Tag Archives: All-Weather Stock

Rudi’s View: A Market Narrative Delayed

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.

In case the Fed won't even cut once in 2024, and bond yields remain higher-for-longer, the modeling suggests fair value for the index between 4900-5000.

The worst case scenario is if higher inflation forces the Fed to deliver more rate hikes. Under those dynamics, the index could well revisit 4500.

In the short term, RBC Capital market strategists stick to their view the current share market correction should remain inside the -5%-10% range, unless a wider war breaks out or the US economy falters.

The second most important input for all of these scenarios are corporate earnings. Here the observation stands most companies that have reported to date in the US have seen share prices weaken post financial update, even if earnings and sales beat expectations. This might tell us more about current sentiment and/or market positioning than it does about the earnings and company prospects.

The quarterly results season in the US is stil in its infancy, so let's wait and see what trend prevails as more results are released. Australian investors have Unibail-Rodamco-Westfield ((URW)), ResMed ((RMD)), and Newmont Corp ((NEM)) to focus on later this week.

Strategists have been warning about overheated sentiment and position crowding for a while. What we are experiencing this month is at least partially related to the unwinding of previously too popular momentum plays in the US.

Modeling The ASX

Whatever happens in the US does impact on the ASX, but the Australian market has room to move in line with its own local dynamics, in particular when worse-case scenarios don't happen.

UBS strategists last week revised their year-end target for the ASX200 to 8000, up from a prior 7660, as risks have generally switched in favour of more upside, on their assessment.

ETF provider VanEck is usually among the more positive forecasters and its latest update on the local market suggests the index may well see 8300 by year-end, on continued resilience for discretionary retailers, supported by migration, and a catch-up performance from undervalued gold miners and AREITs.

VanEck does warn, in line with just about everyone else, shares in Australian banks seem overvalued and vulnerable to a correction. Sector analysts at Citi have put all seven local banks under coverage on Sell.

In summary: uncertainty creates volatility as the previous blueprint for inflation, bonds, central bank policies and financial markets is being scrutinised more closely, and while this opens up all kinds of what ifs, it does not by default derail the narrative that has previously guided equity markets off their lows; inflation is still more likely than not trending lower, and central banks are still preparing for rate cuts.

The most likely scenario is this process will simply develop more slowly than previously hoped for.

Investors might also appreciate the fact current dynamics in the US look more like an exception/aberration while central banks in Europe and in Canada are sending clear signals they are getting ready to cut. Emerging economies have already started with the central bank of Mexico the most recent on March 21.

Here's how Michael Brown Senior, research strategist at Pepperstone formulated it on Monday:

"[...] with the policy backdrop remaining supportive, as the next move from the Fed remains almost certain to be a cut, just later than most had expected, and with the economy continuing to grow at a solid clip, the medium-term path of least resistance continues to lead to the upside, with the aforementioned 'Fed put' likely to continue to give investors confidence to seek to buy the dip, and increase exposure, particularly as geopolitics becomes less of a market driver."

Those mentioned year-end projections for indices locally and in the US also reveal why just about every institutional investor's wish list for 2024 includes a broadening of the prior narrow and concentrated rally.

For more reading:

-https://fnarena.com/index.php/2024/04/17/rudis-view-shaky-sentiment-ahead-of-corporate-updates/

-https://fnarena.com/index.php/2024/04/10/rudis-view-lessons-observations-from-asx-all-weathers/

-https://fnarena.com/index.php/2024/04/04/rudis-view-in-search-of-the-holy-grail/

-https://fnarena.com/index.php/2024/04/03/rudis-view-investor-worries-gold-westpac-and-conviction-buys/

-https://fnarena.com/index.php/2024/03/27/rudis-view-facts-fiction-about-gold/

Conviction Calls & Best Buys

Shaw and Partners Research Monitor for the June quarter shows the broker's ASX100 Large Caps Model Portfolio currently consists of the following ten members:

-Aristocrat Leisure ((ALL))
-Domino's Pizza ((DMP))
-Evolution Mining ((EVN))
-James Hardie Industries ((JHX))
-Pilbara Minerals ((PLS))
-Qantas Airways ((QAN))
-ResMed
-Suncorp Group ((SUN))
-Treasury Wine Estates ((TWE))
-Xero ((XRO))

Preferred exposures among 'emerging companies' (smaller caps) are:

-Abacus Storage King ((ASK))
-Bannerman Energy ((BMN))
-Black Cat Syndicate ((BC8))
-Global Lithium Resources ((GL1))
-Helloworld ((HLO))
-Metro Mining ((MMI))
-Retail Food Group ((RFG))
-Vista Group ((VGL))
-Tyro Payments ((TYR))
-Webjet ((WEB))

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UBS's most recent strategy update revealed the broker has adopted a higher-for-longer view on inflation and bond yields, and this has triggered a number of changes for the Model Portfolio and Best Stock Ideas.

In short, UBS has reduced exposure to REITs, infrastructure and technology -all are victims when bond yields rise instead of falling- while increasing its liking of the energy sector; a prime cause of inflation.

Scentre Group ((SCG)) has been added to UBS's selection of Least Preferred stocks on the ASX. The shopping mall owner has joined the ASX ((ASX)), Bega Cheese ((BGA)), Bank of Queensland ((BOQ)), CommBank ((CBA)), Cochlear ((COH)), Domain Holdings Australia ((DHG)), Super Retail ((SUL)), and Vicinity Centres ((VCX)).

The list of Most Preferred stocks has been extended through the inclusions of BlueScope Steel ((BSL)), Santos ((STO)), Suncorp Group, and Treasury Wine Estates. Have been removed from the list: Transurban ((TCL)), Universal Store ((UNI)), Webjet, and WiseTech Global ((WTC)).

Remain selected as UBS's Most Preferred stocks on the ASX:

Among Resources:

-AGL Energy ((AGL))
-Orica ((ORI))
-Origin Energy ((ORG))
-Rio Tinto ((RIO))

Among Financials:

-AUB Group ((AUB))
-Computershare ((CPU))
-nib Holdings ((NHF))
-QBE Insurance ((QBE))

Among Industrials:

-Coles Group ((COL))
-CSL ((CSL))
-Harvey Norman ((HVN))
-Reliance Worldwide ((RWC))
-Seek ((SEK))
-Telstra ((TLS))
-Worley ((WOR))
-Xero

Rudi Unplugged - The Video

Silly me! I ask for questions and suggestions, produce a video and then forget to include it in last week's Weekly Insights.

For those readers not yet familiar with my research: post the GFC that ended in March 2009, I started specifically researching why certain companies are better in dealing with downturns and crises and eventually developed the concept of All-Weather Performers; companies that generate shareholder rewards no matter what the cycle does.

It's essentially a quest to find the highest quality growth companies in a share market that is predominantly populated by low-quality wannabes and old timers that had their glory days in the past, plus lots and lots and lots of companies for whom the cycle determines what's in store for shareholders.

The list of companies identified as All-Weathers has remained relatively stable over the past 15 years, and as one would expect, it's not an extensive selection either. From 2015 onwards I also identified the once-in-a-lifetime experience of unprecedented technological changes for societies and financial markets, which led to the addition of lists that seek to identify the highest quality companies among the up-and-comers from the new tech era.

All those lists, including a few more, are available 24/7 to paying subscribers via a dedicated section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Last week, a video update was published: https://fnarena.com/index.php/fnarena-talks/2024/04/11/rudi-unplugged-10-april-2024/

In the run up to this latest update, I had asked for questions and feedback, which features in the video. As it is the intention to not make such updates too elongated (we're all time constrained in modern days), some questions remain unanswered, including various suggestions put forward about potential new All-Weather inclusions.

Some brief format responses to some of the suggestions made:

-Data#3 ((DTL)): I view Data#3 as a reasonably well-managed typical software services provider that is enjoying the positive momentum of the technology sector worldwide. Not nearly as exceptional as has been TechnologyOne ((TNE)).

-JB Hi-Fi ((JBH)): Retailing can be extremely cyclical which can upset even the best in the sector, which is why my list of All-Weathers does not include any pure retailing companies. JB Hi-Fi, it has to be said, is one of the best in the sector, and not necessarily only in comparison with local peers. Quality counts when it comes to long-term investing.

-Infratil ((IFT)): An important component of being selected as an All-Weather Performer is an indisputable track record. Many companies can have a number of years of positive performances, but can they last the equivalent of a corporate marathon? I think Infratil's track record falls well short, even though the share price graph is suggesting otherwise. I concede: I have not given Infratil much attention to date, given it's NZ-headquartered and listed and trades on ultra-low volumes on the ASX.

-Light & Wonder ((LNW)): The new kid on the block in Australian gaming has won a lot of hearts and minds over the past twelve months or so, but let's first find out what the longer term holds. On average, businesses do enjoy a period of positive momentum, in particular after restructuring and new management, but to become a true All-Weather that track record has to span over many more years. The local sector leader, Aristocrat Leisure, has been performing for over ten years now and I still haven't included it as an All-Weather. Aristocrat has been included as a 'Prime Growth Story' and that track record looks poised for many more years of robust growth.

-Macquarie Technology ((MAQ)): The outlook for data centres is incredibly buoyant, which is why I remain of the view that the likes of NextDC ((NXT)) on the ASX remain poised for positive surprises over many more years. Unlike NextDC, Macquarie Technology is not a pure-play, but the positives are likely to dominate the more sedate telecom legacy business. I've now added this stock to my selection of 'Emerging New Business Models'. AI is going to dominate the future for all of us; investors better get on board.

-Nick Scali ((NCK)): See also JB HiFi. Nick Scali stands out as probably one of the best in the sector locally. Again: long-term portfolios will learn how to appreciate corporate quality when given enough time to prove itself.

-PWR Holdings ((PWH)): Full of promise, and it is difficult to argue against the fact management and the business have proven themselves since listing in late 2015. Thanks for reminding me. I have now added this stock to my list of 'Emerging New Business Models'.

-Reece ((REH)); I like the suggestion as this is without any doubt one of the quality names inside the home renovation segment on the ASX. Because property markets are inherently cyclical, with the recent past probably more exception than the rule, I'd be reluctant to include a quality performer such as Reece, but this company definitely deserves to be highlighted, even if it's not a true All-Weather.

-RPM Global ((RPM)): Once upon a time, Monadelphous ((MND)) was included in my very first selection of All-Weathers. Then I learned when the sector turns to dust, as the customers suffer from cyclical downturns, there's no support underneath the share price as revenues and earnings disappear in a flash. RPM Global is finally growing into its long-held promises, but an All-Weather? Unlikely.

-Sonic Healthcare ((SHL)): I've always underestimated the number four in the local healthcare sector, which is probably understandable given the quality and performances achieved by CSL, Cochlear and ResMed. Sonic is equally an international top-notch performer, though its network is more vulnerable to price pressures and consumer behaviour, while international expansion is heavily reliant on making further acquisitions. In particular the latter keeps Sonic out of my selective list.

