Tag Archives: All-Weather Stock

Rudi’s View: A Lesson In Quality, And Investing

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 | May 31 2023

By Rudi Filapek-Vandyck, Editor

As investors, we all like to snap up a cheap bargain. But the truth is, cheaply priced stocks tend to provide short-term, temporary pleasures, mostly, while a genuine quality gem is the gift that keeps on giving, and giving, and giving.

Investors need not look any further to find evidence of that statement than last week's interim financial report release by IT services provider TechnologyOne ((TNE)).

While the numbers and metrics were once again of the superb kind, building forth on a remarkable track record and legacy spanning close to two decades and counting, most analysts and market observers would not describe the shares as "cheaply priced".

Trading on a forward multiple of 48x times market consensus forecast for FY24 EPS (54x for FY23), it should be no surprise there is to FNArena's knowledge only one Buy rating left, from a mesmerised Wilsons, alongside an upgraded price target/valuation of $18.12.

Most targets and valuations congregate around $15-$16 while the share price since the H1 release has risen from $15.50 to $16.44 on Monday. Management at the company has stuck with its guidance for EPS growth between 10-15% but just about everyone, including management itself, believes this will prove conservative when final FY23 numbers will be released later in the year.

Already speculation is growing over how much sooner the longer-term target of achieving $500m in annual recurring revenue -still set for FY26- will be achieved. And by how much can the ARR number exceed the target by then?

Some believe $700m by FY26 is not impossible, which implies there's more upside in the share price, irrespective of today's metrics and share price gains already booked.

Herein lays the first major challenge when dealing with a perennially outperformer such as is TechOne: what kind of "valuation" is appropriate?

True Quality 'Values' Differently

If you're a religious disciple of Benjamin Graham's The Intelligent Investor, shares in TechnologyOne have probably never been on your radar.

Sure, they must have been "cheap" at some stage, the years immediately following the Nasdaq meltdown in March 2000 come to mind, but it's only fair to say the company back then was nowhere near the Quality offering we are discussing today.

Having said all of that, the returns for shareholders have been nothing short of exceptional over the past twenty years. Let's ignore for the time being that shares could have been snapped up as low as 7c a piece during the post-2000 bear market.

By early 2008, shares were trading above $1. Five years on, they reached $1.50. Five years after that, we're in 2018 now, the shares approached $5. One year ago, on the 31st of May 2022, the shares closed at $10.50. On Monday, as I write these sentences, shares are creeping up further towards $17.

With the assistance of Harry Hindsight, there's one conclusion that stands above any form of debate: when shares in TechnologyOne sell off, you buy. Preferably, you buy a lot.

If last week's interim report revealed one thing it is that this long-term growth story is still nowhere near ending. If anything, both analysts and investors laud the underlying acceleration that is taking place through customers migrating towards the Software-as-a-Service (SaaS) offering.

SaaS literally creates a win-win for both sides of the ledger. For customers, migrating to the cloud brings increased flexibility and significantly lower costs (reportedly up to -30%), while for TechnologyOne those same benefits accrue into rising margins. Current forecasts are for a gradual increase towards a profit margin of 35%-36% from 30% a few years ago.

Contracts typically allow for price rises in line with inflation which, this time around, is providing an extra-kicker for growth. Equally typical for a rare Quality corporate wealth generator, management at the firm is using this year's additional windfall to spend more on R&D and new product development.

Plenty of companies would be discussing a higher dividend, or a share buyback, or both, but genuine Quality thinks longer term, and realises tomorrow's growth is built on the seeds planted today.

Back in 2008, TechOne's offering consisted of 11 products. Today, the product suite tally stands at 16, with over 400 modules.

How To Be 'Special'

Officially, TechOne is but an IT services provider, conveniently lobbed in the same Software & Services basket with dozens of other ASX-listed "peers". In practice, the company delivers mission-critical products and services, often specifically taylored for corporate clients in targeted sectors of financial services, utilities, government, education, and health.

Clients have proven extremely sticky with annual churn remaining below 1% throughout most of the past two decades. Recently, the percentage of client losses has increased with management indicating it'll probably end up around 1.60% for the running financial year as smaller businesses shy away from migrating to the cloud while clients of UK acquisition Scientia are proving less loyal.

It goes without saying, most management teams at other ASX-listed companies would sacrifice their left arm to be able to operate from such a luxurious position.

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Rudi’s View: Seeking Quality & Growth Offshore

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 | May 03 2023

In todays Weekly Insights:

-Confession Season... It's Baaaaaack!
-Seeking Quality & Growth Offshore

By Rudi Filapek-Vandyck, Editor

Confession Season... It's Baaaaaack!

Once upon a time the two months preceding the end of financial year, and the subsequent weeks leading into reporting season in Australia, caused more than just a little bit of anxiety among investors as market updates might well translate into that universally dreaded Profit Warning that has the potential to inflict a lot of damage to a company's share price.

Recent years have not seen much in terms of profit warnings ahead of the official results season, but early signals are this year might be different. The past week alone has seen market updates by the likes of AdBri ((ABC)), Bubs Australia ((BUB)), Cluey ((CLU)), Mirvac Group ((MGR)), Synlait Milk ((SM1)) and Insignia Financial ((IFL)) force analysts to downgrade forecasts for the financial year running.

Troubled IOUpay ((IOU)) has effectively gone out of business. Most production updates by miners and energy companies proved disappointing too, marred by project delays, weather impact, lower prices and higher operational costs.

It's not all bad news though, as share prices of Bubs, Mirvac Group and Insignia Financial had already largely accounted for what was coming. Sometimes bad news can actually free-up the next move upwards on the reasonable prospect of less-bad conditions ahead, potentially.

Regardless, investors would be wise to not simply assume today's market laggards are by default a great bargain with Synlait Milk yet again proving there's no bottom when troubles keep accumulating.

Trading around $12 in 2018 and having started the running calendar year above $4, today's share price of less than $1.50 reminds me of the old share market joke:

What's a stock that's down by -90%?

That's a stock that first fell by -80%, and then halved yet again.

It's not all negative news though with corporate market updates to date, on balance, proving more positive than negative. Notable positive surprises have been delivered by Camplify Holdings ((CHL)), Helloworld ((HLO)), Megaport ((MP1)), Perpetual ((PPT)), Reliance Worldwide ((RWC)) and Stockland Group ((SGP)).

Such profit warnings (both negative and positive) are often quite random which makes it difficult for investors to prepare or anticipate. Yet one source of potential weakness is the so-called Second Half Club; companies that need a strong second half to meet guidance or market expectations.

The February results season saw this group of companies swell to nearly 50% of all companies, suggesting there is plenty of potential for a lot more negative surprises in the weeks and months ahead.

Local market strategists at Morgan Stanley offer another potential approach; adopting a theoretical framework developed by their colleagues in Europe to establish which companies have been over-earning due to covid previously, the local strategy team has identified four sectors in Australia in danger of an earnings reset, which in practice means: be careful, here's a higher chance for negative profit warnings.

The Morgan Stanley modeling has identified energy, discretionary retail, staples and real estate as sectors most at risk.

All shall be revealed in the weeks & months ahead.

Seeking Quality & Growth Offshore

The promotors of international markets have a way of making us all feel silly and ignorant: do you realise Australian equities represent no more than 2% of the global pie? If you stay local, you are missing out on 98% of what is out there!

It is difficult to argue with the numbers, but what should equally be front of mind is that Australia is inside the Global Top Three when it comes to long-term average investment returns. At the very least this provides local investors with plenty of reasons not to make any rash decisions.

Ultimately, investing is about sustainable return and there's little value in diluting one of the best performing markets with less-returning alternatives, just for the sake of it.

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Rudi’s View: Investing In Megatrends (The Other Ones)

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 26 2023

In this week's Weekly Insights:

-Investing In Megatrends (The Other Ones)
-Research To Download
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

Investing In Megatrends (The Other Ones)

Investors who felt safe hiding in lithium stocks supported by broad-based belief in the global electrification theme have had a rude awakening over the past four months as the price of lithium has tanked by -50%-plus and share prices in the likes of Pilbara Minerals, Allkem and Liontown Resources are down by -25% or more.

This does not imply the global transition towards greener transport and electric power has been over-hyped. It does highlight that when it comes to industrial chemicals, metals and minerals, the short-term horizon is almost always determined by the balance between supply and demand - and history shows supply has a habit of catching up, eventually, as well as intermittently.

To put it bluntly: commodities seldom, if ever, move in a straight line. A similar observation today very much applies to producers of coal, the ultimate beez neez in 2022, while oil & gas producers are one of few sectors not posting a gain year-to-date. Uranium is widely believed to be part of the Megatrends story for the decade(s) ahead, but it's not apparent from share prices in Paladin Resources or Boss Energy.

Megatrends (Supercycles) or not, commodities move through cycles, with often violent price corrections, in both directions, along the way. The promise of a super-sized gain on the way up will always remain too attractive to resist, while the threat of a Wile E Coyote dive-off-the-cliff is never far off.

To illustrate the dilemma, I have included the thirty year price chart of shares in Alumina Ltd, one of the longest-listed commodity producers on the ASX.

It doesn't take much time to figure out there have been numerous occasions when the share price doubled, plus some, on the way up, only to give it all back, and some, on the way down.

Another, equally important, observation to make is that time does not by definition work in the patient shareholder's favour. While Alumina Ltd pays an annual dividend, its share price has effectively posted no sustainable gains since 2008, when shares tumbled from an all-time high above $6 to below $1. Today's circa $1.50 had never been recorded throughout the 1990s.

Sector mega-caps BHP Group ((BHP)) and Rio Tinto ((RIO)) did record new all-time highs in 2022, but their prior records dated from 2007, and we might well be past the summit in the current cycle for iron ore. As a side note: don't be confused by historical data on free websites including ASX.com.au - all those data have been 'corrected' for dividend payouts, and thus show lower share prices for the past.

BHP shares peaked at $50 in late 2007, despite what is shown today on backward-looking historical price charts. (As per always, details matter, as does a great memory).

Alternative: The Forgotten Megatrends

Investing in Megatrends can be a completely different experience through larger sized industrial companies, on the condition that investors can get past the misguided belief that only shares trading on low PE ratios offer sustainable long-term gains, plus the underlying Megatrend needs to remain in place, of course.

Below is the historical chart for shares in property marketing portal REA Group ((REA)) which, on anybody's observation, shows a fundamentally different trajectory over time.

Admittedly, the global bond market reset has pulled down the share price valuation from its 2021 peak, but the shares have embarked on a solid uptrend in line with the market generally since October for a return of approximately 50% from last year's June low (25%-plus year-to-date).

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Rudi’s View: (Not) About The Banks

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 | Mar 29 2023

In this week's Weekly Insights:

-More Data, More Brokers
-US Recession More likely
-(Not) About The Banks

By Rudi Filapek-Vandyck, Editor

More Data, More Brokers

FNArena continues building the best service possible.

On Friday, we added yet another window of company-specific data, thanks to FactSet.

Potentially, the first eye-catcher in Stock Analysis is now how much debt each company is carrying.

Behind the 'More Data' button in Stock Analysis are now four windows of data and charts.

In addition, Credit Suisse is being removed as an FNArena database broker. Instead, the Australian Broker Call Report will now update daily on research from Bell Potter and Shaw and Partners.

This not only means more research, but also more companies that previously were not covered through The Australian Broker Call Report.

If you are not a subscriber, or you are no longer a subscriber, and would like to have another look at our service, contact us via email.

US Recession More likely

Nothing is set in stone when the subject is financial markets, but a financial crisis for regional banks in the US will, all else being equal, put further strain on the availability of credit and thus hamper economic growth.

All talk about a 'no landing' scenario should now definitely been relegated to the sin bin. There will most likely be a 'landing' for the US economy in the twelve months ahead.

As to exactly how 'soft' or 'hard' that landing might be is still dependent on multiple factors and yet to be established outcomes.

Common logic suggests markets will opt for a reduced risk approach, at least until more clarity emerges about the consequences for US businesses and economic growth.

Then again, common logic is not always that common, and the prospect of a boring sideways channel would not excite many who make a living out of daily volatility.

(Not) About The Banks

Today's story is about Australian banks, except it isn't. Not really.

Hopefully this is not too confusing already, but Dear Reader, you will have to read until the end to understand what this story really is about.

As said, I'd like to start off with Australian banks.

For more than a decade now, CommBank ((CBA)) has been priced at a sizeable premium versus other banks in Australia.

The embedded gap in valuation attracts both criticism and amazement; to many Commbank shares sit right at the bottom of industry rankings; other banks on cheaper valuations look so much more attractive.

This is the case today as it has been at any point post the GFC.

The obvious contradiction here is that CommBank shares have not underperformed throughout those years. To the contrary, CommBank shares today are the one sector exception in that the shares have managed to rise above their peak from back then.

The only one in the sector locally.

Fifteen years after the GFC, all other bank shares in Australia are still trading (well) below the levels recorded in 2007.

