FNArena’s Weekly Insights – April 29 2024
In this week’s Weekly Insights:
-Quality Reigns, And How To Identify It
-Macquarie’s ASX Quality Compounders
By Rudi Filapek-Vandyck, Editor
Quality Reigns, And How To Identify It
I used to think investors’ biggest challenge was related to a cheaper share price not always presenting a better opportunity, or that built-in urge we all have to be part of the next share market rally -FOMO! by any other name- but as my experiences grow, and my daily observations accumulate, I am now of the view the biggest challenge is coping with change.
Given we are experiencing a once-in-a-lifetime period of innovative disruptions and technological breakthroughs, adapting to change may well become the all-important factor that separates the Winners from Losers, both in the real economy as among listed equities, but equally so for those investing in them.
GenAI and GLP-1s are now on everyone’s radar given a strong presence among share market winners, but very few are equally aware about the small revolution that has taken place over the past two decades in terms of how to ‘value’ those companies and their brethren operating in cybersecurity, online retailing, and capital-light software and technology services generally.
Admittedly, in a market dominated by banks and resources companies, and with a large swathe of investors solely focused on franked dividends, there’s never been too much urgency to catch up on modern day methodologies to value young-and-upcoming, fresh, modern-day business models. But even the ASX is changing noticeably.
According to my quick analysis, six of the ASX Top20 companies are now consistently trading on above-average PE ratios, while that number grows to eleven if I expand the focus to the ASX50.
The local market’s sweet spot, companies ranked between 51 and 100 on market cap, offers plenty of growth achievers on higher multiples that look poised to develop into potential ASX50 members in the decade ahead.
But the likes of Car Group ((CAR)), Pro Medicus ((PME)), WiseTech Global ((WTC)) and Xero ((XRO)) do not only provide investors the opportunity to outperform the local benchmark, their ascendancy is also impacting on traditional measurements to determine whether the local share market as a whole is ‘expensive’ or not.
Simply put: drawing a straightforward comparison with how the index traded in the past should no longer cut it, if ever that was the case given BHP Group’s heavy weighting today.
Even if we ignore the counter-cyclical PE formation for Australia’s largest index weight (high in downturns, low when the sun shines), the elevation of the likes of CSL ((CSL)), Goodman Group ((GMG)), Macquarie Group ((MQG)) et al means the average PE ratio for the Australian share market has by default increased vis a vis the lower references from the past.
So where exactly is today’s ‘equilibrium’ ………………….