-Brickworks ((BKW)) and Washington H. Soul Pattinson ((SOL)): I have no defence. Both should probably have been included in my selection long time ago. It's the cyclical nature of the core assets that is still guiding my personal bias today, but shareholders have only reaped rewards from staying the course. Impressive, to say the least.

The above mentioned video lasts some 20 minutes. Enjoy. For good measure: the stocks mentioned above do not feature in the video.

As per always: all feedback remains welcome.

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, 22nd April, 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).

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

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.

Technology & Innovation

My research equally tries to identify which ones among those strong performers carry that extra level of corporate quality; the ability to perform better over a prolonged period of time, potentially creating a longer-term platform that, one day, might even lead to be included into the small selection of true blue All-Weathers.

My curated lists thus also include 'Emerging New Business Models' and 'Prime Growth Stories', where I grab the chance to highlight companies such as Audinate Group ((AD8)), Hub24 ((HUB)), NextDC ((NXT)), and Pro Medicus ((PME)).

There is no guarantee that by the middle of the 2030s any of these names will still be part of one of my selections, but for the years ahead growth is slated to be strong, as it has been for a number of years already.

Let's get this straight: the positive outcome of my research post the GFC is partially derived from my quest to identify the highest quality performers on the ASX, with the other part coming from the fact I also identified the current new era of technological transformation and incorporated this in my research.

When the world transitions, so do economies and individual companies. For investors this means: embrace the change. Don't cling on to the past. Tomorrow's new future should be your oyster.

Eventually, even some of yesterday's star performers might find themselves on the wrong side of societal changes. This outcome has been on my mind constantly, and it has previously led to the removal of Ramsay Health Care ((RHC)) from the core selection, but also the removal of Bapcor ((BAP)) from the list of 'Potential All-Weathers'.

More recently, I decided more changes needed to be made. I have thus created a new list; 'Trusty Defensives'. I no longer believe Amcor ((AMC)) or Brambles ((BXB)) deserve to be labeled All-Weathers, but they can definitely still serve a function as a defensive holding in a long-term, diversified portfolio.

Others, including Ansell ((ANN)) and Orora ((ORA)), have been removed altogether.

One lesson I have come to appreciate over the past decade or so is that, when it comes to sustainability and reliability of growth, company size matters. Smaller-cap companies are less robust in general terms because their operations are smaller.

The one obvious exception to this rule remains bull bar manufacturer ARB Corp ((ARB)) whose market capitalisation of only $3.25bn truly stands out against CSL's $135bn or Macquarie Group's ((MQG)) $74bn, or even in comparison to TechOne's ((TNE)) $5bn market cap, but maybe this simply shows how truly exceptional this decade-plus-long achiever is?

Gold & Dividends

All investing is ruled by narratives, rightly or wrongly, and I believe a portfolio portion should be reserved for gold. I also believe every portfolio deserves to have a section dedicated to income. In the share market, investing for income usually translates to buying weaker, lower-quality, more vulnerable stocks.

This is because the available yield is equally determined by the PE multiple a stock is trading on, and robust, strong, quality growers tend not to trade on low PE multiples. This section of my lists I find the hardest, it's also the selection that undergoes the most changes over time.

This is also a specific part of the portfolio that allows for specific, well-timed opportunities. In early 2021, Telstra ((TLS)) shares were trading a smidgen above $3 with the promise of asset sales and better industry conditions ahead. The inclusion of Telstra has been a profitable decision, but ownership of the shares remains under review.

Even though dividends seem poised for further increases in the years ahead, we shall not hesitate when we spot a better opportunity that offers more corporate quality and the promise of better and steadier growth.

Last year, we also jumped on Dicker Data ((DDR)) and HomeCo Daily Needs REIT ((HDN)). The latter's performance remains leveraged to future interest rate cuts and a fall in bond yields. Dicker Data's attractive yield, on the other hand, has shrunk as the share price has rallied post September.

Dicker Data has now been added to the list of 'Emerging New Business Models' because the operational momentum from megatrends including AI and cybersecurity is tangible and real, as also experienced by Goodman Group ((GMG)) and NextDC, and this should support Dicker Data's outlook for the years ahead.

Active Portfolio Management

When it comes to managing the All-Weather Model Portfolio, I remain of the view that limiting losses, if possible, remains an important feature of active management. The first nine years have only witnessed negative returns in 2022 when by June 30th the portfolio remained -2.59% in the red and by December 31st the losses had accumulated to -7.51%.

It was the global reset in bond yields that determined the direction of equities that year, in particular the higher-valued quality and growth stocks. The All-Weather Portfolio significantly increased its allocation to cash and gold that year and by doing so limited the losses that occurred.

While that decision also meant part of the subsequent upside was never included, the hard cold fact remains that a higher starting point implies better returns medium term. This too has contributed to the positive averages reported above.

Possibly the most important experiences and conclusions drawn from the past nine years include:

-a low PE does not equal great opportunity, while a high PE does not by default scupper further upside

-quality never trades cheaply and is equally never understood by your typical value-seeker

-using one universal valuation metric across all companies listed is, simply put, not very smart

-valuation is not a static concept; what looks 'expensive' right now can still be a bargain further out

-great companies have a tendency to surprise to the upside

-impatience is every investor's worst enemy

-know what you own, and why you own it

-investing is about growth, all the rest is second fiddle, at best

-positive share market momentum is good for the soul, but don't allow it to poison your head

-be an investor or a trader, make up your mind, don't confuse yourself

Probably the biggest challenge as an investor is to overcome one's inner resistence when attempting to get on board of some of the greatest and the best the ASX has to offer.

It takes lots of conviction, belief and experience, and that first big leap of faith, to buy into a stock that is trading at a significant premium to the majority of stocks listed on the exchange.

In my personal case, lots of reading, researching and market observations, plus a generally positive outcome from the Portfolio, certainly helped.

I also remain an avid user of the tools FNArena offers me and subscribers, and I try to use them in the most intelligent way possible by, for example, omitting the laggards when it comes to putting a price target on Goodman Group and the likes.

One harsh lesson I had to learn the disappointing way is it is much easier to be on board, and to stay on board, than to get on board.

So be careful when you decide it's time to sell. Might be better to at least keep half an allocation going (even if this means enduring more weakness short term). You might be praising your genius decision later on.

Instead of focusing on 'price' and 'cheap' valuation, I firmly believe most investors would do themselves a humongous favour by identifying first which companies are of the rarest kind. That will prove invaluable with identifying true bargain opportunities.

The All-Weather Model Portfolio considers Woolworths Group ((WOW)) a core long-term holding, and recently increased its allocation.

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

See also:

-https://fnarena.com/index.php/2024/04/04/rudis-view-in-search-of-the-holy-grail/

-https://fnarena.com/index.php/2024/03/06/rudis-view-investing-is-about-the-future/

-https://fnarena.com/index.php/2024/02/19/rudi-interviewed-ongoing-potential-in-technology-growth/

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

Conviction Calls & Best Buys

Morningstar has added insurance broker AUB Group ((AUB)) to its selection of Best Buy ideas in Australia.

The network connected to AUB is estimated to write circa 10% of all premiums written by intermediaries in Australia with Morningstar suggesting brokers are likely to increase market share as consumers are incentivised to shop around for better deals.

Remain selected:

-ASX ((ASX))
-Aurizon Holdings ((AZJ))
-Bapcor ((BAP))
-Domino's Pizza Enterprises ((DMP))
-Fineos Corp ((FCL))
-Lendlease Group ((LLC))
-Newmont Corp ((NEM))
-Pexa Group ((PXA))
-ResMed ((RMD))
-Santos ((STO))
-a2 Milk Co ((A2M))
-TPG Telecom ((TPG))
-Ventia Services Group ((VNT))

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Morgan Stanley's Australia Macro+ Focus List was last changed in early November last year.

The ten stocks included:

-Altium ((ALU))
-Aristocrat Leisure ((ALL))
-Car Group ((CAR))
-CSL ((CSL))
-Goodman Group ((GMG))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Telstra ((TLS))
-Treasury Wine Estates ((TWE))
-Woodside Energy ((WDS))

Portfolio-wise, Morgan Stanley is of the same view as just about everyone else that share prices in Australian banks have undeservedly priced in a very positive outlook for the sector on the prospect for RBA rate cuts.

Morgan Stanley's portfolio preference therefore resides with an Overweight allocation to miners and energy companies (with a preference for the latter) in combination with an Underweight exposure to the banks.

Over in the USA, Morgan Stanley market strategists have identified biotechnology stocks as a major beneficiary of Fed rate cuts.

"Assuming rates trend on a downward trajectory, new innovation delivers, and M&A continues, we see the potential for another cycle of sustained outperformance for the industry."

June Index Rebalancing

A lot can still happen, and probably will, between now and the upcoming index rebalancings by Standard & Poor's in June, but a preliminary preview by analysts at Wilsons is suggesting a number of (potentially) intriguing index changes.

South32 ((S32)) is shaping up as a strong candidate to get booted out from the ASX20, Wilsons believes, with James Hardie ((JHX)) the most likely replacement.

For the ASX50, WiseTech Global ((WTC)) stands ready to make its entrance, but which current member should go?

Wilsons finds there are no strong candidates to exit the Top50, but if one will be replaced to allow for WiseTech's addition, the onus will most likely fall upon Endeavour Group ((EDV)) to lose its inclusion.

Both Nine Entertainment ((NEC)) and Liontown Resources ((LTR)) screen as strong candidates to lose their spot inside the ASX100, alongside AMP Ltd ((AMP)), and Wilsons nominates Viva Energy ((VEA)), Paladin Resources ((PDN)) and Sandfire Resources ((SFR)) as plausible replacements.

The official cut-off of what makes a small cap company in Australia (for institutional investors) is whether a stock sits inside or outside the ASX100, but history doesn't suggest significant impacts from such changes.

More can be expected from future inclusions in the ASX200 with announcements about new inclusions and exclusions to be made on Friday, June the 7th.

Wilsons has identified Domain Holdings Australia ((DHG)) as a strong candidate to be booted out from the ASX200, with Charter Hall Social Infrastructure REIT ((CQE)) and Strike Energy ((STX)) also considered possible removals.

In their place could arrive Judo Bank ((JDO)), Codan ((CDA)) and McMillan Shakespeare ((MMS)).

The next rebalance for the ASX 300 is not until September.

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

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

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.

If we zoom out and look at the broader, longer-term perspective, we see a huge gap has opened up between US markets and the local ASX.

It happened during the 1990s, when the main drivers were technology, the internet and internet infrastructure, but it didn’t last that long. Eventually both markets converged again, and Australia outperformed for a number of years. That came to an end with the GFC.

The gap has really opened up since 2015.

Reversion To The Mean?

Observation: the gap between Australia and US markets has probably never been this wide, and it has never been witnessed for this long. It’s been going on for 16 years now, and counting.

This raises a lot of questions. As one of popular approaches in finance is to position for reversion to the mean, we should be very excited in Australia.

The local market has a lot of catching up to do and this could potentially translate into many, many years of outperformance relative to the US.

