though the analysts cautioned this trend is subject to volatile quarter-to-quarter swings.

Morgans also warned ARB Corp remains subject to numerous consumer-facing headwinds such as cost of living pressures and a cyclical operating market. This broker retained a Hold rating with a 12-month target of $39.10, up from $38.30.

The average target price of five covering brokers (updated daily in the FNArena database) has increased to $40.58 from $37.80 over the past week, suggesting 3.5% upside to the latest share price.

Analysts currently have three Hold (or equivalent) ratings and two Buy recommendations.

Outside the database, Overweight-rated Wilsons lowered its target to $44.39 from $45.69 following the third quarter trading update.

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Rudi’s View: More Positives Than Negatives

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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?


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Rudi’s View: Arcadium Lithium, Goodman Group, Paladin, Pexa & Treasury Wine

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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))


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Rudi’s View: Opportunity In Data Centres

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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.


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Rudi’s View: Quality Reigns, And How To Identify It

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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.


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Rudi’s View: A Market Narrative Delayed

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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.


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Rudi’s View: Lessons & Observations From ASX All-Weathers

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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.


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Rudi’s View: (In Search Of) The Holy Grail

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

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.


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Rudi’s View: Healthcare Under The Scanner

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 13 2024

In this week's Weekly Insights:

-Healthcare Under The Scanner
-February 2024; The Final Verdict
-Rudi Unplugged, In April


By Rudi Filapek-Vandyck, Editor

Healthcare Under The Scanner

Technology companies and discretionary retailers might have crowned themselves as Champions during the local reporting season in February, post-season the focus among analysts goes mostly out to Healthcare and REITs, two market segments that have largely been on the nose ever since the world decided covid is just something you deal with.

The irony that healthcare services are among the most persistent victims of what became an enormous global health scare back in 2020, now in the fourth year post pandemic, shouldn't go unnoticed. Reality does have a way of carving out its own pathway, ignoring forecasts made and solidly beating human imagination.

Double irony: healthcare had been by far the best performing segment on the ASX pre-covid, with local sector leaders CSL ((CSL)), ResMed ((RMD)), Cochlear ((COH)) and Sonic Healthcare ((SHL)) delivering above-average returns for long-term oriented portfolios.

In their slipstream followed a queue of smaller-cap performers, including Ebos Group ((EBO)), Fisher & Paykel Healthcare ((FPH)), Nanosonics ((NAN)), and others.

In 2024, it's much more slim pickings to identify outperformers in the sector, or even 'performers' if we exclude brief, short-term share price moves. Pro Medicus ((PME)) and the aforementioned Cochlear have turned into stand-out exceptions, but their ongoing attraction has now become a public debate revolving around 'valuation' and 'true sustainable growth perspectives' for the years ahead.

In a market that likes to reward companies for reliable, oversized growth with no negative surprises, and both healthcare outperformers are certainly part of that group of companies locally, there will always be that investor dilemma of how much premium is too much?

The more interesting question for most investors relates to the rest of the sector: when can we expect the return of healthcare as a solid, reliable provider of strong growth, with no material negative surprises? Call it the good old days, when ResMed, believe it or not, was one of the best performers on Wall Street with a total return in excess of 1000% over ten years.

There's no denying, the operational context for many healthcare companies has changed. There's also no denying share prices for the past three years are reflecting exactly that.

Bugbears include the advent of competing treatments and medications, such as GLP-1s, the modern day miracle weight loss solution (for now), but equally so budget constraints for governments, for hospitals, and for households, fewer GP visits, and a marked pick-up in general costs.

Margin pressure has become the new focal point for the industry at large. Most analysts, and management teams at the helm of these companies, remain confident today's margins will improve in the years ahead, but maybe not to the levels witnessed pre-covid.

This will have consequences for general valuations, and for investors' enthusiasm to invest in the sector.

History shows, what usually happens when a sector remains under the pump for a longer-than-expected period, there usually follows a number of wash-out events, whereby the weakest, lower-quality and most vulnerable business models implode as the relentless pressure builds.

Recent events at Healius ((HLS)), which have driven the share price to its lowest level in more than 23 years, is such an outcome. Once again, also, investors have been reminded of the dangers of owning cheap-looking sector laggards for no other reason than the 'price'.

So let's assume we have cash to spare, and we are hopeful the current spell over the healthcare sector will not prove permanent. Where should we be looking to invest?

