CSL possible pull back to low $200's, page-127

"I value your posts, but this one seems to apply to every share on the market. Not just CSL."

@nosiromit,

There are some 2,300 shares listed on the ASX.
At any given stage there always some shares that are fundamentally undervalued.

At times (eg, GFC, Greek Debt Crisis, Covid onset) there are a great many under-valued stocks; at other times the number of obviously-attractive investment opportunities is small.

But in almost three decades of analysing and investing in publicly-listed companies, I have never not been able to find shares that are under-priced at any particular point in time.

This is more the case over the period starting about 3 or 4 or so years ago, where what increasingly looks like be a structural change in the composition of the ASX, commenced.

That change is the birth and listing of companies which are quite different to the "typical" ASX domiciled company.

For decades the composition of the ASX reflected the structure of the Australian economy, namely:

1. Natural resources (BHP, RIO, WPL, STO and a long tail of junior miners and explorers whose businesses made the investment bankers, that arranged funding for them, far richer than it did the actual owners of those companies),
2. The oligopoly of retail banking - that owes its existence to funding Australians' love affair with property (the 4 major banks and some small and un-competitive regionals), and insurance (IAG, QBE, SUN),
3. Wealth management and specialist financial services (AMP, CGF, MQG)
4. The duopoly of grocery retailing (COL, WOW),
5. A few stocks exposed to the construction cycle (BLD, DOW, FBU, JHX, LLC, LEI),
6. A few monopoly infrastructure stocks (AIA, APA, ASX, SYD, TCL),
7. Some fixed-income proxies in the form of dull and boring REITS, and
8. A small smattering of companies, which owe their existence to some unique and difficult-to-replicate historical circumstances (AMC, BXB, CCL, COH, CSL, QAN, TLS, WES).

Sure, there has always been a small cap sector, but it has been pretty homogenous, comprising mostly small mining, oil & gas stocks and services providers to these industries, or else mirroring the list above (with a few unique and differentiated exceptions which have gone on to enduring success , eg, ARB, BRG, CAR, DDR, REA, REH, SEK, SHL and TNE).


But in the past 5 years things started to change dramatically: there has been a proliferation of new sort of businesses - ones that do not fit the usual ASX mold of listed company.

And it is technology, specifically the internet-of-things and cloud computing, which is enabling these new companies.

Take just a few examples: ALU, APT, APX, XRO and WTC

As recently as 5 years ago, these companies could physically not exist in their current form: the technology on which their current scale and reach is based simply did not exist.

Yet today they collectively generate some $15bn in Annual Sales.

Think on that for a minute: From nothing to $15bn in the space of a few short years.

For the bulk of my investing career, for a small group of companies to get from zero to the then-equivalent of $15bn in Revenues, and the increase in equity value that would accompany that, would take a very long time: decades, even.

And, what's more, those yester-year companies would have to had to deploy a significant amount of physical assets to achieve that outcome. (You'd need to build a factory to make widgets or even if you were in the service sector, you still needed bricks-and-mortar shop front or office in order to engage with your clients).

Between them, the WAAAX stocks have total assets of a mere $5bn-odd.
That's $5bn in Assets generating $15bn in Revenues.

For context, CSL - not exactly the world's most capital-intensive business - employs $20bn of Assets to generate half of that amount in Revenue(!)

Today, technology is compressing the shareholder value creation time line dramatically.

The point being made is that the world is changing fast and, assuming profit optimisation is the reason one invests in the stock market, then holding legacy stocks "because they've done well in the past" is highly likely to represent an opportunity cost.

[Note that I'm not for one minute suggesting anyone sell their CSL shares to buy WAAAX stocks; I never bought any of them (unfortunately I only awoke to this new paradigm relatively recently... around 12 to 18 months ago).
But the vibrancy in the rapidly expanding category of "new generation" companies is not confined to the large WAAAX companies - there are a large and growing number of highly competitive and compelling business offerings that are technology-enabled which are still at small- and even micro-, cap levels. ]

To demonstrate this opportunity cost in action, have a look at the sorts of superior investment returns generated by some Australian small- and micro-cap funds in recent times (I follow 3 of them and they all outperformed the All Ords in excess of 40% last year). (And these aren't investment managers who got lucky after taking speculative punts on some biotech breakthrough or tech start-up concepts; they are prudent, conservative, risk-averse investors with excellent investing track records and who invest almost exclusively in established, profitable and well-managed companies).

In the large cap space, there is much research coverage so the scope for mis-pricing due to "under-discovery" of stocks is zero.

In the small- and micro-cap space there is almost no publicly-available equity research being conducted. This results in significant number of undiscovered investment opportunities.



"Also, CSL has historically maintained a fairly high PE, this is not new."

I feel that is the point which is being made: what we are seeing now is, in fact, new.

CSL's P/E has never been as high as the level it reached in 2019/2020:




"For me, I cannot sell CSL.
I would have to pay outrageous CGT and whatever I buy next would need to go up 22.5% just to break even.
Then it needs to have potential to outperform CSL over the long term or else I would need to sell again and get back into CSL which would need to add a further 22.5% all to get me back to even.... I'm sure there are stocks that have and could do this. But that's not my investing strategy."

Like you, I too was a long-standing CSL shareholder who now faces a large CGT bill following the sale of my CSL shares early last year soon after Covid.

But a 22.5% investment return hurdle is hardly that demanding.

During March last year - when CSL was at record levels - there were a great many truly highly quality businesses which offered upside that was several multiples of 22.5%.

And there have been numerous stocks which have delivered far more than that even in recent months.

Of course, it may be that you don't have the time or inclination to look for these sorts of situations in pursuit of absolutely maximising the value of your investments.

This is all fine, but on a forum like this there is a wide spread of varying personal investing circumstances (age, risk tolerance, capital gains considerations, capacity to conduct research, capital availability, investing "DNA", etc.), and the posting content cannot apply to the circumstances of all participants on the forum.

For example, your CGT restraints won't be a consideration to someone who does not own CSL (or, indeed, who acquired CSL at higher prices).

So the context of all my comments on CSL are, by necessity, general in nature and are predicated on the assumption that participants on this forum are "average" investors who generally seek to maximise their investment returns, on a risk-adjusted basis.


In summary, my observation over the past year or two is that large caps reflect a very crowded trade (in no small part due to the same factors which have made CSL expensive, in my opinion).

Meaning that for the "average" investor, one who seeks to maximise his/her investment returns, I believe that the place to spend one's time is not with today's heroes such as CSL (which are already well-known by market participants, and therefore fully priced), but in researching the emerging crop of tomorrow's heroes (which are not receiving any analytical attention, with the attendant scope for significant mis-pricing).

There is a structural change happening on the ASX which I believe will mean that, while the overall ASX Market Indices (which are, by definition, heavily weighted by market cap) are likely to perform unspectacularly in years to come, the emerging end of the spectrum will outperform significantly.

The process has already commenced and I firmly believe it will continue, based purely on the chasm-like valuation differential between the two ends of the company size spectrum.

.