The biggest mistake investors could make this reporting season, or this year for that matter, is underestimating stocks that have already run hard over the past 12 months.
That's according to FNArena's Rudi Filapek-Vandyck, who believes we are now in a period of innovation and revolution similar to the Roaring '20s.
"The 1920s was this great era of technological innovation, which also meant it was a great era to be a shareholder. And a lot of companies, of course, had tremendous growth on the back of new developments that were re-shaping society, the share market and economies," he says.
"We are going through a similar phase now and as a consequence, high growth driven by megatrends and technological innovation is not going to go away... Those companies will continue to perform, and they will never be priced at nine times next year's profits."
WiseTech Global (ASX: WTC)
REA Group (ASX: REA)
HUB24 (ASX: HUB)
ResMed (ASX: RMD)
Goodman Group (ASX: GMG)
In this interview, Rudi shares what he believes investors can expect over the February reporting season, the companies that should be on your radar where expectations continue to soar higher, as well as why he believes investors should get their heads out of the charts and focus on fundamentals instead.
Plus, he also names one stock that he argues could be in for a ResMed-like recovery in the coming months.
Note: This interview was recorded on Wednesday 7 February 2024 and first appeared on Livewire Markets.
0:00 - Intro
0:41 - The big picture (and Rudi's market outlook)
2:21 - Why the Value versus Growth debate is "warped"
4:36 - Testing universal market forecasts - why it's important to remain selective
6:19 - The companies Rudi is backing this reporting season
9:22 - Beats versus misses: How will share prices perform post-results?
10:38 - Why investors need to stick to their strategies this reporting season
12:16 - Putting some of Rudi's 18% cash allocation to work
14:33 - Rudi's view from the top: Focus on fundamentals
Ally Selby: Hello and welcome to Livewire's newest series Views from the Top - a series dedicated to bringing you the best of the best ideas and insights from those at the top of their game. Today we're very lucky to be joined by FNArena's Rudi Filapek-Vandyck for a deep dive into the reporting season and what you can expect. Thank you so much for joining us today, Rudi.
Rudi Filapek-Vandyck: It's a pleasure.
Ally Selby: You told me I would be surprised by what you have to say today - so I am both excited and nervous, but let's get straight into it. The big picture - the market is looking through all the headwinds that we're seeing right now and betting big on rate cuts in 2024. Is there anything wrong with sticking to consensus?
Rudi Filapek-Vandyck: It's not necessarily wrong, but we have been here before, just a short memory back - February 2023 last year and August 2023 last year. In both cases, the setup was basically the same. We get a big rally leading into the reporting season and then of course the reporting season turns out to not be good enough to sustain the share prices and then we basically erase all the gains we had and then the process starts again. So it's not inconceivable that we will have a similar process.
Now we have rallied on macro considerations from the bottom up. There's not an upgrade cycle happening in economies or profits, but there are two things I think that are different now. One is that the carrot of interest rate cuts, whether that is short-term or medium-term, the carrot is there and I think that will, to a certain extent, support share prices. The other thing is that - while it's very early days - we've actually made a good entrance into the reporting season. The reporting season starts really slowly and gradually in Australia. So we have a very small sample, but the early signs are there that companies are tending to do better than forecast or at least meet expectations. So far so good. But again, it's a small sample, but at least we've had a good start.
Ally Selby: Okay, we'll get into some of that granular detail later on, but I want to talk about what you can expect going forward. We saw value being tipped as the area of the market that would outperform in 2023. It didn't. Growth and momentum outperformed instead. What can investors expect this year and did that surprise you?
Rudi Filapek-Vandyck: In my view, and that's probably a little bit different from what the majority of experts, we're going through quite an exceptional era and the era is of technological innovation. I've made the comparison in the past a number of times. I think the best comparison we have is the 1920s.
The 1920s was a great era of technological innovation. It also meant that it was a great era to be a shareholder in the share market. And a lot of companies, of course, had tremendous growth on the back of new developments that were essentially reshaping society, and the share market and economies.
