Rudi's View | May 27 2021
This story features A2 MILK COMPANY LIMITED, and other companies. For more info SHARE ANALYSIS: A2M
This story contained a mathematical error when mailed out to subscribers late on Monday. That error has been corrected in the version below.
In this week's Weekly Insights:
-Investing In Quality & Growth; A Journey
-All-Weathers, EML Payments, Macquarie, And Risk
Investing In Quality & Growth; A Journey
By Rudi Filapek-Vandyck, Editor FNArena
Investing in Growth companies is something entirely different from trying to find true value among bombed out cyclicals, disrupted business models and misjudged disappointments.
Which is why my investment rule number one says: never ask your typical value investor for an opinion on a Growth stock.
You know the answers already. It's either too expensive. Or it won't last. Or the world has gone super-duper crazy.
But Growth stocks offer a lot more than the next investment fad or mini-market bubble. As one astute fund manager stated recently: find the right one, and you can keep them in your portfolio for the next decade, possibly longer. Along the way, fortunes are being made and lives are changing – literally.
New Zealand-based a2 Milk ((A2M)) achieved a secondary listing on the ASX in March 2015 at a price of 56c. Mid-last year the shares peaked near $20 for a return ex-dividends of no less than circa 3470%. What this means is that $10,000 spent on the first day of trading would have appreciated to $347,000 in a little over five years.
What this also means is that investors could have bought those shares in any meaningful pull back and still have made a huge return on investment. One that literally could prove life-changing.
But those earlier mentioned value investors are correct too. It couldn't last and it didn't. a2 Milk shares are today languishing around $5.50 which translates into a depreciation of approximately -72%. In less than one year. That's one big ouch!
And a2 Milk is far from the only one. Shares in artificial intelligence company Appen ((APX)) peaked below $45 in August last year. They are now changing hands at around $13.50, having recently rallied off a bottom not far above $10.
Credit-but-no-credit provider Afterpay ((APT)) still had the wind firmly in the sails in February with the shares surging well above $150. They are now struggling to hold above $90.
Not All Tech
Observation number one is that the concept of achieving a prolonged period of strong growth is by no means reserved for technology companies only.
Apart from a2 Milk, which is a marketer of dairy products by anyone's definition, the past decades have shown extended periods of uninterrupted Growth can be achieved by a wide variety of sectors and business models; from medical devices to poker machines and online gaming, to online classifieds and paper and packaging products and services, to car accessories, small electrical appliances and cheap pizzas.
And that's simply limiting my selection of successful Growth stories to the ASX where, arguably, the likes of NextDC ((NXT)), Pro Medicus ((PME)) and Xero ((XRO)) are still in a relatively early stage of what could prove to be another decade of strong growth ahead.
But how do we separate the wheat from the chaff -distinguish between truly sustainable Growth companies and temporary pretenders- and, equally important, how can we know when the tide is shifting as has happened in the case of a2 Milk, and Appen, and Kogan ((KGN)), and Blackmores ((BKL)), and Redbubble ((RBL)), and so many others?
It is here that investing in Growth companies reveals itself as being more art than science. Shares in accountancy software provider Xero have sold off twice already in 2021. First they sank from near $160 to $105 and upon releasing FY21 financials in May the share price pulled back from circa $140 to near $111.
I did not sell my shares, having reduced my exposure a little in February, but I did aggressively increase portfolio exposure during the second pullback. I never climbed on board the register of Afterpay, but if I had I most definitely would not have had the same confidence as with Xero.
One problem with emerging success stories is they sometimes capture the imagination of the crowds, and while everyone is getting excited and boasting about their exposure, the public adulation always makes me wary there's too much money flowing in that is too flighty for its own good. Someone shouts Boo! and risks setting off a stampede towards the exit.
Which is why I much more prefer achievers a la ARB Corp ((ARB)), or Breville Group ((BRG)), or Ansell ((ANN)). I hardly ever receive an enquiry about these companies, but have you checked their performances yet?
This is not to deny that Growth stocks in general can be a lot more volatile than the average stock listed on the ASX. Take the aforementioned a2 Milk for example. Whereas the share price had risen by some 3470% over as little as 5-plus years, from 2018 onwards there have been a number of serious pullbacks (-20%, -30%, -40%) that would have made many a shareholder uncomfortable on each occasion.
