Rudi's View | Dec 06 2019
Dear time-poor reader: a lifesciences conference, a stern warning, secular growth stocks and Conviction Calls
In this Rudi's View update:
-Lots Of Chutzpah In Local Lifesciences
-Day Of Reckoning Coming, Lazard Warns
-Morgan Stanley Updates On Secular Growth
-Rudi On Tour
By Rudi Filapek-Vandyck, Editor FNArena
Lots Of Chutzpah In Local Lifesciences
Corporate sponsored equities research is not everybody's cup of tea, though it has to be noted following Europe's mifid ii legislation this sponsored format of research is undeniably on the rise, including in Australia.
FNArena has a distribution agreement with Pitt Street Research, one of the up and coming on the local sponsored research scene. As it turns out, the founders of Pitt Street Research are mighty fine organisers of one day corporate conferences.
I make this observation having attended Pitt Street Research's inaugural semiconductor sector conference in May and, last week, the second conference on life sciences companies. Both events were of admirable quality and investors interested in the smaller segments of the local share market are most likely doing themselves one big favour when attending these events.
One of the surprising new insights from last week's conference is the largely unreported and underestimated importance of the life sciences industry for the Australian economy. It turns out with 232,000 employees in Australia, life sciences companies including the Big Three -CSL, Cochlear and ResMed- employ more people than either mining and telecommunication.
But the economic impact goes well beyond direct jobs creation. With over 1,000 clinical trials taking place in this country each year, the value of these trials in terms of direct investment runs beyond $1bn per annum. And, of course, more than half of the jobs in the sector are highly skilled.
As became apparent throughout the event, Australia's contribution to the world has gone well beyond blood plasma, hearing aids and breathing support.
It's a sad observation though, many of the speakers -honourable veterans in the local industry- had to make the point they are achieving no traction in Canberra when asking for more equitable and fairer R&D treatment, among many other requests.
The big challenge, or so it seems, is to retain enough of the progress and the promise that emerges every year from this sector locally, so that Australia remains inside the Top Five globally, without selling out too early to foreign suitors with deep pockets.
Or, as it happens, without having to move big chunks of investments offshore because Australian governments don't want to budge on R&D tax treatment. Cochlear, for example, is spending close to $200m on R&D next year, but only half of it is spent in Australia, because the current tax limit is set at $100m.
In terms of that one golden stock tip: investors should keep an eye out for QBiotics. Its board is stacked with ex-Cochlear veterans. The technology simply seems fabulous. The clinical results are extremely promising. To keep the company in Australia, the board has made a conscious decision not to list. Of course, one day it will seek an ASX-listing. Make sure you have some money ready then.
In terms of companies presenting their investment case at the Conference, most are still in a relatively early phase of their corporate development and experienced investors know this translates into above average volatility in the share price as well as above average risk in terms of one day turning into a profitable growth company.
Anatara Lifesciences ((ANR)) is one such early development stage promising company. It is developing non-antibiotics solutions for farm animals with gut problems, as well as an over-the-counter dietary supplement for humans. It had a set-back last year when the international licensee decided to hand the opportunity back to the company and this is reflected in a depressed share price since.
Management is confident, given enough time, 2019 will simply prove a blip in a long term success story. Finding a new partner, one that proves more serious about selling and marketing, might have a significant impact on the share price.
EMvision Medical Devices ((EMV)) listed in December last year and is proudly run by former Nanosonics CEO Ron Weinberger. The company is developing a portable head scanner with first commercial point of application near bed sides of patients who suffered a stroke. The competition reportedly offers a less practical, over-sized solution and thus the marketing opportunity seems obvious, and large.
CannPal Animal Therapeutics ((CP1)) is happy to remain inside the animal health sector, aiming to develop therapeutics for "companion animals" (dogs, cats, but also horses) from cannabis and hemp compounds. The current plan is to tackle anti-inflammation and pain relief, first for dogs (cats will have to wait their turn).
Bio-Gene Technology ((BGT)) is trying to fill the gap that is forming in the slipstream of toxic insecticides, including glyphosate (such as "Roundup"). It's part of a new sector labelled New Chemistry which aims to develop effective insecticides from natural ingredients.
It'll save the global bee population, among many other advantages. Bio-Gene's not so secret ingredient is a compound from a local species of eucalyptus. James Cook University and German giant Bayer are involved with product development and third party validation.