Popular explanations for CBA's valuation premium, there are many, but the most quoted and most credible on my observation, is that CommBank is simply Australia's superior bank - better than all the rest.

Testing The Thesis

To genuinely test the thesis, we must have an impartial, non-subjective, unbiased method for measuring the corporate quality for CommBank and the others. Is there a difference at all, and can we measure it?

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Rudi’s View: All-Weather Stocks – Back In Fashion

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 | Mar 22 2023

In this week's Weekly Insights:

-Banks Need Confidence (Lots Of It)
-All-Weather Stocks - Back In Fashion
-All-Weathers: Post-February
-Research To Download

By Rudi Filapek-Vandyck, Editor

Banks Need Confidence (Lots Of It)

What investors are witnessing this month is not a re-run of the Lehman Bros collapse in late 2008, but it isn't "nothing to see here" either.

Central banks and regulators around the world have been in a frenzy to prevent confidence to fully abandon local and international banks. While their swift actions might prevent worst case scenarios, confidence remains all-important for all banks; from the strongest down to the smallest lenders.

It is anyone's guess precisely how markets will respond to further daily news flow. As things stand on Monday, we have two separate bank problems that need to be dealt with. The easiest to solve is Credit Suisse, the weakest link inside the global financial system for a long while and it seems this particular vulnerability will soon be quarantined.

Over in the USA, however, we have now witnessed Silicon Valley Bank (SVB), Silvergate Capital, Signature Bank and First Republic Bank making headlines and there's more news waiting to come out, for sure. How much exactly remains unknown, also because we don't as yet know how effective regulatory actions will be.

No two situations are exactly the same, but this year's banking crisis in the US appears to have plenty of similarities with the Savings & Loans (S&L) crisis that occurred in the 1980s and early 1990s.

That crisis followed aggressive tightening from the Fed, looser regulatory restrictions and oversight, and lenders not marking to market which prevented the outside world to get a clearer (and more accurate) insight into the balance between assets and liabilities.

Ultimately, the S&L crisis went on and on, preceding a nasty recession in the US and elsewhere (the recession Australia had to have, according to Keating).

Not saying history is about to repeat, but the public debate whether the US will suffer an economic recession this year has instantaneously become a lot less combative. Banks' focus has now shifted to preserving, if not repairing, balance sheets, and counter-party risks.

History shows when this happens, economic recession is usually not far off. Bank credit is almost literally the oxygen that feeds today's economies.

There will be rallies after falls, but I would not recommend trying to be a hero in the days, weeks, or even months ahead. When the facts change, savvy and experienced investors know it's time to adapt.

For those who'd like to find out about today's similarities for themselves, I'd recommend putting S&L crisis in your internet search engine, and start reading.

It won't cheer you up.

All-Weather Stocks - Back In Fashion

This year's deterioration in economic prospects, now complimented with a banking crisis in the US and the inevitable demise of Credit Suisse, has strengthened expert calls for robust, defensive, reliable, High Quality equity exposures.

Many of the calls made include a large overlap with my personal research into All-Weather Performers listed on the ASX (see further below).

Outside of my personal selections, references often include Cleanaway Waste Management ((CWY)), Ramsay Health Care ((RHC)), Sonic Healthcare ((SHL)), and Washington H Soul Pattinson ((SOL)).

The general idea is that indiscriminate selling will at some point recognise not all companies are of similar core characteristics and those with more robust and dependable earnings will ultimately outperform.

Traditional labeling by the investment community refers to defensives versus growth companies, and many of the High Quality companies listed on the ASX are usually included when the market focus shifts to defensives, but differences still matter.

A recent research paper released by Wilsons suggests investors have a choice between 'defensive' and 'defensive growth' - the difference in return between these two categories can be significant over time.

To illustrate their thesis, analysts at Wilsons compared the performance of CSL ((CSL)) and Woolworths ((WOW)) shares over the past ten years. Woolworths functions as your typical defensive exposure, while CSL is the counter-example of a defensive growth company.

Back in early 2013, CSL shares were trading on a PE multiple of circa 21x and a forward-looking implied dividend yield of 1.9% only. Woolworths looked a lot more attractive, trading on a PE of 13.3x and offering a yield of 5.3%.

Fast forward to one week ago (March 14) and $100,000 invested in CSL shares back then would have generated $525,473 while total return from Woolworths only reaches to $142,078.

The first calculation amounts to an annual capital return of 18% over the decade while investors in Woolworths had to satisfy themselves with an annual return of 3.6%, 5.4% in total if we include dividends.

Wilsons still thinks CSL shares are more attractive than Woolworths today. Its projections for CSL are for EPS CAGR of 24% between FY23-FY25. For Woolworths the comparative pace of forecast growth is 7%.

The underlying message from this research is that growth matters, growth ultimately creates the difference in return between shares. The lowest valuation is not by definition the better choice (even though this may not be apparent in the short term).

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article 3 months old

Rudi Interviewed: Tough February

It has become the 'unofficial' tradition in recent years: an interview with Livewire Markets ahead of yet another corporate reporting season in Australia. Below is a sub-edited transcript from last week's interview, released this week by Livewire (also available on YouTube).

James Marlay: Since early October the ASX200 has rallied a stunning 17% to the highest point in February. Straight off the bat: is this still a bear market or a rally with more positive long term implications?

Rudi Filapek-Vandyck: It'll depend on one's definition. We all tend to get more excited when share prices rally and we get more optimistic about the future. But I would caution that after a return of that magnitude which, let's call it out, has surprised most people in and around the market, such a strong rally is going to colour the February reporting season.

It will have a massive impact. Needless to say, company reports will be judged differently from when markets were still -17% lower. It's good for investors to keep this in mind. The benchmark for company results to exceed has now been reset. The bias has shifted. At the depths of last year, companies would be given a lot more leeway. Right now, I think companies will have to prove why share prices should still go higher.

Early indications are in most cases companies that release financial results see their share prices weaken, in some cases quite significantly so. While it's still early days, I think this trend may well dominate this season.

James: We'll touch on that trend in a bit more detail later on. I want us to revisit some commentary that we covered in our last interview (August last year). Back then it was your view that commodities were not recession-proof. I bring it up as we can all see today that the commodities component of the market has been very strong and a big driver of the market's recovery. Have you been surprised by the strength in commodities and what's the impact of China re-opening for Australian commodities?

Rudi: Similar to what has happened with equities in general, I think commodities have rallied ahead of fundamentals, and the China re-opening is part of it. The other thing which I think is very important to note is that the process of raising interest rates, higher bond yields and then the impact on the economy has been much slower than history would suggest.

Markets are not patient. They are not going to sit around and wait for things to happen. So the obvious observation is that the direct correlation between an economic slowdown, economic recession and commodity prices weakening is usually a pretty solid correlation. The problem thus far is, of course, we haven't seen any recessions just yet; we have hardly seen economies slow down.

This is an important part of the picture that is weighing over this reporting season. Some of the corporate results will look absolutely fantastic. But the question remains: what comes next?

For commodities, yes, they've all rallied and the fact that the slowdown is arriving in a much slower manner than one would expect has given investors a lot of leeway to put a lot more risk in markets, but there are still question marks out there. If we look at bond markets; bond markets essentially are forecasting a significant slowing in economic activity.

Whether this will result in a recession or not, we will have to wait and see, but markets don't wait around. Having said so, it may well be given the re-opening in China that even if we still see massive slowdowns in places like Europe and the US, the prices of commodities might remain well supported. I do think the commodities space will splinter. Not every commodity will hold its own.

Another observation is that I did make the forecast last year that oil would not hold above US$100/bbl, and that has proven correct. This hasn't translated into a similar pullback for share prices of producers. This is not that unusual. It happens on occasion.

Needless to say, at some point this gap has to be corrected. Either one goes down or the other goes up.

If those two explanations are not sufficient, I can always fall back on the old joke about economists. What's an economist? That's someone who makes erudite forecasts and then later on explains in that same erudite manner why those forecasts have been inaccurate.

It's very difficult to make forecasts in a market that is all but normal, definitely not textbook. As investors, we always have to be mindful that things change along the way. Will we avoid recessions? I don't know. But I would not be cocky about it because share prices have rallied.

James: Let's dig a little deeper into what I think is a good read on how you're feeling about markets. Twelve months ago, you were holding 30% in cash. When we last spoke in August, that had reduced to around 20%. What's your cash position now and what's the reasoning behind it?

Rudi: I have done remarkably little. I checked this morning, the cash level (in the All-Weather Model Portfolio) is slightly below 18%. From memory, the last thing that happened was buying extra shares in NextDC ((NXT)) when the share price looked ridiculously low. The Portfolio has done nothing else. The reason for that is that I remain skeptical about the fundamentals underneath this rally. The other reason is I expect this reporting season to be brutal at times, and this means you can jump on opportunities.

James: You mentioned you hold a healthy level of skepticism. What are some of the reasons? What are the big things that support your position?

Rudi: Because it's such a slow, ongoing process. Maybe the best comparison to make is with an example from real life. If one asks the billionaire and the homeless guy how did you end up where you did? They usually give the same answer: it happens very slowly and gradual for a long time, and then all of a sudden it accelerates.

My suspicion is we are in a similar process. We're all getting very optimistic because consumer spending is holding up and company results are not falling off a cliff. But central banks continue to tighten and the full impact from last year's rate hikes still has to come through. I think time will come when we might see things deteriorate rather rapidly.

I have a suspicion this is also the view of central bankers, which is why the Federal Reserve is injecting liquidity in the system, and China's doing the same.

As I said earlier, yes, share prices can rally and investors are taking a big leap in that fundamentals will catch up, but there are some big question marks that still need to be answered. To my surprise, which I suspect has also surprised many locally, the increase in the RBA cash rate has not yet been fully passed on by the banks to mortgage holders. Let's see what the impact will be when that happens.

James: Nearly every sector is in the green this year. Last year was effectively all about materials and energy. Small caps have also been resilient. What's your interpretation of these moves? Do you think the market is now looking through the great hiking cycle you are referring to?

Rudi: I think the big rally can partially be explained by market positioning. Many an investor last year was positioned for much worse times ahead. Forecasts were for a very tough first quarter, with improvement likely further out. This rally has now put everything on its head. Some people might draw a direct correlation with central banks and liquidity.

The market is supposed to be forward looking, but it's not perfect in what it does. Human nature, how we are built and operate, is that we become optimistic when share prices go up, but share prices arguably were quite beaten down. So from the moment share prices start moving upwards, money starts flowing in.

The current situation requires that fundamentals catch up with prices. Either that, or share prices have to come down. We will see both in February, and that process can be brutal.

James: We've had a few early reports and as you alluded to, the trend has generally been for negative market responses despite what looked from your analysis and your reading relatively okay results. Can you explain what you've observed and how you think that plays out through the rest of the season? Maybe you can give a couple of examples?

Rudi: I think there's a big difference between the laggards and those companies that have performed well, either in the past weeks or throughout last year. That second group, I think, is now being treated more harshly by investors. You saw that with results from the likes of Nick Scali ((NCK)), ResMed ((RMD)), maybe even Amcor ((AMC)).

There have been a few exceptions, such as Janus Henderson ((JHG)) and Suncorp Group ((SUN)). Suncorp hasn't genuinely participated in last year's market and it is now getting the benefit of the doubt. While others are basically being punished for the little things that may not be perfect. Sometimes this comes down to cost inflation, which is very difficult to forecast from outside the business. Not even management teams themselves can often put a finger on what is likely to happen.

This is not something that just applies to financials or industrials, or healthcare, it applies across the board. In January we saw production reports coming out and many mining companies showed difficulty with containing costs. We've seen few mining companies update early in February. One is an iron ore miner (Champion Iron ((CIA))) and the other is IGO ((IGO)). In both cases share prices weakened. In both cases cost inflation was one of the key ingredients.

This signals it's very difficult to know in advance how investors will respond to financial results.

James: Let's talk some names. Which are the companies you are expecting to deliver strong results, which we don't know whether that's a good or bad given how the market is responding. But tell me some of the names that you're interested in, and follow closely?

Rudi: I think it's important to emphasise the dynamics for this season will be different from what normally applies. What happens usually is that if you're surprising to the upside, you get rewarded. Your share price outperforms sometimes for up to four months. And the opposite holds true as well: you disappoint and that can linger for months.

I think this time around dynamics will be different because we have that Sword of Damocles hanging in front of the market that things might still look good right now, but what about the second half? What about the third quarter?

Having said so, because of the work I do at FNArena, I see a lot of research passing by and that allows me to pick up when sentiment clearly improves towards a given company. Over the past few weeks sentiment has noticeably improved for CSL ((CSL)), also a laggard from last year as the share price hasn't done much. This is why the CSL share price is no longer around $270.

Another stock for which sentiment has improved is Telstra ((TLS)). Last time Telstra actually increased its dividend and very few were anticipating that. It appears from research since then that, overall, dynamics for the telecom sector on the ground have only further improved. Indications are this might further improve in the second half and beyond.