We are going through a similar phase now. I think as a consequence, that high growth driven by megatrends and technological innovation is not going to go away. So this whole discussion about whether we should go into value, which basically is either cyclicals or old economy companies or high growth companies that promise the future, I think this whole discussion is a bit warped. And on occasion, we will see the pendulum swing between those two extremes in the share market. But I think on average, longer-term, sustainably, I think you can't ignore the fact that we are going through this tremendously exciting time and technology should be on everyone's radar. Those companies will continue to perform and they will never be priced at nine times next year's profits.
Ally Selby: Another area of the market that everyone says investors should be looking at right now is small caps. Do you agree with that?
Rudi Filapek-Vandyck: It's a universal forecast, small caps, and it's not such a difficult one. We've had two years of a tremendous bear market for small caps and you don't have to be a genius to work out at some stage that corrects itself. So small caps, yes. Other universal forecasts are the comeback of REITs, yes. The comeback of healthcare, yes - and in particular, quality healthcare. The comeback of small-cap resources and the comeback of emerging markets. All those forecasts are probably correct, but they won't be universal.
I think the mistake investors will make is thinking that by default there are only gains to be made in small caps. Or that there are only gains to be made in REITs. Or that there are only gains to be made in healthcare stocks. That will not prove to be the case.
So I think investors should be selective. The most important thing to add is that there's still a lot of growth and upside to be had out of large gaps, out of growth stocks, out of technology, and that will not disappear. So I think the best strategy for this year is diversification across all those themes, not just picking one of them because again, it won't be universal and it won't be all at the same time every single time throughout the year.
Ally Selby: If it's not universal, which companies do you think will outperform then within those sectors?
Rudi Filapek-Vandyck: Well, I think I just mentioned healthcare. Healthcare is always on my radar. I think we've already seen that with ResMed (ASX: RMD).
Ally Selby: But that's also been a consensus call ...
Rudi Filapek-Vandyck: Yes, exactly. So that's quite an easy one. Well, if it was that easy, we don't want to pay a dollar for everyone who wasn't in ResMed. CSL (ASX: CSL) is making a comeback - it's visual - it's above $300 now. The market is also preparing for a very strong result in Cochlear (ASX: COH).
Outside of that, we have the REITs and I think the last three months or so have already seen some share prices move there. The market leader is Goodman Group (ASX: GMG) and they continue to perform. And again, expectations remain quite positive.
If you go to small caps, we have the laggards, the ones that haven't performed or maybe a little bit and that's where everyone's attention will go, of course. And if I look through all the forecasts I'm going through now ahead of February, companies that are often mentioned are the travel industry - like Corporate Travel (ASX: CTD) and Webjet (ASX: WEB). A company that is definitely often mentioned is Hansen Technologies (ASX: HSN). Everyone sees that as a quality company and its share price is not moving essentially.
You can add a few more in there. We just mentioned ResMed, my candidate for the next ResMed-like recovery, if you like, might be IDP Education (ASX: IEL). I think, at the moment, the market is very unsure about how to deal with the uncertainty and once that becomes more clear, I think that could potentially be the next rebound, but not necessarily in February. It might require more time.
There's also the other side of the small caps and I just mentioned growth technology and megatrends. There's quite a group of relatively small-cap companies that already have performed. And I think the mistake investors could make is thinking they're done with their growth because they still have a lot of growth in front of them. Obvious candidates as far as I'm concerned are NEXTDC (ASX: NXT) and Macquarie Technology (ASX: MAQ), depending on where you put exactly your demarcation when it becomes a small cap or a mid-cap. I also think Steadfast Group (ASX: SDF) and AUB (ASX: AUB) - the insurance brokers - look very good still. And you have the financial platform operators, HUB24 (ASX: HUB) and Netwealth (ASX: NWL). The mistake investors could make is thinking because they have performed to date that there won't be anything coming beyond what already is in the share price. And I think that would be a mistake.
Ally Selby: You talked before about share prices not performing as expected post a company beating or missing expectations last year. What can investors expect this year?
Rudi Filapek-Vandyck: That is the big unknown. I think because we're trying as a community to look beyond the short term, we're looking forward to better times ahead, in the second half of '25. But that's the big question. I mean, admittedly we've seen, for example, with a disappointing market update by Bapcor (ASX: BAP) that the share price did not fall, it actually went up. So that could be good news. But I still think we will see some fireworks here and there. And for that reason, I think it's only smart to have a little bit of cash on the sidelines. If I can go back to last year, last year, both ResMed and WiseTech Global's share prices sold off quite heavily. I bought both and I think for that reason, we will see more opportunities coming this year and you don't know in advance which ones they are. So the best strategy you have is to have some cash and if it happens, buy and be comfortable.
