1 00:00:05,790 --> 00:00:08,579 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. 2 00:00:08,639 --> 00:00:10,830 Sean Aylmer: The earnings season kicks off this week with a handful 3 00:00:10,830 --> 00:00:14,309 Sean Aylmer: of miners reporting results, including Rio Tinto tomorrow. There are a 4 00:00:14,309 --> 00:00:17,190 Sean Aylmer: few more big names next week as well before activity 5 00:00:17,369 --> 00:00:19,530 Sean Aylmer: really ramps up mid- August. It's going to be a 6 00:00:19,530 --> 00:00:22,440 Sean Aylmer: very interesting earnings season because the market has been trading 7 00:00:22,530 --> 00:00:25,560 Sean Aylmer: at all- near record highs. As Brian Han, Director of 8 00:00:25,560 --> 00:00:29,309 Sean Aylmer: Equities Research Australia, New Zealand, at Morningstar puts it " We 9 00:00:29,309 --> 00:00:32,519 Sean Aylmer: will get to see if actual company earnings justify the 10 00:00:32,519 --> 00:00:36,809 Sean Aylmer: equity market's remarkable resilience." Remember, this is general information only. 11 00:00:36,810 --> 00:00:39,780 Sean Aylmer: You should seek professional advice before making investment decisions. Brian, 12 00:00:39,780 --> 00:00:40,950 Sean Aylmer: welcome back to Fear and Greed. 13 00:00:41,190 --> 00:00:42,720 Brian Han: Hi Sean. It's great to be back. 14 00:00:43,229 --> 00:00:46,110 Sean Aylmer: Priced to perfection, that's what the market seems to think 15 00:00:46,110 --> 00:00:48,179 Sean Aylmer: about a lot of these stocks. What are you looking 16 00:00:48,179 --> 00:00:50,070 Sean Aylmer: at going into earnings season? 17 00:00:50,729 --> 00:00:55,020 Brian Han: Look, Sean, I can say the usual things like we 18 00:00:55,020 --> 00:00:59,940 Brian Han: should look out for rising costs, impact of inflation, higher 19 00:00:59,940 --> 00:01:05,550 Brian Han: interest rates, and the uncertain economy, but as you alluded 20 00:01:05,550 --> 00:01:10,649 Brian Han: to, Sean, ultimately, this is a reporting season that needs 21 00:01:10,740 --> 00:01:15,209 Brian Han: to justify the market rally that we have enjoyed over 22 00:01:15,209 --> 00:01:18,090 Brian Han: the past six to 12 months. It needs to justify 23 00:01:18,090 --> 00:01:23,548 Brian Han: in terms of earnings, the sustainability of those earnings and 24 00:01:23,550 --> 00:01:28,410 Brian Han: the outlook, because despite all these macro uncertainties, as you 25 00:01:28,410 --> 00:01:32,670 Brian Han: said, the market is near its all- time highs. So 26 00:01:32,730 --> 00:01:35,430 Brian Han: what we're looking for is you really want to look 27 00:01:35,430 --> 00:01:39,569 Brian Han: out for companies that are well positioned if interest rates 28 00:01:39,569 --> 00:01:46,530 Brian Han: keep on rising, if geopolitical risks escalate, if technology creates 29 00:01:46,559 --> 00:01:52,770 Brian Han: even more havoc for businesses, and if the proverbial really 30 00:01:52,770 --> 00:01:55,380 Brian Han: hits the fan, you want to look out for companies 31 00:01:55,380 --> 00:01:59,159 Brian Han: that are resilient enough to withstand these risks. So that's 32 00:01:59,160 --> 00:02:01,919 Brian Han: what we'll be focusing on in the upcoming reporting season. 