Of course, there are many ways in which this can happen. It can also mean US shares tank and we don't - and all the scenarios in between.

Interestingly, if we take a very long-term perspective of one hundred years and longer, the performances of US shares and the ASX turn out relatively similar.

Both markets are in the Global Top Three of best performing share markets longer term. It makes the current outperformance of US markets even more remarkable.

So the key question thus becomes: is it feasible we will see a reversion to the mean?

To find the answer, we need to investigate whether there is a fundamental reason as to why the US is outperforming so strongly and for so long.

If we find that fundamental reason, and it remains in place, we might need to conclude there’s no reversion to the mean on the horizon, not until underlying fundamentals change.

The Longer Term Picture

There are many different ways of investing and trying to make money from the share market.

For many people it consists of hopping on and off of stocks, buying and selling, trying to pick the troughs and peaks in share prices.

But let’s just assume, for this exercise, we like to buy and hold for longer periods of time.

Within such framework, the stock I am showing you right now is nothing but the ideal proposition.

Yes, of course, there’s the occasional bout of volatility, and there are sell-offs along the way, but ultimately the share price moves from the bottom left-hand corner on the price chart to the right hand corner near the top.

As a long-term investor, that’s what we want to see. This is the sort of stock we like to hold in our portfolio.

This is Microsoft. Maybe Microsoft is showing us why US markets are outperforming Australia?

Let’s compare, say, with one of our major index constituents. Let’s look at a long-term price chart for National Australia Bank ((NAB)).

I’d like to think if I showed both price charts to a five-year old, the conclusion would be that shares on number one are going ‘up’ and shares on number two not so much.

Hence, NAB shares over 16 years have gone through a lot of volatility, as have Microsoft shares, but, ultimately, they’ve made no real progress over that time.

Could we possibly have found the explanation for the big gap in relative performances between both markets?

At the very least, I think we have discovered something that needs to be investigated further.

Some people might say Microsoft is a technology company. And NAB is a bank. That's your explanation right there.

"The outperformance in the 1990s was simply about technology and we are repeating the same story over and again."

So, let’s stay inside the finance sector in Australia, let’s compare the banks.

I’ve gone back to the bottom of the GFC, 6^th of March 2009.

The worst performer in Australia among the Big Four is Westpac ((WBC)). If you held those shares from the absolute bottom until three weeks ago, you’d had made 4.7% per annum on average, plus dividends, and franking.

If we add dividends that’ll bring total return up to between 9-10% per annum. That’s not too bad, I think most investors would agree.

But we are measuring from the bottom of the GFC. If we measure from a later date, when share price levels were higher, that 4.7% quickly reduces towards zero. All that’s left then, on the long-term average, are the dividends and franking.

Let’s now compare with CommBank ((CBA)).

Same starting point, same length of holding period, and the average return is more than 22% per annum, ex-dividends.

The difference is enormous.

If I then broaden my perspective, and compare with Macquarie Group ((MQG)), not quite apples versus apples, but we are inside banks and financials nevertheless, the average return climbs to 68% per year. Plus dividends on top.

I guess what we are discovering here is this is not about technology versus banks.

Also, allow me to point out:

Westpac is the ‘cheapest’ of the banks. CommBank is the most ‘expensive’, not only at the end of the holding period, but CBA has been the most expensive throughout the whole 16 years.

CommBank pays the lowest yield in the sector. Westpac pays the highest yield. Macquarie sits on both accounts closer to CommBank than to Westpac.

Observation: the cheapest stock has generated the worst return. The highest yield equals the worst return.

We might be onto something important here.

Compare all four of the Big Banks in Australia and I think we all agree, the price chart for CBA looks pretty similar to that of Microsoft, while the other three don’t.

What we see is a sharp difference. What could potentially explain this?

The Quality In Businesses

From Warren Buffett’s recent homage to the late Charlie Munger: Charlie taught me it’s better to invest in wonderful companies at a reasonable price instead of in reasonable companies at a cheap price.

In my personal research, I focus on finding wonderful, great, high-quality businesses. But that’s a very contentious concept: what makes a great company while others are not?

I discovered research conducted in the US and locally by Betashares on this matter.

The central question remains the same: what have companies in common whose price chart looks similar to CBA’s, Macquarie’s, and Microsoft’s over a long period of time?

The research suggests a strong correlation exists between companies that invest and those that don’t, or only a little.

The real gap becomes evident when we compare Nasdaq companies with those in the S&P500, while removing those from the Nasdaq that are also in the S&P500.

As a percentage of sales, investments by those Nasdaq winners are absolutely massive if one also considers how large some of those companies are, like Meta, for example, or Alphabet, or Microsoft.

So… what makes a great company, according to this research, is that it invests, on average, ten times as much as others, on developing new products, on reinforcing the moats, on strengthening market share, on improving and expanding products and services, etc.

This Time Is Different

There’s a tendency in finance to joke about the four most dangerous words ever used: this time is different.

It’s usually in reference to market bubbles and share markets at all-time highs.

But I've been arguing now for a number of years that this time is different.

At the macro-level, we are still operating inside a slow growth environment, and we have been for quite a while.

And probably the key change is that we are living through an almost unprecedented time of technological advances, innovations, and changes.

I believe those dynamics polarise the market, because not every company is adept enough to catch up.

This is also what we see in the share market, where since 2015 share prices have become polarised between the Haves and the Have Nots.

In February, one observation was that companies are increasingly mentioning and referring to artificial intelligence (AI), both in the US and in Australia.

AI has the potential to further polarise economies and companies.

It’s not necessarily going to happen immediately; these are long-winded processes. But as investors with a longer-term horizon, I think this is most definitely something we should pay attention to.

In my own research, I pay attention to the concept of megatrends; trends that remain in place for a very long time. If companies are being driven by such megatrends, it means they have the wind in the sales for a very long time.

As an investor, we need to ask ourselves the question what is more important; the short-term valuation or the prospect to enjoy strong investment returns over an extended period of time?

Valuing Companies

Another element that is changing is how to value modern day businesses.

There are still people in today's share market who think they can simply put a backward-looking PE ratio on all companies, universally, and decide which ones are a good buy and which ones are not.

I say good luck with that, you are very well adjusted to the 19th century. Please, stop using backward-looking PE ratios; you're not doing yourself any favours.

Secondly, accept that valuing a company has become increasingly more sophisticated.

For those who’d like to research this aspect more, I happily refer to Aswath Damodaran, considered the Dean of valuing companies in our lifetime.

Website: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm

All-Weather Performers

I started my research into high-quality performers on the ASX after the GFC and the subsequent bear market.

In essence, I got interested in figuring out why some companies perform so much better through tough times and downturns while others drop like flies.

Since that time, my research has identified a number of All-Weather Performers in the Australian share market.

Let’s find out how some of my favourite companies compare against Microsoft & Co.

Maybe one observation to make here is that you can have US-type returns in Australia, as long as you have Microsoft-type companies in your portfolio.

And I am not referring to the technology component, but simply to the similarity on these price charts.

Conclusion

What I’ve tried to show you today is there’s a lot we don’t see when we’re focusing on the short-term, but investing is a long-term endeavour and maybe we should pay more attention to the differences in between companies and the different dynamics that rule them?

The share market consists of a small minority of exceptional performers and a large majority of mediocre wannabes.

As an investor, I am happy to stick with the minority.

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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Rudi’s View: Healthcare Under The Scanner

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.

Some analysts might remind investors when CSL acquired Seqirus (loss-making vaccines operation from Novartis) in 2015, the market was equally non-enthusiastic, at first, which allowed for positive surprise.

An investment in Australia's largest biotech, and the country's number three largest company by market cap, relies on belief management can deliver on the promised margin recovery, while integrating and growing Vifor, and grabbing opportunities elsewhere, including from Vifor's pipeline of products under development.

As is often the case in these matters, the outlook for CSL shares is now closely intertwined with investor sentiment and the general perception is the shares don't genuinely move. In other words: a catalyst is needed, some good news. Under such circumstances, patience is a virtue.

FNArena's consensus target sits at $313.40, suggesting double-digit upside if sentiment, on balance, remains supportive in the year ahead. CSL remains a cornerstone inclusion in the FNArena/Vested Equities All-Weather Model Portfolio.

Macquarie

The healthcare team at Macquarie still has CSL as its most preferred healthcare exposure, followed by ResMed ((RMD)) and Monash IVF Group ((MVF)).

The resurrection of ResMed shares has been nothing short of spectacular once the shorters' GLP-1 scaremongering was replaced with a better understanding of the risks and potential consequences further down the road for medical equipment manufacturers such as ResMed. But there's also still the ongoing struggles at key competitor Philips, which will return to the US market at some point.

Most importantly, ResMed management got the message post August results season last year, and they made certain there would be upward movement in the company's margins this time around. It worked!

The message emanating from the ResMed experience is that investors want to see tangible evidence of margin recovery three years after the covid pandemic subsided. And if enough evidence is shown, the share price gets rewarded.

ResMed remains among the favourite stocks in the sector for many analysts teams researching the sector locally.

Monash IVF enjoys a positive rating from all four brokers monitored daily by FNArena. The consensus target sits at $1.56, circa 7.8% above today's share price (on Monday).

Morgan Stanley

The healthcare team at Morgan Stanley has also nominated CSL and ResMed as the two local sector favourites.

Morgan Stanley's preference lays with the large caps in the sector, with Monash IVF the sole small cap that carries an Overweight rating, the highest possible in this broker's ratings universe.

Equally worth noting: Ebos Group is also rated Overweight.

Morgan Stanley prefers to avoid Healius and Integral Diagnostics ((IDX)) on margins and elevated labour costs.

The analysts remain skeptical about the short-term outlook for Sonic Healthcare ((SHL)), having endured a series of disappointing market updates, but are prepared to retain an Overweight rating for the shares (on a longer term horizon).

Macquarie analysts are not so kind. They have Sonic Healthcare as their second least preferred sector pick, only preceded by Cochlear (on a too elevated valuation).

UBS

Conversely, healthcare analysts at UBS include Sonic Healthcare in their Top Three sector favourites, alongside Telix Pharmaceuticals ((TLX)) and CSL.

Sonic Healthcare is not a CSL, not in the slightest, but both share a common theme: the underlying core business is performing. At some point, we can but presume, most of the negatives will be left behind in the past and the market's attention will be drawn to the positive core.

UBS has only one genuine dislike; Cochlear. This time it's not the share price. The broker sees a potential threat from a product still in development by Moderna. If the upcoming phase III trial is positive, UBS can see a similar market response as was the case with GLP-1s for both ResMed and CSL last year.

Citi

The highly regarded team of sector analysts at Citi has more dislikes than favourites, also because share prices for Cochlear and Pro Medicus are simply considered too elevated to not warrant a Sell rating.

Other Sells carry too many unanswered questions; Ebos Group, Nanosonics, and Healius.

Citi's two favourites are Australian Clinical Labs ((ACL)) and ResMed.