I asked the analysts.



The local market leader, CSL ((CSL)), has for many years carried the halo of 'probably the highest quality growth stock on the ASX' but general appraisal has gone silent as the share price keeps reverting back to the $280 price level in line with disappointing margin recovery to date and more negative market updates.

Spending more than US$1bn on developing and trialling CSL112 and ending up empty-handed is not something witnessed every day either locally or elsewhere.

The acquisition of Swiss company Vifor, costing circa US$11.7bn, has not been a grand success either, at least not in the initial phase of ownership. Vifor is being challenged in some of its key products.

Losing the label of apparent immortality has made the local analyst community noticeably less enthusiastic too. Model portfolios have scaled back their allocations, albeit generally in small gestures. Some analysts, like those at Wilsons, have now turned super-critical of the business, labelling Vifor a 'dud' and questioning CSL's small base for future growth.

The majority, however, focuses on the 80% of CSL that is performing well, with ongoing prospects for robust growth and recovering margins; plasma collection and vaccines.


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Rudi’s View: February Trepidation

In this week's Weekly Insights (the first in 2024):

-All-Weather Model Portfolio
-Rudi Unplugged
-February Trepidation


By Rudi Filapek-Vandyck, Editor

Weekly Insights returns with a bang this week, so too much material forces me to publish this week's update in two separate parts.

The story below is best read in conjunction with the Part Two follow-up which will be published on the website on Thursday, zooming in on potential winners and losers in February, alongside best ideas, conviction calls and strategy preferences.

As per always, I hope you'll enjoy it and are able to use the input to your personal advantage.

All-Weather Model Portfolio

On occasion, we receive questions about the All-Weather Model Portfolio and it's probably but a fair assessment we can do a better job with updating and communicating all things relating to the portfolio.

The performance last year was nothing to be sniffed at (up more than 20%) which goes to show a cautious approach to share market risks does not have to go hand-in-hand with a disappointing outcome.

Over the December-January holidays, we updated late last year's portfolio review with the key 2023 performance numbers: https://fnarena.com/index.php/2023/11/29/rudis-view-all-weather-portfolio-in-2023/

The All-Weather Model Portfolio's performance as per January 31st:



For those as yet not familiar: the All-Weather Model Portfolio is run in the form of self-managed accounts (SMAs) on the Dash financial platform in cooperation with Queensland-based Vested Equities. Stock selections are based upon my personal research into all-weather performers on the ASX.

Paying subscribers have 24/7 access to a dedicated section: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Note: the All-Weather Model Portfolio does not own all stocks mentioned, but only circa 20 of them. Most inclusions are kept for elongated periods (as it should given the nature of the companies involved).

Rudi Unplugged

One new initiative this year will be your chance to ask questions ahead of online video recordings during which I shall answer as many questions as possible.

The idea has been suggested a number of times by subscribers and we're finally ready to execute on it.

We should see the first Rudi Unplugged video session in mid-March, after the dust has settled for the February results season. So keep your note blocks ready!

I shall remind you in time.

February Trepidation

Every reporting season has its own background and characteristics and this year's investor dilemma yet again consists of positive sentiment led by general belief interest rates and bond yields will fall this year.

This is a positive for equities generally, but economies and corporate profits are not in an upgrade cycle just yet.

Some three months ago, global equities looked relatively "cheap" but a double-digit percentage rally into late January without much of an uptick in earnings forecasts has pushed up price-earnings multiples above longer-term averages, and that's usually when the investor community starts getting cold feet.

We have been here before. Both February and August last year had been preceded by firm rallies, only for share prices to deflate again when corporate profits did not justify the multiples at which markets were trading.

Maybe it's no coincidence local share market moves have become noticeably more volatile in February?

The past five trading days each have seen the ASX200 move by 0.90% or more, of which only two sessions in positive direction. The problem with macro-inspired market rallies is that, eventually, company fundamentals need to catch up, or else the share price will (by weakening).

Aussie Banks

Probably the best way to illustrate this month's investor dilemma is through the major banks in Australia.

Operationally, the banks are still in pain with margin pressure continuing to weigh on cash profits. Consensus forecasts are anticipating falling EPS numbers in combination with static dividend payouts, yet the banks are on a roll because of RBA rate cuts that haven't arrived as yet.