33 00:02:02,610 --> 00:02:04,649 Sean Aylmer: I want to go through some of the overvalued and 34 00:02:04,650 --> 00:02:07,740 Sean Aylmer: undervalued stocks that you and Morningstar have put together, but 35 00:02:07,740 --> 00:02:11,190 Sean Aylmer: just before we get to that, are we running into 36 00:02:11,190 --> 00:02:12,930 Sean Aylmer: an earnings season where we could get a lot of 37 00:02:12,930 --> 00:02:16,050 Sean Aylmer: price volatility? Because if you take the June quarter earnings 38 00:02:16,050 --> 00:02:18,690 Sean Aylmer: season in the US last week we had tech stocks 39 00:02:18,990 --> 00:02:22,199 Sean Aylmer: reporting, even I think it was Alphabet actually beat revenue 40 00:02:22,199 --> 00:02:27,120 Sean Aylmer: and earnings expectations and then fell 5%. Tesla dropped 12% 41 00:02:27,210 --> 00:02:30,240 Sean Aylmer: on its result. Are we expecting to see a bit 42 00:02:30,240 --> 00:02:32,880 Sean Aylmer: more price volatility during our earnings season? 43 00:02:33,480 --> 00:02:36,360 Brian Han: I think we will. And I think we say that 44 00:02:36,599 --> 00:02:40,349 Brian Han: before every reporting season because as you know, information is 45 00:02:41,250 --> 00:02:44,940 Brian Han: quickly flowing and there's algo trading and all sorts of 46 00:02:44,940 --> 00:02:48,210 Brian Han: things going on. But Sean, I think you raised a 47 00:02:48,210 --> 00:02:51,389 Brian Han: good point there in terms of a segue into one 48 00:02:51,389 --> 00:02:54,508 Brian Han: of the things that we really focus on, which is 49 00:02:54,660 --> 00:03:00,389 Brian Han: expectations. Now, in my recent report, I had a subtitle 50 00:03:00,389 --> 00:03:08,160 Brian Han: called happiness equals result minus expectations. So all those results 51 00:03:08,160 --> 00:03:11,550 Brian Han: that you just mentioned there, Sean, a result in and 52 00:03:11,550 --> 00:03:14,909 Brian Han: of itself is sort of meaningless when you think about 53 00:03:14,910 --> 00:03:18,240 Brian Han: it. When one of my sons tells me what he 54 00:03:18,240 --> 00:03:23,040 Brian Han: got for his exam, my reaction depends on what he got last 55 00:03:23,040 --> 00:03:27,570 Brian Han: time, how the result compares with other students and whether 56 00:03:27,570 --> 00:03:30,749 Brian Han: he came home happy or sulky on the day he 57 00:03:30,750 --> 00:03:33,240 Brian Han: did the exam. So what I mean is you need 58 00:03:33,240 --> 00:03:37,529 Brian Han: a benchmark, a reference point for an ASX- listed company, 59 00:03:37,530 --> 00:03:40,080 Brian Han: or whether it's Tesla and Google, that reference point is 60 00:03:40,080 --> 00:03:45,240 Brian Han: usually the consensus expectations or the expectations of the analysts and 61 00:03:45,240 --> 00:03:48,719 Brian Han: the fund managers following that company. And Sean, that's why 62 00:03:48,719 --> 00:03:52,770 Brian Han: sometimes you see what looks like a good result where 63 00:03:52,770 --> 00:03:55,620 Brian Han: say, profit is up 30%, but the stock price is 64 00:03:55,620 --> 00:04:01,170 Brian Han: down 15% because consensus expected the company to do much 65 00:04:01,200 --> 00:04:04,830 Brian Han: better than whatever increase it did. And Sean, this is 66 00:04:04,830 --> 00:04:09,780 Brian Han: also why you have this industry called investor relations that 67 00:04:09,780 --> 00:04:15,240 Brian Han: specializes in managing expectations. So as a longterm investor, I 68 00:04:15,240 --> 00:04:18,599 Brian Han: think you should be aware of these consensus expectations and 69 00:04:18,690 --> 00:04:22,919 Brian Han: it is these consensus expectations that probably will drive a 70 00:04:22,920 --> 00:04:25,258 Brian Han: lot of volatility in the upcoming reporting season. 