Three of the presenting companies have already progressed further down the corporate development route. Abundant Produce ((ABT)) is selling products every day and its CEO Tony Crimmins has personally been involved with no less than 18 IPOs over the decade past.
Abundant develops and markets plant-based over-the-counter relief products. It currently offers products for pain, psoriasis, migraine and rosacea with plenty of testimonials from happy customers on the company's website and head office walls. The United States and China are waiting to be conquered.
PharmAust ((PAA)) is a vastly different proposition. One of its two divisions, Epichem, is trading profitably which allows it to invest in the repurposing of an existing anti-parasites product for sheep. This product, Monepantel also has anti-cancer qualities.
If successful, dog owners who receive the sad news their pet has cancer will no longer have to choose between putting their canine friend to sleep or paying for expensive and excruciating radiation. The goal is an anti-cancer tablet with preventative qualities.
Osteopore ((OSX)) only listed less than three months ago and its share price has lost some steam after the initial enthusiasm. This company listed with already close to $1m in annual sales under its belt, predominantly in Asian markets.
Osteopore has successfully developed a 3D printable bioresolvable scaffold that allows bones and cartilage to regenerate, for example after surgical procedures or major accidents. Applications could also include dental adjustments. The company is developing new formats and applications while the marketing effort is focused on Europe and the USA. A deal for access into China was signed recently.
As per always: investors should know their tolerance for risk and volatility, and add their own research.
One more final tidbit: of the 2218 ASX listed entities 169 are officially classified as pharma, biotech, healthcare or lifesciences.
Pitt Street Research reports have a dedicated section on the FNArena website:
2019 is the year when equity investors went a little crazy. I am paraphrasing Warryn Robertson, portfolio manager for Lazard Asset Management in Sydney.
Lazard recently organised a media briefing during which Robertson and Aaron Binsted, portfolio manager for the Australian Equities team, argued valuing stocks at 2% bond yields will prove a recipe for disaster within the next three years.
Either earnings are going to disappoint because growth is lower or interest rates have to rise, at some point, which means bonds at 2% cannot last. Robertson predicts a painful process, in particular for the most overvalued companies.
Lazard adheres to a "value"-oriented style of investing and Robertson admitted the methodology for valuing stocks uses quite the conservative input, including US bond yields above 4%, a phenomenon last time witnessed on 1st October 2008.
Probably the most eye-catching chart shown during the presentation was a graphical ranking of all equities covered by Lazard globally showing projected expected return for the three years ahead. The graphic is very much an 80% vs 20% proposition with only a small group expected to stay positive for the period.
Those companies are the ones that have not been priced at 2% bond yields. Needless to say, the asset manager is advising investors should temper their enthusiasm and start focusing on a much more conservative, cheaper valuation-based approach. This does not automatically imply there no longer is value among growth stocks, bond proxies or quality franchises. Not by definition.
In Australia, the team likes quality resources with growth potential, including Rio Tinto ((RIO)), Woodside Petroleum ((WPL)), Whitehaven Coal ((WHC)), and Alumina ltd ((AWC)), while also some of the fast-growers that are still attractively priced, including Reliance Worldwide ((RWC)), Domino's Pizza ((DMP)) and Flight Centre ((FLT)), alongside some of the defensives with stable cash flows, including Atlas Arteria ((ALX)), Spark Infrastructure ((SKI)) and Transurban ((TCL)).
Internationally, Lazard is looking for companies with large economic moats, a stable history and a higher degree of earnings forecastability. Think Oracle, Anheuser-Bush, Visa, Costco and National Grid.
Morgan Stanley Updates On Secular Growth
Those familiar with my research into All-Weather Performers know I am not the only one trying to distinguish the vulnerable from the superb among listed companies. Morgan Stanley has a long legacy of publishing research, and investing in secular growth stocks, defined as deliverers of leading growth based on idiosyncratic strengths.
In other words, these companies should be able to deliver value for shareholders, irrespective of whether the global climate changes overnight. If you think about it, this comes pretty close to the concept of an All-Weather Performer.