Why is this important? Because if we are preparing for tougher times ahead, then companies like Telstra will become more attractive, because they move in the opposite direction operationally.

Next, the company I already mentioned, Suncorp, is widely regarded as the undervalued insurance company. This doesn't explain everything, but it does explain why this insurer can release a wishy-washy result and the share price goes up. I would be surprised if that share price does not keep on going up in the next few weeks, or months.

Another interesting thing to point out about last year's laggards, and this is a comparison that very few investors make, is that we all get excited about copper and lithium as they are, apparently, in a long term beneficial trend. So we're more than just excited about this prospect and prepared to own those companies for the longer term.

It's not too far out of the ballpark to make a similar comparison to many of the high quality, sustainable growers in Australia who each have a super-cycle that helps and supports them. That has helped those companies over the past decade and it will continue to help them in the years ahead.

Many people still have to get their head around this. Today's opportunity in the share market is not necessarily with PE ratios on three, or eight, or thirteen. The opportunity can be with a stock that is trading on a PE of 30 and beyond. Now we are talking about REA Group ((REA)), Seek ((SEK)), Carsales ((CAR)), even Pro Medicus ((PME)), TechnologyOne ((TNE)), CSL and ResMed, Breville Group ((BRG)) even, and Goodman Group ((GMG)).

Some investors have this misconceived idea these companies have not yet de-rated, but they have. We had a massive de-rating of multiples last year, but it hasn't hit every segment of the market in the same way. There's an illusion that a stock like CSL, which essentially moved sideways, hasn't de-rated, but it has. Last year was a big bear market which only didn't show up at the index level in Australia.

I'll be definitely watching these stocks, in particular as they have participated in this year's strong rally. I wouldn't necessary jump on board at current levels, but if weakness kicks in at some point, I am certain I am not the only one who's looking to get on board.

James: Final question: what does it take for you to reduce your cash to, say, 10%, or lower? Is it down to share price movements or an external factor that increases your confidence that we've moved through the worst of the impacts from the tightening cycle?

Rudi: It will probably be a combination of the two. Confidence should not necessarily come from how markets behave. But it's difficult because the market doesn't always cooperate, it doesn't always present the opportunities when people would like to see them.

Assuming equities don't continue rallying, the market has two choices; either move sideways for a while, or revisit the low. In the second scenario, hopefully we'll all be more keen to allocate more money than in the first. But we can only make assumptions and the market will ultimately decide where the opportunities come from, and how to allocate one's money. We have to be flexible.

James: Thanks for coming in today. Always good to catch up.

(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.)  

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article 3 months old

Rudi’s View: Regrets, 2022 Delivered A Few

In this week's Weekly Insights:

-Final Weekly Insights For 2022
-Regrets, 2022 Delivered A Few
-Conviction Calls

By Rudi Filapek-Vandyck, Editor

Final Weekly Insights For 2022

Weekly Insights is taking a break until January next year, when we start preparing for the February reporting season.

I hope you all enjoyed reading my weekly writings as much as I enjoyed preparing and sharing them.

Merry Festive Season to you all!

Regrets, 2022 Delivered A Few

You just know 2022 has been an eventful, but certainly unusual year when you look back over your shoulder and conclude moving into Overweight cash early has been the best decision made in the year.

As the Federal Reserve in the US, and many central banks around the globe, abruptly reversed course and embarked on probably the steepest tightening path ever witnessed, it seemed appropriate to lift the portfolio percentage in cash to 30%-40%, where it has been until last month.

Cash makes up less than 20% in November, but serious considerations will be made whether it should be higher ahead of what promises to be another volatile reporting season in January-February (US and locally).

A decision to convert part of the portfolio into cash always meets with emotive resistance and fierce rejections among investors. Is it possible to "time" the market (including when to get back in)? Shouldn't investors simply take a long term view and resist the urge to respond negatively during times of extreme volatility?

Certainly, there is a class of investors who holds a strong belief that share markets always recover and post gains in the long run. Those investors have been busy buying more stock upon volatility and weakness this year. Judging from some of the data available, there has been a lot of such buying at lower prices this year.

Contrary to what many might expect, including experienced veteran market commentators, bear markets are never quite the same. 2022 certainly has not been one-on-one comparable with late 2018, 2015-16 or that dreadful 2007-09.

This year, the FNArena/Vested Equities All-Weather Model Portfolio found itself quickly on the wrong side of share market momentum. As an investor in long-duration, high quality and growth companies, owning shares in Goodman Group ((GMG)), Hub24 ((HUB)), REA Group ((REA)), Xero ((XRO)) and the likes was never the ideal starting point in early January.

While the pressure from rising bond yields was relentless and inescapable, we take comfort from the fact the portfolio sold shares and substantially lifted the allocation to cash.

But there's another observation that equally deserves to be highlighted: in my research I try to distinguish the higher quality companies from the rest. Not that high or low quality makes a lot of difference during the run-away bull market that preceded this year, but when times got tough, it most definitely did.

Whereas many a prior high-flyer got smashed to pulp in the first half of 2022, personal favourites such as Pro Medicus ((PME)), TechnologyOne ((TNE)) and WiseTech Global ((WTC)) stoically stood their ground, and not simply in a relative sense (though they did fall a lot less than most High PE peers); as we approach the end of the calendar year these stocks are sitting on a net positive return.

Yes, you read that correctly. 2022 has not all been about fossil fuels and large cap financials. One of the regrets for the year is the All-Weather Portfolio went cautious and conservative early, and this included selling out of Pro Medicus, Xero, Breville Group ((BRG)), Charter Hall ((CHC)), Seek ((SEK)) and Hub24.

We did not get back in. With perfect hindsight, there are no silver bullets when it comes to protecting one's capital. In light of next year's plausible ramifications from the international 2022 tightening frenzy, there are reasons to remain cautious on immediate prospects for Xero, Breville and Seek, maybe for Charter Hall too, but this year's regrets definitely include Pro Medicus, WiseTech Global and Hub24 no longer being part of the All-Weather Portfolio.

We will bide our time. Today's eerily calm is unlikely to be representative of what next year will look like for the share market. Opportunities will present themselves, exact timing unknown.

Moving a large percentage of the portfolio into cash is not a panacea for all conditions and circumstances, but my personal contribution to the public debate is that local fund managers saw their return slump to -20% or more, sometimes a lot more, and the All-Weather Portfolio has kept losses this year in the single digits.

Raising the level of cash was specifically aimed at exactly such outcome. Or as I like to respond when receiving questions about it: it's never an attempt to "time" the market; it's aimed at reducing risk. There's a difference between the two.


Resources and other heavily levered cyclical companies remain off the menu for the All-Weather Portfolio and that's certainly no help in a year when shares in coal producers quadruple and earnings momentum, including massive dividend payouts, resides with closed shop fossil fuel producers (Ukraine-inspired or otherwise).

Bear market rallies, including the one that is currently still taking place off the October lows, have been fierce and powerful, and they too benefit the lower quality, small cap laggards most.

Somehow I feel we shouldn't be overly disappointed with the small portfolio retreat that will likely mark this year on December 31. Most portfolio constituents and companies on my radar have largely compensated for earlier losses in the opening months, in particular over the two months past.

CSL ((CSL)), for example, is trading in positive territory year-to-date, ex a small dividend, as is Amcor ((AMC)) though the latter made all gains early in the year. Overall, your traditional defensives largely missed out on sustainable market momentum in 2022, including supermarket owners Coles ((COL)), Metcash ((MTS)) and Woolworths ((WOW)).

The largest surprise, however, has been the significant outperformance of energy producers, which is not solely because of LNG exposure and not simply a local phenomenon either. Investors should always be mindful of the fact that share prices in producers do not by default blindly follow the price of the commodity, but this year's de-coupling of share prices when the price of oil succumbed to fears of global demand shrinkage is still remarkable.

There's no shortage in energy bulls in today's market, but history shows that gap between the price of oil and share prices in Santos ((STO)), Woodside Energy ((WDS)), et al will close, exact timing unknown, and there are, roughly, two scenarios:

-either the price of oil picks up again and share prices for the sector globally have been proven prescient, confidently focusing on underlying fundamentals rather than short-term volatility in futures markets;

-or share prices will fall to match the price of oil to the downside.

My favourite observation about bear markets is that of domino stones; ultimately the last ones standing will also fall. Note, for example, how shares in high flying coal producers quickly lost -25% and more in just a matter of weeks recently. The latest sector to be hit are currently the producers of lithium.

Of course, such short-term sell-offs tell us nothing about the longer-term up-trends, but it is probably wise to keep an eye on what is happening in those smaller markets for what might follow next for your typical fossil fuel energy producer.


Among the beneficial decisions taken this year is the addition of the Vanguard Australian Property Securities Index ETF ((VAP)) to the Model Portfolio on the belief that, yes, inflation might stick around for longer and central bankers are not yet done with tightening, but bond yields might have seen their peak already.

This ETF was added on an implied yield above 5%. According to the Vanguard website, the yield has now shrunk to 4.6% (implying there has been a rally in the price).

Bonds no longer rallying has equally allowed the share price in the HealthCo Healthcare and Wellness REIT ((HCW)) to appreciate from a very beaten-down looking level in weeks past, though volatility remains high on a daily basis, and it has been a disappointing allocation overall.

We haven't lost faith and if next year brings us uncertainty over corporate profits and lower bond yields, we will welcome the prospective 5% in payout, hopefully with some price appreciation on top.

Telstra ((TLS)) remains another yield stock in the portfolio, to date generating a small capital erosion for a prospective 4.3%. Telstra's attraction remains the sale of infrastructure assets, while underlying the shares should benefit from the same bond market dynamics.

The portfolio also stuck with retailer Super Retail ((SUL)) whose come-back is currently in full swing. At just under $11, Super Retail's prospective payout should yield 5.5% in the year ahead, though a lot will depend on whether margins and cash flow can be maintained.

The latter might turn into a crucial question next year, as also suggested yet again by shares in over-sized women's wear retailer City Chic Collective ((CCX)) whose latest profit warning has caused the share price to tank by -50%-plus in two days, after the shares had already lost circa -75% since the all-time peak last year.


The All-Weather Model Portfolio has had no City Chic experiences this year, which can be interpreted as a vindication of the quality company choices, as well as the decision to reduce risk.

Xero, for example, is still carrying the risk of significant further deterioration in the post-Brexit UK economy, while the geographic exposure to troubled economies stretches further for Breville Group. This is why both are no longer in the portfolio.

Inside the All-Weather Portfolio, companies such as Amcor, CSL, Goodman Group, TechnologyOne, Carsales ((CAR)), etc have mostly stuck with positive guidance for the year ahead. Disappointments have thus largely been macro-related, including negative impact from FX and bond yields.

With one notable exception...

Iress ((IRE)) used to be part of the higher quality ASX listings, which had gone through a tougher period dominated by margin pressures.

The dangers of investing in higher quality companies is that quality generally requires maintenance and constant investment. CSL, as a prime example locally, invests more than $1bn every single year to secure its product pipeline and guarantee future growth.

Iress, it seems, is today but a shadow of its former quality self. I wouldn't be surprised if in years to come, investors rank it in the same basket as the likes of AMP, Lendlease, Myer and Westfield. Maybe they already do and I have simply been too slow in catching up (?).

Compensating for the solidity elsewhere in the Portfolio, Iress has been forced to issue two profit downgrades in the year past. Time to remove this company from my research radar.

The Portfolio sold out of NextDC ((NXT)) early in the year, and returned at much lower price level, only to see the shares take another leg lower. It turned out, investors are worried about a potential capital raising assuming company management is still looking to expand into Asia.

We're comfortable with the market position and longer-term growth dynamics that support the investment thesis in NextDC.


All in all, the key question that pops up as share markets seem hell-bent on finishing 2022 on a positive note remains: if one became cautious and defensive too early, does that mean the decision itself was wrong, or was it just that the timing was off?

By now, early in the year I would have expected corporate profits had wilted and central bankers would be closer to pause or pivot, but none is the case as we prepare for 2023 (though there's lots of speculation about the latter).

The market has simply split and polarised in 2022. While we can all make confident predictions about what might be in store for next year, I think it's important to keep an open mind.

Shorter-term, investors best not forget about the challenges that are hitting corporate margins and profits. Share price action this year has been mostly directed by bond markets and other macro-considerations, including speculation about central banks' stamina.

While the latter will remain with us for longer, investors might be forced to pay attention to corporate challenges in the not-too distant future.

When this happens, I think we'd want to be on the right side.

More Weekly Insights reading:

-Preparing For Bear Market Phase II:


-Re-Opening Opportunities In Healthcare:


-More Choice For Income Hunters:


-Technology's Moment Of Truth:


Conviction Calls

Shares in Breville Group have come under pressure this month and the reason seems to be related to market updates by peer companies in the US.

