Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

<ul class=""><li>Australian Growth stocks have under-performed in the past four years, but they generally perform well in a rising global interest rate environment.  We think it’s now worth revisiting some of the healthcare names that have been left behind.</li><li>Buying<a href="https://www.smartkarma.com/entities/917" target="_blank" data-smartkarma-citation="entities:917:1">CSL Ltd (CSL AU)</a>, <a href="https://www.smartkarma.com/entities/918" target="_blank" data-smartkarma-citation="entities:918:1">Cochlear Ltd (COH AU)</a> and <a href="https://www.smartkarma.com/entities/22653" target="_blank" data-smartkarma-citation="entities:22653:1">Resmed Inc Cdi (RMD AU)</a> has proved successful, with these stocks providing the best returns in the sector when global Growth stocks out-perform. <a href="https://www.smartkarma.com/entities/2086" target="_blank" data-smartkarma-citation="entities:2086:1">Regis Healthcare Ltd (REG AU)</a> has also performed well in these periods, but it trades on a much lower PE multiple. </li><li>SIG, <a href="https://www.smartkarma.com/entities/757" target="_blank" data-smartkarma-citation="entities:757:1">Mayne Pharma Group Ltd (MYX AU)</a>, <a href="https://www.smartkarma.com/entities/673" target="_blank" data-smartkarma-citation="entities:673:1">Ramsay Health Care Ltd (RHC AU)</a>, <a href="https://www.smartkarma.com/entities/19399" target="_blank" data-smartkarma-citation="entities:19399:1">Australian Pharma Indus Ltd (API AU)</a> and <a href="https://www.smartkarma.com/entities/15254" target="_blank" data-smartkarma-citation="entities:15254:1">Vtx Holdings Ltd (VTX AU)</a> have also performed generally well when global Growth has out-performed, but they were left behind during the most recent period (November 2016 – May 2017). <a href="https://www.smartkarma.com/entities/673" target="_blank" data-smartkarma-citation="entities:673:1">Ramsay Health Care Ltd (RHC AU)</a> looks the most appealing out of these laggards, with strong analyst conviction for FY17 earnings and solid earnings growth expectations for the next two years.  There is possibly upside risk to acquisition synergies.  The main down-side risk is that private health insurance growth slows further.</li><li><a href="https://www.smartkarma.com/entities/14466" target="_blank" data-smartkarma-citation="entities:14466:1">Sonic Healthcare Ltd (SHL AU)</a>, <a href="https://www.smartkarma.com/entities/24208" target="_blank" data-smartkarma-citation="entities:24208:1">Fisher &amp; Paykel Healthcare Corporation Limited (FPH AU)</a>, <a href="https://www.smartkarma.com/entities/14760" target="_blank" data-smartkarma-citation="entities:14760:1">Japara Healthcare Ltd (JHC AU)</a> and <a href="https://www.smartkarma.com/entities/77" target="_blank" data-smartkarma-citation="entities:77:1">Estia Health Ltd (EHE AU)</a> performed well during the most recent period of global Growth out-performance.  </li><li><a href="https://www.smartkarma.com/entities/24208" target="_blank" data-smartkarma-citation="entities:24208:1">Fisher &amp; Paykel Healthcare Corporation Limited (FPH AU)</a> has repeatedly delivered a strong RoE and it has a strong earnings outlook, but with these positives is a lofty PE multiple. Legal risk seems contained, but new tariff's from a renegotiated NAFTA could be problematic.  However, the stock has given investors the sector's best risk-adjusted return since 2012, closely followed by <a href="https://www.smartkarma.com/entities/673" target="_blank" data-smartkarma-citation="entities:673:1">Ramsay Health Care Ltd (RHC AU)</a>.</li></ul>

