Rudi's View | Aug 08 2018
In this week's Weekly Insights (published in two parts):
-August Reporting Season Preview: Potential Beats & Misses
-Goldman Sachs Initiates Healthcare
-Rudi Talks - Uncomfortable Truths About Investing
-Rudi On TV
-Rudi On Tour
[Non-highlighted parts will appear in Part Two on Thursday]
August Reporting Season Preview: Potential Beats & Misses
By Rudi Filapek-Vandyck, Editor FNArena
As the wide gap in valuations between "growth" and "value" stocks continues to dominate the Australian share market, general views and opinions from stock market experts have opened up a new Grand Divide.
When exactly are we going to witness the Big Switch out of popular winners into cheap looking market laggards?
Back in January, investors had decided to cautiously take some money off the table, paring back share prices in high-flying, popular growth stocks before their interim results releases were due. But as most of them outperformed expectations, soothing general discomfort about elevated valuations, fully valued, High PE stocks turned themselves into the undisputed winners of the February reporting season.
Yet another frustrating experience for those whose mandate and mindset is restricted to buying into cheaply looking, if not beaten down, out of favour share prices. It has been a tough five years, and February did nothing to sooth the pain.
Five months later and the Grand Divide remains alive and well. Top of the Pops benchmark CSL ((CSL)) refuses to sink well below $200, and we could easily use Macquarie Group ((MQG)) -still above $120- or Cochlear ((COH)) -still above $200- as an equally fitting example, though smaller cap technology stalwarts including Altium ((ALU)), WiseTech Global ((WTC)) and Appen ((APX)) have seen the pullback everybody had been waiting for.
Time For The Big Switch?
If it were up to stockbroker Morgans, investors should divest more High PE stocks and re-allocate the proceeds into "value" stocks including mining, energy, staples, media and selected retailers. Morgans is convinced that a switch away from popular High PE stocks into forgotten about and ignored low PE stocks is but a catalyst away, and every week the switch doesn't occur is one week closer to when it will actually happen.
It is such mindset that leads Morgans to suggest that CSL is primed for failure & punishment this reporting season, a view categorically denied by multiple analysts elsewhere. Numerous sector reports in recent weeks have come out in support of owning shares in healthcare leaders CSL and ResMed ((RMD)). Analysts at Wilsons simply declared: those are the stocks investors buy high and watch them go higher.
Instead, many see a rather mixed picture among healthcare services providers and smaller cap peers. Wilsons thinks Mayne Pharma ((MYX)) is a prime candidate for disappointment. Others nominate Ramsay Health Care ((RHC)), but Cochlear is also mentioned here and there.
Index With No Fuel Left?
Whatever the detail and specifics, it appears few dare to predict this year's August reporting season will provide sufficient fuel for the ASX200 to break out to the upside. Stockbroker Morgans thinks rotation will become the defining feature, with the major index range bound as a result.
After all, the market's average PE ratio sits at just under 16x with the average for high performing, sustainably looking industrials stocks above 20x. This ain't no 2009 bottom fishing exercise, to put it mildly.
Strategists at Morgan Stanley hold the exact opposite view: share market laggards, in their view, are going to prove why they have been lagging and why their share price valuation is nowhere near the likes of ResMed and CSL. Those super-duper high quality performers, on the other hand, are most likely to perform, but less likely to significantly outperform which also means the index's upside potential remains restricted; but without the rotation Morgans is craving.
Investors should note Nanosonics ((NAN)) is also mentioned multiple times for potential disappointment this month. In stockbroker's Morgans defense, ResMed did report on Friday and the result wasn't quite what most analysts had penciled in, in particular with the stock having been nominated multiple times for its upside surprise potential. The share price has since seen weakness, though by no means to the extent of what stocks like Janus Henderson ((JHG)), Integrated Research ((IRI)) and Ardent Leisure ((AAD)) had to endure after they delivered a negative surprise recently.