Sector analysts at Wilsons and Jarden weighed-in on growing concerns last week.

Wilsons suggested with weakness popping up in Q3 market updades for the likes of Williams Sonoma and Best Buy, this might be an indication the US consumer is simply following into the footsteps of consumers in Europe.

Not colouring the overall picture any rosier, DeLonghi has signalled both increased discounting and strong growth in manual coffee machines, which might be an indication the Italian competitor is grabbing market share from Breville.

Jarden focused on the fact a number of US retailers is sitting on too much inventory; this raises the risk of general price discounting to reduce stock. As part of inventories are supplier funded, Jarden has scaled back its expectations for margins.

All in all, Jarden has moved to Underweight on the stock (downgrade from Neutral) also because of momentum concerns across the EMEA countries, with a reduced price target of $19.20.

Wilsons is still sitting on Market Weight with a price target of $22.10.


When it comes to seeking exposure to the local lithium story, Macquarie's preferences are with Mineral Resources ((MIN)) and IGO ((IGO)).


Goldman Sachs' A&NZ Conviction List consists of 13, all Buy-rated, ASX-listed companies:

-Charter Hall Social Infrastructure REIT ((CQE))
-Elders ((ELD))
-Fisher & Paykel Healthcare ((FPH))
-HealthCo Healthcare & Wellness REIT
-Iluka Resources ((ILU))
-Lifestyle Communities ((LIC))
-Omni Bridgeway ((OBL))
-Qantas Airways ((QAN))
-REA Group ((REA))
-Webjet ((WEB))
-Westpac ((WBC))
-Woolworths Group


How low 2023? According to the latest investment outlook by Credit Suisse, global economic growth next year will slump to 1.6% only. And no major central bank is expected to cut its cash rate.

Credit Suisse believes investors should consider adding fixed income assets to their portfolios.

Other predictions made: the eurozone and the UK will see recessions, while China will experience a growth recession. All regions will start a weak, tentative recovery by mid-year, on the assumption the US manages to avoid a recession.

On freshly updated projections, GDP growth next year in the US is expected to average no more than 0.8%, but to stay positive nevertheless.

Economic growth in Australia is projected to decelerate to 1.6%, in line with international growth, from 4% this year. Local inflation is expected to peak at 8% and to have fallen to 3.5% by year-end next year.

Credit Suisse expects a muted performance for equity markets in the first half next year.


The latest update on 2023 by Goldman Sachs essentially reflects the same blue print outlook as projected by Credit Suisse.

The numbers look slightly different, but Goldman Sachs also sees the US economy narrowly avoiding negative growth (i.e. recession) while the recovery in China is expected to be "bumpy" and underwhelming.

The Federal Reserve is expected to hike by a further 125bp to 5-5.25%. Inflation will come down. No repeat of the 1970s is anticipated. No rate cuts are expected in 2023.

Recessions in Europe and the UK are expected to remain relatively mild.

(This story was written on Monday, 28 November, 2022. 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: info@fnarena.com or via the direct messaging system on the website).



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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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article 3 months old

Rudi’s View: Re-Opening Opportunities In Healthcare

In this week's Weekly Insights:

-Re-Opening Opportunities In Healthcare
-Conviction Calls
-Research To Download
-FNArena Talks
-AIA Investor Day In Sydney

By Rudi Filapek-Vandyck, Editor FNArena

Re-Opening Opportunities In Healthcare

US midterms, crypto failures, China re-opening and US CPI have pushed corporate profits into the background recently, but investors would be wise to not let their attention weaken.

Some important signals are there for everyone to see, both locally and internationally.

In the US, the Q3 reporting season, virtually finished, is accumulating into the weakest since Q3 2020; two years ago. The problem, thus far, is not so much with sales and revenues, but with a peak in profit margins.

Aggregate top line growth is still recording 10% growth year-on-year but at the bottom line growth has fallen to no more than 2%. And the outlook, it appears, remains sombre with forecasts for the quarters ahead worse or at best of similar magnitude.

Many forecasters worry the US economy might be in recession by early next year and corporate profits will increasingly start to reflect this downturn challenge.

Wilsons, on Monday, made the following prediction:

"A US downturn (even if it does prove to be a recessionary downturn) is likely to be mild by historical standards, but would likely still send the US earnings cycle into contraction mode."

Locally, the majority of market updates have failed to trigger a positive share price response and quite a number of recent updates has seen share prices weaken noticeably, including for Xero ((XRO)), News Corp ((NWS)), Sims ((SGM)) and James Hardie ((JHX)) -  and Elders ((ELD)) on Monday.

Admittedly, the sharp Buy-everything short-covering rally that has ensued post the US CPI release last week has seen these share prices in strong recovery mode since, but that would be to ignore the underlying message that corporate Australia, yet again, is polarising around profit growth momentum.

Within this context, Friday's Q1 trading update by private hospital operator Ramsay Health Care ((RHC)) might well prove important on multiple levels:

1. As far as Ramsay's Australian business is concerned, the re-opening momentum is strong and positive

2. The business continues to struggle with multiple headwinds in Europe

Those who've been following Ramsay Health Care know the business has been struggling to keep operational momentum positive since 2016 when, not by coincidence, the share price peaked well above $80.

And while many an expert/stock picker has nominated the shares for a post-covid opportunity, it has been a two steps forward, one step backwards, difficult trajectory for the company over the past two years.

Analysts are quite divided about Ramsay's future return profile: should one emphasise the positives locally or worry about the ongoing headwinds internationally?

Ramsay's market update also yet again highlighted sections of the healthcare sector on the ASX are now beneficiaries of the re-opening of societies - a fact the share market seems to have all but forgotten about when short-term momentum is all about banks, financials, cyclicals and commodities.

If those worries about international recessions next year return front of investor minds, it is likely All-Weather Performers in the healthcare sector will quickly return on investor radars - in particular those that enjoy re-opening benefits and recession-proof characteristics.

A brief run through the key constituents of the ASX-listed healthcare sector.


Plasma and vaccines company CSL ((CSL)) is the Grand Dame of Australian biotech and healthcare, or, if we want to choose a masculine label, the Emperor among Kings.

The share price hasn't progressed for its third year in succession (net), and on that basis, it would be easy to conclude the best years are now in the past, a la Ramsay Health Care. After all, doesn't the share market always know best?

Such assessment ignores the fact the global recovery in plasma collection is solidifying and CSL's R&D pipeline looks poised for a number of positive developments, on top of the recently acquired Vifor.

CSL is without the slightest doubt one of the highest quality operators on the local exchange. Forecasts are for double-digit percentage growth (ex FX) in successive years and the company's track record provides ongoing strong support for guidance provided by management.

Most importantly: history shows this company can achieve guidance and growth irrespective of economic slowdowns on the horizon. FNArena's consensus target is currently $324.80, more than 13% above the share price on Monday.


Not dissimilar from the local healthcare Emperor, global sleep apnoea market leader ResMed's ((RMD)) share price is around the same level as in early January - a feat that should not be underestimated for what are, all else remaining equal, high quality growth companies trading on premium PE multiples.

ResMed is expected to reap long-term, sustainable benefits from product problems at competitor Philips. The recent quarterly update revealed momentum in regions such as Europe is not as strong, but the company remains on course for double-digit percentage growth for multiple years to come.

Chip shortages and other supply chain related headwinds are still preventing the company from maximising its growth potential in the short term, but underlying increased market share and margins are preparing for the next future upside surprise.

A visionary ResMed is building a software-as-a-service (SaaS) addition to its medical equipment platform, but time is needed for decisive profit contributions.

Similar to CSL, society re-openings have created strong underlying demand for ResMed's products and services following covid interruptions in the prior two years.

Pro Medicus

Without any doubt, the most exciting success story in Australian healthcare in recent years has been delivered by imaging software company Pro Medicus ((PME)) whose ability to add ever more new customers, predominantly among US hospitals, at an increasing profit margin has defied all sceptics and surprised the many happy fans and well-wishers.

Similar to CSL and ResMed, Pro Medicus is developing global leadership built on technological advantages. The key difference: the global market Pro Medicus is targeting is still in its infancy. Customers, sales, profits, dividends and margins are all on a steep upward trajectory - and they have been for many years now.

Given it takes time to bring new customers on board with the company's leading software solution, forward estimates are relatively predictable, similar to CSL.

For all these reasons, Pro Medicus shares are trading on what looks at face value an eye-watering PE multiple of 113x FY23 consensus EPS forecast, but today's share price is not far off from where it started on January 1st.

Pro Medicus shares will never trade on market-conforming PE multiples, unless its growth story runs into troubles, temporary or otherwise.

Investors will simply have to get comfortable with management's strategy and execution, and grab the opportunity of a weaker share price at a level they feel comfortable with.

Not All Of Healthcare Is A Winner

Now that we highlighted three positive stories, it should be emphasised not every company carrying the healthcare label stands to benefit from re-opening momentum; some companies are looking forward to a much more challenging outlook.

Such challenges are likely to translate into a moribund share price trajectory ahead, with potential downward bias in case of disappointment.

Three major beneficiaries of covid testing are facing much tougher times ahead, even with other sections of their respective businesses now also enjoying recovery momentum; Sonic Healthcare ((SHL)), Healius ((HLS)) and Australian Clinical Labs ((ACL)).

While respective share prices might look "cheap" or "undervalued", this must be weighed up against the prospect of possibly declining EPS profiles, potentially beyond FY23.

Others, such as Fisher & Paykel Healthcare ((FPH)), might prove a big bargain at present share price level, but the market will want to see operational momentum turn for the better.

Similar questions surround the outlook for Cochlear ((COH)), Integral Diagnostics ((IDX)), Nanosonics ((NAN)), as well as Ansell ((ANN)).

The latter company is only "healthcare" by half (50%) but similar issues plague the outlook varying from being a previous covid-beneficiary, to currencies, cost inputs, and the prospect of economic recessions elsewhere in the world.

Ebos Group

One company that has been steadily growing its foot print in Australia is Ebos Group ((EBO)), of New Zealand origin.

Ebos celebrates its centenary existence in 2022, alongside its status of being the largest marketer, wholesaler and distributor of healthcare, medical and pharmaceutical products in Australia. The company has now added animal care brands to its business.

Among local retail outlets, investors might be familiar with the Terry White Chemmart or the Pharmacy Choice brands, as well as the Red Seal and Faulding consumer products. The company also runs Community Pharmacies.

Recent market updates, including at the company's AGM, further re-enforced operational momentum remains strong.

Longer-term, the impact from a resurrection in now Wesfarmers-owned Australian Pharmaceutical Industries remains an open question mark, but the company's track record to date, including acquisitions and their successful integration, is impeccable.

More Potential, More Risk

As with every other sector, there are always opportunities among riskier, small-cap, less developed businesses for investors who want more excitement and the potential for higher, outsized returns.

Companies that currently offer such potential, supported by positive bias from sector analysts include:

-Aroa Biosurgery ((ARX))
-Immutep ((IMM))
-Mach7 Technologies ((M7T))
-Telix Pharmaceuticals ((TLX))

Two healthcare-related names that often appear on analysts' lists of favourites are staff services provider PeopleIN ((PPE)), whose placement services include nurses and healthcare workers, and HealthCo Healthcare & Wellness REIT ((HCW)), whose assets are concentrated around hospitals; aged care; childcare; life sciences & research; and primary care & wellness property assets, as well as other healthcare and wellness property adjacencies.

Conviction Calls

Morgan Stanley has started to communicate its predictions for next year:

"For markets, [2023] presents a very different backdrop. 2022 was marked by resilient growth, high inflation, and hawkish policy. 2023 sees weaker growth, disinflation, and rate hikes end/reverse, all with very different starting valuations.

"It seems reasonable to think that we’ll see different outcomes, especially in high grade bonds. We forecast US 10-year Treasury yields to end 2023 lower, the US dollar to decline, and the S&P 500 to tread water (with material swings along the way)."


Tactical and various other models at Longview Economics are yet again suggesting the rally in global equities is exhausting itself this month.

"While there’s a strong chance of a change in the (primary) trend in gold, rates and bond yields, that is less likely in equities. [...]

"we expect this bear market to continue into 2023.

"... the current bear market rally is likely nearing its conclusion."


A general sector update on Australia's technology stocks has opened up a rather noticeable divide between JP Morgan and local retail partner Ord Minnett.

Ord Minnett white labels JP Morgan's research, with added opinion and views from a select group of its own in-house analysts, which seldom shows wide divergences from Big Brother's research.

But a five-step tiered rating system, versus only three for JP Morgan, plus some differences in views, quickly creates different dynamics between the two research partners.

The most obvious observation consists of less Buy ratings from Ord Minnett (as many less-positive Accumulate ratings cover JP Morgan's Overweights).

This leads to a smaller section of Buy ratings for Bravura Solutions ((BVS)), Data#3 ((DTL)), Hub24 ((HUB)), NextDC ((NXT)) and Superloop ((SLC)).

Key differences are JP Morgan only rating Hub24 Neutral, while also having Overweight ratings for Altium ((ALU)), Iress ((IRE)), WiseTech Global ((WTC)) and Xero ((XRO)).


In local retail, Citi continues to have a preference (and Buy rating) for Coles Group ((COL)), Woolworths Group ((WOW)), JB Hi-Fi ((JBH)) and Super Retail ((SUL)).

For exposure to housing market leverage, Citi analysts prefer Harvey Norman ((HVN)) and Nick Scali ((NCK)). In fashion (in the broadest sense possible) current favourites are Lovisa Holdings ((LOV)) and Michael Hill International ((MHJ)).

The preference among retail REITs sides with Scentre Group ((SCP)) and Charter Hall Retail REIT ((CQR)).

Colleagues at Jarden stick with youthful consumers that can continue to spend, hence Universal Store Holdings ((UNI)), Accent Group and Premier Investments ((PMV)) are high on the list of favourites, alongside Treasury Wine Estates ((TWE)), The Reject Shop ((TRS)), Domino's Pizza ((DMP)), Woolworths Group, Costa Group ((CGC)), Wesfarmers ((WES)) and Flight Centre ((FLT)).

Jarden remains not keen on JB Hi-Fi, Endeavour Holdings ((EDV)), Nick Scali and Kogan ((KGN)).


With private equity suitors commanding headlines in local media on a weekly basis, analysts at UBS have dug deeper into the local share market to assess which companies could be high on suitor's lists for a leveraged buy-out.

UBS' conclusion is funds management and retailers stand out as most attractive. This should not surprise given both sectors have been severely de-rated in 2022.

Yet GrainCorp ((GNC)) and Vulcan Steel ((VSL)) seem to rank the highest in the research, beating many other attractive looking candidates (sitting ducks?) including Super Retail, Adairs ((ADH)) and Accent Group ((AX1)), as well as Magellan Financial Group ((MFG)), Platinum Asset Management ((PTM)) and GQG partners ((GQG)).


Credit Suisse's Model Portfolio guardians have highlighted three high-conviction calls from the broker's small-cap research team; Webjet ((WEB)), GUD Holdings ((GUD)) and McMillan Shakespeare ((MMS)).

Credit Suisse's all-cap Model Portfolio recently switched out of Harvey Norman into Brambles ((BXB)) to become more defensive and reduce exposure to consumer discretionary.


On Thursday, FNArena reported how Morgan Stanley was making the case for adding gold exposure to portfolios.

Morgan Stanley liked Evolution Mining ((EVN)) and Newcrest Mining ((NCM)) the most, but downgraded Northern Star ((NST)) to Equal-weight and kept Regis Resources ((RRL)) on Underweight.

Colleagues at UBS had similar ideas, with their list of favourites consisting of Northern Star, SSR Mining ((SSR)), Evolution Mining, Gold Road Resources ((GOR)) and De Grey Mining ((DEG)) with both Newcrest Mining and Regis Resources rated Neutral.

Analysts at Macquarie, however, have a differing view. They believe as inflation will start trending down, and this creates an automatic headwind for gold and gold producers. Macquarie is thus of the view last week's sector rally offers an opportunity to sell into.

Macquarie's Top Picks for the sector are Norther Star, Gold Road Resources and, among smaller-cap names, Bellevue Gold ((BGL)) and De Grey Mining.

Research To Download

Research as a Service (RaaS) on:

-Betmakers Technology Group ((BET)) https://www.fnarena.com/index.php/download-article/?n=7C863347-92CD-4F44-D5AA3FA70E6BE0A8

-Metarock ((MYE)) https://www.fnarena.com/index.php/download-article/?n=7C981AEC-ECB2-13F0-C6EB98205E7F15B9

-Pointerra ((3DP)) https://www.fnarena.com/index.php/download-article/?n=7C9C2836-943D-1B67-BAD0F1CAA5B4AEF4

-Spenda ((SPX)) https://www.fnarena.com/index.php/download-article/?n=7CA3606B-94E3-9E60-F729A1697CE92A53

FNArena Talks

My latest interview by Peter Switzer includes a funny editing oversight (or two) but I'm on after circa 15 minutes, talking equity markets, inflation, interest rates, central banks and corporate profits.

Among those names receiving a mention are the Vanguard Australian Property Securities Index ETF ((VAP)), gold, Xero ((XRO)), Amcor ((AMC)), CSL, ResMed, Audinate Group ((AD8)), IDP Education ((IEL)), and WiseTech Global.

Total duration is circa 30 minutes: https://www.youtube.com/watch?v=mJ-HIHCKxUg

AIA Investor Day In Sydney

I won't be presenting this time around, but I might make a surprise attendance at the Australian Investors Association's (AIA) Investor Day in Sydney later this month.

Those interested in attending, use coupon RUDIpromo for a super early-bird ticket price of $59 only - includes lunch, morning and afternoon tea and networking drinks at the end of the day.

Sydney, on November 25:


(This story was written on Monday, 7 November, 2022. 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: info@fnarena.com or via the direct messaging system on the website).



Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $480 (incl GST) for twelve months or $265 for six and can be purchased here (a subscription to FNArena might be tax deductible):


article 3 months old

Rudi’s Views: Pre-August Observations

In this week's Weekly Insights:

-Pre-August Observations
-Reporting Season: Early Signals
-ASX/S&P Index Rebalance Predictions
-Conviction Calls
-All-Weather Model Portfolio
-FNArena Talks

By Rudi Filapek-Vandyck, Editor FNArena

Pre-August Observations

To borrow a famous quote from Winston Churchill and make it my own:

You can depend upon the share market to do the right thing. But only after it has exhausted every other possibility.

And so it is with great delight that I have been witnessing the return of buyers to share prices in some of the highest quality and resilient business models listed on the ASX. Think CSL ((CSL)), Cochlear ((COH)) and ResMed ((RMD)), but also Amcor ((AMC)), TechnologyOne ((TNE)) and Woolworths ((WOW)).

Both analysts and investors might at times find it difficult to warm towards these High Quality stalwarts, usually because the valuation never looks as attractive as for lower quality, smaller cap and cyclical companies, but it is my observation when times really get tough and uncertainty dominates the broader picture, these are the Go-To companies that will stabilise and rise first amidst turbulent and volatile times.

Always difficult to pinpoint exactly when that moment arrives, but in 2022 it seems to have arrived in early June, just before share prices for the likes of BHP Group ((BHP)), Woodside Energy ((WDS)) and Fortescue Metals ((FMG)) started to break down. Take a look at share price graphs for the likes of CSL, Cochlear, Woolworths and TechnologyOne and admire how strong the rebound is that has occurred over the past six weeks.

I think we can now conclude the market is comfortable with valuations for these High Quality companies following this year's general de-rating as bond yields had to reset from exceptionally depressed yields. At the same time, with the risk of an economic recession looming, or at the very least a significant slowdown, the apparent rebound is equally the market's call on (much lower) earnings risk.

In simple terms: amidst a multitude of risks surrounding the upcoming August reporting season, as well as the eight months ahead of next year's February season, where do we all think the greatest risks lay for downgraded earnings and reduced dividends?

I think the market is showing us where the risks are the lowest.


Traditionally, a recovery in share prices of CSL & Co marks Phase One in the equities market recovery, so which sectors might be up next?

With a rare exception of, maybe, coal prices, I continue to see large question marks obfuscating the outlook for iron ore, base metals, oil & gas, precious metals, EV battery materials, steel and most other cyclicals. Serious questions remain about what exactly is happening inside the Chinese construction industry; what will happen in Europe during the upcoming winter; or the duration of the strength and direction of the US dollar.

These unanswered enigmas all represent additional risks on top of the one key question in mid-2022: how recession-proof exactly are those businesses?

Note: even if there won't be a recession anytime soon, it is most likely that question will still be asked by nervous investors.

My focus thus naturally shifts towards technology and smaller cap growth companies, as well as to the local REITs. All three market segments have been trading under serious duress this year, as first excessive exuberance needed to be priced-out and then the natural de-rating kicked in from higher bond yields.

There is one caveat that needs to be highlighted: that optimism that has been creeping into share markets these past weeks is based upon a general belief that inflation will peak soon, as well as that bond yields will mostly trade sideways from here onwards, i.e. the peak in 10-year bond yields is well and truly past us; at least for the time being.

These are all-important requirements for those three sectors to experience a sustainable recovery from beaten-down share prices. Plus, of course, the next question that will be asked is: how recession-proof exactly are those businesses?

If ever anyone has the feeling that investing during a raging bull market is so much easier, well, that feeling is probably 100% correct.

One problem with local technology and smaller cap growth companies is most have a rather limited track record and, with exception of the exceptionally brief recession of 2020, there's no reference or framework for how these business models operate when confronted with economic stress tests.

Which is probably why, being a cautious investor, approaching the upcoming reporting season with a great deal of caution seems but the logical thing to do. And that's assuming August does not come too early in today's cycle, leaving key questions for the next eight months.

Either way, I am of the belief that, here too, the market is providing investors with valuable clues as to the various risk profiles of companies that are either technology or promising high growth small cap opportunities.

I am generalising now, but there should be very little surprise as to why shares in TechnologyOne have not nearly fallen as much as, say, Kogan ((KGN)), Nuix ((NXL)), Redbubble ((RBL)) or Zip Co ((ZIP)), and they have been quicker in staging a noticeable recovery.

Mr Market can be a highly unreliable weather vane, and the next tantrum might be but another economic update away, but my experience is that when it comes to separating the wheat from the chaff, i.e. identifying which companies are High Quality and which ones are certainly not, Mr Market's communication is often loud and clear, and correct.

Note, for example, how both Objective Corp ((OCL)) and WiseTech Global ((WTC)) issued a positive market update in July. Yes, of course, one can potentially make a higher return out of a share price that has fallen a lot further, but what is the real trade-off when adjusted for the risks involved, as well as when taking a longer-term view?

Lower quality fly-by-nighters tend not to perform well over a longer period of time. This is the confusing message the share market throws at bargain hunters: it does not account for the risks involved.

Having said all of that, certainly following the firm bounce in share prices since early June, there should now equally be a degree of caution when buying into the local High Quality names. If they're in the portfolio already, congratulate yourself. Your decision from the past has once again been vindicated.

But as also indicated by current valuations and price targets for those stocks, buying now runs the risk of low returns in the immediate, and there always remains the risk for disappointment in August, for higher bond yields, or for inflation to stick around for longer.

This is the share market, remember? Other opportunities will present themselves.

Some of the most obvious opportunities, it would seem, are among local REITs. Just about every sector analyst has conducted a general review of the sector over the past two months, and not one has drawn a different conclusion to most ASX-listed REITs seeming undervalued.

The one requirement for this sector to genuinely and sustainably close the gap between share prices and intrinsic valuations is for investors to become comfortable with the outlook for bond yields (thus: inflation and central bank policies), about which we can all make various forecasts, but this can take a while, still.

Since most REITs are, operationally, in good health, which also applies to balance sheets, investors can opt for the waiting game, while confidently cashing in relatively high distributions to shareholders.

Exactly how to play this sector is very much dependent on personal views and preferences. Sector heavyweight Goodman Group ((GMG)) is usually singled out as a lower-risk exposure, but it also pays out a rather low yield in distributions. See the earlier remarks about quality and risks, which also applies to REITs.

Potentially higher returns, including a higher yield in distributions, can be derived from owning Charter Hall ((CHC)) or Qualitas ((QAL)), while the likes of HomeCo Healthcare & Wellness REIT ((HCW)), HomeCo Daily Needs REIT ((HDN)) and Charter Hall Retail REIT ((CQR)) look well-undervalued.

Some in this sector, like Waypoint REIT ((WPR)), are now closing the gap with analysts' targets rather rapidly.

Investors should, however, not ignore that parts of the sector might still have vulnerable balance sheets combined with the potential for disappointing operational performances. Macquarie in a recent report highlighted Scentre Group ((SCG)), Charter Hall Long WALE REIT ((CLW)) and Dexus Industria REIT ((DXI)) within this context.

JP Morgan, on the other hand, has nominated GPT Group ((GPT)) as its least preferred A-REIT because of low interest rate hedging, significant vacancies inside the Office portfolio and a higher geared balance sheet, ahead of a likely devaluation in asset values.


The FNArena-Vested Equities All-Weather Model Portfolio owns shares in Goodman Group, as well as in HomeCo Healthcare & Wellness REIT, alongside Super Retail Group ((SUL)) and Telstra ((TLS)) for their reliable and dependable dividends.


The various selections available to paying subscribers via the All-Weather Stocks section on the website have seen a few changes in light of this year's changing share market context.

No longer represented under the label of Emerging New Business Models are Fineos Corp ((FCL)), Megaport ((MP1)) and Symbio Holdings ((SYM)). This is not to say these beaten-down share prices cannot become a profitable investment in the months or years ahead, but I believe their respective risk profiles no longer justify inclusion.

On the other hand, earlier this year I did add Steadfast Group ((SDF)) as a Potential All-Weather Performer, and I have since also added Endeavour Group ((EDV)) and Objective Corp ((OCL)) to the same selection.

WiseTech Global ((WTC)) has made a come-back under Emerging New Business Models. It was once removed due to bad governance practices which I hope are now well and truly in the past.

The selection I umm and ah the most about are local Dividend Champions, which is now officially under review.

Paying subscribers have 24/7 access to all lists, personally curated by myself, on the dedicated All-Weather Stocks section on the FNArena website with the explicit warning that none of it is investment advice.

Reporting Season: Early Signals

The local reporting season hasn't genuinely started just yet, but early signals mimic initial reports from the Q3 reporting season over in the USA: investors should prepare for heavy swings either way.

One of the disappointing market updates in Australia stems from Jumbo Interactive ((JIN)) as the online reseller of lotteries was believed to be poised for a strong performance in August. Instead the share price got dumped on Friday. Higher costs and lower margin sales seem to have been responsible for the miss in guidance.

But there's a twist in the Jumbo story. With just about every analyst maintaining the longer-term, structural growth story remains intact, investors holding large swathes of cash would be hoping there will be more Jumbo experiences over the weeks ahead with companies that have their longer-term interest.

In the same vein, analysts thought Rio Tinto's ((RIO)) quarterly production report was weak and that share price would probably have fallen more on the day if it hadn't already weakened that much over the month past. Rio Tinto's weak quarter follows a number of soft updates and operational disappointments from smaller cap producers over recent weeks.

Credit Suisse, in its update on Sandfire Resources ((SFR)), highlighted a different kind of risk that resides within the smaller cap resources sector with the FNArena Broker Call Report stating on Friday:

"The broker raised concerns around Sandfire Resources's cash generation, and ability to service debt in the next 6-12 months, and believes the company is likely to suffer funding challenges if commodity prices continue to decline."

To stay with the swings and roundabouts narrative, a number of companies surprised in a positive sense throughout the week past, including Data#3 ((DTL)), Eager's Automotive ((APE)), Viva Energy ((VEA)), and WiseTech Global. Given where share prices are, generally speaking, those share prices are likely to be rewarded.

And herein lays the key challenge for investors over the coming six weeks: there will likely be an oversized number of disappointments, but not every "miss" is a bad thing. Similar to earlier in the year ahead of the February reporting season, everyone who owns shares must accept that "misses" will occur, and they are simply not always predictable.

Add the CEO suddenly jumping ship at EML Payments ((EML)) and ANZ Bank ((ANZ)) buying the banking operations from Suncorp Group ((SUN)) and there might be enough surprise and excitement on offer this season to keep even the most stoic among us on their toes.

A healthy dose of cash reduces risk and offers opportunity, as does patience. Meanwhile, the public debate -globally- rages on about recession yes/no and central bankers continuing to tighten aggressively yes/no.

Nobody ever promised this was going to be a walk in the park.

ASX/S&P Index Rebalance Predictions

The next rebalancing of local share market indices is not due until September but this doesn't stop analysts at Wilsons already reflecting on and publishing predictions of which stocks might get booted out or included.

With some indices, like the ASX300. currently running below capacity there's anticipation September will see a noticeable catch-up with more inclusions than exclusions.

Wilsons is expecting 13 new members for the ASX300 in September, and given six vacancies this forecast only requires seven removals.

Most likely fresh inclusions, on Wilsons' assessment, are Boss Energy ((BOE)), Mincor Resources ((MCR)), Ebos Group ((EBO)), Neometals ((NMT)), Ventia Services Group ((VNT)), Grange Resources ((GRR)), Australian Clinical Labs ((ACL)), OFX Group ((OFX)), Maas Group ((MGH)), Macquarie Telecom ((MAQ)), Seven West Media ((SWM)), Arafura Resources ((ARU)), and Argosy Minerals ((AGY)).

Those believed will be booted out in September are: AVZ Minerals ((AVZ)), PPK Group ((PPK)), Nuix, AMA Group ((AMA)), BWX ((BWX)), Redbubble, and Dubber Corp ((DUB)).

The ASX200 will already see one change on Thursday this week when soon-to-be-acquired Uniti Group ((UWL)) is to be replaced with West African Resources ((WAF)).

Wilsons sees five more probable changes in September with all of Charter Hall Social Infrastructure REIT ((CQE)), Johns Lyng Group ((JLG)), Capricorn Metals ((CMM)), Genworth Mortgage Insurance Australia ((GMA)) and Sayona Mining ((SYA)) poised to replace AVZ Minerals, Zip Co, City Chic Collective ((CCX)), EML Payments and Life360 ((360)).

As far as the ASX100 goes, Wilsons is predicting one probable change with nib Holdings ((NHF)) as a replacement for Virgin Money UK ((VUK)).

It is also possible that Shopping Centres Australasia ((SCP)) replaces Tabcorp ((TAH)), while still an option, but at this stage labeled as "unlikely" are the inclusions of TechnologyOne and Charter Hall Long WALE REIT for which Star Group Entertainment ((SGR)) and ARB Corp ((ARB)) would have to lose their spot.

As per usual, there are likely no changes to be announced for the ASX50 or ASX20 with Wilsons ascribing an unlikely chance for replacement of respectively Lendlease ((LLC)) with Lynas Rare Earths ((LYC)) and of James Hardie ((JHX)) with South32 ((S32)).

Historically, any changes to the ASX200 have the largest impact as institutions often cannot own stocks that are outside of that index. Also, when a stock moves inside the top100 it officially becomes a large cap, meaning institutional small cap investors are forced to sell it in-line with their mandate.

Standard & Poor's is scheduled to announce the September changes on Friday the 2nd, to be implemented two weeks later, on Friday the 16th, after the close of the market.

Conviction Calls

Morningstar recently updated its Global Equity Best Ideas which saw the fresh inclusion of Berkshire Hathaway, but for the brevity of today's report, let's stick with the ASX-listed ideas.

Morningstar's methodology is heavily weighted to valuation, and on the assumption there is a price for everything, its collection of best opportunities can sometimes lead to some odd bedfellows (so to speak).

Hence, specifically for Australia and New Zealand, the following Best Ideas have been put forward:

Newcrest Mining ((NCM)), TPG Telecom ((TPG)), Kogan, InvoCare ((IVC)), G8 Education ((GEM)), a2 Milk ((A2M)), Woodside Energy, Magellan Financial Group ((MFG)), Westpac ((WBC)), Aurizon Holdings ((AZJ)), Brambles ((BXB)), Lendlease, WiseTech Global, AGL Energy ((AGL)), and Fineos Corp.


Morgan Stanley's Australia Macro+ Focus List consists of the following 11 holdings: Amcor, Computershare ((CPU)), CSL, Goodman Group, Macquarie Group ((MQG)), Orica ((ORI)), Qantas Airways ((QAN)), QBE Insurance ((QBE)), Woodside Energy, and Telstra.


Ord Minnett has highlighted the virtues of owning Telstra to its clientele, with Australia's number one telco sharply reducing debt on the back of asset sales and offering a rather steady-as-she-goes, non-discretionary growth profile at a time when many other businesses will be challenged.

Telstra shares have provided a total positive return of 6.9% over FY22 while the market overall ended with a negative return, points out the broker. Given Telstra's balance sheet is limited in franking credits, and more asset sales remain on the agenda, Ord Minnett is anticipating share buybacks will complement the juicy dividend over the coming years.

The combination of growing cashflows and buybacks might push up the annual dividend to 22c by FY25, reckons the broker. Ord Minnett estimates capital management at the telco could reach an additional $3bn over the next three years (FY25).

Telstra was included in the All-Weather Model Portfolio in early 2021 for exact those reasons, as the Portfolio always owns a number of reliable dividend payers.


With smaller cap healthcare services providers facing their most difficult trading environment in years, according to Wilsons' research, the broker has identified two favourites in Silk Laser Clinics ((SLA)) and Capitol Health ((CAJ)).

In contrast, Wilsons predicts Pacific Smiles ((PSQ)) and Integral Diagnostics ((IDX)) may struggle to re-rate back to the good old times.


The language is finding its way into stockbroker updates these days as witnessed by the following quote from a recent report by stockbroker Morgans:

"We call out key all-weather companies we think are most capable of resisting cost inflation".

Those 'All-Weather' companies, on Morgans' assessment, are Woolworths, Coles Group ((COL)), CSL, Amcor, REA Group ((REA)), AGL Energy, ALS Ltd ((ALQ)), Corporate Travel Management ((CTD)), Treasury Wine Estates ((TWE)), and PWR Holdings ((PWH)).

The broker's Best Ideas for commodities stocks are BHP Group, Santos ((STO)), South32, Whitehaven Coal ((WHC)), and New Hope Corp ((NHC)).

Companies identified for potential disappointment in August: APA Group ((APA)), Ansell ((ANN)), Star Entertainment, Bapcor ((BAP)), Ramsay Health Care ((RHC)), and Blackmores ((BKL)).


Emerging companies analysts at JP Morgan have nominated GUD Holdings ((GUD)) as their Top Pick and Flight Centre ((FLT)) as Least Preferred.


Analysts at stockbroker Morgans have nominated their favourites among ASX-listed retailers: Lovisa Holdings ((LOV)), Breville Group ((BRG)), and Universal Store Holdings ((UNI)).


Investors looking for a positive thesis from here onwards, you don't have to look any further than JP Morgan strategist Marko Kolanovic:

"While growth risks are elevated, our base case looks for an acceleration in global growth in the second half of the year, led by China, and a moderation in inflationary forces that should allow central banks to pivot."

All-Weather Model Portfolio

Mid-year review & update for the All-Weather Model Portfolio - better than most, but still suffering a small loss over the twelve months past. Cash really was King over the months past.


FNArena Talks

My presentation at the Australian Gold Conference (30 minutes):


Podcast - Spark your F.I.R.E. (57 minutes) on this year's Bear Market and how to survive it:


Peak Asset Management debate whether the bottom is in for this Bear Market (I am one of five participants, 63 minutes):


(This story was written on Monday 18th July, 2022. 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: info@fnarena.com or via the direct messaging system on the website).



Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $480 (incl GST) for twelve months or $265 for six and can be purchased here (a subscription to FNArena might be tax deductible):


article 3 months old

Rudi’s View: Peter’s Portfolio Reviewed

Peter's Portfolio Reviewed

By Rudi Filapek-Vandyck, Editor FNArena

Occasionally I am being asked to cast my eye over someone's investment portfolio and give my honest opinion.

Time and other constraints (no financial advice!) often prevent me from responding in-depth. This week I have decided to dig deeper and provide more colour in response to the latest request, and share my insights with a broader audience.

The portfolio in question contains the following stocks:

-a2 Milk ((A2M)),
-Audinate Group ((AD8))
-Amcor ((AMC))
-Ansell ((ANN))
-Bapcor ((BAP))
-Bigtincan Holdings ((BTH))
-Breville Group ((BRG))
-Catapult Group International ((CAT))
-Cochlear ((COH))
-CSL ((CSL))
-Goodman Group ((GMG))
-Kogan ((KGN))
-Megaport ((MP1))
-NextDC ((NXT))
-Pro Medicus ((PME))
-TechnologyOne ((TNE))
-Wesfarmers ((WES))
-Woolworths ((WOW)).

The General Framework

First up, when it comes to portfolio construction, I am a firm believer in creating a general framework with one eye on the immediate circumstances and one eye on the long-term. There's only so much we can confidently predict and/or anticipate, which is why a truly diversified selection of companies will prove its true value over time.

Having said so, investors should never be afraid to make changes. Things change. The world has been changing quite profoundly post-GFC. The past few years have seen multiple shocks to the global system that all had major impacts on trends and general market dynamics.

Don't believe for a second that this time is never different from the past. It has been different on every single occasion!

Whereas covid has had a significant impact on the world, and on markets, since 2020, investors must now consider whether the Russian invasion into Ukraine and the subsequent response from the Biden administration and its Western allies might not have an even greater impact in the months and years ahead.

Things to consider in the short to medium term:

-Is inflation near its peak and about to trend downwards? Hopefully the answer is 'yes', but we cannot be 100% certain.

-Will central bankers have to choose between taming inflation or keeping economic momentum in the positive? The Federal Reserve is behind the curve and needs to step on the accelerator. Historically, this is when bad things happen. Who knows how strong exactly the US economy remains in the face of aggressive tightening?

-Will there be a recession? The pressure is on for Emerging Economies, also not helped by a weakening Chinese economy and sanctions on Russia. But the most obvious pick for the next recession is Europe where economies broadly haven't grown post-GFC (and often for much longer), and household budgets already were under pressure from stagnant wages when confronted with rising food and commodity prices. Now a genuine energy crisis is piling on further pressure.

