Australian Investment Blog

Quality stocks will get too expensive

As the recent rally in stocks continues unabated, it should not be forgotten that we are now wearing our "sellers hat," medium term and "buyers hat," only for shorter term opportunities. Hopefully, this does not sound too contradictorily / confusing to subscribers. We are over 90% committed to stocks and are hence, enjoying this anticipated current strength, but with the ASX200 likely to breach 5,500, today we must remain aware of our medium term goal to significantly increase cash holdings over coming months, hopefully into prolonged strength - ideally the US S&P500 ~6-8% higher.

As we witnessed in 2015, even quality stocks like Commonwealth Bank (CBA) can become overvalued, as investors chase stocks where they feel comfortable on the perception of no/little risk! – Worth remembering that CBA corrected over 27% from its panic highs in March 2015. Being able to sell at the right time, when optimism is generally high, and when the press are bullish is probably the weakest part of most retail investors’ strategy and one of the main reasons we find people subscribe to Market Matters - we look forward to helping in the fun months ahead!

As discussed in previous reports, fund managers / investors are sitting on record cash reserves and this current global equities rally is not making them look clever. Obviously, some are now biting the bullet and buying stocks, pushing markets higher. Yesterday this buying was across the board, except the resources, pushing some healthcare stocks to record high levels. In short, we got a mix of investors buying beaten up stocks and ones they perceive to offer safety - very often with investing the "comfortable" trade is the poor option.

ASX200 Healthcare Sector Monthly Chart



The Healthcare sector has been a fantastic performer since 2011, rallying ~175% during a fairly weak period for equities. However, as we pointed out with CBA, even the best companies can have share prices that are too high and often unsustainable when all the good news is embraced and the risks ignored.

Consider the simple P/E valuations of CBA est. 13.9x for 2016 and CSL est. 32x for 2016 - is the 230% premium warranted for growth company CSL? Highly valued growth stocks must continue to perform, or the market generally savages them e.g. Huge success story, Netflix is 34% below its December high even while the S&P500 makes record highs.

Today we are going to look at three of the Australian markets favourite stocks. We have a 5% weighting in CSL, from ~$110, which we believe is a great company, but one that has corrected over 10% three times in recent years, illustrating buying opportunities do present themselves. We will be considering taking profits in the $120 area.

CSL Ltd (CSL) Monthly Chart $117.01

Ramsay Healthcare (RHC) is a private hospital company, trading on an estimated P/E for 2016 of 33x. Unfortunately, we cannot buy all the stocks we like, with RHC definitely in that category. The stock looks great at present, and if we were long, we would run stops under $73 and look to start selling above the $80 area. Technically, RHC fits our market view....it looks good for higher prices, BUT we do believe it will retest the $60 region in the next 2 years.

Ramsay Healthcare (RHC) Monthly Chart $76.59



Hearing implant company Cochlear Ltd (COH) is trading on an estimated P/E for 2016 of 37.5x. A stock that has outperformed our expectations as it continues to make all-time highs, however, if we were long, we would be selling into strength above $130, looking to buy a $17-$18retracement as the stock experienced in 2015.

Cochlear Ltd (COH) Quarterly Chart $125.37

• The Dow has now had nine consecutive up days, seven of them in record territory. The index closed up 36 points (+0.2%) at 18,595, while the broader S&P 500 also finished the day in the black, up 9 points (0.4%) at 2,173.
• Oil put in a better performance, with the price closing up 21c (+0.5%) to US$45.66/bbl. This was after the weekly report had shown there was a continual drawdown in inventories of 2.3m barrels, compared to an expected 2.1m.
• Gold fell to its lowest level in three weeks, after traders concentrated on equities (Risk On), together with a stronger US$. The price fell US$16.50 (-1.2%) to US$1,315.80/oz.
• The September SPI Futures is indicating the ASX 200 will open higher this morning, around 34 points, to around the 5,522 level.
• Note it is July Index Options Expiry this morning and anticipate volatility in the open. For index options expiry, the opening match period is extended by around 6mins for quarterly expirations, while normal month expiration market opening times remain as per normal (10.10am the match out completes).

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 21/07/2016. 9:00AM.

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