Rudi's View | Jul 05 2018
In this week's Weekly Insights (this is Part Two):
-Oil Becomes The New Defensive
-Playing The Odds
-Rudi On TV
-Rudi On Tour
By Rudi Filapek-Vandyck, Editor FNArena
This will frustrate many a value-seeking investor, but analysts at Goldman Sachs initiated coverage on the Australian healthcare sector, issuing two Buy ratings, two Neutrals, and only one Sell. Price targets for the two Buy-rated stocks -CSL ((CSL)) and ResMed ((RMD))- suggest ongoing upside potential for respective share prices to the tune of 17-18%.
Yes, you read that correctly. Goldman Sachs has initiated with a price target of $231 for CSL and a target of $16.70 for ResMed.
Supporting the buoyant perspectives for both companies is an above-average return from capital invested, with CSL still the best equipped in a sector that remains high on demand and supply-constrained. ResMed, of course, remains a leading player in a market that remains in structural growth.
The price target for Cochlear ((COH)) is $200 with the current management team still largely unproven, points out Goldman Sachs, while Fisher & Paykel Healthcare's ((FPH)) target of $13.40 is actually below the current share price. For Ramsay Health Care, the analysts agree there remain many positives but the negatives from rising costs in private health insurance and related pressure are too much to ignore.
Ramsay Health Care's price target only sits at $49, suggesting the 18-month long de-rating of the private hospital operator still has a wee bit to go.
Within this context it remains equally remarkable that analysts at Morningstar, once upon a time known as Huntley's, stoically hold on to their fair value estimate of no less than $82 for Ramsay Health Care shares, which they declare "substantially undervalued".
Morningstar continues to forecast 8% growth (CAGR) for Ramsay's Australian hospital operations over the coming five years. Increasing utilisation by over-65s supports that forecast, with the analysts highlighting this older segment of the population will grow at around 3% per annum, ahead of the general population.
Rolling out pharmacies, group purchasing cost saving initiatives, plus a healthy balance sheet (allowing for additional acquisitions) are all seen as additional positives.
Not venturing off the well-trodden healthcare path just yet, analysts at Morgan Stanley already released their previews for the sector during the August reporting season. Conclusion: ResMed, Cochlear and CSL will most likely simply continue performing irrespective of "rich valuations".
Analysts at Bell Potter have lined up their sector favourites -"Top Stock Picks"- for the financial year ahead.
Macquarie Group ((MQG)) remains the favourite in the banking sector; price target $125. Other favourite picks are Clydesdale Bank ((CYB)) and Westpac ((WBC)) with price targets of $6.30 and $31.90 respectively.
Corporate Travel Management ((CTD)) and Johns Lyng Group ((JLG)) are most preferred among industrials.
When it comes to resources, the broker's favourites are Aeon Metals ((AML)), Pantoro ltd ((PNR)), and Breaker Resources ((BRB)), with price targets of 54c, 36c, and 96c, respectively, as well as FAR ((FAR)), Metals X ((MLX)), and Xanadu Mines ((XAM)), targets: 26c, 98c, and 58c.
In the healthcare sector, Bell Potter's picks are Mesoblast ((MSB)), target $3.75, and Pharmaxis ((PXS)), target 52c, as well as Bionomics ((BNO)), target 92c, and Starpharma ((SPL)), target $1.88, Avita Medical ((AVH)), and Zenitas Healthcare ((ZNT)), target $1.49, and Elixinol ((EXL)), target $2.16.
"We currently expect the S&P/ASX 200 index to finish the year around the current level but the outlook particularly this late in a sustained business cycle, is becoming more vulnerable."
Probably not exactly what investors would like to be told, but that is the opening sentence of stockbroker Morgans' recent Australian equities strategy update. As a direct result, the broker sees limited opportunities in what it regards as a "directionless market" from here onwards.
Last week, the strategists highlighted eleven opportunities (see last week's Weekly Insights). They have now also removed Cleanaway Waste Management ((CWY)) from their select list of Conviction Buys, while adding Kina Securities ((KSL)). The latter is only covered by stockbroker Morgans as far as FNArena's knowledge goes.
