Last year, we asked two fund managers what they would do if they could start completely from scratch. It seemed to hit a nerve with our readers, with the episode turning out to be the most popular of the year.
It's likely because we all, at some point in our investment journeys, have cursed the day we bought a particular stock (or let's face it, stocks) - and wished, wholeheartedly, that we could start over. Facing this dilemma, some investors may sell everything and give up for good. Others may just watch on as those losing positions become smaller and smaller pains in their portfolios.
However, it's far better to review your holdings, have an honest conversation with yourself about what worked and what didn't, and develop a plan so that you can better stick to your strategy over the year ahead.
They will share the headwinds they believe you should keep on your radar in 2024 - particularly as the ASX 200 hits a new all-time high, the key opportunities they have identified today, as well as three stocks they would own if they could start completely from scratch.
Plus, unless you invested all your life savings in NVIDIA last year, we've likely all made some mistakes throughout 2023. So, our guests share the most painful position in their portfolio from 2023 - and what they learnt from it.
Note: This episode was filmed on 31 January 2024. You can watch the episode, listen to the podcast or read an edited transcript below.
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In this video:
00:35 Is now the time for a full portfolio reset?
02:15 What are the risks investors should have on their radar in 2024?
04:00 Where are the opportunities?
06:00 6 stocks to watch for a portfolio rest: Pro Medicus (PME), Light and Wonder Inc. (LNW), Aristocrat Leisure (ALL), Resmed (RMD), Pilbara Minerals (PLS)
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we're joined by Jun Bei Liu from Tribeca and Randal Jenneke from T. Rowe Price for a full portfolio reset. Our guests will be sharing with us some of the opportunities they've identified today, the headwinds they believe you should keep on your radars, as well as the three stocks they would own if they had to start from scratch. Thanks so much for joining us today. Really excited for this discussion.
The ASX hit a new all-time high today. Is now a good time for a full portfolio reset? Randal, I might start with you.
Randal Jenneke: Thanks, Ally. I'd say yes. Whenever you reach a higher level in terms of asset values and prices, it's a good time to think about where the opportunities are and if you've done well out of it also, where you want to take some profit. I also think that, given it's the start of the year - I know we're one month in - it's always a good time ahead of reporting season to think about the risks and the challenges. So I think this is a really important time, given that valuations have moved higher. We're probably about one standard deviation above the market average in terms of the multiple over the last 10 years. And earnings risk is also quite high. So I think now is a good time to think about the portfolio, where the risks are, and where the opportunities are.
Ally Selby: We will get into some of those risks later on, but I'll go over to you now, Jun Bei. Do you feel like now is a good time for a full portfolio reset?
Jun Bei Liu: Absolutely. I think, first of all, we always need to have the best portfolio and make sure every stock we hold has its purpose in the portfolio. Now, heading to reporting season, we need to focus on earnings - what are the misses, what are the beats, and what were some of the feedback we got from some of the industry players? So January is an incredibly busy time for us to get these sorts of senses, so we know what the portfolio might look like, and what stocks might look like when the result does come through.
Ally Selby: Okay, before we started filming this, I was talking about reading Howard Mark's memo recently. He talks about there being a lot of "Goldilocks thinking" in the market right now. What are the risks that you think investors should have on their radars in 2024?
Jun Bei Liu: There's always plenty of risk. Last year, we worried about a recession and that never eventuated. This year, I think with interest rates heading lower towards the end of the year, recession risk certainly looks like it's off the table. We think that it's more about the unexpected geopolitical risks or the US election. These are the exogenous shocks that we talk about. It's very difficult for investors to price these in. They're tail risks. They're a small probability, but they could cause an impact. But net/net, I think the equity market actually looks pretty good compared to last year.
Ally Selby: Okay. Over to you, Randal. You talked about there being quite a lot of risk before. What are the risks that you have on your radar right now?
Randal Jenneke: I think one of the things to think about is taking the other side of the consensus view. So the market now is pricing in a soft landing. The economy has been more resilient, earnings have been more resilient than people expected, and I would say that's now priced in. So the main risk is that that gets disappointing, in terms of how things play out. And so this reporting season I think is key. We had a soft retail number for December, and all of the anecdotes are that the economy is quite mixed. So I think the biggest near-term risk is around earnings.
The other risk I think that people are complacent on also is inflation. Everyone's now going to tell you they're going to have this nice, light path and immaculate disinflation. I'm not so sure. I think in the second half of this year, you will worry about that. The geopolitical stuff, in a funny way, we know about it - we just think something bad's going to happen, and normally when that's the case, it doesn't happen. So I worry about those other two risks as the key ones for 2024.
Ally Selby: With all that in mind, where are you finding opportunity?
Randal Jenneke: So again, putting on the contrarian hat, I kind of look at what didn't do well last year, and therefore where the valuations are more attractive, and the fundamentals are getting better. And I think healthcare looks attractive. It was a really tough 2023, whether it's CSL (ASX: CSL) or ResMed (ASX: RMD), a lot of the healthcare stocks disappointed in terms of earnings. I think you've had that rebase, and this year looks good. I think energy looks good as well. Again, tough 2023. The fundamentals I think are looking better, we're kind of basing out. And then finally, I'd say lithium as well, and everyone's going to give you the bad story about what's happening with the lithium price, and obviously, supply is being curtailed. That's a really good thing. So I think it's a good setup for lithium - to buy it this year and really prosper into 2025 and beyond.