But also: none of these pullbacks marked the end of the uptrend that remained in place until the middle of last year. If we look back at recent history, we'll find this is quite a common feature for Growth stocks, including for ARB Corp, Breville Group and Ansell.
Such pullbacks are not necessarily always related to a company's performance. Sometimes the market simply gets in a mood to sell everything that trades on above average multiples.
See the first two months of calendar 2021, for instance, or the third quarter of 2018, or the second half of 2016.
While these significant draw-downs always attract a lot of attention from media and market commentators, with the usual explanation given that the shares were simply too expensive, it's good to realise that investors suffering heavy losses is not the sole prerogative of Growth companies.
AMP. QBE Insurance. Telstra. Unibail-Rodamco-Westfield. Not to mention your typical cyclicals such as Woodside Petroleum; they have all caused shareholders serious grief and disappointment, often with losses that are far greater and with very slim prospects of getting back to old share price levels anytime soon, if ever again.
My Personal Lessons
Us humans are not naturally well-equipped to excel in the share market. Whereas your typical value investment style often requires patience, and a lot more than many have available, investing in Growth companies scares people because of the big accidents and the huge draw downs that do occur.
The extra mental barrier comes from the general misconception that Price-Earnings (PE) multiples define whether a given stock is "cheap" (thus: opportunity) or "expensive" (thus: a disaster waiting to happen).
Simply analysing CSL ((CSL)) over the past (nearly) three decades would deliver sufficient counter-evidence of this Grand Misunderstanding, but emotions get in the way, or otherwise our personal biases, the lack of understanding, insufficient in-the-market experience, the fear of suffering losses, or the inability to look beyond the here and now.
It's never a pleasant experience to see the price of your shares falling, let alone dropping like a rock. Unless you are confident and ready to pounce with a big bag of money on the sideline, but I find such ideal scenario is rather seldom a reality.
I don't consider myself your typical Growth stocks investor either. Rather, I aim to seek out those businesses that have that something special; something that makes it worthwhile to stay on board when volatility hits the share price. I don't always get it right, and I definitely don't always respond appropriately or on time.
The portfolio I manage sold out of Appen ((APX)) above $20, which is more than -50% below last year's peak, but also more than 100% above the recent low. I was lucky I sold out of Treasury Wine Estates ((TWE)) before the Chinese import duties hit the share price. I made good money out of Nanosonics ((NAN)) which the All-Weather Portfolio currently does not own. I never anticipated that CSL shares would fall as low as $245 during the post-November pullback.
On average, I find confidence in my understanding and my insights about the companies I select, and this includes their potential weaknesses as much as their competitive prowess, their business moat, the structure of the sector and the embedded corporate quality within.
Every day I learn and I read. Newspapers. Broker research. Company statements. Corporate presentations. Strategy reports. General news. Look as much for negatives as you do for positives.
The most important lesson I can pass on is to not treat investing as a game of being perfect. This is as much about learning, including from mistakes, and finding what suits you best. In the end, if something doesn't suit you, it can never grow into a comfortable fit.
To those with diversified, long-term portfolios, or the desire to build such a portfolio, I can wholeheartedly recommend thou should not dismiss the benefits and beauty of being part of some of Australia's high-quality, pre-eminent success stories. Them being out of favour is usually not a long-winded trend, as also once again proven by the fact CSL shares are grinding their way back towards $290.
See also Conviction Calls further below.
Paying subscribers can stay on top of my research into All-Weather Performers via a dedicated section on the website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/
Here's the April update on the All-Weather Model Portfolio: https://www.fnarena.com/downloadfile.php?p=w&n=51C9C4D8-CC0D-24EC-9FE75F69E9D98B9F
Mid-year is approaching and JP Morgan is reviewing its assumptions and outlook for sectors listed on the ASX. Its healthcare update, released on Monday morning, nominates ResMed ((RMD)) as Top Pick and Nanosonics ((NAN)) as least preferred.
ResMed is chosen because of share price weakness post quarterly results release, with the new product launch of AirSense11 later in the year providing the logical next positive catalyst for the share price.
Nanosonics has fallen out of favour because it is increasingly becoming clear to JP Morgan that hospitals worldwide are cutting their spending. This shrinking of budgets, the broker worries, might slow growth for Nanosonics, even if its main device is relatively low cost.
Ongoing uncertainty about the company's new device, details unknown at this stage with potential for further delays, only adds to the broker's concerns.