Wilsons

Healthcare analysts at Wilsons still like ResMed and Cochlear, but here the analysts are prepared to move into the smaller cap space in order to find additional opportunities.

Such opportunities, Wilsons believes, include Telix Pharmaceuticals, Clarity Pharmaceuticals ((CU6)), Neuren Pharmaceuticals ((NEU)), Mayne Pharma ((MYX)), Immutep ((IMM)), Percheron Therapeutics ((PER)), Nanosonics, Avita Medical ((AVH)), PolyNovo ((PNV)), and Mach7 Technologies ((M7T)).

Evans and Partners

The order of larger cap preferences at Evans and Partners is ResMed on top, followed by Cochlear, CSL, Sonic Healthcare, Fisher & Paykel Healthcare, Ramsay Health Care ((RHC)), Ansell ((ANN)), and Healius last. Among smaller caps, the favourite is Integral Diagnostics.

Private hospitals operator Ramsay Health Care ((RHC)) delivered a positive surprise in February, but post share price reset general skepticism dominates. It has been a long while since this company came out with genuinely good news, outside of asset sales to reduce the debt burden or a financial performance that wasn't as bad as feared.

Ansell is only half-healthcare, at best, and that division is still suffering from post-covid hangovers. Similar to Healius, it is no surprise management is restructuring operations.

Sigma Healthcare's ((SIG)) future is now closely linked to the (effectively) reverse take-over by major client and shareholder, Chemist Warehouse. This company is scheduled to report financials on March 21.

According to analysts' forecasts post the February results season, healthcare is one of the strongest growing segments for the years ahead, led by Pro Medicus, CSL, ResMed, and Cochlear. The sector was equally mostly disappointing in February, including through Pro Medicus and CSL.

No doubt, the latter has tempered the market's enthusiasm in the immediate aftermath. Now the big question is: can the former outperformers start performing again, or do investors have to be patient for much longer?

Almost forgot to mention: ResMed too has remained a cornerstone inclusion for the All-Weather Model Portfolio. Plus healthcare services should be among key beneficiaries of AI in the decade ahead.

February 2024; The Final Verdict

In the end, corporate releases generally proved better-than-feared, though share prices were equally supported by positive sentiment.

Hold a big carrot in front of financial markets, in this year's context: the prospect for interest rate cuts, and underlying sentiment finds it a lot easier to look beyond short-term stumbles and hiccups.

But does any of this make the February results season a "good" one, or even a "positive" one?

On CommSec's data-crunching, expenses in aggregate are growing at 6% annually while revenues only increased by 3%. This is why winners and losers throughout the month were largely defined by the management team's ability to rein in costs.

And as most management teams, three years post global pandemic, lockdowns and supply chain bottlenecks, have formed a tighter grip on operational dynamics, the bias turned towards more positive surprises. Subdued economic forecasts and low expectations beforehand also assisted companies with meeting or beating expectations.

In a season mostly defined by cost control, one would expect many metrics to show deterioration, and February truly played to that script. Back to CommSec's data: in February 81% of companies reported a profit, continuing the down-sloping trend since August 2022 and below the long-term average of 87%.

CommSec also reports this is the lowest outcome in seven consecutive reporting seasons. Aggregate profits have fallen by -35%. Less than half of all companies (49.6%) managed to grow profits versus a long-term average of 58%, but February signaled a marked improvement on the two seasons of last year.

This, naturally, weighs on available cash with total levels dropping by -25% over the year. Dividends retreated, but only by a net -2%. Of those paying out a dividend, 52% increased it, against 29% reducing their dividend and 19% holding it steady.

The ASX200 members have declared $33.9bn to be paid out in coming months, compared with $34.8bn a year earlier. More companies are still increasing their dividends, but the percentage is sliding steadily.

The market consensus forecast is for aggregate EPS to fall by -5.5% for the year to June 30th, with a positive follow-up to the tune of 4% in FY25.

A lot will hinge on economic momentum between now and then. Or maybe not. Analysts at Macquarie believe investors can be optimistic because more companies are able to keep costs under control and this should result in upgraded forecasts before the August season.

Already, on the broker's data gathering, more companies issued improved guidance in February than those who felt the need to temper expectations, with the largest contingent maintaining full year guidance. 82% of companies provided some kind of guidance, report the analysts, albeit not always quantified in numbers.

"Overall", concludes Macquarie, "the lack of major negative surprises in reporting season is probably enough to support Australian equities, so long as the cycle continues to improve and investors can look forward to Fed rate cuts and Stage 3 tax cuts in 2024."

Market analysts at Wilsons believe costs and the ability to control costs will continue defining corporate winners and losers over the coming 6-12 months.

Wilsons: "Despite cost deflation/disinflation being evident for freight and some raw materials, other key costs of doing business (CODB) line items have remained relatively sticky including wages, rent and other overheads (e.g. energy, IT expenses). A number of these CODB headwinds will remain prominent in 2H24 and FY25."

The final verdict of the FNArena Corporate Results Monitor is that 32.8% of corporate results proved better-than-expected while another 39.3% proved in line, leaving the remaining 27.9% to disappoint either through earnings, margins, forward guidance or a combination of multiple factors.

Seeing one third of result releases surprising positively is good for the soul and investor sentiment generally, for sure, but in the context of all reporting seasons we've covered since August 2013, and given expectations were low beforehand, it's not a tremendously fantastic outcome.

History shows February usually delivers more surprises than disappointments, and the number of 'beats' can run as high as 47%. February's percentage sits among the lowest from the past eleven years. The percentage of 'misses' (27.9%) is the fourth highest over that period.

CommSec's forecast is for "the Aussie sharemarket to drift through to mid-year as rate cut validation is amassed. The S&P/ASX 200 index is expected to be trading in 7,750-8,050 point range near the close of 2024."

Rudi Unplugged, In April

March is a busy month for Your Editor with presentations to CPA and the Australian Shareholders Association respectively on the 20th and 21st.

Rudi Unplugged, which intends to be an interactive communication/presentation for FNArena subscribers and enthusiasts, will thus take place in April.

I'll keep everyone in the loop; no need to hurry to send in questions and points of interests just yet (Though you can, of course).

Questions received to date relate to dividends, including APA Group ((APA)), investment opportunities, and All-Weather Performers.

Question and suggestions: editor@fnarena.com

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(This story was written on Monday, 11th March, 2023. 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).

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).

Rudi Interviewed: Megatrends A Go-Go

In late January, I participated in Tech2024, a series of expert interviews on the outlook for technology companies in the year ahead, and beyond. The video of that interview can be viewed at https://ausbiz.com.au/ (sign up and logging in is required).

In addition, I can be followed on the AusbizTV platform via https://ausbiz.co/RudiFV

Below is a curated transcript of that 13 minutes interview.

Interviewer Danielle Ecuyer: My next guest says not all tech companies are good investments, and not all beneficiaries are labeled tech. For more Rudi Filapek-Vandyck from FNArena joins me now. Rudi, it's really great to have you here. I like to ask the guests to explain what is the process that you go through for stock selection?

Rudi Filapek-Vandyck: In my case it's probably a little bit different from most other people. I like to own stocks that can be kept in portfolio for longer than next week, or next month, hopefully for the next number of years. So for me, it's very important that I look at the prospective growth of companies. And I find that more important than a cheap looking valuation in the short term.

Interviewer: Okay. So within the context of that, you published a book in 2015, which is a great book, and it certainly opened my eyes about this whole concept of megatrends, growth and technology. So just share some insights that you established then.

Rudi: I've been writing about this since 2015. And I think too many people are too busy with valuation on a micro-scale: whether a stock is cheap or not; whether interest rates go up or down; and whether markets have a correction or not; or are they in a bubble?

I think the most important message for investors today, as it was in 2015, is that we are going through a period of technological innovation that is pretty much unprecedented in history. We have, however, one potential precedent: the 1920s. What we remember about the 1920s is what happened next in the 1930s. But the 1920s itself were absolutely fabulous for equity investors.

Society changed. Innovation changes society, and that means you actually create megatrends. Megatrends are new developments in society that will support companies that are riding the wave of that trend for many, many years on end. Most industrials and other companies have a few good years but then growth peters out. If you successfully identify megatrends, and you successfully pick the quality companies inside those trends, you can keep those companies in portfolio for multiple years on end.

If people go back to 2015, they can clearly see that has been the case for more than just a few companies. Yes, shares move up and down with interest rates, currencies and because of other influences, but at the end of the day, share prices move from the bottom left corner on price charts to the top right hand corner, and that's exactly what you want as an investor.

For me, that's the type of company you want to own as a long term investor who doesn't want to switch every five minutes into a new discovery.

Interviewer: Your point about labeling is really interesting. As a classic example, people look at secular themes from the top down, like clean energy. They say, wow, this is off to the races, and they dive into an ETF and then they discover all is not necessarily rosy. Does the same thing apply with technology?

Rudi: Absolutely. We are going to look back in 10 years time, to today or to 2015, and we'll conclude why didn't we see these developments coming? Why haven't we been more exposed to this? What is happening, essentially, is the technological innovation is coming through. As a first result, the stock exchange in Australia has changed, a lot. The ASX used to be all about financials and resources, and a little bit of industrials on top. Now we have a lot more technology on the stock exchange, and those who complain we don't have technology should open their eyes.

The other thing, of course, is we get these mega-trends, because of the process I just explained, and it's not just technology companies that are benefiting from those megatrends. Another observation to make is: don't get too bogged down in labeling. Technology is fast becoming a fact of life for most companies, even those who are far, far away from what we would regard as being a technology company.

It doesn't turn these companies into technology companies. I do remember, a few years ago, we had this public discussion whether Domino's Pizza ((DMP)) was a technology company or a pizza deliverer. As it turned out, Domino's was a pizza deliverer trading on a technology company's PE ratios - it's not quite the same.

I do think it's symptomatic of what is happening: technology becomes ever more increasingly important for all businesses. If you want to have a long term investment strategy, and you incorporate mega-trends, don't get bogged down simply on a company carrying the label of technology.

One company I have owned for many, many years is NextDC ((NXT)). Officially, it's a technology stock, in practice it's not. Nevertheless, I like it because it's carried by one of the strongest megatrends in the market. Another example is Goodman Group ((GMG)). Most people would regard Goodman Group a REIT, or a property developer, which, of course, it is, but Goodman is benefiting from one of the strongest megatrends globally.

That gives you an idea you don't have to stick with the stocks that officially have a technology label. Also, biotechnology has 'technology' in its name and it too is technology. One of the industries to look at, of course, is healthcare. Many companies are labeled as healthcare, but in practice, they often are technology.

Interviewer: I think that's such an important point that you draw out and it's particularly relevant with artificial intelligence, now it is being rolled out across so many different industries. So by definition, if investors just look at the big names in AI, they may be missing a whole lot of other opportunities.

Rudi: Absolutely. At the very beginning, it means a lot of companies will have to make lots of investments. What you see in the first phase is the so called pick and shovel providers for the industry are the initial beneficiaries. Later onwards, it's going to define the winners from the losers in every single sector. So quality and the ability to invest become increasingly important.