71 00:04:26,099 --> 00:04:28,109 Sean Aylmer: Okay, so let's get into some of the stocks. Let's 72 00:04:28,109 --> 00:04:32,070 Sean Aylmer: look at the ones that you think are overvalued with 73 00:04:32,070 --> 00:04:36,060 Sean Aylmer: high uncertainty. Now, the point being, if some of these 74 00:04:36,060 --> 00:04:41,040 Sean Aylmer: disappoint against expectations, you could end up with sell- offs 75 00:04:41,040 --> 00:04:46,198 Sean Aylmer: here. Polynovo, the medical device stock is one that you 76 00:04:46,199 --> 00:04:48,690 Sean Aylmer: are not a big fan of at the moment. Well, 77 00:04:48,690 --> 00:04:50,880 Sean Aylmer: we think it's well priced, shall we say, or fully priced. 78 00:04:51,120 --> 00:04:53,820 Brian Han: Yeah. One thing we need to make clear is we're 79 00:04:53,820 --> 00:04:56,400 Brian Han: not saying we're fans or not fans of any of 80 00:04:56,400 --> 00:05:01,529 Brian Han: these companies. What we are saying is that our analysts have a mid- 81 00:05:01,529 --> 00:05:06,930 Brian Han: cycle view about what the earnings, ultimate earnings potential is for 82 00:05:06,930 --> 00:05:07,111 Brian Han: these companies. 83 00:05:07,111 --> 00:05:07,741 Sean Aylmer: Yes. 84 00:05:08,100 --> 00:05:11,010 Brian Han: So for a company like Polynovo, we just think the 85 00:05:11,010 --> 00:05:14,488 Brian Han: market is sort of getting ahead of itself about what 86 00:05:14,490 --> 00:05:18,330 Brian Han: the earnings may look like five years time or three 87 00:05:18,330 --> 00:05:21,599 Brian Han: years time. But perhaps, Sean, I can give you a 88 00:05:21,599 --> 00:05:26,250 Brian Han: more topical choice. Let's take, say, the Mexican fast food 89 00:05:26,250 --> 00:05:32,549 Brian Han: joint, Guzman y Gomez. So judging by its sky- high price- to- 90 00:05:32,550 --> 00:05:35,849 Brian Han: earnings multiple, and the fact that it's trading at, I 91 00:05:35,849 --> 00:05:41,609 Brian Han: think, more than twice our analysts valuations, the expectations are 92 00:05:41,609 --> 00:05:45,480 Brian Han: high. Now, I mean, Sean, their burritos are pretty good 93 00:05:45,750 --> 00:05:49,380 Brian Han: and their stores are pretty funky, but the current stock 94 00:05:49,380 --> 00:05:53,969 Brian Han: price is assuming that we each eat a lot more 95 00:05:54,270 --> 00:05:58,230 Brian Han: of these burritos and that they open a bucket load 96 00:05:58,230 --> 00:06:02,159 Brian Han: of new stores, not just in Australia, but also in 97 00:06:02,160 --> 00:06:06,810 Brian Han: the US. And the last time I checked, these Americans, 98 00:06:06,839 --> 00:06:12,809 Brian Han: they're pretty concerning with their Mexican food. So we are just 99 00:06:12,809 --> 00:06:18,359 Brian Han: not sure whether investors are paying enough attention to the 100 00:06:18,360 --> 00:06:22,830 Brian Han: risks to the growth hype that's already built into the 101 00:06:22,830 --> 00:06:23,490 Brian Han: stock price. 