Australian Growth stocks have under-performed in the past four years, but they generally perform well in a rising global interest rate environment.  We think it’s now worth revisiting some of the healthcare names that have been left behind.BuyingCSL Ltd (CSL AU), Cochlear Ltd (COH AU) and Resmed Inc Cdi (RMD AU) has proved successful, with these stocks providing the best returns in the sector when global Growth stocks out-perform. Regis Healthcare Ltd (REG AU) has also performed well in these periods, but it trades on a much lower PE multiple. SIG, Mayne Pharma Group Ltd (MYX AU), Ramsay Health Care Ltd (RHC AU), Australian Pharma Indus Ltd (API AU) and Vtx Holdings Ltd (VTX AU) have also performed generally well when global Growth has out-performed, but they were left behind during the most recent period (November 2016 – May 2017). Ramsay Health Care Ltd (RHC AU) looks the most appealing out of these laggards, with strong analyst conviction for FY17 earnings and solid earnings growth expectations for the next two years.  There is possibly upside risk to acquisition synergies.  The main down-side risk is that private health insurance growth slows further.Sonic Healthcare Ltd (SHL AU), Fisher &amp; Paykel Healthcare Corporation Limited (FPH AU), Japara Healthcare Ltd (JHC AU) and Estia Health Ltd (EHE AU) performed well during the most recent period of global Growth out-performance.  Fisher &amp; Paykel Healthcare Corporation Limited (FPH AU) has repeatedly delivered a strong RoE and it has a strong earnings outlook, but with these positives is a lofty PE multiple. Legal risk seems contained, but new tariff's from a renegotiated NAFTA could be problematic.  However, the stock has given investors the sector's best risk-adjusted return since 2012, closely followed by Ramsay Health Care Ltd (RHC AU).

Time to Look at the Laggards in Aussie Healthcare

Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Equity Bottom-Up

Domino's Pizza Enterprises / Equity Bottom-Up

<ul><li>Four months ago, Evidente published a post suggesting that Australian growth stocks were over-priced <a href="https://www.smartkarma.com/insights/the-big-short-australian-growth-stocks" target="_blank" data-smartkarma-citation="insights:6166">The Big Short: Australian Growth Stocks</a> and followed up with an update of the analysis in December <a href="https://www.smartkarma.com/insights/re-visiting-the-big-short-australian-growth-stocks" target="_blank" data-smartkarma-citation="insights:6838">Re-Visiting the Big Short: Australian Growth Stocks</a>.  In this post, I update and expand the analysis.</li><li>The key conclusions are little changed.  Despite precipitous falls in the share prices of a number of high growth names in recent months, the valuation dispersion between growth and value stocks remains high by historical standards, and cannot be explained by trends in ROE and long term growth expectations.   Lower expected stock returns therefore remains the basis of Evidente's view that Australian growth stocks represent the big short.  The key new insight is that compositional change in the growth portfolio - the 'new growth migrants' - has driven multiple expansion, many of which are newly listed.</li><li>The basket of six short candidates Evidente identified in October to capitalise on the big short have yielded an average accumulated return of -15%, well below the ASX200 return of +8% over this period.  In particular, <a href="https://www.smartkarma.com/entities/757" target="_blank" data-smartkarma-citation="entities:757:1">Mayne Pharma Group Ltd (MYX AU)</a>, <a href="https://www.smartkarma.com/entities/323" target="_blank" data-smartkarma-citation="entities:323:1">TPG Telecom Ltd (TPM AU)</a> and <a href="https://www.smartkarma.com/entities/700" target="_blank" data-smartkarma-citation="entities:700:1">Domino's Pizza Enterprises Ltd. (DMP AU)</a> have each fallen by no less than 20%.  In this post, Evidente identifies a new basket of twelve short candidates.</li><li>Unless growth stocks experience a substantial upgrade to consensus long term EPSg and ROE estimates, 2017 promises to be another challenging year for Australia's community of growth oriented investors.  The analysis advises caution in particular for growth stocks that have been listed for a short time and thus whose business model and management only have a short track record to boast of.  Analysts and investors are therefore likely to have less conviction around their earnings forecasts for these newly listed firms.</li></ul>

