Bottom-up stock selection shines as sectors demonstrate greater variance

Markets have seen companies operating in the same sector produce very different results this past financial year, proving it’s time for active managers to shine in bottom-up stock selection, according to these portfolio managers.

The latest reporting season has shown increasingly divergent outcomes for stocks and within sectors themselves as stocks that tend to perform in tandem, such as Coles and Woolworths, have seen opposing performance.

Shih Thin Wong, chief investment officer and portfolio manager at Prime Value Asset Management, said this effect is being demonstrated in multiple different ASX sectors, not just retail.

He said: “For example, the major supermarkets saw Woolworths down 1 per cent in August but Coles heavily sold down by 10 per cent. We’re seeing similar with the major real estate portals, Domain down 4 per cent in August but REA up 4.7 per cent.

“The major banks are also showing divergence, with Westpac down following reporting while NAB rose. And we see it in the AREIT stocks, with Goodman Group enjoying strong results while GPT is down.”

He believes this divergence could be a lasting trend due to four C’s: consumers, cost inflation, cost of debt and capital expenditure.

Wong explained: “The consumer is under pressure, and we know cost inflation is impacting both consumers and companies. The cost of debt continues to be a factor, particularly if you consider companies with higher debt levels, and capital expenditure is going through the roof in many cases.

“While these ‘four C’s’ continue to hold sway, the market is gravitating to stocks which are giving investors the comfort of certainty. The market is craving certainty regarding earnings growth in particular.”

Speaking at the Fidante Equity Symposium in Sydney, WaveStone Capital principal Raaz Bhuyan also said this is a trend likely to continue.

“Here is a classic situation of companies within the same sectors performing very differently, and to me, that’s what’s going to happen in the future. It’s not going to be just ‘buy Coles and Woolies and we’ll be fine’. It’s not working that way,” Bhuyan said.

“Coles and Woolies was a classic. Coles haven’t managed the business well, they got through COVID and it was a free kick. Now that COVID’s washed through, you’re seeing the difference in the performance of this company.”

The supermarket chain reported a full-year profit of $1.09 billion, falling short of market forecasts, and saw total losses, including stock loss, waste and markdown, increase by an estimated 20 per cent with industry-wide headwinds of “elevated levels of organised retail crime and theft driven by cost-of-living pressures”.

Bhuyan continued: “We’ve seen Goodman Group on one hand, Dexus on the other; James Hardie, which is one of our core stocks, compared with Louisiana-Pacific, which is the biggest competitor in the US.”

Goodman Group is up 30 per cent since the start of 2023, but Dexus is down by 5 per cent over the same period. Building products firm James Hardie is up 60 per cent since the start of the year but Louisiana-Pacific, listed on the New York Stock Exchange, is down 2 per cent.

“I think, for the first time in a long time when there’s no free money, you’re seeing a situation where good management in good companies that have executed well [rose to the top].

“The time is now for active managers to shine based on their experience,” Bhuyan said.

Wong agreed there remain plenty of positives in the market despite the large variations in performance.

“There are always good opportunities for those prepared to look to the medium to longer term and target companies which are financially healthy, have strong management and a product or service that’s in demand,” he said.

“Currently we’re seeing plenty of positives in sectors including diversified financial services, health insurance companies, and investment platform providers such as HUB24, which appear to be in a sweet spot.”

See full article here: Money Management 

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