Australian Investment Blog

Local stocks enjoyed a decent recovery yesterday led by the resources while there was a notable lack of aggressive selling across our time zone, even after the S&P500 had closed down -0.6% the prior session. The market still feels jittery, which is normal after such a savage sell off – the obvious questions is whether or not that’s the end of it, or a pause before another leg lower. Given the aggression of the initial selling we do think another attempt on the downside remains likely. One standout undertone is that interest rate sensitive and high valuation / growth stocks are being met by sellers.

The ASX200 continues to trade in the 5775 – 5900 range we highlighted on the weekend as we commence the traditional “hump” day for the week. MM continues to anticipate tweaking our Growth Portfolio over the coming weeks the old cliché “buy strength & sell weakness” our current mantra.

MM remains marginally negative the ASX200 short-term, with an initial target ~5700, now around -3% lower.

Overnight stocks bounced strongly with the US S&P500 gaining +2.1%, all sectors closed in the green but the largest gains were seen by the technology and healthcare sectors which is coincidental with today’s report. Europe was also strong gaining +1.5% while the emerging markets outpaced US stocks gaining +2.5%.

The SPI futures are pointing to a gain of around 40-points, just above the psychological 5900 area.

Today’s report is going follow on from yesterday’s initial discussion on late cycle investing, looking at our exposure to the healthcare sector.

ASX200 Chart

We have been bullish Kidman Resources (KDR) below 90c over recent weeks targeting a strong countertrend rally towards $1.30. We believe the move started yesterday but it’s not too late to jump on board for the very active subscribers.

Technically we are bullish KDR below $1.20 targeting a 25% rally minimum.

We will not be adding KDR to the Growth Portfolio because we are already holding some lithium exposure via Mineral Resources (MIN) which also rallied 4% yesterday – we expect to re-evaluate the MIN position ~$17.50.

Kidman Resources (KDR) Chart

Mineral Resources (MIN) Chart

We believe it’s prudent overall to increase our short exposure to US stocks as a hedge, and this morning appears to be a reasonable opportunity following last night strength.

MM is looking to increase its BBUS (bearish US stocks) ETF into the current bounce.

US S&P500 Chart

The Healthcare Sector

Historically more defensive sectors like Healthcare and Consumer Staples (essentials like food & drink such as Woolworths / Wesfarmers) outperform “late cycle” i.e. when economic growth is peaking / falling. This makes sense because people need to eat and look after their health whatever the economic backdrop.

Similarly, during aggressive corrections healthcare fares ok from a relative perspective e.g. in 2011 when the US S&P500 fell over 18% the healthcare sector was the 4^th best performer, only beaten by Telcos, Consumer Staples and Utilities – note this correction was not fuelled by rising interest rates. Hence the next decent pullback may not be so kind to utilities.

Private equity currently has a significant taste for the sector with BGH / Australian Super recently having a failed tilt at Healthscope (HSO) while in July KKR announced the bid for Envision Healthcare for $US9.9bn.

Conversely many Australian healthcare stocks had become regarded as “safe” and hence crowded investments causing their valuations to become stretched and outing them into the GAAP basket – growth at any price. This has led to aggressive market corrections by market favourites CSL and COH of 21.3% / 17.3% respectively, along with the hospital operators Ramsay and Heathscope

We recently bought CSL and Cochlear into their sell-offs but as part of our investment process we must question was it too soon.

ASX200 Healthcare Sector Chart

1 Healthscope (HSO) $2.09

We have 3% of the MM Growth Portfolio in HSO at $2.25 which currently looks poor today.

Australian Super still holds a 13.9% stake and were keen to take over the business in late April, which the board subsequently rejected, along with the higher bid by Canada’s Brookfield Asset Management at $2.50 – I wonder this morning with the stock sitting over 23% below the higher bid there is some concern by the board about the decision taken! We understandably ponder if a 3^rd attempt will come out of the woodwork into the current market weakness. Two intelligent parties performed their due diligence on the business this year and clearly saw plenty of financial upside when the stock was 20% higher hence raising the question is the stock cheap under $2.