Four months ago, Evidente published a post suggesting that Australian growth stocks were over-priced The Big Short: Australian Growth Stocks and followed up with an update of the analysis in December Re-Visiting the Big Short: Australian Growth Stocks.  In this post, I update and expand the analysis.The key conclusions are little changed.  Despite precipitous falls in the share prices of a number of high growth names in recent months, the valuation dispersion between growth and value stocks remains high by historical standards, and cannot be explained by trends in ROE and long term growth expectations.   Lower expected stock returns therefore remains the basis of Evidente's view that Australian growth stocks represent the big short.  The key new insight is that compositional change in the growth portfolio - the 'new growth migrants' - has driven multiple expansion, many of which are newly listed.The basket of six short candidates Evidente identified in October to capitalise on the big short have yielded an average accumulated return of -15%, well below the ASX200 return of +8% over this period.  In particular, Mayne Pharma Group Ltd (MYX AU), TPG Telecom Ltd (TPM AU) and Domino's Pizza Enterprises Ltd. (DMP AU) have each fallen by no less than 20%.  In this post, Evidente identifies a new basket of twelve short candidates.Unless growth stocks experience a substantial upgrade to consensus long term EPSg and ROE estimates, 2017 promises to be another challenging year for Australia's community of growth oriented investors.  The analysis advises caution in particular for growth stocks that have been listed for a short time and thus whose business model and management only have a short track record to boast of.  Analysts and investors are therefore likely to have less conviction around their earnings forecasts for these newly listed firms.

Australian Growth Stocks: The Big Short (Still)

Macroeconomics

The Government's release&nbsp;of Re:think,&nbsp;its tax discussion paper, is a welcome development, designed to kick-start the conversation with the community on a range of reform options designed to&nbsp;achieve a simpler&nbsp;and&nbsp;streamlined&nbsp;tax system&nbsp;capable of meeting the growing needs of an ageing population.&nbsp;&nbsp;&nbsp;I discuss some of the areas raised in Re:think which are of greatest interest to equity investors: how important income and consumption taxes are to Australia's tax take in a global context,&nbsp;the prospect of the growing drag from bracket creep on household disposable incomes (discretionary retailers), the outlook for the GST (supermarket&nbsp;retailers),&nbsp;the efficacy and viability of the dividend imputation system (high yielders with predominantly domestically oriented operations), the sustainability of the concessional tax treatment of superannuation (asset managers), and the risk associated with companies that have low effective tax rates.

The Government's release&nbsp;of Re:think,&nbsp;its tax discussion paper, is a welcome development, designed to kick-start the conversation with the community on a range of reform options designed to&nbsp;achieve a simpler&nbsp;and&nbsp;streamlined&nbsp;tax system&nbsp;capable of meeting the growing needs of an ageing population.&nbsp;&nbsp;&nbsp;I discuss some of the areas raised in Re:think which are of greatest interest to equity investors: how important income and consumption taxes are to Australia's tax take in a global context,&nbsp;the prospect of the growing drag from bracket creep on household disposable incomes (discretionary retailers), the outlook for the GST (supermarket&nbsp;retailers),&nbsp;the efficacy and viability of the dividend imputation system (high yielders with predominantly domestically oriented operations), the sustainability of the concessional tax treatment of superannuation (asset managers), and the risk associated with companies that have low effective tax rates.

Australia

Regis Healthcare Limited is a treatment program that offers Family Therapy, Clinical Psychology, Education and Occupational Therapy.

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Regis Healthcare (REG AU)

Time to Look at the Laggards in Aussie Healthcare

Australian Growth stocks have under-performed in the past four years, but they generally perform well in a rising global interest rate...

Shane Lee

Australian Growth Stocks: The Big Short (Still)

Four months ago, Evidente published a post suggesting that Australian growth stocks were over-priced The Big Short: Australian Growth Stocks and...

Sam Ferraro

Taxing Times For Australia

The Government's release of Re:think, its tax discussion paper, is a welcome development, designed to kick-start the conversation with the...

Sam Ferraro

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