The other thing, of course, is that while we don't have an Nvidia on the Australian stock market, if you look into the finer details there's this relatively small cap stock, Dicker Data ((DDR)), that happens to be the exclusive distributor of those chips in Australia. So we do have Nvidia on the local stock exchange.

Interviewer: Let's throw some names out there, something like Car Group ((CAR)) by way of example. People would have thought, oh, it's just an online portal to sell cars, but maybe REA Group ((REA)) and Car Group are two great examples of there's a lot more going on beneath the hood?

Rudi: I've been doing the megatrend technology approach now for quite a while. The three of Seek ((SEK)), Car Group and REA Group were always on my radar. They are the so-called previous wave of technology stocks on the ASX. What is important here is that the winner takes all and there's a flywheel effect that benefits those companies. When you are the market leader, you can do a lot more than number two and three in the same sector.

We're now coming into a new wave of technology stocks, and we have new names coming up. Nevertheless, another example is TechnologyOne ((TNE)) and that's still one of the best performers on the stock exchange.

Companies that are maturing more recently in Australia include the likes of Altium ((ALU)) and WiseTech Global ((WTC)). We also have, in the healthcare sector, Pro Medicus ((PME)). The reason why I mention those stocks is because I believe these are amongst the highest quality, best performers we have on the stock exchange.

Two things you need to remember here: if you're constantly reading the Intelligent Investor by Benjamin Graham, you will never invest in those stocks. You cannot value them on the same principles as you do with banks, resources and your traditional industrials. That's number one.

The other element is these stocks usually outperform expectations, and they have been so far. So what's the best strategy to get on board? In my view, if you own them already, by all means, don't get too bogged down about the short term and stay on board. If you don't own them, do what I do: You wait for a significant correction to come through.

For example, for reasons I won't explain here, I did no longer own shares in WiseTech Global. To my delight, last August the market sold out of the stock. Guess who was buying? I think that's the strategy investors should have. Once you're on board, you just wake up with a smile every day and worry less. I mean, yes, the 1920s ultimately ended with the 1930s, but that's a worry, I believe, we might have to revisit later on. It's little bit too early for that at this stage.

Interviewer: I asked a previous guest the same question: Do investors underestimate the strength and longevity of secular trends?

Rudi: Yes, people don't understand a megatrend makes it so much easier for a decent quality management at a decent quality company to create shareholder value, and to continue creating shareholder value over multiple years. It's very difficult for your standard company to do that. Usually, what you see in practice, is companies do it for a few years, or sometimes even less, and then growth becomes more difficult to achieve. When you have a megatrend just carrying you along, it makes the task a lot easier. And I mean: a lot easier.

But, of course, you still have to distinguish quality from the lesser quality ones because, ultimately, quality will drive you through the good times and the bad times. It's particularly in the bad times when the difference becomes very, very visible in portfolios.

Interviewer: Unfortunately, one last question: Australians love their dividends. They love their yield. It's quite bizarre there's been so much investment moving into big tech in the US that doesn't pay dividends. Investors buy it for growth. Yet, for some reason, there seems to be this mental block here in Australia. How do investors get over that hump?

Rudi: They have to realise that even with dividends -and I write about this on a regular basis- even with dividends, it still remains important that the company grows. There are plenty of examples out there of companies that pay dividends and grow and thus will trade on higher multiples and therefore not offer you the same yield as another company.

But if you keep the shares for years, you actually end up with a higher total return and often also with a higher income from dividends as well, because those dividends grow faster. There are technology stocks that pay dividends. Apple pays dividends. Microsoft does. In Australia, the likes of TechnologyOne; they do pay dividends. You just have to combine that with a not overly overpriced share price, and still with growth underneath.

Interviewer: Fantastic Rudi, as always wonderful analysis. Very insightful. Thank you so much for joining Tech 2024.

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

FNArena Subscription

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FNArena is proud about its track record and past achievements: Ten Years On

ResMed Recovery Turns Into Hollywood Script

By Rudi Filapek-Vandyck

What a difference five months can make!

In August last year, global CPAP market leader ResMed ((RMD)) released a rather uninspiring financial update, showing yet again a gross margin under continued downward pressure. Healthcare post covid was in a struggle, globally, to rid itself of the post-pandemic negatives and ResMed's market update revealed the timing of the turnaround lay even further into the future.

Soon after the initial share market punishment, hedge funds started targeting the shares in a global quest to seek out the losers from ultra-successful GLP-1 diabetes/weight loss drugs developed by Novo Nordisk and Eli Lilly. As the world woke up to the fact these modern day 'wonder drugs' promised to eradicate obesity -exact timing unknown- the ResMed share price kept falling, and falling, and falling.

What had previously looked like a volatile journey in between $30-$40 post 2021 had now become a rapid descent into the low $20s. At least one analyst suggested the board should look into pulling up stumps and distribute all the liquidity it could muster to suffering shareholders (more on that below).

ResMed, one of the best performing stocks on Wall Street and locally throughout the prior decade, had met its Waterloo. At least such was the narrative dominating opinions and debates on social media. Add technical analysis-inspired forecasts and it now was pretty much guaranteed; the race to zero had begun.

What a shame! It had looked like such a great success story for such a long time. Every journey must come to an end, eventually.

Fast forward to this week, the release of December quarter financials suggests the death of ResMed's growth story had been grossly exaggerated. ResMed's quarterly financials (the shares are listed in the USA) showed a continuation of robust growth but, most importantly, this time growing sales and services came with a notable jump in the gross margin.

The negative trend that had persisted for six quarters in succession has now been broken. Analysts have been busy remodeling a higher gross margin and what it means for the quarters/years ahead. Company management is confident the gross margin will not only not return to last year's level, but it will further improve over the years ahead.

And the share price? The price is back to where the shares were trading when hedge funds initiated their attack. Yesterday's close just under $29 galvanises a great return for those who acted against the prevailing mood that depressed the shares into the low-$20s. It's not inconceivable at least some of those relatively fresh shareholders are now thinking about securing their windfall.

The return of margin confidence has led to upgraded EPS growth forecasts (in USD) of respectively 18.4% and 21.5% for this financial year and next. FNArena's consensus price target lifted to $33 from $32.22, suggesting, all else remaining equal, there's still plenty in the tank for those who stay put.

The one key factor that had gone missing, albeit temporarily, post August last year is the global sleep and respiratory care markets are huge, and penetration by the likes of ResMed remains benign. It is estimated no less than 424m people suffer from severe sleep apnoea, another 340m people battle with asthma and another 380m with chronic obstructive pulmonary disease, or COPD, a group of long-term lung conditions.

Diagnosis levels remain low with the most-developed sleep market, the US, only having a 20% diagnosis rate. This is why a company like ResMed should continue to enjoy an elongated runway of continued growth. In response to the freshly emerged GLP-1 threat, management has countered those anti-obesity drugs actually support an increase in awareness and diagnoses, which should only prove to the benefit of CPAP providers.

Reading through analysts' updates post this weeks market update, some are toying with the idea ResMed management might be onto something here. Maybe GLP-1s and CPAP are the combination made in heaven for new patients, at least in the initial phase of treatment?

The future will tell. Meanwhile, the vast size of the opportunity that resides with obseity and all its treatments and related devices remains a significant attraction for the pharma industry so don't expect any pause in the efforts from Novo Nordisk, Eli Lilly, and their peers, to command their share. But at least the market at large has come to the understanding this is a far more complex situation, not an instant winners-take-all set up.

And yet, this is not the full extent of this saga just yet...

ResMed's major competitor, Philips of the Netherlands, is in deep struggle street. Gone are the days when Philips and Sony battled for global domination in consumer electronics. Nowadays my former colleagues in the Dutch media are publishing in depth analyses with titles such as: Where did it all go wrong?

Philips' troubles extend into its healthcare operations, including CPAP and other medical devices. Philips has not been able to sell its Respironics competing devices in the lucrative US market since 2021. Oddly enough this too has weighed on the ResMed share price as investors worried Philips upon return would possibly start price discounting in order to regain lost market share.

That prospect has yet again been dealt a blow this week with Philips and regulatory authority FDA agreeing Philips will not sell any new CPAP or BiPAP devices in the US for longer. Respironics will only service and support existing patients. Most analysts had been incorporating the Philips market re-entrance in their modeling from early 2024 onwards.

Philips' announcement coincided with the decision to slim down its suite of products and services. CPAP machines have not been abandoned, and the company continues to sell them outside of the USA, but at least one team of analysts can see a scenario of Philips simply throwing in the towel and concentrating its efforts (and future investments) elsewhere.

Under the FDA agreement, any re-entrance into the US market will be spread out over multiple years.

Before problems started that led to the recall of millions of breathing devices and ventilators three years ago, Philips/Respironics had a market share in excess of 30% in the US. Analysts now assume the market share recovery will stop at 20%. ResMed should grab, and hold on to, the majority of the share permanently lost by the troubled Dutch-based competitor.

Incidentally, there's plenty of anecdotal evidence around the reputational damage done to Respironics' competing CPAP devices is large, and potentially permanent. New patients are overwhelmingly opting for ResMed, which, given the circumstances, should surprise no-one.

Analysts thus far have been hesitant to make bold statements about what this fresh development means for ResMed's outlook. Common logic dictates it can only be a positive, at least for the quarters ahead. Any additional positive, be it through an acceleration in sales or otherwise, has not yet been incorporated in current modeling.

The obvious observation to make from the sideline is that ResMed's fortune seems to have made a 180 degree turnaround incredibly quickly. As your stock standard Hollywood script writer would say: real life is much more surprising than human imagination.

And as far as that analyst advice from last year is concerned: clearly, there's more to share market research than doing the numbers and making numerical assumptions. In-depth knowledge about a company and its industry are simply a necessity.

Investors take note.

(Plus, I am sure, there are a number of lessons to be gained from this experience).

ResMed is part of my research into All-Weather Performers on the ASX. Paying subscribers have 24/7 access to a dedicated section on the website:

https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Rudi’s View: All-Weather Portfolio In 2023

The story below was originally published in late November 2023. Performance indicators for the All-Weather Model Portfolio were drawn from preliminary estimates and have proven to be too low for the short term (2023) and too high for the post-covid years.

To set the record straight, below is the performance update as per 31 December 2023, straight from Dash (formerly WealthO2), the platform on which the portfolio is managed.

In this week's Weekly Insights:

-All-Weather Portfolio In 2023
-Conviction Calls & Best Ideas

By Rudi Filapek-Vandyck, Editor

All-Weather Portfolio In 2023

This week I am visiting Melbourne on invitation of the Big Australian, BHP Group ((BHP)), hence this week's Weekly Insights is written from an inner-city, Melbournian hotel room. It's been raining outside.

****

It's not an exaggeration to state the post-covid years have been tough on most investors, with plenty of angst and threats forcing financial markets through volatile swings and roundabouts.

At the macro level, 2021 was all about the post-pandemic recovery and whether the comeback of inflation would prove temporary, but then came 2022, and central bank tightening; it was not much fun.

