- Earnings & valuations
- Stocks (IRE, ALU, RMD)
- Iron ore
Earnings & valuations
Would the equity market have been 30% above Jan-2020 levels, as it is now, in a world in which COVID never happened? Probably not, we’d suggest. But you can, at the least, make the case that earnings have been a powerful driver of the recovery.
You can likewise make the case that the multiple expansion (market valuations outstripping the earnings growth) has only been possible due to the Fed’s willingness and ability to get real rates to record lows, and Treasury’s willingness to keep households whole.
Note also that despite the powerful nature of the Aussie earnings recovery in the short term, over a longer time frame you get a sense of how anaemic earnings growth has been. That’s true of most countries, bar the US.
And hence the market multiple has ground higher over time, with that recent burst of post-COVID earnings strength helping to modestly reduce the multiple from otherwise near-record highs. And for Australia, much of that earnings growth is commodity centric, and hence more volatile, less predictable, and indeed less sustainable over time.
Stocks (IRESS, ALU, RMD)
We exited our IRE position at $13, when the first indications of a bid started to emerge. We’d made good money, relative to our entry price, and had found the stock sufficiently undervalued that we could give the company the benefit of the doubt regarding the recent lull in earnings growth, given the strong track record.
But the view tabled today – that the company will double earnings over the medium run – as a reason to rebuff the takeover seems… a bit rich.
Altium (ALU), one of our other recent portfolio exits, tabled an equally bullish view of the future as a reason for resisting a transfer in control (with the share price now some fair way south of proposed takeover by Autodesk) and serves as a good reminder of a) deal shortfall risk and b) the dangers of great expectations.
A similar view applies to ResMed (RMD), a truly great business and one we’d owned for many years, across now multiple firms, a stalwart of our portfolios. But even we took the good news of a competitor’s product recall as a door to the exit, because at c50x forward earnings a secular growth thesis just can’t get much better.
Iron ore has modestly, but meaningfully, retraced from its highs. That means it is still high, but has fallen by enough that it should trigger thoughts like “what if winds up like lumber” (see graph).
Yet the drum-beating on why you should buy the double-digit yields currently on offer in iron ore producers (like RIO, BHP, FMG, MIN) is louder than ever. Both sides of the trench are doubling down on their exposures.
We are firmly in camp of $60-90 iron ore prices, in a timely fashion, and that those yields will therefore only be briefly realised. Fine timing the exit (along with everyone else) is a (wooden) bridge too far.
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