102 00:06:24,360 --> 00:06:27,960 Sean Aylmer: Okay. I'm just going to mention another group of funds, 103 00:06:27,960 --> 00:06:31,919 Sean Aylmer: and kind of in that wealth management area, Netwealth, Hub24, 104 00:06:32,730 --> 00:06:36,029 Sean Aylmer: GQG Partners, some of those have done really well in 105 00:06:36,029 --> 00:06:39,180 Sean Aylmer: recent times. Is there a feel that some of the 106 00:06:39,180 --> 00:06:42,359 Sean Aylmer: players in that sector might be overvalued, or sorry, not 107 00:06:42,360 --> 00:06:43,800 Sean Aylmer: at fair value is a better way of putting it? 108 00:06:43,920 --> 00:06:48,989 Brian Han: Yeah, we definitely think, for instance, investment administrations provider, Netwealth, 109 00:06:49,349 --> 00:06:53,909 Brian Han: is overvalued. I think there is a bit of an industry 110 00:06:53,910 --> 00:06:59,310 Brian Han: consolidation and rationalization angle, that people are playing it. There's 111 00:06:59,310 --> 00:07:02,309 Brian Han: also a bit of rotation because as you know, the 112 00:07:02,309 --> 00:07:08,279 Brian Han: fund managers themselves are struggling in this age of passive 113 00:07:08,520 --> 00:07:11,160 Brian Han: investing popularity and all of that. So some of the 114 00:07:11,160 --> 00:07:15,900 Brian Han: money, perhaps, is rotating out of pure asset managers into 115 00:07:16,350 --> 00:07:20,759 Brian Han: these administration and platform providers. A bit more like when 116 00:07:20,760 --> 00:07:22,980 Brian Han: you have a gold rush, instead of investing in the 117 00:07:23,309 --> 00:07:26,849 Brian Han: gold miners you invest in the shovels and picks companies. 118 00:07:27,179 --> 00:07:28,739 Brian Han: So I think there might be a little bit of 119 00:07:28,740 --> 00:07:30,569 Brian Han: a rotation on that front. 120 00:07:31,080 --> 00:07:32,760 Sean Aylmer: Stay with me, Brian. We'll be back in a minute. 121 00:07:38,760 --> 00:07:43,049 Sean Aylmer: I'm speaking to Brian Han from Morningstar. Okay, so there 122 00:07:43,049 --> 00:07:46,529 Sean Aylmer: are some of the overvalued stocks. What about the undervalued 123 00:07:46,529 --> 00:07:50,760 Sean Aylmer: stocks where it'll be interesting to see what earnings season 124 00:07:50,760 --> 00:07:55,020 Sean Aylmer: means for them? DEXUS is a good place to start. 125 00:07:55,380 --> 00:07:58,830 Sean Aylmer: That's the property group, DEXUS. Undervalued, Brian? 126 00:07:59,250 --> 00:08:02,429 Brian Han: Yeah, we believe so because I think it's suffered a 127 00:08:02,429 --> 00:08:07,320 Brian Han: lot of headwinds in terms of as interest rates go 128 00:08:07,320 --> 00:08:10,950 Brian Han: up, obviously, that has a negative impact on these property 129 00:08:10,950 --> 00:08:15,270 Brian Han: developers whose balance sheets are usually quite leveraged in terms 130 00:08:15,270 --> 00:08:19,860 Brian Han: of their development and their funds' management pipelines. But also, 131 00:08:19,860 --> 00:08:23,760 Brian Han: you have, obviously, the working from home phenomenon, which is 132 00:08:24,510 --> 00:08:28,650 Brian Han: putting some doubts into investors' minds about what the future 133 00:08:28,650 --> 00:08:32,189 Brian Han: of office towers and their occupancy and the price that 134 00:08:32,190 --> 00:08:35,580 Brian Han: they can charge would be in the long term. But 135 00:08:35,580 --> 00:08:40,170 Brian Han: we think those headwinds are more than reflected in the 136 00:08:40,170 --> 00:08:43,078 Brian Han: current stock rise. And we do feel that people are 137 00:08:43,080 --> 00:08:48,300 Brian Han: underestimating what the mid- cycle earnings potential could be for 138 00:08:48,300 --> 00:08:51,899 Brian Han: a company like DEXUS. And also, I think people might 139 00:08:51,900 --> 00:08:57,839 Brian Han: be over- estimating debt pressure that's on DEXUS. We think 140 00:08:57,839 --> 00:09:02,368 Brian Han: DEXUS, at a corporate and consolidated level, the balance sheet 141 00:09:02,369 --> 00:09:03,929 Brian Han: gearing is actually pretty reasonable. 