Market strategists at Macquarie warn investors should be cognisant of the fact global cyclical momentum is in the process of peaking, which loosely translates as the easy gains have been made from this recovery. From here onwards, returns might still be positive, but they will be smaller and possibly harder to achieve.
Which is why Macquarie is starting to advocate investors should return to local healthcare and staples retailing. Slowing momentum usually goes hand-in-hand with reduced risk appetite, meaning a shift towards defensives. Macquarie in particular likes CSL ((CSL)), Cochlear ((COH)), Ramsay Health Care ((RHC)), and Woolworths ((WOW)).
Strategists at Wilsons are equally in favour of adding more defensive names to investment portfolios, while pointing out the Australian share market has been rallying higher for 13 months in a row without a sizeable pullback or correction.
Wilsons likes Amcor ((AMC)), Coles ((COL)) CSL, Northern Star Resources ((NST)), Medibank Private ((MPL)), Ramsay Health Care, and Telstra ((TLS)).
All-Weathers, EML Payments, Macquarie, And Risk
As communicated a few weeks ago, I am reviewing and revisiting the lists of companies that are mentioned across the various categories that are on display via the All-Weather Stocks section on the FNArena website.
For those who are reading this through the free email that goes out on Thursday; sorry, but this section is for paying subscribers only.
Historically, most of my amendments tend to focus on sub-categories such as Emerging New Business Models and Dividend Champions, which act as a complimentary add-on to the original concept of finding true All-Weather Performers such as TechnologyOne, REA Group, CSL, et cetera.
The fact that my specific choices regarding All-Weather Performers have remained largely unchanged over the past decade or so in essence solidifies the core-concept of my research. All-Weather Performers are rare, which is what makes them so valuable for long-term oriented investment strategies.
One of the changes I did make this month is adding EML Payments ((EML)) to the selection of New Business Models. This company has been one of the prime achievers among local fintech companies with many institutions and professional investors singing its praise, which is usually what happens when the share price keeps rallying towards new record highs, of course.
I was very well aware the recent change in overall strategy, whereby EML Payments is effectively moving into online banking, brings about added risks, but I also realised this could potentially be that success story that keeps on giving for many years into the future.
Almost immediately after I added EML Payments on the website, news broke the Irish central bank had communicated some reservations about the company's subsidiary in the country. The ultimate irony after I waited this long to include the stock. Just goes to show there is always a level of risk that simply cannot be forecast or anticipated.
It goes without saying, I have removed EML Payments from my selected list. Not necessarily because I no longer believe in this company's ability to shape a profitable future, but this is simply not the kind of uncertainty that belongs in my curated selections.
On a slightly related topic; investors are being treated with some of the finest investigative journalism through the Sydney Morning Herald and the Australian Financial Review this month.
The subject of investigation is the flopped IPO that has been Nuix ((NXL)) and the insights provided are best summarised with the scathing assessment of one of the sources quoted:
A pig was put on a dress and then sold to investors as being a princess.
Another insider quoted makes the bold prediction that Nuix will turn into the next AMP.
Macquarie Group ((MQG)) still owns 30% of Nuix's equity and will be held responsible for this debacle, one way or another. Which is doubly annoying because Macquarie has been a proud member of my small selection of Prime Growth Stories on the ASX.
Last year I was annoyed with myself for having sold out of the stock when economies locked up and borders and travel closed down as the share price recovered quicker than anyone can say Shemara Wikramanayake.
This time around, however, if Macquarie were still held in the All-Weather Portfolio, I might actually have decided to wave goodbye.
The stock has not been removed from my list, but I have serious reservations. Consider this the equivalent of a first strike against management and the corporate culture at the Silver Doughnut.
(This story was written on Monday 24th May, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday 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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Click to view our Glossary of Financial Terms
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: ANN - ANSELL LIMITED
For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED
For more info SHARE ANALYSIS: APX - APPEN LIMITED
For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED
For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED
For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED
For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED
For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: EML - EML PAYMENTS LIMITED
For more info SHARE ANALYSIS: KGN - KOGAN.COM LIMITED
For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED
For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED
For more info SHARE ANALYSIS: NAN - NANOSONICS LIMITED
For more info SHARE ANALYSIS: NST - NORTHERN STAR RESOURCES LIMITED
For more info SHARE ANALYSIS: NXL - NUIX LIMITED
For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED
For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED
For more info SHARE ANALYSIS: RBL - REDBUBBLE LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED