Equity market review
March has been a generally good month, with our Healthcare names faring well on the 3rd & 4th wave of COVID in Europe (driving SHL specifically) and the lower AUD (driving CSL, RMD, RHC more broadly).
BXB, the ASX, SCP all lifted, and two of our departing CEP names (CWN and SGM) left on valuation grounds having performed quite well (CWN with the Blackstone approach, and SGM due to the elevated scrap steel price resulting in the stock being “fully priced” to our minds).
COL has bounced somewhat, although it is mainly following the higher priced/higher value(d) WOW. In our view the stock has overshot to the downside, and doesn’t deserve the valuation discount relative to WOW.
TPG declined sharply, as the market feared the exit of David Teoh (TPG’s enigmatic founder) signalled a divergence in strategy and or power within the newly merged management ranks of TPG and Vodafone. In our view, Teoh’s well established intent to retire is explanation enough, and further, given Teoh’s (admirable!) track record of a highly competitive price-based offering, we think now is a better time for a more rational/less-cut-throat approach to mobile pricing.
Our positioning remains defensive, with sizeable underweights to cyclicals (metals and mining stocks, discretionary retail, banks) and overweights to Telecos, Healthcare, and a narrowing underweight (i.e. our exposures getting larger) to Infrastructure (with the addition of SYD) and REITs (with the addition of VCX).
There have been some very notable falls over the past month, really from January but accelerating over March, and that’s in the IT sector, and software-as-a-service type companies, which includes several of the buy-now-pay-later names.
This is pleasing to us, as we’ve viewed just about all of them as wildly overvalued, and have been underweight, albeit feeling the drag on portfolio performance, until now (at least). Z1P is shown below as a “special case”, but that’s just to control for the Y-axis (to see the data more clearly) – you can nonetheless spot that HUB, NWL, APT (most of the finance-technology stocks) are down materially, and we expect that underperformance to continue for some time (they are that expensive!).
Gold continues to sell off due to the increase in the real interest rate, although as we’ve noted before, we simply think they became far too overvalued, having overshot the commodity price by a multiple since 2011. The worst performer within the space was Resolute, who had a mining licence issue. “Expropriation of assets” risk is something we are very mindful of when selecting commodity companies, and has kept us away from many an interesting-looking/attractively priced producer over the years, but, we think, is a sensible precaution nonetheless.
The challenge for baby-related stocks continues. The number of new births has dropped notably, with people understandably cautious about procreation over COVID. Add into that a daigou channel in reverse (because of the travel bans) and A2M has a lot of headwinds. It remains a very high quality company, but is not cheap despite halving, and thus we would look to wait for a better entry point before considering it as a CEP candidate.
It is the same with TWE, currently embroiled in the China trade wars. Efforts to source new end markets for millions of litres of wine is no easy thing to do, and the new(ish) news was the “final” confirmation of a 5 year tariff placed on TWE’s products.
We share the below, as worked examples of our process in action. In this instance, we are comparing expectations, and examining them for plausibility, as part of our efforts to understand what’s driving the stock, and what the market’s narrative is.
Here, it is interesting to see the market revisions to SHL’s EBITDA trajectory. You can compare the current blended forward estimates (the 3 bars at the end of the time series) to the historical estimates (the red dashed lines).
These are upgrades associated with the 3rd and 4th wave in Europe, and the associated increased demand for pathology services.
Compare this to say a stock like ALU, where although expectations are still very high, they’ve dropped quite considerably. Those small drops produce enormous changes to valuation models.
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Please note that past performance is not a reliable indicator of future performance.
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