Private hospitals are currently struggling on a few levels including:

1 Cash strapped Aussies are foregoing private healthcare as rising premiums (around 6% p.a.) put pressure on household balance sheets

2 Reduced demand for private health insurance means the insurers are putting pressure on their service providers, like hospitals

2 A large proportion of private patients are going through the upgraded public system reducing the occupancy at private hospitals.

Obviously there will be an “uncle point” when the public system cannot cope and this will be one for the politicians.

We like HSO as a business and it clearly has some very attractive assets like the new Northern Beaches hospital in Sydney. The partnership model used here with Government making a public / private hybrid facility is clearly an interesting one.

MM is likely to stick with this position and will consider averaging below $1.80

Healthscope (HSO) Chart

2 Ramsay Healthcare (RHC) $52.31

RHC is another private hospital operator that we hold 3% of the MM Growth Portfolio in after buying the recent weakness – were currently find ourselves down a few percent.

Many of the points raised above for HSO are relevant to RHC on the domestic front plus of course RHC has been on acquisition trail with its bid for Capio having been recommended by the board creating expansion into Germany and Scandinavia plus likely synergy with its French operations, however the main benefit here for the boarder group is around technology advancements in the delivery of healthcare – something Capio is strong in.

We like the way RHC is evolving overseas but the shares remain under pressure primarily due to domestic issues – the stock has now almost corrected 40%.

Our current plan is to average below $50 and sell around $58 – very much inline with our current mantra.

Ramsay Healthcare (RHC) Chart

3 CSL Ltd (CSL) $188.36

We bought CSL into its recent panic sell off and the position is showing a very small profit.

This is a high quality business with strong earnings that are growing. Growth businesses actually perform well late cycle if those earnings can be sustained. Businesses on a growth multiple that are yet to monetise their product / platform / service is the area that should be of concern. CSL, COH and even A2M for that matter have real businesses, with real earnings.

We continue to like CSL however appreciate that if markets fall, CSL could be targeted simply because of its high multiple and strong performance over the past year.

MM will consider exiting CSL if it cannot hold current levels

CSL Ltd (CSL) Chart

4 Cochlear (COH) $185.85

As we often mention stocks / markets regularly swing between unbridled bouts of pessimism and optimism, and COH has both rallied and fallen ~20% in just 3-months.

COH like CSL is a wonderful example of Australian business at its best.

Yesterday, they had their AGM and re-confirmed earnings guidance forecasting a profit of ~$250m, up between 8-12% on the year.

As businesses we love both CSL and COH but the question to ourselves is are we a touch too exposed owning both considering the markets current position?

MM will consider exiting COH if it cannot hold current levels

Cochlear (COH) Chart

Conclusion

We like the Healthcare Sector for “late cycle” investing and during market corrections.

MM is monitoring CSL and COH closely, and will cut either / both positions if they cannot hold current levels – theoretically, they should bounce from current levels

KDR looks a good technical buy

Overseas Indices

The US Russell 2000 remains bearish, targeting ~1450 or 9% lower.

US Russell 2000 Chart

European indices are a touch tricky just here – technically the shorter timeframe is bullish / supportive having hit our targeted retracement areas but the longer term picture looks very concerning.

German DAX Chart

German DAX Chart

Overnight Market Matters Wrap

· The SPI is up 32 points as European and US markets surged overnight. The Dow and S&P 500 closed up nearly 2.2%, while the NASDAQ was the best performer, +2.9%.

· Strong results from investment banks Morgan Stanley and Goldman Sachs, as well as health care stocks, led the market. US job vacancies rose to 7.14m – the highest since this data started being collated in 2000.

· Tech stocks including the FANGs were strong and Netflix shares were trading 13% higher after market as they reported profit that soundly beat consensus.

· LME metals were mostly weaker as traders held on to concerns around Chinese inflation and global growth. Oil inched ahead and gold fell as investors moved out of safe havens. Iron ore was marginally lower.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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