142 00:09:03,929 --> 00:09:08,939 Sean Aylmer: Another one close to you is TPG Telecom, which is 143 00:09:08,940 --> 00:09:11,280 Sean Aylmer: sort of morphed as a business, well, has always morphed 144 00:09:11,280 --> 00:09:14,250 Sean Aylmer: as a business that one. You think that that could 145 00:09:14,250 --> 00:09:16,799 Sean Aylmer: be undervalued. There has been quite a bit of hype 146 00:09:16,799 --> 00:09:20,670 Sean Aylmer: around some of these telcos. What do you think of TPG? 147 00:09:21,330 --> 00:09:24,540 Brian Han: Yes, we do feel that it's undervalued compared to what 148 00:09:24,540 --> 00:09:29,099 Brian Han: it can truly earn at a mid- cycle basis. As 149 00:09:29,099 --> 00:09:34,320 Brian Han: you know, Sean, it owns Vodafone and Vodafone is raising 150 00:09:34,350 --> 00:09:40,890 Brian Han: its mobile prices along with Telstra and Optus. And that's 151 00:09:40,890 --> 00:09:44,310 Brian Han: a really good thing at an industry level where after, 152 00:09:44,340 --> 00:09:48,750 Brian Han: perhaps four, 4 1/ 2 years of heavy discounting now 153 00:09:48,750 --> 00:09:51,870 Brian Han: that the 5G is coming on board and these companies 154 00:09:51,870 --> 00:09:57,240 Brian Han: are becoming more rational, we are seeing real rationality returning 155 00:09:57,450 --> 00:10:01,890 Brian Han: to the space and all three players raising prices. So 156 00:10:01,890 --> 00:10:05,819 Brian Han: that's one tick. Its corporate telecom business is doing very 157 00:10:05,820 --> 00:10:11,039 Brian Han: well, that's another tick. And it's finally cutting costs and 158 00:10:11,039 --> 00:10:16,890 Brian Han: improving operating efficiency after all those mergers and business disruptions that 159 00:10:17,250 --> 00:10:21,270 Brian Han: it's suffered. So that's another tick. And ultimately, I don't 160 00:10:21,270 --> 00:10:24,420 Brian Han: think the market is factoring in any of these upside, 161 00:10:24,809 --> 00:10:29,069 Brian Han: so therein lies the opportunity for longterm investors. 162 00:10:29,639 --> 00:10:33,420 Sean Aylmer: Okay. It's interesting, in your top 10 most undervalued stocks, 163 00:10:33,420 --> 00:10:37,770 Sean Aylmer: we mentioned TPG and DEXUS, but it's a very eclectic mix. You've got 164 00:10:37,830 --> 00:10:40,559 Sean Aylmer: Ramsay Health Care in there, you've got Bapcor, which is 165 00:10:40,559 --> 00:10:44,309 Sean Aylmer: the retailing group. You have Charter Hall, another property... Rizen, 166 00:10:44,490 --> 00:10:49,050 Sean Aylmer: which is a transport group and seller/ manufacturer. I suppose, 167 00:10:49,080 --> 00:10:51,570 Sean Aylmer: it's interesting, it's not like a sector view here, it's 168 00:10:51,570 --> 00:10:54,000 Sean Aylmer: very much a stock picker's view on what's cheap and 169 00:10:54,000 --> 00:10:54,660 Sean Aylmer: what's not cheap. 