While 2020 was a year of surprises, the latest earnings season demonstrated that the fundamentals behind our investment strategy remain as true as ever. The strong performance of the Australian Equities Growth portfolio is a result of staying true to the way we think about stock selection and valuations.
In particular, our investment approach means we:
Look beyond volatility
Instead, we focus on fundamentals. Our approach going into this reporting season was not to expect a precise picture of right now, but to look at where companies are heading in 2022. This means we are not concerned with the pandemic-drive volatility of the moment; instead we focus on business models, balance sheets, how companies are positioned to weather short-term shocks, and how well can they fund themselves in coming months. We seek to be supportive shareholders, focused on the big picture.
Look beyond dividends
Given the tough market conditions, it was not surprising that around 70% of companies cut or withheld dividends. While this was understandably alarming for some investors, this did not affect our valuations, because dividend yield is not a valuation metric for us. Instead we focus on the real drivers of returns, such as cashflow, earnings and return on capital.
Look beyond the ‘bubble’ talk
Some commentators questioning some of the high valuations we are seeing in the market, and some talk has turned to the idea of a bubble in technology stocks. However, if we bear in mind today’s low interest and inflation rates, we are comfortable with valuations. We don’t look at metrics like EBITDA (earnings before interest, tax, depreciation and amortisation) multiples; rather, we project the cashflows out to 2022 and look at a company’s balance sheet to get a more complete picture.
Embrace great Australian companies
We like to remind people of the strength of corporate sector in Australia. There is a great menu of companies we can invest in, and there is far more to the ASX than just banks, mining companies and retailers.
We are never short of investment ideas and there are lots of great Australian success stories in our portfolio, including:
- James Hardie – This is a global success story in building materials, which has continued to show stellar earnings growth, reflected in its increasing share price.
- Domino’s Pizza – People are often surprised to hear that this Australian company owns the franchise in Germany, Netherlands, Japan and Belgium. It continues to grow sales as well as its footprint, through new store openings. It’s a core part of our portfolio and continues to enjoy good market share and sales growth across all the locations it operates in.
- Goodman Group and Charter Hall – these companies are more than just property owners – they are essentially fund managers who have continued growing their funds under management.
- Wisetech – this logistics software provider has continued to perform well, defying gloomy predictions from some in the market last year. We often hear people question our tech sector, and the valuations of stocks like Wisetech and Afterpay.
We remind investors that Australia has a strong history of producing successful tech companies, such as SEEK, REA Group and Carsales.com.au, which were precursors to the newer tech stocks. The sector has grown sustainably over the last two decades and generated significant wealth for investors.
Overall, we did not view the recent earnings season as an important insight into the current market. Our investment lens looks out to 2022 and beyond, and remains focused on the fundamentals, not the market noise.
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