The "banks are expensive" is a commonly heard phrase these days. Investors need not look any further than CommBank ((CBA)) whose share price briefly touched $118 on Wednesday last week, more than 20% above FNArena's consensus price target of $91.86.

Does CommBank truly deserve to be the world's most highly valued mortgage lender?

For good measure: shareholders need not be concerned about the shares needing a reset of at least -20% in order to become good value again. What those who value CommBank shares in isolation always miss out on is the sector premium the local leader commands versus its lower-quality peers.

In other words: CommBank shares trade relative to share prices of National Australia Bank ((NAB)), ANZ Bank ((ANZ)) and Westpac ((WBC)), and always at a premium. Understanding CBA means one has to look at its share price through the lens of that relative sector premium.

If we look at share prices of the other three, we see all are currently trading above consensus target. The smallest valuation premium is presently granted to ANZ Bank shares which are only trading 2.4% above the average target set by six brokers monitored daily by FNArena.

This set-up suggests at face value there's more downside risk hiding in that "expensive" looking CBA share price than there is in ANZ Bank shares, but history has shown plenty of examples when the opposite occurred. As said: Australian banks tend to move in tandem, including relative premia and discounts, that form over longer periods of time.

There's a whole graveyard underneath Martin Place in Sydney of sector analysts that have predicted the demise of CommBank shares and their persistent sector premium. At the same time, the current premium vis-a-vis the rest of the sector seems well above average, suggesting this time there may well be less downside in ANZ Bank & Co if/when the next downward move arrives.

For many years I used the Big Four banks in Australia as the obvious measure for investor sentiment generally. With all four share prices above consensus, take it from me, market sentiment is running 'hot'. But hey, that's what happens when we all start buying shares on the prospect of interest rate cuts later in the year.

It should therefore not surprise, shares in BHP Group ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Macquarie Group ((MQG)), Aristocrat Leisure ((ALL)), and numerous others are all trading around or above targets. If you're not a member of the Eternal Bulls Club, it's fairly natural to feel a little bit uneasy when looking at the local share market set-up today.

But it's equally important to understand that PE ratios, and the forecasts on which they are based, are not a static concept. And reporting season, even if it entails mostly half-yearly updates in Australia, will offer plenty of 'beats' and 'misses' that subsequently trigger upgrades and downgrades to forecasts (and thus to valuations).

Another consideration to make is whether a little bit of weakness is such a bad thing after what has been another stellar few months. I am making the point because on my observation, which spans multiple years, those companies that are truly great quality achievers tend not to fall as deeply as others. They tend to recover from weakness more quickly too.

The risk you run as an investor who's too eager to sell out and secure profits at the top, is that any subsequent weakness remains rather benign, thus creating an automatic barrier to get back on board, with the share price quickly running away.

The likes of REA Group ((REA)) tend to weaken post the release of financials, in particular when shares rally in the lead-up. But look again twelve months later, and the price is yet again a lot higher.

Selling high and buying low turns out a lot more difficult when you're not concentrating on low quality, small cap explorers and developers.

Laggards Are Back

Late last year I suggested healthcare and REITs looked destined for a come-back, and the past three months have not disappointed. ResMed ((RMD)) shares have been the best performer in the All-Weather Model Portfolio, and CSL ((CSL)) -whatdayaknow- has already revisited the $300-plus region.

Contrary to the names mentioned earlier, both share prices are still well-below consensus targets and with ongoing potential for positive newsflow in 2024, I'm not even thinking about securing profits at this stage.

For my updated thoughts on ResMed, read the story I published on January 31 (see bottom today's story).

The best description I came across is from analysts at Wilsons who described what has happened in between last August and the release of December quarter financials by the company as "irrational fear of the improbable".

Those curious about what a potential positive outcome from CSL's AEGIS-II Phase III trial can do to the share price, read my Rudi's View story from January 24: https://fnarena.com/index.php/2024/01/24/rudis-view-healthcare-reits-uranium-banks/

The resurgence of both healthcare stalwarts does highlight an important question for investors: is 2024 the year to own last year's laggards? If the answer is 'yes', it also reflects positively on REITS, on small and mid-cap stocks, on most commodities, and on Emerging Markets.

I am inclined to think this year's come-backs won't be a universal move and it's probably wise to remain selective.

