Portfolio, page-110

"In your current research, I noticed you did not include healthcare or other "defensives" (not a fan of that term). Yet, in the quality bucket, you have a few healthcare companies, such as CSL, COH and RMD. Personally, I'm a big fan of CSL, though I find it generally trades at 'Quality at Any Price' levels rather than at 'Quality at a Reasonable Price'. I understand that the current valuations for these quality companies still remain too high for value investors. However, with the current conditions in the market, and large parts of the healthcare sector being down up to 75%, are you not interested in looking through the rubble for value opportunities in other parts of healthcare?"

@dabozza,

I don't invest on thematic lines; I am interested in buying undervalued companies, irrespective of what sectoral buckets people might applied to them.

I recognise that the fundamentals for healthcare - ageing demographics, medical technology advancements, government underwritten support etc - are attractive, but these are already widely known, so they are effectively already imputed into the valuation of healthcare stocks.

At a structural level, I think the healthcare sector in Australia is represented by a barbell distribution, differentiated by size:

1. Well established, large-cap stocks (CSL, COH, RHC, RMD, SHL)

...on the one end, and on the other end:

2. Emerging medical technology companies (too numerous to mention)


In the case of the former category, given I invest on absolute valuation basis, as opposed to index-referenced basis like institutional investors, on pure valuation grounds I see no reason today to own shares in any of those companies - none of them appear to me to be sufficiently undervalued.

On the rare occasion they do become undervalued, they tend to do so as a group due to some or other extraneous factor (usually due to major instos rotating sectors, as they are wont to do from time to time), so when that happens because they are largely proxies for one another I tend to buy just one or two of them; CSL and SHL are the ones I've owned in the past (RMD a great many years ago).

Like you seem to indicate, in terms of business model, I prefer CSL to COH or RMD.

The reason being is that I perceive CSL to be an IP business with a more granular product suite than COH or RMD which I've always viewed as single-product, single-application med device companies....very very good single products, but single products nonetheless [*].

If someone came along and invented a better mousetrap to COH's or RMD's (slim chance, I know) then it would cause serious valuation damage, compared to a competitor coming along and making one of CSL's product lines obsolete.

So, while I was a CSL shareholder for many happy and profitable years, I divested my stake in April 2020, at the onset of Covid. And RHC I've also owned for many years, and I expect there is an odds-on chance that I am about to have my shares acquired from some private equity led syndicate.

But suffice to say that I can't see too much valuation appeal in this large end of town in the healthcare sector.

[*] (Although, to be fair, COH and RMD have morphed increasingly into software as part of their revenue models, but they are still essentially device designers and manufacturers.)



On the other hand, looking at the emerging companies in the healthcare sector, this area looks far more interesting to me, with far greater scope of mispricing of stocks (because they are less well known and, hence, poorly researched).

But, as always, the trade-off is that this area of the market is more risky, meaning one's investment thesis for owning shares in small- or micro-cap medical (and especially med tech) companies needs to include very clear performance milestones which, when breached, forces immediate selling. Otherwise, things can slip away from you faster than you can imagine.

Truth be told, I have had mixed success dabbling in this micro-cap healthcare corner of the market: if I've made money overall, I don't think I've exceeded by mental effort cost of capital.

So the reward-to-effort ratio has been sub-optimal for me over the past 2 or 3 years (Covid partly to blame and partly judgement errors made on my part in failing to appreciate the time lines involved in reaching scale, even with the best-sounding commercially-established concepts).

But because I think the opportunity set here is large, I'll keep trawling around this small- and micro-cap part of the healthcare world.

You referenced stocks that are 75% down; of course, that might be for perfectly good reason, but that kind of stat always makes my ears prick up. Can you list some companies, whose share prices have suffered that fate, which might be worthy of assessing?

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