-Is Australia still the Lucky Country? In light of serious challenges for Europe, China and other parts of the world, and unanswered question marks about the trajectory in the US, it looks like Australia might yet again stand out in a positive light.

Inflation over here is still quite contained, the RBA is not in a hurry, the local housing market might be deflating, but that doesn't automatically translate into 'disaster', and the world is short crucial basic ingredients Terra Australis has in abundance; iron ore, copper, coal, nickel, uranium, the list goes on.

-Quo vadis the Aussie dollar? One additional complication is that when Australia truly stands out on the global scene, the Aussie dollar might grab the limelight and become a lot stronger.

Apart from one-eyed market sentiment which pushes investors into chasing the momentum of the day, the AUD is one key reason as to why a buoyant super-duper, never-ending party for commodities can easily become a big negative for most companies listed on the ASX. If the pressure doesn't show up in thinner margins, the currency might wreak havoc through the translation of foreign sales.

-The megatrends from yesteryear haven't gone missing, of course. It's just that, for the time being, general attention is focused elsewhere.

-What's the market impact from tightening liquidity? Having injected unprecedented, previously unimaginable liquidity into the global financial system, central bankers are now increasingly looking into how they can reduce it. This is in particular the case at the Federal Reserve.

We don't know exactly how this increased liquidity has impacted on assets and on markets, but if it has been a positive in the past, what then will be the consequences of reducing it? My suspicion is that the impact will be felt first through the more speculative segments, including crypto currencies & NFTs, and microcap stocks, but admittedly, I am simply sticking one wet finger into the air. We shall have to wait and see.

The above list is incomplete, and not without contradictions, but such is life as an investor. Equity markets don't seem too worried just yet about the risks that lay ahead, but as we all know, that can change pretty quickly (see the first weeks of the calendar year, for example).

The Individual Stocks

With all of the above in mind, now let's have a look at the individual portfolio constituents.

-The a2 Milk Company

Since co-listing on the ASX in 2015, a2 Milk has literally changed people's lives. That's but the logical result when a share price appreciates from an initial 56c to a peak of nearly $20 by mid-2020 when covid had investors running for apparent safe-havens. The demise in the share price since has been nothing but brutal. In 2022, a2 Milk shares are oscillating around the $5 mark, and there doesn't appear to be much life left (at the moment) in the former market darling.

Obviously, too many investors are in the same position in that they refused to acknowledge the general context has changed for a2 Milk. Many have now been left to ponder why they didn't sell when the share price was at a much higher price level.

Always easier to draw conclusions in hindsight, but the -75% fall in the share price has laid bare two major barriers most investors need to overcome (and many never do): to acknowledge when a good news story changes into failure and disappointment, and knowing when to sell.

I think we all want to prevent ending up in a situation where the losses are so large, it literally causes a headache simply thinking about it. It can be done. Draw a line in the sand beforehand, be it at -15%, or -20%, or -30%; it doesn't matter where precisely, but set your ultimate limit for instant capital loss, and stick by it.

I often recall my personal experience with Slater & Gordon ((SGH)) whose shares I sold at a loss, but at least I did not stick around to see the share price ultimately sink by -96%!

Having said so, what should one do when still holding a2 Milk shares today?

Risk hasn't evaporated, and things can still deteriorate further. But there is equally upside potential from a management team that is all too aware that shareholders are, and have been, suffering. Maybe they'll sell some assets? Maybe a larger international competitor might have a go at buying the lot? Maybe things can finally improve operationally?

Whatever the decision at this point, it has to be made with patience in mind, and with the understanding that more bad news can still be next. Then there's that other major error too many investors make: anchoring their view on the share price from the past. a2 Milk is not going back to its glory days anytime soon, if ever. That pretty much is a guarantee I am willing to provide (do the maths!).

What not to do? Anchor your mind on $10, or $15, or $20 or wherever the share price has been. Start from a clean slate. Today's journey starts at $5.

Alternatively, and I can confirm this from personal experiences, don't underestimate the relief that kicks in once you got rid of that blatant failure in your portfolio. It's almost like you teared down walls, opened up all the windows and gave your mind the opportunity to broaden its scope again, free from long-lasting, debilitating shackles.

Taking a much broader vision, as an investor, we simply have to be mindful of the fact that most companies cannot continue performing over a long period of time. There's literally no value in getting stuck in the past; mentally, financially, or otherwise.

-Audinate Group

Audinate Group is one highly promising local technology developer whose growth outlook has been seriously impacted by two major events since its IPO in late 2016. First came covid, closing down all stadiums and outdoor venues. Next came a global shortage in semi-conductors ("chips").

For a company that is potentially developing the next global standard for wireless -"point-to-point"- audio-visual equipment and network-infrastructure, both major events have created major bumps in the road. No wonder, the share price has now given up all gains that were made since 2020.

Come to think of it, that is not too bad a result, in the bigger scheme of things. Other technology companies that are equally not profitable have seen their shares fall by -75% over the past six months or so. For Audinate shares the losses are, thus far, less than -40%. Ok, that is still a big loss, but it does signal investors still believe in the growth story and in the company's potential.

The main problem investors, and management at the company, are facing is that nobody knows when exactly that global shortage will be resolved. Here too, it turns out, the war in Ukraine has had an unforeseen negative impact. Judging from ResMed's recent indications, it appears chip shortages are still getting worse in the short term. This is a problem that is completely outside the control of the companies concerned.

Patience seems like the best remedy here. Or to summarise Audinate's predicament in a buddhist manner: shit happens, what do you do?


Packaging giant Amcor is one of the truly international operators on the ASX though, ironically, since the spin-off of Orora ((ORA)) in December 2013, it no longer has any operations in Australia or New Zealand. Amcor's second-life glory days started with the acquisition of Alcan Packaging from a debt-ridden Rio Tinto during the tumultuous GFC-period.

Amcor has a stated target of providing shareholders with a 10% annual return, which is not always possible, of course, but a steadily growing dividend (yield above 4%) is a great place to start from. On outdated sector-qualifications, Amcor is part of the Materials sector, side by side with BHP Group et al, but take it from me, Amcor is a solid, international, defensive growth company whose accumen has usually been underestimated.

There is a lot more technology and innovation going on in the global packaging industry than most of us appreciate. Amcor works with/for the largest consumer-oriented multinationals of our time. From drink bottles to pre-packaged food and medicines; it all requires a flimsy wrap, or more.

Amcor is part of my selection of All-Weather Performers on the ASX. I consider it typically a stock to own for the long time, Warren Buffet-style. Yes, the industry is not without its challenges (no industry is). Yes, given its international character there is always a problem somewhere, if not in Venezuela, then in Russia or the Ukraine. Yes, it nowadays reports in USD, which makes it vulnerable to AUD-appreciation. No, there is no franking on the dividend. And its contracts typically allow for cost inflation pass-through with a delay.

But every time the world turns cautious and seeks protection, investors know where and how to find Amcor. Should prove resilient during times of economic distress.


Ansell is what is left on the ASX from the old Pacific Dunlop conglomerate. The company has gone through significant changes since it changed name in 2002. Traditionally, Ansell is put in the same basket as CSL, ResMed et al, but only half (roughly) of its latex-related products are sold into the healthcare sector; the other half consists of selling gloves and other protective gear to manufacturers, professional cleaners, builders, chemical companies, and even the mining and oil & gas industries.

Ansell shares many similar characteristics with Amcor; lots of products and customers spread out over many geographies, stable margins, an under-appreciated innovation drive, a long history of delivering shareholder value, etc... Though the key difference between the two is equally important: Ansell is much smaller than Amcor (US$2bn in annual sales and $3.3bn in market cap versus US$12bn and $23bn respectively) plus it has exposure to direct-to-households channels, which makes it more vulnerable to competition from cheap alternatives.

The latter also means Ansell is less protected against rising input prices. Occasionally, these greater vulnerabilities show up, and 2021/22 is one prime example of this. In 2020, Ansell was revered as a prime beneficiary of the global pandemic. Today, the shares represent "deep value", which is quite the extraordinary turnaround in market perception and treatment.

Six months may seem like a long time on the share market, it's next to nothing when running a business and trying to solve problems. Ansell has disappointed in two results seasons in a row. Can management start anew in August? No guarantees are available, but what we do know is this company has an excellent longer-term track record and today's share price valuation looks severely undercooked.

All that is required, possibly, is some good news and an indication of a successful turnaround.


Autoparts distributor Bapcor listed as Burson Group on the ASX in 2014. Thanks to my research into All-Weather Performers, I was able to relatively quickly identify this business as being extremely resilient, which it has proven to be. The FNArena/Vested Equities All-Weather Model Portfolio seldom welcomes a recent IPO, instead preferring to wait 3-4 years in order to gauge a new business's true colours, but an exception was made for Burson/Bapcor.

Throughout numerous market tribulations, this has proved a great decision with the share price reaching an all-time high last year above $8, roughly 2.5x times up from the early days on the ASX. But Bapcor is no longer included in the Model Portfolio.

Over the years that Bapcor was in the Portfolio, it had become obvious the company's long-term risk profile is changing, because of the accelerating advent of electric vehicles. But when the news broke of a serious rift between the CEO and the company's board, leading to the abrupt retirement of CEO/MD Darryl Abotomey, the company's short-term profile suddenly became a lot riskier too.

This is why Bapcor shares are no longer in the All-Weather Model Portfolio.

-Bigtincan Holdings

IT services provider Bigtincan Holdings has been a victim of a change in general market sentiment with its share price halving (-50%) in less than seven months. Admittedly, soon after listing on the ASX in 2016 it had quickly become one of the beneficiaries during a time when everything 'software' and 'technology' looked sexy and extremely attractive to investors riding positive market momentum for tomorrow's new economy representatives.

At face value, Bigtincan has a few obvious disadvantages inside the new market context of 2022 triggered by rapidly rising global bond yields: it is not profitable, and profitability looks a few years out at best, its market cap is only $450m with annual sales but a tiny $44m, while negative cash flow only further reduces the investment appeal.

Outside of the occasional rally, which is part and parcel of being publicly listed, it may well take a long time before this company lands back on the radar of the broader investment community (if at all). The days when carrying a 'technology' tag was sufficient to see share prices flying higher are well and truly behind us. Instead, investors are now demanding positive cash generation as a minimum requirement, and Bigtincan does not meet the benchmark.

-Breville Group

Multinational manufacturer and marketer of home appliances Breville Group has been one of the more silent performers on the ASX post-GFC with its share price appreciating more than seven fold over the past fourteen years. Once the company's growth profile got more broadly recognised in about 2018, the share price appreciation accelerated noticeably.

Take a look into the future that is coming towards us and what we see is direct communication between ourselves, our home appliances and the outside world. What if our fridge would signal the local supermarket when the household is running out of milk, which then promptly is delivered to our front door? No more sudden visits at the eleventh hour to save our Sunday morning cuppa experience!

Breville Group is very much part of that future, though it's early days as yet. Positioned as a mid-market player in between cheap-and-nasty and pricey luxurious, Breville is still expanding its international network, which still leaves a lot of growth up for grabs for many more years to come.

The key offsets to that ongoing growth potential are international competitors, such as De'Longhi and Philips, and, naturally, consumer sentiment and household spending. One of the key risks today is Europe facing an economic recession, which seems but a plausible outcome within the current context. But even in better placed economies, such as the US and Australia, consumer spending might well shift away from goods to services, post-lockdowns, which can easily impact on the short-to-medium term pace of growth.

Analysts covering the company believe Breville Group can withstand the negatives from reduced consumer spending through successfully extending its products reach into new geographical markets. This might well prove the case, but the share market in 2022 is not one that takes a positive view first and then waits to see whether that decision is correct.

Breville's share price has thus fallen from $33 in August last year to circa $25 this month. A relatively high PE ratio, typical for a successful growth story as has been Breville's, has not helped either.

Viewed from a broader angle, it can be argued Breville Group trades like your typical consumer-oriented stock, a la JB Hi-Fi and Super Retail, and history for all those stocks shows occasional volatility can be high, as has been proven yet again by Breville since August last year.

It is difficult to see how this success story would be finished right here, right now. It most likely has a lot further to go, but question marks about inventory, supply chains and consumer spending are likely to keep the buyers at bay for the time being.

-Catapult Group International

Catapult Group International offers market-leading technology for a targeted audience; professional athletes. The company initially generated a lot of media attention, and investor enthusiasm, after listing on the ASX in late 2014, but that all changed from mid-2016 onwards when the shares peaked at $4 - a level not witnessed since.

Similar to earlier mentioned Audinate Group, covid has seriously impacted on Catapult's growth plans, and similar as with Bigtincan Holdings, Catapult is not yet profitable, though it has started to report positive operational cash flow. Another positive is that subscription and recurring revenues now represent 86% of annual revenues.

As a non-profitable, technology-driven, small-cap, promising growth company, Catapult shares have nearly halved in a matter of weeks since January, and that was off a level that was pretty much half the peak share price back in 2016. Investors who like to adhere to the narrative that small cap companies by default generate higher returns than large cap companies, pay attention.