That much maligned big bear market did not arrive, however, but 2023 has nevertheless still managed to disappoint most. We've seen rallies, and retreats, discussions and debates, the public arrival of AI, but ultimately this year shall be characterised by low volumes, low conviction, lots of trading and very little in sustainable gains.

At least such seems to be the experience for those investors whose main focus is on the Australian exchange.

Performances from indices and general impressions are not every investor's game, and if we dig deeper below the surface of the ASX there are plenty of positive surprises to be found.

Take the banks, for example, prime point of attention for just about everyone in Australia.

The regionals haven't performed well; luckily they pay franked dividends. Sector laggards ANZ Bank ((ANZ)) and Westpac ((WBC)) have more or less kept track with the resources heavyweights BHP Group and Rio Tinto ((RIO)) in generating between high single digit and low double digit share price appreciation for the past three years (in total, not per annum).

All have paid out above-average dividends to shareholders, no doubt yet again highlighting the importance of dividends to many an investor.

It might come as a surprise, however, share prices of National Australia Bank ((NAB)) and CommBank ((CBA)) are up circa 24% and 26% respectively since 1st January 2021. Add six half-yearly dividends and the return from the outperformers can only be described as "excellent", in particular when placed in the context of all that has happened over the past three years.

Note: CommBank shares, despite being the most "expensive" and least liked (pretty much as a standard setting) have once again crowned themselves as the best performer in the Australian banking sector. It's by no means a one-off experience.

What NAB and CBA are suggesting is that investing in the post-covid era is dominated by share market polarisation and thus investment returns are heavily influenced by which stocks in particular are included in the portfolio, and -equally important- which stocks are not.

Avoiding major disasters from a2 Milk ((A2M)), AMP Ltd ((AMP)), Bega Cheese ((BGA)), Chalice Mining ((CHN)), Cromwell Property Group ((CMW)), Healius ((HLS)), Iress ((IRE)), Lendlease ((LLC)), Link Group ((LNK)), and the likes would have gone a long way to achieving decent return from the share market, and with less headaches too.

In the same vein, those who jumped on board the momentum train for specific market segments such as oil and gas, battery minerals, and coal have equally come to appreciate the all-importance of having a timely exit strategy.

All-Weather Portfolio

The experience of the FNArena/Vested Equities All-Weather Model Portfolio pretty much mirrors that of the broader market; many portfolio constituents have been lagging, for a variety of reasons, while others have outperformed expectations.

When I recently checked the returns for 2021-2023 (up until late November), I discovered the average for 2021 and 2022 was shy of 14% while the return to date for calendar 2023 is equally below 14% post last week's general market retreat.

These numbers are better than the local index, also highlighting for investors the market is not by definition the index, and vice versa.

These numbers also prove that sticking by High Quality companies with a long-term growth trajectory that fall temporarily out of favour, think CSL ((CSL)) and ResMed ((RMD)), does not automatically translate into a disappointing outcome overall.

So which companies can be held mostly responsible for the Portfolio's return in 2023?

2023 Winners & Losers

Car Group ((CAR)), previously known as Carsales, has been an outstanding performer, even though rising bond yields in 2022 proved the obvious headwind. Participating in the capital raise earlier in the year was a no brainer.

TechnologyOne ((TNE)) has been an excellent and consistent performer too. No other constituent is able to match TechOne's consistency, but 2023 has given plenty of opportunity to shine to the likes of Aristocrat Leisure ((ALL)), Goodman Group ((GMG)), NextDC ((NXT)), even Wesfarmers ((WES)).

The decision to permanently have some exposure to gold, and to increase that exposure in 2022, has also contributed positively this year.

Equally important, when mayhem hit global markets throughout 2022, the Portfolio moved a large chunk into cash, which limited losses last year. In 2023, some of the new allocations have proved quite fortuitous, including in Dicker Data ((DDR)), HUB24 ((HUB)), REA Group ((REA)), and WiseTech Global ((WTC)).

Some of these allocations were made near the bottom of share prices in October, in line with my Weekly Insights at the time describing equities as technically over-sold and poised for a rally.

The Portfolio is not always able to time its decisions as perfectly as in October. Apart from the positive contributions to this year's performance, we're delighted to once again own a piece of some of the most robust and reliable growth stories on the ASX.

Moving to a safer cash buffer in 2022 meant we had to let go of companies we'd like to own longer term. As the saying goes: no omelet can be made without breaking some eggs. In hindsight, all we had to do was stay true to our conviction, remain disciplined along the way, and wait for market volatility to give us opportunities.

Did we have doubts along the way? Questions? Dilemmas? You bet. The end outcome is but a tiny piece of this story. Then again, we should always remain cognisant we are running a marathon, not a 60 meters indoor sprint.

Next month we'll be celebrating holidays and the start of a new calendar year, but there are no guarantees the quarters ahead will be any easier. Ask any economist, even the ones with a more rosy picture in mind, and they all are bracing for slower economic momentum ahead.

On the other hand, falling inflation and lower bond yields offer support for equities generally, all else remaining equal. As per always, none of this will move in a straight line, without any interruptions.

The most-used credo in the stock market is investors should be on the lookout for shares that are worth one dollar but that can be bought for less, maybe as low as 60c or even cheaper.

This has never been the specific strategy for the All-Weather Portfolio which on occasion is content to pay more than one dollar for shares in a company, knowing the value of the shares will increase towards $2, and even more thereafter.

The fact this upside potential has not revealed itself in the past three years has not reduced our confidence in the outlook for CSL and ResMed, or Woolworths Group ((WOW)), or Macquarie Group ((MQG)).

Among smaller cap companies, the likes of IDP Education ((IEL)) and Steadfast Group ((SDF)) have equally failed to fire up this year, without a deteriorating outlook operationally.

The next round of re-assessments will arrive with the delivery of interim and full-year financial results in February.

Meanwhile, the biggest mistake for investors to make is to assume real opportunity in the share market only presents itself in the form of a subdued PE ratio; see AMP, Iress, and the likes.

The February results season will once again prove just that.

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The All-Weather Model Portfolio is based upon my research into All-Weather Performers on the ASX.

Paying subscribers have 24/7 access to my research via a dedicated segment on the website.

The Portfolio does not own all the stocks mentioned, but cherry picks predominantly from the selections and lists available on the website.

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

More reading/recent editions:

-Quality In Stocks, What Is It Good For?

https://www.fnarena.com/index.php/2023/11/22/rudis-view-quality-in-stocks-what-is-it-good-for/

-Between Perception And Reality

https://www.fnarena.com/index.php/2023/11/15/rudis-view-between-perception-reality/

-Outlook 2024, Is History Our Guide?

https://www.fnarena.com/index.php/2023/11/08/rudis-view-outlook-2024-is-history-our-guide/

Conviction Calls & Best Ideas

Ord Minnett just released its inaugural Analysts' Conviction List, which is to be interpreted on a 12 months horizon.

The selection starts off with 10 stocks:

-Acrow Formwork and Construction Services ((ACF))
-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Lindsay Australia ((LAU))
-Ramelius Resources ((RMS))
-Sandfire Resources ((SFR))
-Waypoint REIT ((WPR))
-Webjet ((WEB))

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, 27th November, 2023. 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).

Rudi’s View: Quality In Stocks; What Is It Good For?

-Quality In Stocks; What Is It Good For?
-Conviction Calls & Best Ideas
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

Quality In Stocks; What Is It Good For?

Institutional investors and grey-haired market commentators often refer to it; Quality. But what is it exactly and does it really matter in a low volume share market that hasn't made any sustainable progress in 2.5 years?

The simplest definition is to seek out those companies that have superior qualities over the majority that can be measured through financial metrics such as gross margins (and the stability thereof), high return on equity and on capital invested, as well as managerial characteristics such as market-leading products and services, delivering on promises and execution on strategy and plans.

Some experts might take this one step further and also include something as intangible as 'corporate culture'.

Let's face it, a quality company led by quality management is not expected to issue a serious downgrade to forward guidance less than three months after reporting the business is back on track and the only way forward is through higher margins, revenues and profits, like what just happened with Integral Diagnostics ((IDX)).

Financial markets at times can be 'blessed' with a short memory, but those investors who own the shares on the basis of management's previous optimism have plenty of reasons to feel disgruntled and disappointed today.

Quality businesses also don't carry too much debt as that might impact on their operational stability and profitability. Having a strong moat helps with keeping margins stable and high.

Those who manage to continue to generate shareholder value over long periods of time know profitable investments, regularly executed, are but an essential part of the secret sauce that distinguishes the superior few from the low quality peers.

Quality companies are seldom the fastest growing in the share market, and neither will they ever be the cheapest priced, but they are usually adept in dealing with misfortune and challenges, always coming out on top given enough time.

And that, right there, at the end of the previous sentence is the biggest dilemma for today's investor: Quality does not by default distinguish itself through daily share price moves.

In the here and now, Westpac ((WBC)) shares can beat expectations and forecasts, and so can ANZ Bank ((ANZ)) and National Australia Bank ((NAB)), but their performances look pretty bleak when compared against CommBank's ((CBA)) over the past 10-20 years.

Owning Quality then becomes a matter of identifying the strong track record, trusting management at the helm, keeping the faith in their ability and qualities, and having a long-term horizon.

There's no uniform concept of what exactly is Quality, not in the share market, but it remains remarkable that whenever someone tries to identify the select few on the ASX, there's a lot of overlap with other selections and attempts.

Selections that come to mind include those released by Bell Potter, Morgan Stanley and Wilsons; selections that usually find their way into Weekly Insights when renewed or updated.

I've often remarked on the many similarities with my curated lists of All-Weather Performers in Australia (see the website and further below).

"The Best Of The Best"

One investor recently published his Quality Top20 for Australia; the best of the best available through the ASX:

-REA Group ((REA))
-Cochlear ((COH))
-TechnologyOne ((TNE))
-CSL ((CSL))
-Pro Medicus ((PME))
-Altium ((ALU))
-Wesfarmers ((WES))
-Car Group ((CAR))
-Xero ((XRO))
-CommBank
-JB Hi-Fi ((JBH))
-Pexa Group ((PXA))
-Lottery Corp ((TLC))
-ResMed ((RMD))
-Ebos Group ((EBO))
-Dicker Data ((DDR))
-ARB Corp ((ARB))
-Computershare ((CPU))
-BHP Group ((BHP))
-Seek ((SEK))

My main disagreement with that selection centres on Pexa Group, which seems to be lauded by all and sundry for its local near-monopoly in digital housing transaction settlements, but a costly and slow-going expansion into the attractive-looking UK market has eroded much of the company's halo since de-merging from the troubled Link Group ((LNK)).

Having a near-monopoly position in one market is definitely not good enough reason to be labelled High Quality. If it were, the number of companies carrying the label would be a whole lot higher.

For me personally, being part of the select few on the ASX means a company has the track record to earn inclusion, and for Pexa that is definitely not the case today.