Ally Selby: We'll get to your cash holding a little bit later on. I know that it's a spicy subject. Where are our expectations too high right now? Where could we see some of those fireworks?
Rudi Filapek-Vandyck: That's a little bit of how long is a piece of string because we will have to find out, and as I said, we don't know how the market is going to respond to disappointments and surprises, but I think as an investor you have to know your strategy. I mean is your strategy to sit in undervalued assets and then wait for that to get to fair value? Or in my case, are you comfortable holding companies that have many years of growth ahead of them and even if they dip or fall in price after the results, that doesn't bother you?
For example, two of my favourite stocks would be TechnologyOne (ASX: TNE), which is not reporting this month. And the other one is REA Group (ASX: REA), which does report in February. Often what happens is the share prices fall after they report results. For me, that's never a problem. If I don't have enough shares, I buy more. And if you look back subsequently 12 months later, the share price is higher. So how you respond to that is basically the type of investor you are and what exactly your strategy is. But my strategy definitely is that I will keep my eyes open for those structural growth companies and if they do dip in share price, then I might consider even buying more shares or if I don't own them, I might actually buy them.
Ally Selby: You talked about having a little bit of powder on the side just in case any companies sell off on the day. Last August, and I think also last February, you told us you were holding 18% cash, which is quite a lot of cash. How much cash are you holding today and have you put any of that money to work?
Rudi Filapek-Vandyck: Yes. So last year I was pretty confident, don't ask me why, but I was pretty confident that those rallies we saw each time leading into a reporting season would prove futile - that they were basically running on fumes and it would not be sustained. Now twice I was correct on that one. But the second time after August, I started looking differently at the market and I thought I was going to use some of that cash.
And I've been, from memory, I've been buying, WiseTech Global, REA Group, HUB24, ResMed and Goodman Group. Pretty much a lot of the companies I just mentioned earlier. So I've been putting some money to work. I basically halved my cash level too. It's around 9% now. Is that a lot? Well, if you consider that I own about 20 stocks in my portfolio, 9% is two times five, pretty much four and a half. It can also be three times three. So is it a lot? It's not a lot because I would still have to be selective in how to allocate that money assuming that I'm going to allocate it in full after this, although that may not necessarily be the case, I can be patient.
I do think that the overall environment, at least for the time being, has changed. I think the bias is now less to the downside than it was last year. Even though last year, the real downside hasn't come through, apart for some individual companies. As long as you can avoid the real disasters in that scenario and you can be confident in using share price weakness, like for example, ResMed and WiseTech Global,I think you're doing quite a good job in allocating your capital.
Ally Selby: Okay. Last question for you today, Rudi. We like to ask all our guests what's something they've learned in their years in markets or from those connections they've made after decades working in similar roles. What's your view from the top?
Rudi Filapek-Vandyck: I learned a lot over the past two years or so from the share prices of CSL and ResMed. Last year, they did not perform for a while. And what I noticed is that so many people are focused on price and on charts. What I noticed is that when you are only focused on price action and on charts, you never get to the bottom of what consists of a company - what makes a company tick. And unless you get to that point, you find it very difficult to understand why ResMed at $21 is an excellent opportunity. Or that CSL at $248 or however low it was, even at $260 or $280 is an excellent opportunity. The charts will not tell you that - the price action will not tell you that.
You have to try to get to the bottom of what makes a company and sometimes the fundamentals of a company longer-term and the share price action diverge. And at that point, it is very important to understand the fundamentals of a company. And I've learned from the past few years that there are so many people who are being led by price action and by charts. And they literally don't understand the company. And you have to question if you are an investor or a trader, whether that is the right way of approaching the share market.
Ally Selby: Okay, well I've absolutely adored this chat today. Rudi, thank you so much for your time.
Rudi Filapek-Vandyck: My pleasure.
Ally Selby: If you enjoyed that too, don't forget to subscribe to Livewire's YouTube channel. We're adding so much great content just like this every single week.
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