Rudi's View | May 31 2018
In this week's Weekly Insights (this is Part Two):
-Value Versus Growth - The Uncomfortable Truth
-Conviction Calls (1)
-Compare The Pair: REA vs DHG
-Conviction Calls (2)
-Pressure-Points In Aussie Staff Costs
-Rudi On TV
-Rudi On Tour
-At The AIA Conference
[Note the non-highlighted items appeared in part one on the website on Wednesday]
Compare The Pair: REA vs DHG
By Rudi Filapek-Vandyck, Editor FNArena
The more I research the share market, the more I come to similar conclusions.
One of my recent pet observations is that certain stocks are trading on a higher valuation than others, simply because they are "better quality" companies. Cue Aristocrat Leisure ((ALL)) versus Ainsworth Gaming ((AGI)); Xero ((XRO)) versus MYOB ((MYO)); Ramsay Health Care ((RHC)) versus Healthscope ((HSO)), et cetera.
Under different circumstances I would also have included any of the banks versus CommBank ((CBA)), but maybe when CBA is involved in so many more scandals and mistreatments of its customers, while the share price is shedding its usual sector premium, maybe in this particular case the standard rule no longer applies?
Otherwise, and I have done the historical analysis to back this up, any relative outperformance by either ANZ Bank ((ANZ)), National Australia Bank ((NAB)), or Westpac ((WBC)), to stick with the major four, was always but a temporary phenomenon and investors have been best served by sticking with CBA over the past two decades.
In similar fashion, while short term momentum changes might well favour the lesser quality alternatives of Ainsworth, MYOB and Healthscope, to stick with the examples mentioned earlier, long term investors are most likely best off by ignoring the short term and keeping faith in the fact that time always works in favour of the better quality companies.
Take a look at long term price charts, if you don't believe me, and discover it for yourself.
The "better quality" theme featured prominently in a recent research update on online property platforms by Citi. In the local context this means REA Group ((REA)), still partially owned by News Corp ((NWS)), and Domain Holdings ((DHG)), partially spun off by Fairfax Media ((FXJ)) in mid-November last year.
At face value, REA Group shares seem quite "expensive" trading on 40x FY18 multiple and 33x FY19 consensus EPS forecast. In contrast, Domain Holdings trades on 36x FY18 estimates and on 28x FY19 consensus EPS forecast. The usual conclusion is thus that Domain Holdings is "cheaper" than REA Group, with the underlying suggestion it thus makes for a better investment option between the two.
I've said this before, and I will keep repeating it, backed up by hours of historical data research, this is not how it works.