I always think in terms of risk-adjusted returns when I shift focus to Quality and All-Weather stocks; the fact these companies have a proven track record of deliveries and success means the risk for heavy disappointment is considerably reduced.

A similar argument can be made against Lottery Corp, which was spun-off by Tabcorp ((TAH)) only in mid-2022.

Observations

The first observation to be made is a number of the selected companies are trading at or near an all-time record high, which by definition means they've achieved great rewards for loyal shareholders.

A second observation is that respective superiorities shine through when compared with similar companies over a longer period of time.

Shareholders in ARB Corp ((ARB)) might be feeling a bit let down post covid, but longer term returns still handsomely beat those from GUD Holdings ((GUD)) or Bapcor ((BAP)).

Domain Group ((DHG)) is only able to keep pace with REA Group during the boom times and while the local software services sector is welcoming a reborn Data#3 ((DTL)), it is but fair to say no company has ever come close to match the phenomenal trajectory of TechnologyOne shares on the exchange, including mini-look-alike Objective Corp ((OCL)).

Sonic Healthcare ((SHL)) is not represented in the above list but it too towers above Healius ((HLS)) -and Integral Diagnostics- in terms of quality characteristics and shareholder rewards.

And while many investors refuse to ever consider Aristocrat Leisure ((ALL)), there's simply no denying its superiority over smaller competitor Ainsworth Game Technology ((AGI)).

Aristocrat Leisure is also outperforming the international competition, which is an achievement the company shares with Altium, Car Group, Computershare, CSL, Cochlear, ResMed, and Pro Medicus.

It takes time and lots of luck and effort to become the global number one, but it takes many times over more effort, tenacity and successful execution to remain on top of the global competition.

This is why established global market leaders should be appreciated for what they are; special.

Unfortunately, as we've also witnessed with CSL and ResMed this year, Higher Quality companies are not 100% immune against the occasional disappointment or set-back. They are simply less likely to be seriously impacted by it, and mostly quicker in successfully dealing with it and recover.

Investors might want to keep this in mind now international shopping platforms Amazon and Temu are starting to make further inroads into Australian household shopping habits. A recent study has found both shopping apps are now the sixth and the first most downloaded shopping apps in Australia.

Combine this with the fact that middle and lower income Australians are under pressure to seek more value for their discretionary and non-discretionary dollars and we may well witness more pain and disappointment from those who are most vulnerable to changing spending habits in the months, if not years ahead.

Consumer Spending Is Changing: Winners vs Losers

Analysts of consumer-related stocks at Jarden have been warning for a while now the gap between winners and losers in the sector is about to widen. They've already spotted the first signals during AGM season indicating the winners may not remain completely unscathed, but the gap with the more vulnerable is likely to only widen further.

The first comparison that comes to my mind is between supermarket operators Woolworths Group ((WOW)) and Coles Group ((COL)). Too many investors still think of them as 'equals' for whom the pendulum swings favourably in alternate periods. What they are missing is that Woolworths is now the CommBank in this sector.

As it turns out, Jarden's analysis agrees with me with the latest sector update identifying Super Retail ((SUL)) and Woolworths as having the "best opportunity to re-rate via successful execution". Jarden equally appreciates Wesfarmers spending $100m on customer data, with $80m more to be spent in FY24.

It is this type of forward-looking investments that ultimately create the division between winners and losers in any sector.

Note companies including Endeavour Group ((EDV)), Accent Group ((AX1)), Coles and JB Hi-Fi ((JBH)) are equally increasing investment in data gathering and employment.

Who's Missing?

And now for the ultimate question: are there any companies that should be included in the above list instead of Pexa and Lottery Corp, and maybe even a few others?

There's always a level of subjectivity of course, and any Top10 or Top20 selection will always have its numerical limitation, but names that spring to my mind are Goodman Group ((GMG)), Macquarie Group ((MQG)) and Wisetech Global ((WTC)), alongside some of the names that had already been highlighted above.

Paying subscribers have 24/7 access to a dedicated section on the website to All-Weather Performers on the ASX, and other curated lists:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Conviction Calls & Best Ideas

Martin Crabb, CIO at Shaw and Partners:

"If we look at the last two and a half years, the market has effectively gone nowhere, but there have been opportunities to trade and add value.

"In fact the 2.5 year return to the end of October was -1.57% in price terms (versus an average of 15.7% since 1990) and 9.7% including dividends versus an average of 28.1%."

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Citi banking sector analysts in Australia:

"We think the unexpected resilience of share prices was driven by strong capital returns, supported by surprisingly benign asset quality.

"Looking forward, we expect price performance will be increasingly pressured by declining core earnings. Higher deposit and funding costs, as well as elevated cost growth are emerging as the key hazards.

"We believe the current set of PEs are not reflective of the growth and risk profile and, thus we no longer have any Buy recommendations amongst the Major Banks."

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The guardians of Wilsons' Model Portfolio have been rather negative on Australia's supermarket operators, arguing while valuations were relatively elevated, there was not enough growth on the horizon for the industry overall, while tailwinds from price inflation were reducing and operational costs are difficult to tame.

Last week they simply reiterated that view, in particular singling out Woolworths Group shares as too expensively priced in a strategy update titled Zero Appetite for the Supermarkets. No room for double-guessing the message there.

The conclusion says it all: "...given the sector’s uncompelling long-term growth outlook, we are structurally cautious the supermarkets."

Now inflation is being replaced with disinflation, Collins Foods ((CKF)) has become the favourite stock to invest in the theme.

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Franklin Templeton:

"The final mile is often the most difficult. While we hope that adage does not result in significant economic hardship in regard to the US monetary policy, we also recognize that hope is not a strategy. Investors may need to prepare for a difficult final ascent.

"Franklin Templeton says investors risk underestimating the resolve of the Fed to engineer below-trend economic growth and rising unemployment to achieve its inflation target.

"A harsher-than-expected recession is likely.

"Rate cuts will probably occur later and more gradually than is currently priced into the market."

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Morgan Stanley:

"There's too many sellers, too many buyers, making too many problems. And not much "dove" to go around.

"Can't you see this is a land of confusion?

"Lower central bank policy rates, smaller balance sheets, more sovereign bond supply, and a global economy near recession mean lower rates, stronger USD."

****

Wilsons:

"Despite calls for structurally higher inflation, the US headline consumer price index (CPI) appears to be falling as fast as it went up.

"This should provide support for both fixed interest and equity markets over the coming year.

"The past 12 months have shown that the trend improvement in inflation will not be a straight line."

"Overall, the decline in inflation is supportive for our relatively constructive fixed interest and global equity market view, and provides support to Australian equities (and bonds) despite our own stickier inflation situation and higher-for-longer cash rate expectations."

Also, from another strategy update:

"Overall, we see a mixed outlook for the local share-market, with disinflationary global trends likely providing some upside pressure, while a higher-for-longer domestic cash rate will create headwinds for the local market.

"Within our neutral view on the Australian equity market (global equities still marginally preferred), investors should focus on active portfolio management, with the local market’s heavyweight banking sector particularly likely to struggle to grow in 2024."

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Real estate sector analysts at Citi:

"Historical regression analysis suggests REITs outperformance starts 0-4 months prior to the first RBA rate cut."

Stock beneficiaries identified include:

-Residential stocks Stockland ((SGP)) and Mirvac Group ((MGR))
-Defensive retail real estate stocks BWP Trust ((BWP)), Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX)) benefitting from lower interest rates on both the consumer and the real estate loans.
-Industrial including one of our top picks Goodman Group with best in class financial and operational position.
-Higher Beta value stocks such as GPT Group ((GPT)) and Charter Hall ((CHC)) where valuations may be supportive of performance.

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Barrenjoey:

"In our view the largest commodity and equity positioning market debate is in the lithium sector.

"The 70%+ correction in prices and up to 60%+ in equities has been severe, but we don’t see enough evidence to call a market bottom.

"As always markets can over-shoot and capitalize a short-term problem. Our preference in mining is to be generally exposed to free cash generation in iron ore and now emerging in gold."

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T.Rowe Price:

"Equities are still the best place to be for the long term, but the playbook that worked for the last 10 years won’t work for the next 10. In a more uncertain environment, valuations will become even more important.

"A sensible investing approach to generating excess returns in the new regime is to balance growth and value style factor tilts, to invest in durable growth themes, to balance recession and macro risk, and to find companies with a positive catalyst for change.

"In an uncertain world, areas of investment opportunity include artificial intelligence, such as the semiconductor ecosystem and AI infrastructure, health care innovation, such as obesity drugs and bioprocessing, and residential and commercial construction.

"Artificial intelligence is a big deal, in both the boardroom and in the public’s imagination. We can all feel it – AI is going to proliferate in nearly every facet of our daily life. This unique technology has the potential to be the biggest productivity enhancer for the global economy since electricity, and we’re positioning our strategy to navigate this rapidly changing environment responsibly.

"The global market environment is now in a state of purgatory, with continued uncertainty about both inflation and recession risks as the Fed considers its next move. Stock/bond correlations are constantly shifting. Investors need to hedge their bets accordingly, taking advantage of attractive yields while choosing their stock, bond, and real asset allocations wisely."

FNArena Talks

Last week I was interviewed by Peter Switzer about share markets and a bevvy of individual companies.

That video of approximately 37 minutes is now available via Youtube: buff.ly/3usNHUG

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, 20th November, 2023. 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).

Rudi’s View: Between Perception & Reality

In this week's Weekly Insights:

-Between Perception & Reality
-Conviction Calls & Best Ideas

By Rudi Filapek-Vandyck, Editor

Between Perception & Reality

Probably the biggest surprise I have come across over the past year or so is the observation that so many investors are firm believers in the 'Market Knows All' narrative; this idea that share price moves are highly efficient, because someone out there, on the other side, hiding in obscurity, knows something you and I are as yet not privy to.

Yet most of us will specifically refer to sentiment, bullish and/or bearish, and money flows when we discuss markets generally. It's as if we have decided that trends and moves at the macro level occur through a two-way loop with human group sentiment, but at the individual stock level it all boils down to specific knowledge by those in-the-know.

Bizarre.

I've long held the belief the concept of the efficient market thesis was dreamt up by an academic who would observe and judge financial markets from afar. More than three decades of watching share prices move up and down has only galvanised my conviction.

To illustrate what's going on inside financial markets, my favourite parallel is with the Olympic games. Look to your left and you might see an athlete trained in weight lifting. The one on your right looks more like a swimmer or a future champion in gymnastics. Behind you stands a golfer and the back you see in front is that of a rugby sevens player.

The difference with the Olympics is all of you are competing in the same playing field, at the same moment, every single day. Which is why my favourite market description is:

The share market will eventually do the right thing, but not before it first has tried out all other options.

Goes without saying: we never ask further questions when the share price moves in our favour (that's our intelligence being rewarded). Plus, yes, the concept of holding on to your shares when the trend is bending south is not something we are naturally wired for.

Volatility only equals risk for the short-term trader who cannot "risk" the trend moving in the opposite direction, but coping with a falling share price triggers feelings of guilt and failure from most of us.

