Hi Tim,
This is a very good question and Pro Medicus (PME) is perhaps the most extreme example on the ASX. We have debated this internally, and a lack of consensus has meant we have not bought the stock, a good thing given its recent sell-off is now over 30%, making fresh 2025 lows in the process. This health imaging technology company was a standout market favourite through 2024 as it continued to win fresh contracts and deliver solid earnings growth.
Momentum was a clear winning ‘factor’ in 2024, not just for PME, but right across the market. Momentum in price, momentum in earnings was the investment theme to back last year, but not so far in 2025.
There is little doubt that PME is kicking goals and growing strongly, and the contract wins they have regularly announced turn the dial quickly on earnings.
- Their EBIT margin was an impressive 71.9%, in other words over 70% of new revenue became profit.
- Net Profit after Tax (NPAT) of $51.7 million, reflected a 42.7% growth rate.
However, as you rightly say at what cost. PME is a $21bn company, so the above numbers need to be considered with that in mind. It needs to grow into its valuation and based on consensus numbers, this just doesn’t happen for a quite a while.
While we think PME are doing an incredible job, we could not buy PME on any sort of valuation basis. However, we also know that many of the world’s largest companies, that dominate their respective industries, and are extremely profitable now, generally traded on ludicrous valuations in the early stages.
PME ticks many of the box’s indicative of these sorts of stocks but where to start accumulating PME is a tough call. Our plan here is to revert to price action, and we’d like to see more of a capitulation of the hot money i.e. a final aggressive spike lower, potentially into Wednesday’s tariff announcement in the US.
Importantly though, we would be very conscious that valuation support is simply not there, and if buying on the basis of price action, we then must sell on the basis of price action, whether that’s cutting for a loss, or taking profit.
There are a number of stocks in this basket though, and PME is a high beta example, so, it’s not for everyone. Another lower risk example we are looking at is Aristocrat Leisure (ALL) which has also corrected sharply on the momentum unwind, but where price action can be supported by valuation support.
