- Key reasons why Aussie investors are facing an interest rate dilemma
- Looking beyond the share price – a key lesson from CBL’s capitulation
- Rotation to large caps ‘uncomfortable’ but creating opportunities
- 30 years after 1987 – how stock market crashes can make you a better investor
- Avoiding the next Vocation: Five “watch outs” for selecting stocks
- Is the market expensive? Four reasons this is the wrong question to be asking
- What makes the table-topping Prime Value Cash Plus Fund tick?
- Stocks to watch in an uncertain market: CSL
- Two big takeouts for investors from 2016
- Five reasons why absolute return investing is less volatile than index investing
- Six keys to finding value in the market
- Brexit: Implications for investors
- Difficult start to 2016 for share market – opportunities exist for high conviction stock pickers
- Prime Value’s views on current market volatility
- Short-term cycles to continue into 2015
- Some stocks cope with volatility better than others
- Reporting Season Underlines Need For Strong Fundamentals
- In the world of finance, the most dangerous thing is the thing that never moves
- 2014 shaping as a stockpickers market
- Dark Clouds On The Horizon – Risk Or Opportunity?
- Three Chances at Getting it Right
- Keeping on top of the RORO markets
- Notes from China
- Spring Cleaning The Investment Pantry
- Does Corporate Memory Have A Role In Stockpicking?
- How Do You Harvest Your Returns?
- Why Avoiding the Herd is More Important than Ever
- Safe Bets In Turbulent Times
- History: First Multinational Renaissance Business
- How Bees Invest
Stocks to watch in an uncertain market: CSL
ST Wong, 9 February 2017
A defining investment theme for 2016 was unpredictable events and share markets. Everything seemed topsy-turvy. Forecasts were smashed, and investor behaviour seemed to change. Keynes’s famous ‘animal spirits’ apparently enlivened the market: this seemed especially true towards the end of last year when Donald Trump was elected the 45th US president, suddenly turning on a party for shares.
Well, not entirely true: investors raced to buy up ‘riskier’ or ‘value’ shares but they also raced to sell off ‘quality’ companies.
These events have created a particularly uncertain environment for investors. When quality is punished, risks unclear, and macro forecasts no better than a flip of the coin, what is the way forward?
Firstly, let’s avoid being too hung up on the macro picture – no-one can accurately forecast the macro future, a fact surely put beyond doubt by 2016’s Brexit and Trump surprises.
Instead, let’s focus on quality. In Australia, CSL is an example of a quality stock that sold off. We have followed and owned CSL for years. More recently, the health care sector has been in the headlines for reasons ranging from political controversy over drug pricing to Obamacare and so on.
Late last year, our fund performance was negatively impacted by CSL. It hurt. But we are pleased to see the company announce its FY17 profits are exceeding management’s expectations – possibly 7% to 10% better. CSL’s share price reacted positively to the news.
Each fund manager has their own investment process. At Prime Value, a key to our approach is to avoid making a ‘call’ on the macro environment, and then filling our boots to express that call. Instead, we look for companies that are well capitalised on the balance sheet and off; have the potential to compound earnings over three to five years; and are managed by teams aligned with outside minority shareholders like us.
CSL meets every tenet of our investment philosophy. (1) The balance sheet is strong and robust. Net debt to total capital has risen to 55% as of FY16, and will decline to 45% by FY19. Much of this improvement is the result of a highly cash-generative business that will produce cash from operations of approximately $1.5bn in FY17.
(2) From a compounding point of view, CSL continues to build value through investments in a long duration R&D pipeline. The benefit of having a strong cash flow position is allowing CSL to seek long-term opportunities from its platform. The company spent 10% revenue on R&D in FY16 and will increase to 10-11% over the next few years.
(3) CSL’s outlook is compelling. The company is currently benefitting from a gain in market share in plasma collection. This comes on the back of a decision to invest in infrastructure over the past few years. The company has a strong record of creating value from high margin products. We expect CSL to allocate appropriate investment capital if high value opportunities are identified. We talked about CSL’s cash flows earlier: this advantage gives CSL the ability to sustain new sources of revenue over the long term.