We have been "wrong", apparently. And the market, well, the market is always right, isn't it? Even if this means that kicking a rugby ball on the seventeenth green has prevented the golfer behind you from shooting a birdie.

In all fairness, sometimes the market is truly telling us we are wrong, at least in the here and now, while other times it is simply being silly and mercurial. And while share prices should not be front of mind constantly -all the legends in the industry tell us it should not be- our human brains are naturally wired for 'momentum', thus share prices guide our perception, our views, even our forecasts and expectations.

To paraphrase the legendary Peter Lynch: the share price of a company should be the least concern for investors, yet it attracts the most attention. Share price down means it's a bad proposition. Share price up equals great management, running a fantastic franchise, and killing it.

Let's not beat around the bush: we've all been guilty of allowing the share price to colour our mind. Most of us would pay heed to Lynch's motto: "know what you own, and why you own it", but that's so much easier when the market follows the script we have in mind.

Nice one, Rudi, I suspect some of you are thinking now, but where exactly is this leading to?

To CSL ((CSL)), of course, one of Australia's most successful business stories from the past three decades, widely regarded the benchmark for 'quality' on the ASX, also because a share price growing from $2-something to $300 and beyond will seldom, if ever, trigger anything but admiration from investors, journalists and market commentators.

CSL is high quality quality, simply because the share price tells us.

At least, such was the case until the pandemic hit in 2020 and CSL's safe haven status propelled the share price beyond $335. It later emerged blood plasma collection centres are not immune during societal lockdowns and the share price has found it difficult to stay above $300 since. More recently the shares temporarily dived below $230 for a total loss of -32% in market cap.

Now, of course, the question being asked is: is this yesterday's case study for why investors (including me) hold on too long to growth stories that, ultimately, cannot last forever?

Experiences with companies including a2 Milk ((A2M)), Appen ((APX)), Lendlease ((LLC)), and Ramsay Health Care ((RHC)), to name but a few, make asking the question all but justifiable.

And investors do hold on too long to yesterday's success stories because opinions don't change quickly, and neither do the embedded perceptions that are the foundation underneath investor views.

In most examples, and I am sure we can all come up with many more names, there's a relatively close correlation between what has happened to the share price and the undeniable deterioration inside the underlying business.

Profits, dividends and key financial metrics for Lendlease today are but a fraction of what they were many moons ago. The same observation stands for a2 Milk, Appen, Ramsay Health Care, and so many more others. Using the same label for CSL, however, looks like a stretch.

While it is true covid and the $11.7bn acquisition of Vifor have unmasked a number of vulnerabilities at the company and its operations, also weighing down a number of financial metrics, CSL's EPS is still forecast to grow this year between 13-17% in constant USD terms on a post-covid margin that is yet to bounce back, with growth poised to continue in the years thereafter.

CSL spends the equivalent of a small to mid-cap company on capex & R&D each year and the company's pipeline of products under development has seldom looked as rich in potential as it does this year. This is not my personal assessment, but of sector analysts who are invited on site tours and investor days.

At this year's investor briefings, management at CSL expressed its confidence of achieving annual double-digit earnings growth over the medium term, on lower capex, higher operational yield (increased efficiencies), lower costs, margin recovery and a number of new initiatives and products.

But also, there's no denying the company's risk profile has risen post 2020. There's more competition for some of its specialised products, through ArgenX and others, and the company had to issue a profit warning ahead of its FY23 release, if only to correct the analysts who had too easily assumed rapid margin recovery.

More recently, CSL shares were dragged down because of the risk (speculation?) that popular GLP-1 anti-obesity drugs from the likes of Novo Nordisk and Eli Lilly could potentially impact on Vifor's dialysis drugs portfolio.

When it comes to explaining the share price performance over the past three years, I am sure we all have our views and opinion. We all carry along our biases and narratives, and if we thought CSL shares were too expensive back in 2020, then that's our explanation. Others like to look at price charts and draw support and resistance lines.

There's a whole group of investors who've never liked the company or its shares, and they are highly unlikely to change their stance. Backward-looking, simple PE ratios will never turn CSL into an attractive proposition.

There's literally no purpose in me trying to address all possible narratives and views, other than pointing out maybe the answers are not to be found with CSL itself?

One of my long-standing observations is most investors and market analysts cannot get their head around the premium valuation for CommBank ((CBA)), which as every investor hopefully realises, is the only bank in Australia that has been worth owning post-GFC.

This inability is because the answer does not lay in the dividend or in the mortgage book of CBA, but in the sector premium the shares have been rewarded with over the past two decades. In other words: to properly assess the prospects and 'valuation' of CommBank, one has to compare and measure against the rest of the sector domestically.

In similar vein, CSL's lagging share price performance post 2020 might be more explained by the fact the healthcare sector over that period has turned into a market laggard - globally. The S&P500 Health Care Index, for example, peaked in mid-2021 at the level of 2015, and has been in a downsloping trend since.

This becomes extra-remarkable if one realises this index includes Eli Lilly whose shares have almost quadrupled since 2020.

There's no denying the healthcare sector has been struggling with re-discovering its pre-covid mojo, as also yet again illustrated by last week's profit warning from Integral Diagnostics ((IDX)) in Australia.

Higher costs in combination with a slower-than-anticipated revenue recovery post covid generally has proven to be somewhat of a ball and chain for many industry stalwarts.

In the USA, the Biden administration is of the intent to address extreme price gauging that makes US healthcare unaffordable for many. This cannot be great news for major pharma companies.

In addition, defensive sectors on the share market have effectively stood still or have gone backwards over the past two years. Think supermarket operators such as Woolworths Group ((WOW)), staples such as Endeavour Group ((EDV)), and local telecommunication leader Telstra ((TLS)).

Clearly, shares in CSL, that has proven to be no longer as 'superior' as it was pre-covid, have not been able to withstand the multiple pressures descending from the macro level. As investors we cannot always accurately anticipate what is likely to happen next, but it's good to keep in mind nothing is ever permanent in finance.

This too shall change, eventually.

If CSL is indeed able to achieve those double-digit annual increases in the years ahead, the share price will pick up on this, and resume its uptrend. It's the response a young Warren Buffett received from his mentor, Benjamin Graham. It's also what history shows us, with the benefit of hindsight.

It's typical for humans to live in the moment, to be impatient and draw far-reaching conclusions on the basis of recent observations and experiences. Sometimes the share price follows its own scenario, and it doesn't match what we had in mind. The task at hand, however, doesn't change because of how the share price has performed.

A period of lacklustre disappointment is nothing unusual. In fact, it happens to the best. In CSL's case, two precedents are 2001-2006, as well as 2008-2012. You didn't seriously think shares in Microsoft or in Apple have only gone up over the decades past, do you?

One of the absolute outperformers on the local exchange over the past two decades is TechnologyOne ((TNE)), which has been a staple in the FNArena/Vested Equities All-Weather Model Portfolio. While total return generated has been nothing short of phenomenal, between 2016 and mid-2018 there was literally no appetite for the stock.

Now cue all the possible reasons and explanations you can think of. Shares too expensive. Growth is poised to slow down. Foreign competitors have bigger balance sheets and more muscle. The shares don't move!

Five years later the share price has tripled and if current market speculation proves correct, management is about to announce underlying growth is accelerating, which would be a bonus indeed for a premium-valued share price already.

CSL's business is a lot more complex, and for many an investor it's too much of a challenge to properly understand its pros and cons and inner-business dynamics. Today's story is not a personal recommendation to buy or hold the shares. It's merely an invitation to re-appraise what happens on the market, and why.

If share price and fundamental prospects of a company are out of sync, they will reconnect. It's what happened to Microsoft shares in 2012 and to TechnologyOne shares in 2018.

The worst narratives investors could have taken guidance from prior to those price pivots include "the share price doesn't move" and "the shares haven't moved since..."

Sounds familiar?

This story is about the share market as much as it is about us.

Conviction Calls & Best Ideas

From a recent strategy update by T.RowePrice:

"Higher interest rates don’t necessarily take all the oxygen out of the system. The market could get excited by the prospect of productivity gains driven by artificial intelligence.

"And, as one T. Rowe Price Asset Allocation Committee member pointed out recently, ‘Sticky inflation historically has been good for earnings.’

"The high level of U.S. government debt was an important caveat.

"It is important not get too bearish. Market segments that don’t trade at nosebleed valuations, such as small and mid-cap stocks and real asset equities, look appealing on a relative basis in our view.

"And if we see a spike in volatility and a market sell-off, it may be an opportunity to buy stocks."

****

Stock pickers at Wilsons believe the time is right to add more exposure to copper, given supply constraints will eventually lead to higher pricing.

Quite a few forecasters are signalling market deficits are on the horizon for copper, though none see this as an imminent possibility given the global economy is still decelerating, and expected to continue doing so in the quarters ahead.

Possibly the top-tier ASX-listed pure exposure is Sandfire Resources ((SFR)), which has now been added to Wilsons' Most Preferred Direct Equities ideas. That portfolio, by the way, is Overweight international equities, but Neutral Australia.

Wilsons does see opportunity in high quality domestic private credit where yields on offer can rise as high as 9%-plus.

Other ideas maintained by Wilsons are Amcor ((AMC)), APA Group ((APA)), CSL ((CSL)), and ResMed ((RMD)).

****

Judging from a recent investor presentation document, Morgan Stanley's favourites among ASX-listed mining companies currently are: 29Metals ((29M)), Alumina Ltd ((AWC)), Deterra Royalties ((DRR)), Evolution Mining ((EVN)), Rio Tinto ((RIO)), Regis Resources ((RRL)), South32 ((S32)), and Whitehaven Coal ((WHC)).

****

From a strategy update by Citi:

"We have held the view that US Equities would prove more resilient relative to historical recession compares.

"The S&P 500 has experienced a rolling earnings recession, timing disparities at the sector level have masked the overall index impact.

"Should a soft landing materialize in ‘24, the stage is set for material upside to earnings growth as a Cyclicals recovery aligns with new structural tailwinds in the Growth cluster.

"This is reflected in our scenario weighted S&P 500 targets. Currently, we project:

-Year End ’23 – 4,600
-Mid Year ’24 – 5,000"

****

Morgan Stanley strategists are in the process of informing their clientele about prospects for 2024:

"For investors, 2024 should be all about threading the needle: With our baseline expectation that 2024 will see slowing growth, falling inflation, and eventually easier policy, we'd need to see the macro outlook sticking the landing across all of these to justify current valuations – many assets are already fairly priced for this benign environment.

"And the eye of the needle is smaller and narrower than usual, as is the usual case in late-cycle: Financial conditions are tight. Rate cuts generally aren't expected until later in 2024. Downside risks to global growth are high. An earnings recession is still in train.

"Bond supply continues to be a market concern. EM fundamentals face headwinds. Cross-asset correlations have not budged from extremes. Finesse will be needed to find openings in markets which can generate positive returns."

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(This story was written on Monday, 13th November, 2023. 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).

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