I note, for example, there are still significant question marks surrounding pathology and radiology services providers. This suggests it may yet be too early to get overly excited about what a company such as Sonic Healthcare ((SHL)) can achieve in the short term.

Investors are being reminded time and again not all healthcare companies are made from the same cloth. For every long-term success story through Pro Medicus ((PME)), Cochlear ((COH)), ResMed and CSL there are many more disappointments through Ramsay Health Care ((RHC)), Healius ((HLS)) and others, while prior high-flyers Nanosonics ((NAN)) and Ansell ((ANN)) continue to operate in struggle street.

The picture won't be much different for REITs, I suspect, or for smaller cap companies. The domestic economy has plenty of headwinds to deal with. Companies are still battling higher costs, be it through labour, interest rates, funding, supply chains, or otherwise. Not all sectors are impacted equally, but smaller companies tend to be more exposed, and have smaller buffers (if they have any).

Local mining services providers and contractors are mostly smaller cap companies and one question investors have on their mind is whether last year's disaster for lithium and other parts of the smaller-cap commodities space will show up in this month's market updates from companies such as Imdex ((IMD)), Emeco Holdings ((EHL)), and NRW Holdings ((NWH)).

Among REITS, it has been remarkable but Goodman Group ((GMG)), despite its outperformance and relative sector premium, has remained the sector favourite for most property sector analysts in Australia. The share price seemed to be facing a ceiling above $24 in January but more recently another leg upwards has ensued on further data centre newsflow.

In case you haven't caught up yet: Goodman Group is the most exposed ASX-listed large cap to the megatrend that is also supporting the likes of Amazon, Microsoft and Nvidia in the USA: data centres. Other local exposures include NextDC ((NXT)), Macquarie Technology ((MAQ)), Megaport ((MP1)) and smaller cap Global Data Centre Group ((GDC)).

As also reiterated in my recent interview with AusbizTV (link at bottom), megatrends remain firmly on my radar. And I am far from the only one. It is no coincidence shares in NextDC, Macquarie Technology and Global Data Centre Group are all trading at or near all-time record highs.

Goodman Group shares could be in the same boat if it weren't for the fact they were casually trading at much higher levels pre-GFC. Post near-death experience in 2008 and the subsequent rebirth into today's high quality, high achieving local sector leader, the shares are setting new record highs post GFC.

Another short-term boost may well be related to the potential inclusion of Goodman shares into the FTSE EPRA Nareit Global Real Estate Index. Following a change in eligibility criteria, Citi analysts think this year's inclusion looks like a shoe-in, potentially triggering another wave of buying from passive investors who benchmark against that index.

When it comes to dividends, always important for Australian investors, the outlook is the worst it has been since covid-impacted 2020. Banks are either expected to reduce their payout a little, or increase it by a minuscule amount. But dividends might be due for a positive surprise from iron ore producers, insurers, REITs, consumer discretionary and potentially even media companies.

For potential take-over targets, medical devices company Clarity Pharmaceuticals ((CU6)) is widely regarded a "sitting duck" waiting to be snapped up by big pharma.

Bapcor ((BAP)) seems like a franchise in deep trouble, but management departures and disappointing newsflow are no longer pushing the share price into further weakness. Investors trying to look beyond the immediate outlook to when the turnaround arrives, potentially?

It will be a feature this reporting season, no doubt, but there will also be plenty of fireworks either way. I think a smart investor is keeping a portion of his funds in cash this season, as volatility is already picking up and there will be plenty of punishments when results are released, of which at least a few will be excellent opportunities for longer-term oriented portfolios.

August last year opened up one such opportunity in WiseTech Global ((WTC)) shares, as well as in ResMed. What will it be this month?

Start preparing by drawing up your personal wish list.

Part Two will be published on the website on Thursday.

FNArena's results season monitor (with calendar): https://fnarena.com/index.php/reporting_season/

More reading:

-https://fnarena.com/index.php/2024/01/31/resmed-recovery-turns-into-hollywood-script/

-https://fnarena.com/index.php/2024/02/05/rudi-interviewed-megatrends-a-go-go/

-https://fnarena.com/index.php/2024/01/15/rudis-view-boss-energy-mineral-resources-tpg-telecom-resmed-wisetech-global/

-https://fnarena.com/index.php/2023/12/06/rudis-view-bearbull-market-to-continue-in-2024/

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 5th February, 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).