Rudi’s View: CSL, The Answers

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 01 2021

In Weekly Insights this week:

-CSL, The Answers
-Research To Download

CSL, The Answers

By Rudi Filapek-Vandyck, Editor FNArena

Since listing in June 1994, the performance of CSL ((CSL)) has been nothing but spectacular, with the stock ultimately growing into the ASX200's largest constituent, beating the far more familiar household names of CommBank and BHP Billiton.

It took the better part of the past 2.5 decades, but Australian investors eventually warmed to Australia's largest and most successful biotech company, even though it never offered a genuine "yield" to get excited about and the valuation never looked "cheap".

But CSL performed when others couldn't, and it kept on simply doing that, until the global pandemic and calendar year 2020 arrived.

Just when it seemed nothing could ever possibly go wrong for Australia's number one business success story, it somehow did.

While the Australian share market has enjoyed one of the strongest bull markets in living memory, the CSL share price has sagged, clocking up its worst relative performance since the IPO 26 years ago.

Below is an attempt to explain the "why" behind this remarkable turn of events. More than a simple company-specific expose, it might as well be treated as an informative and educational vivisection of the share market in general, and the past twelve months specifically.

Answer #1: No More Buyers Left

Can an investment ever become too popular?

In overseas markets, particularly in the US, teams of quant analysts are regularly sifting through fund manager statements, drawing up rankings for popular ownerships in an attempt to determine which stocks are over-loved and which ones are temporarily under-owned. Such insights might prove pivotal when exploring the next trading opportunity.

The situation of CSL in Australia is somewhat different.

For most of its ASX-listed existence, the stock did not feature prominently on many active funds managers' radar. Too expensive, would be the standard response for a long while, in particular during the years of Commodities Super Cycle and strong outperformance from the Big Four major banks.

And frankly, CSL as the topic of conversation among retail investors was simply non-existent. No yield. A high valuation. A complex science and investment-based business model. Predominantly active in overseas markets.

Who in their right mind would possibly invest in it?

Meanwhile, CSL shares kept on rising through the local rankings. Member of the ASX200. Then followed the ASX100, the ASX50, the ASX20, the Top10, the Top5.

Nothing grabs the attention of investors as much as a steady and persistent outperformance, and the fact CSL grew ever more important for the local index meant the business and its share price were consistently outperforming the broader market, in particular near the top where it counts.

On my observation, things started to change in 2016, maybe 2017. Public conversation shifted from "expensive" to "you pay up for quality" and more and more investors, both professional and retail, joined the fan club.

What helped growing enthusiasm was that CSL shares kept on keeping on. First past $100, then $200, and even $300 was not a bridge too far.

By late 2019, a local survey among investors put CSL up as a must-own stock for the second year in a row. In hindsight, it was then I started to feel a little less comfortable. But, of course, as soon as markets entered 2020 and the global pandemic hit, no such doubts seemed valid with the CSL share price, true to its form and reputation, surging as high as $339.14.

What happens when everyone is on board with a guaranteed good thing? It means there are no logical buyers left when money starts shifting elsewhere. So, when parts of the investment community started to concentrate on greener pastures elsewhere, there was no money on the sideline waiting for the opportunity to get in.

In fact, that money on the sideline last year was very much looking elsewhere because the opportunities to be had were of the once-in-a-lifetime kind, leaving early safe havens and outperformers like CSL hanging high and dry.

To answer today's first question: there most definitely is a danger with having convinced the last of the sceptics, as share prices need a marginal buyer to provide natural support.

That marginal buyer was not around, or had other interests, when the CSL share price pulled back from its all-time high last year.

Answer #2: It's All Relative

Most share market analysis focuses on company specific features (bottom up) or starts with a macro view (top down), but both omit the fact that relativity is equally important in the share market, in particular during times of extraordinary circumstances and a heavily polarised asset spectrum.

Why would an investor buy into 4% yield when 5% is still on offer? Why buy into a stagnant business when plenty of growth is around? Why hold on to a falling share price when so many others are trending upwards?

The rise of CSL's popularity stems to a large degree from the fact most old economy stalwarts on the ASX were starting to be challenged in their growth path, and many local management teams (and boards) did not have a ready-to-be-executed answer or response.

Yes, the past five years have thrown up multiple tech success stories including Afterpay, Altium and Xero (sorry, New Zealand), as well as a2 Milk (sorry again), Lovisa Holdings, and Netwealth but at the top, where most institutions allocate their funds, the Australian landscape gradually turned grey and bleak.

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