Ally Selby: Okay, over to you Jun Bei, where are you finding the most opportunity? In which sectors?
Jun Bei Liu: I must agree, healthcare is incredible in terms of value, but that's the obvious one that your likes of CSL and ResMed should do quite well. But in my view, in terms of the economic reality, we're doing okay. Yes, consumer stock, retailers, and the economic environment will slow down, and consumers will have to pull back, but that's in expectations. People still expect JB Hi-Fi's (ASX: JBH) earnings to fall 25%.
Yes, the share price rallied, but that's on the earnings falling 25%. And so far, it's actually doing okay. Mid this year, don't forget, we've got the tax cut coming through for the lower to mid-income tax bracket households, and they will spend a lot of that money. And now, there's increasingly more fiscal noise from both sides of the party, heading into the budget. So I actually think there's a lot of stimulus coming through for the consumer sector. So I think this sector may have a tough reporting season, a little bit soggy here and there, but it's a little bit mixed. But this is your buying opportunity. I think this sector will do quite well.
Ally Selby: Okay. I am quite excited about this, we asked our guests to bring along three stocks that they would own if they could start completely from scratch. Jun Bei, what would be your three stocks?
Jun Bei Liu: If I could completely start from scratch, I would still own the stocks in my portfolio, and I'd buy them any day. Pro Medicus is number one. I think this stock has an incredibly huge, addressable market. It's expensive, but it is one of the very rare growth finds you can find here in Australia. The next one is Light & Wonder. I think it's a smaller company, less liquid, but it is dual-listed over in the US. It is very fast growing, and catching up to the likes of Aristocrat (ASX: ALL). It has a great management team and it's doing really well. If we are moving to a little bit more defensive, so I think the likes of ResMed is looking very good in the portfolio. It had a very tough year over the last 12 months, but heading into a much better environment this year.
Ally Selby: Okay. Over to you, Randal. If you had to start completely from scratch, what three stocks would you own?
Randal Jenneke: Look, the three stocks I would own are Aristocrat, ResMed, and Pilbara, and I'll tell you why. So starting with Aristocrat, it's the market leader in terms of electronic gaming machines around the world. It's moving into digital gaming as well. But the fascinating thing is it's been a stock that's delivered very strong, consistent earnings growth now for the better part of a decade, but it hasn't re-rated. So from multiple perspectives, it's lower than its average for the last 10 years, and we still think it's got double-digit earnings per share growth to come for the next three years. It's gaining market share. So the momentum we think is going to continue.
The second stock is ResMed. It had a tough 2023 for reasons around some missteps around the cost structure, and concerns about the impact of GLP-1 on the use of CPAP, which is their core business, being in the sleep apnea market. We think a lot of those concerns are overblown, and that's now coming to the fore. And now you are also seeing that Philips, its main competitor, is really going to be out of the market for even longer. So ResMed, we think, is going to be the dominant player globally for quite some time, and its valuation looks attractive.
And then the third stock is Pilbara. And that's again because if you think about it, we are going to require enormous amounts of lithium for many, many years to come, for decades to come. So whilst there's a short-term supply imbalance now as demand has slowed - it's still very healthy, but it has slowed - we think we're going to get this curtailment in supply, bring the market back into balance, and then we're going to see price improvement going forward. Prices have come down by 80%, we think we're at a low, and that's what's going to drive the stock going forward.
But the key point I just highlight behind all those three stocks is that they've all got good valuation support, and I think that's what you need in a market that's at an all-time high.
Ally Selby: I want to know what went wrong for you in 2023. What was that dud in your portfolio that you just regret buying, and what are you going to do with that stock? Did you sell out of it or are you holding onto it this year?
Randal Jenneke: Look, the biggest dud in the portfolio was ResMed (ASX: RMD), and that was really a function of the fact that I think we were a little bit slow to react to the noise around GLP-1s. And whilst we don't think it is a bigger, longer-term risk and issue as the market believes, I think it always creates that uncertainty about what it means for the earnings profile. And at the same time, I'd also say ResMed had some issues with their cost structure, where I think a lot of companies kind of let their cost structure become bloated over the COVID period. ResMed's definitely one. So they had to take a big restructuring. So that all led to some pretty poor share price performance. So when I think about the attribution in my fund, ResMed was the worst-performing company, and therefore the dud in the portfolio.
Ally Selby: Over to you, Jun Bei, what was that stock that kept you up at night? What was the biggest dud in your portfolio?
Jun Bei Liu: Not to sound like we all hold all the same stocks, but it's Pilbara - it's been very tough for the last 12 months. Because we're long/short fund, so fortunately for us, we can hold long, Pilbara, because we think it's a company that has a great balance sheet and it's very low cost of production, and lithium is a space that we do believe in, and we can short ones that are yet to make money. And that sort of work for us, but Pilbara has been very tough. I do think they're heading into a much better environment now, over the next 12 months, and I do think with the M&A activity that is happening in the industry, it certainly sounds like it's bottomed.
Ally Selby: Okay, well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.
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