170 00:10:55,620 --> 00:10:59,099 Brian Han: Sean, we, analysts and fund managers, we always harp on 171 00:10:59,099 --> 00:11:01,620 Brian Han: about you have to know the stock, you have to 172 00:11:01,620 --> 00:11:04,949 Brian Han: be a stock picker. And we say that because we 173 00:11:04,949 --> 00:11:08,010 Brian Han: want to keep our jobs, but more importantly, we say 174 00:11:08,010 --> 00:11:14,400 Brian Han: that because ultimately, it is all about specific company fundamentals 175 00:11:14,520 --> 00:11:19,110 Brian Han: and how its mid- cycle might be impacted by short- 176 00:11:19,110 --> 00:11:23,129 Brian Han: term factors and people extrapolating those short- term factors. So 177 00:11:23,129 --> 00:11:25,679 Brian Han: when you look at all these undervalued stocks that we 178 00:11:25,679 --> 00:11:29,850 Brian Han: have on that table, the common theme really is each 179 00:11:29,850 --> 00:11:33,659 Brian Han: of these companies, for better or worse, are suffering from 180 00:11:33,660 --> 00:11:37,770 Brian Han: some near- term pressures, whether it's interest rates, whether it's 181 00:11:38,099 --> 00:11:42,839 Brian Han: customer demand, or whether it's company specific, for instance, one 182 00:11:42,840 --> 00:11:45,929 Brian Han: of its businesses is not doing as well as it 183 00:11:45,929 --> 00:11:50,010 Brian Han: promised. And what we're saying is we think the market 184 00:11:50,040 --> 00:11:55,350 Brian Han: is extrapolating these bad things forever out into the future, 185 00:11:55,799 --> 00:11:59,639 Brian Han: and we or our analysts think that that is a 186 00:12:00,059 --> 00:12:03,720 Brian Han: short to medium term blip. We are willing to look 187 00:12:03,780 --> 00:12:07,200 Brian Han: over the value and we are willing to value this 188 00:12:07,200 --> 00:12:12,120 Brian Han: company on what it is capable of earning on conservative 189 00:12:12,210 --> 00:12:16,170 Brian Han: and reasonable assumptions. So if you wanted a common theme 190 00:12:16,170 --> 00:12:18,689 Brian Han: among them, that would be the theme that we are mid- 191 00:12:18,690 --> 00:12:21,600 Brian Han: cycle, it can earn much more than what the market 192 00:12:21,600 --> 00:12:23,340 Brian Han: is currently extrapolating it. 193 00:12:24,300 --> 00:12:26,159 Sean Aylmer: Do you get excited during earning season, Brian, or is 194 00:12:26,160 --> 00:12:27,179 Sean Aylmer: it just a lot of hard work? 195 00:12:27,599 --> 00:12:31,440 Brian Han: Oh, I get excited in the morning at about 8: 196 00:12:31,440 --> 00:12:33,990 Brian Han: 30 P. M. I get a little bit depressed because 197 00:12:33,990 --> 00:12:35,940 Brian Han: I want to have dinner and I want to watch 198 00:12:35,940 --> 00:12:39,328 Brian Han: Netflix and spend some time with my kids, but what's 199 00:12:39,330 --> 00:12:40,260 Brian Han: got to be done, it's got to be done. 200 00:12:40,530 --> 00:12:42,270 Sean Aylmer: Very busy. Well, good luck with it. And thank you 201 00:12:42,270 --> 00:12:43,410 Sean Aylmer: for talking to Fear and Greed. 202 00:12:43,470 --> 00:12:44,130 Brian Han: Thank you, Sean. 203 00:12:44,340 --> 00:12:47,730 Sean Aylmer: That was Brian Han, Director of Equities Research, Australia, New 204 00:12:47,730 --> 00:12:50,219 Sean Aylmer: Zealand, at Morningstar. This is the Fear and Greed Business 205 00:12:50,219 --> 00:12:53,279 Sean Aylmer: Interview. Remember, this is general information only and you should 206 00:12:53,279 --> 00:12:56,580 Sean Aylmer: seek professional advice before making investment decisions. Join us every 207 00:12:56,580 --> 00:12:58,679 Sean Aylmer: morning for the full episode of Fear and Greed, business 208 00:12:58,679 --> 00:13:00,838 Sean Aylmer: News for people who make their own decisions. I'm Sean 209 00:13:00,840 --> 00:13:02,190 Sean Aylmer: Aylmer. Enjoy your day.