The latest update, researched and published by the US team, contains 35 stocks that carry the label of Secular Growth Stocks. In alphabetical order: Alphabet, Amazon.com, Anaplan, The Blackstone Group, Coupa Software, Datadog, DexCom, Equinix, Estee Lauder, Facebook, Five Below, Incyte, Live Nation Entertainment, Lululemon Athletica, Lyft, MasterCard, MongoDB, Netflix, Nike, Palo Alto Networks, PayPal, Q2 Holdings, Salesforce.com, SBA Communications, ServiceNow, Splunk, Spotify Technology, Tenable, Tesla, Twilio, Uber Technologies, Verra Mobility, Vertex Pharmaceuticals, Visa, and Workday.
FNArena subscribers can access my research into All-Weather Performers on the Australian stock exchange via a dedicated section on the website:
Wilsons' selection of Conviction Calls has been on a tear in recent months, decisively outperforming the broader market. The latest update which measured performance data as per the end of October (why not November?) proudly states the outperformance over twelve months has been 8.11%.
Included on the list are: Bravura Solutions ((BVS)), Class ((CL1)), EML Payments ((EML)), ReadyTech ((RDY)), Whispir ((WSP)), ARB Corp ((ARB)), Ridley Corp ((RIC)), ImpediMed ((IPD)), National Veterinary Care ((NVL)), Countplus ((CUP)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Mosaic Brands ((MOZ)), Perenti Global ((PRN)), Mastermyne ((MYE)), and Whitehaven Coal ((WHC)).
Strategists at Credit Suisse, who have set their end of year 2020 target for the ASX200 at 7000 have selected the following stocks from the ASX100 to own for the year ahead: Mirvac Group ((MGR)), Beach Energy ((BPT)), Stockland ((SGP)), a2 Milk ((A2M)), Charter Hall ((CHC)), James Hardie ((JHX)), Origin Energy ((ORG)), Newcrest Mining ((NCM)), GPT ((GPT)), Dexus Property ((DXS)), Lendlease ((LLC)), Downer EDI ((DOW)), Aurizon Holdings ((AZJ)), Vicinity Centres ((VCX)), Scentre Group ((SCG)), BlueScope Steel ((BSL)), CSL ((CSL)), Goodman Group ((GMG)), ResMed ((RMD)) and BHP Group ((BHP)).
Strategists at stockbroker Morgans have published their Best Buy ideas for each sector for the year ahead. Standout opportunities, in their view, are currently Telstra ((TLS)), Treasury Wine Estates ((TWE)), and Oil Search ((OSH)).
Other Best Buy Ideas are:
-Banks: Westpac ((WBC))
-Diversified Financials: Link Administration ((LNK)), Kina Securities ((KSL)), Generation Development ((GDG))
-Industrials: Orora ((ORA)), Cleanaway Waste Management ((CWY)), PWR Holdings ((PWH))
-Healthcare: ResMed ((RMD)), Sonic Healthcare ((SHL)), Pro Medicus ((PME)), Volpara Health Technologies ((VHT))
-Telcos and IT & Software: Over the Wire ((OTW))
-Consumer Staples: none
-Consumer Discretionary: Lovisa Holdings ((LOV)), Baby Bunting ((BBN)), Super Retail Group ((SUL))
-Resources: OZ Minerals ((OZL)), Orocobre ((ORE)), Red 5 ((RED))
-Energy: Woodside Petroleum ((WPL)), Cooper Energy ((COE))
-Online Media: Iress ((IRE)), Frontier Digital ((FDV))
-Property: Aventus Group ((AVN)), APN Convenience Retail REIT ((AQR)), Viva Energy REIT ((VVR))
While reading through various 2020 Outlook reports published by Morgan Stanley these past few weeks, I picked up that the three most preferred large cap stocks in Australia are Aristocrat Leisure ((ALL)), Sydney Airport ((SYD)), and Macquarie ((MQG)).
Investors should note Morgan Stanley still does not like Australian banks, or Telstra.
And finally, Model Portfolio strategists at UBS have retained their highest preference for CSL, REA Group ((REA)) and Altium ((ALU)), while the three least preferred are InvoCare ((IVC)), Sims Metal Management ((SGM)), and IOOF Holdings ((IFL)). They still do not like retail REITs at UBS.
This is my final update for 2019. I hope you all enjoyed reading my weekly updates as much as I enjoyed researching and writing them. I'll be back in action in January next year. Enjoy the festivities. Don't overdo it. Until next year.
Rudi On Tour In 2020:
-ASA Hunter Region, near Newcastle, May 25
(This story was written on Thursday 5th December 2019. It was published the following day 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: email@example.com or via the direct messaging system on the website).
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