Late Addition: On Wednesday, Moelis Australia initiated coverage on two locals in the residential aged care sector. While acknowledging short term the pressure on margins is not going anywhere, Moelis analysts Ronan Barratt and Brendon Kelly have adopted the view this pressure has by now been priced in.
On a medium to longer term horizon, strong structural tailwinds, favourable development funding structures, ongoing potential for opportunistic acquisitions and a more lenient government towards what should remain a viable industry are all supportive factors that will play their role in pushing share prices higher, or so the rationale goes.
Moelis has initiated Regis Healthcare ((REG)) with a Buy rating and $3.97 price target, while Estia Health ((EHE)) also received a maiden Buy rating, accompanied by $3.90 price target. With Regis Healthcare projected to remain the more profitable operator longer term, the stock starts off as the sector favourite.
And, finally, Shaw and Partners analyst Peter Zuk is convinced market sentiment is too bearish towards Stockland ((SGP)), reiterating his Buy recommendation with a slightly lowered price target of $4.70 (-4c).
Any downside to commercial property valuations should by now be well and truly in the share price, Zuk states, while occupancy remains high for the shopping malls where a shift towards more food and less apparel should translate into relatively resilient retail sales across the portfolio. It'll be up to management to prove market scepticism wrong, but Shaw and Partners suggests (firmly) the odds seem in the company's favour.
Playing The Odds
Forecasts. I have seen a few. After all, I have only been paying attention to research reports for seventeen years now. And that's just accounting for my time in Australia.
As per standard practice, when consensus predictions prove accurate, that's because they were easy forecasts. When the opposite happens, it means the forecast was corrupted by an ulterior motivation, or that he/she doesn't know what they're doing, or a combination of nefarious factors.
It's never simply because forecasting is under all circumstances subjected to various possible impacts and outcomes, and multiple factors can, and likely will, change in the course of the forecast period.
It gets worse in the share market, of course, because if/when share prices move in the opposite direction, someone is losing money. Here at FNArena we sometimes receive the abusive email, or the frustrated question, but a clear cut answer cannot always be returned. Unless it concerned Telstra, of course, but even that share price will stop falling at some point.
When investors do ask me to explain why researched opinions on a given stock can be so divergent, I usually refer to sports betting and commentators. Some of the old hand expert voices out there (pick your sport) have grown up with it, played the game for at least one third of their life, then analysed it as a coach or professional commentator and after all that, do they comfortable predict who will be the champion this year or next?
Hardly. Too many moving factors to take into account. Plus we all have our biases and preferences.
This year's World Cup in Russia is yet another case in point. I think Soccer is an ugly word, but I also realise most Australians have different connotations when they hear "football". Regardless, analysts at Macquarie had thrown in their best effort, using sophisticated modeling with lots of input and predictive power, and up until Friday their choice was clear: Spain will most likely be crowned the new world champion when the tournament ends in two weeks time.
Alas, the Spanish team has seldom looked at its best in this tournament and on the weekend it was sent home by a not so highly regarded Russian opponent. Spain joins current world champion Germany with an early exit. Nobody predicted both events, until they actually happened.
Macquarie's two other favourites are Belgium and Brazil, and they are both still in with a good chance. May the best team win, for the sport's sake, but my heart is with the Belgians. My bias, sorry.
Returning to the art of forecasting, betting agencies still have Labor clear favourite to win the next federal election while Brazil is now clear favourite in Russia, followed by France, Croatia, then Belgium and England. Does any of this provide us with any certainty on possible outcomes?
No, it doesn't. You just make sure your life isn't ruined in case of a less predictable outcome. The same goes for the share market.
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11am Skype-link to discuss broker calls
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls
Rudi On Tour
-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
(This story was written on Monday 2nd July 2018 and published on the day in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. This is Part Two).
(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: firstname.lastname@example.org or via the direct messaging system on the website).
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