Given the trend in revenues and positive cash flow, one would have to assume investors will be looking to get back on board, on the condition that management continues to execute well. Offsetting this optimism is the observation this still is a company with a market cap of $300m only, and not included in the ASX200 or ASX300.

Catapult shares are currently part of the All Ordinaries, as well as the All-Technologies index.


The aforementioned Ansell is not the only remnant of the once glorious Pacific Dunlop on the ASX today. Cochlear too was once part of the same conglomerate. It was spun-off as a separate entity in the early 1990s.

Cochlear is part of the trio that made the healthcare sector the best performing sector on the ASX over the past two decades. Unlike CSL and ResMed though, there are more questions creeping in about Cochlear's true underlying pace of growth.

Those questions will remain unanswered for now, because covid and lockdowns have had a significant negative impact on Cochlear's business. Today's investment proposition is thus very much linked to the re-opening theme, as it is for Ramsay Health Care and a number of other healthcare companies, even though the sector label 'healthcare' and a high PE ratio are not the characteristics most momentum-following market participants will be looking for.

As a global market leader, Cochlear equally suffers when the AUD is in fashion, even though the company still reports in local currency. Most of its revenues are nevertheless derived internationally.

The interim report release in February has injected renewed confidence into analysts' and investors' mindset to anticipate ongoing improvement for Cochlear's business as societies adjust and adopt a post-pandemic 'normal'. It's probably a fair statement to make that, for the next 2-3 years, Cochlear is but an obvious re-opening beneficiary.


CSL remains one of the highest quality, high achievers on the ASX but even the most glamorous success story needs to take a break every so now and then. It happens to the very best and in CSL's case, covid has disrupted US plasma collection, and thus kept the share price under a cloud over the past two years.

Similar to a number of other ASX-listed healthcare companies, CSL is now part of the so-called re-opening trade. With plasma collection data indicating volumes are recovering from virus-interruption, common sense suggests CSL's operations are now in full recovery mode, and that share price, AUD permitting, should respond accordingly.

But what is more interesting, in my personal assessment, is the recent acquisition of Vifor takes Australia's number one biotech into new product territories, outside of its two core competencies of plasma and vaccines. One of the speculations doing the rounds is that CSL might be anticipating future disruptions to its two key businesses (there are new technologies popping up every year) and that Vifor is now adding extra growth optionalities in case such disruption might occur.

CSL has been part of my All-Weather Performers from day one and the Vifor acquisition, when placed in the above framework, once again bears all the hallmarks of a great business led by quality management. I'd simply add: investors take note. CSL's track record suggests Vifor's contribution will likely surprise to the upside in the coming years.

-Goodman Group

I have watched the transformation of Goodman Group, nowadays included in the ASX Top20, from a debt-overloaded property developer that almost went bankrupt during the GFC into a successful fund manager and one of the world's prominent designers & developers of modern warehouses.

Those two key characteristics have turned the company into a mega-trends beneficiary, and the subsequent re-rating of the company's share market valuation means Goodman Group shares are no longer attractive for your traditional yield-seekers. Goodman Group is priced as a growth company these days, which makes it vulnerable to rising bond yields, as it traditionally always has been.

Common sense says the present double-digit percentage pace in annual growth, reliable and dependable as it has been, will reduce to the high single digits that used to be more common over many years prior, but who's to say this will be a problem? For as long as mega-trends continue, and Goodman management keeps its eye on the ball and its finger on the industry's pulse, it's hard to see the underlying uptrend not be extended, beyond the occasional hiccup, with the latter probably related to surging bond yields.


It's hard not to mention the importance of 'governance' and the treatment of ordinary shareholders when writing about online shopping platform Kogan. On the one hand, we have a great coming-of-age story led by a young entrepreneur who, at the age of 23, started this business in his parents' Melbourne garage in 2006.

On the flipside we have a business that has received fines for misleading its customers while management has been accused of releasing press releases to prop up the share price so that directors, including founder Ruslan Kogan himself, can offload equity at a more favourable price (only to be rewarded with additional free stock options).

Of course, when the times are good and get-me-in-too momentum is strong and positive, many an investor doesn't care about such dark spots. There's money to be made! And Kogan shares, just like so many other online retailers, found themselves in an operational sweetspot when covid necessitated lockdowns in 2020, but that narrative has turned sour by now.

Kogan shares peaked in 2020 near $25; they are trading above $5 in 2022. Bloated inventories and ongoing margin pressure have quickly pulled investor enthusiasm back to earth. Contrary to, for example, CSL or Goodman Group, I have yet to spot any signals of a quality, long-term achiever. Can leopards truly change their spots?

When it comes to applying ESG filters, I find most attention tends to go to the E (environment) and the S (social) but I recommend investors not to lose sight of the G (governance).


The world is generating more and more data; it's one of today's undisputed mega-trends. Megaport is the intermediary that connects businesses to data centres via its propietary network-as-a-service (NaaS) offering. The company was founded by Bevan Slattery, local royalty when it comes to investments in telecom and technology following success stories including Pipe Networks, NextDC, Cloudscene and Superloop.

One would be inclined to think the combination of all of the above would guarantee success for Megaport and for its loyal shareholders, which still includes Slattery, but investor appetite has made a big switch in 2022 as rising bond yields and high inflation now require businesses to be profitable, or at least cash flow positive.

Megaport is still in the investment phase and thus neither profitable or generating excess cash out of its day-to-day operations. For the time being, this is a big no-no (double negative). Thus the share price is trading well below broker targets, and well below the levels witnessed last year.

Given the ongoing need for significant investments, as Megaport builds and extends its international platform, and the current mood in financial markets, with a preference for commodities and cyclicals, it remains anyone's guess as to when exactly a company such as Megaport can come back into investor favour.

The safest prediction, no doubt, is that patience will re required.


NextDC is also part of the ever-more-data mega-trend, being the largest local owner and operator of 'neutral' data centres. Apart from Bevan Slattery, NextDC shares with Megaport the fact it is not yet profitable as investments need to be made first in building those data centres, after which clients and sales can follow. NextDC has expanded its plans and footprint multiple times over the years past.

It's a mega-trend, remember? Demand simply keeps running ahead of capacity and availability.

Strictly taken, and I keep repeating this, NextDC might be included in the local All-Technologies index, but it is essentially an infrastructure play, similar to Transurban and Atlas Arteria today - or the NBN if it ever lists on the ASX. In many years from today, NextDC shares will be priced off the forward yield on offer, though, admittedly, this still is a long while off.

The key difference between NextDC and the likes of Megaport is it generates plenty of cash off existing contracts, and there remains plenty of capacity, including data centres under development, to keep this growth story going. The main threat for operators such as NextDC comes in the form of pricing pressure through competition, but with demand growing as strongly as it has, this does not look like an imminent threat.

NextDC shares are equally trading well below consensus target and the near-$14 peak from mid-last year. A stabilisation in bond yields, along with investors becoming more comfortable with the outlook for inflation, might be required before the share price can resume its prior uptrend. The exact timing of this remains anyone's guess.

-Pro Medicus

Pro Medicus offers all the ingredients of a long-term, international success story a la ResMed, Cochlear and Fisher & Paykel Healthcare. It is the global market leader, with the most advanced technology, in a young and unfolding new development inside the global healthcare sector.

Equally important; its contracts are with quality operators, for multiple years and provide excellent visibility. Last week, Pro Medicus announced an 8-year, $32m per annum deal with Inova Health in Northern Virginia, USA. The company has also announced a share buyback over the coming twelve months.

Of all the analysts who cover this company, not one doubts the quality or the growth prospects for Pro Medicus, which cast a dark shadow over most ASX-listed peers on a longer-term horizon. There is, however, a 'but'... and that is the share price valuation.

Even after pulling back from $66-plus, the Pro Medicus share price valuation remains rich on traditional metrics with a price-earnings ratio of 90x-plus. But then again, high quality technology with such a long runway for growth, underpinned by great visibility and recurring income should probably not be measured against the same benchmarks as, say, Healius or Virtus Health.

It is anyone's guess as to when exactly the pre-2022 uptrend can sustainably resume for Pro Medicus shares, but an already high valuation will certainly keep a lid on any rallies while the market's focus is on bond yields, central banks tightening and, potentially, an economic recession.

The best remedy, from Pro Medicus shareholders' point of view, is for the company to continue announcing fresh contracts.


Having survived the Nasdaq meltdown of March 2000, TechnologyOne has grown into one of the most consistent performers on the ASX. Average annual growth in earnings per share post-2004 is in the vicinity of 15%, which is impressive on its own account, and it comes with a high degree of forward visibility too.

Local and federal governments, healthcare providers, universities, and financial institutions; they all rely on the company's tools and services for business analytics, supply chain management, student management, support and training, and other business tasks. With client churn of less than 1%, it appears this is but one of the key ingredients underpinning the unusual solidity on display over such an extended period.

Ongoing strong growth for the years ahead seems all but secured as those sticky customers are being transferred into the cloud (SaaS), away from desk-operated software packages, which also translates into higher margins.

Similar to everything tech-related, TechOne shares have fallen from $13-plus to briefly below $10, but this is all about changing market dynamics and investor preferences. Eventually, the solidity and visibility, combined with margin expansion and steadily increasing dividends, will catch the market's attention again, as it always has.

I personally think of TechnologyOne as one of the most under-rated quality growth stocks on the ASX. This is probably related to the fact that, after all that growth that has accumulated since 2004, the company's market capitalisation is still only $3.5bn. Many high-flyers in the sector have seen their market cap shoot-up to much higher numbers, and then subsequently crash down to a smaller size.

There is a lot of comfort in the profile that TechnologyOne offers, as also on display on a long-term share price chart.


The Wesfarmers conglomerate combines fertilisers with lithium, natural gas, industrial chemicals, and safety workwear but its main growth drivers have been consumer-oriented businesses through Coles (now mostly divested), Bunnings, Kmart, Target, Catch and the recently acquired Australian Pharmaceutical Industries.

If we forget about the shameful failure in the UK, Wesfarmers' track record for allocating capital and accumulating shareholder value throughout the cycles can only be praised, but it has been heavily supported by housing market strength in Australia, which may no longer provide the same support for Bunnings in the year(s) ahead.

Maybe this is where the API acquisition steps into the limelight?

The current market has a dislike for higher PE valuations, plus investors have become concerned about what a slowing housing market and consumer spending under pressure might look like. Such concern is now also reflected in a Wesfarmers share price trading well below the $66 peak from August last year.

Rising costs and supply chain hurdles add to the challenges for Wesfarmers management this year. If history can be relied upon, however, it would not seem wise to bet against management rising above those challenges. Maybe all shall be revealed in August?


Management at Woolworths runs one of the most valuable franchises in the country. Woolworths is Australia's best-run supermarket operator, and this commands a premium valuation. Unfortunately, hubris hit the boardroom in 2014 and this resulted in a brief but painful experience for shareholders during which the share price almost halved over the following two years. That misguided hardware JV with Lowes has been dismantled, and now Endeavour Group ((EDV)) is trading on its own strength too.

Woolworths still owns discount department store Big W, but the key attraction now comes from the solidity and predictability of supermarket sales. Every well-diversified portfolio needs a backbone of lower-risk, dependable and reliable, defensive growth and Woolworths offers just that.

Which is also why Woolworths, as well as Wesfarmers, is included in my selection of All-Weather Performers on the ASX. These stocks do not necessarily perform every day or under all circumstances, but they tend to come out well given enough time. There's a long track record to support that statement.

Longer-term price charts tend to move from the bottom on the left to the top corner on the right.


In summary: A portfolio without banks and commodity producers was always primed for a tough time in 2022 as sharply higher bond yields and more hawkish central bankers have swiftly shifted market momentum out of technology, quality and defensives - stocks that were on the winning side previously.

While true quality companies will not remain out of favour forever, and there should always be room for truly defensive businesses in every long-term portfolio, the same cannot be said about the speculative exposures that have revealed their inner-vulnerability when the market tide turned.

In some cases the market preference has, temporarily, changed. In some case there has been a shift in risk profile, at least for the months ahead.

One of the most difficult decisions to make, for most investors, is to sell when the share price is at a much lower level than the original purchase price. I'd still be inclined to make changes, instead of hoping for miracles to happen. Successful investing includes learning from mistakes, and trying not to repeat them, rather than staying the course, no matter what.

The outlook for equities in the months ahead looks more uncertain than is currently suggested by daily price action, so I'd definitely not be afraid to carry a healthy dose of cash, which can also be put to work when market volatility offers up opportunities.

One alternative course of action could be in adding some exposure to (producers of) commodities. Even if this proves the wrong action at the wrong time later on, the rest of the portfolio should then start to shine, so one is effectively hedging against extended disappointment.

I hope all the above helps with making the necessary decisions.

(This story was written on Monday 11th April, 2022. 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: info@fnarena.com or via the direct messaging system on the website).



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