Interview: Why these stocks were taken off the ‘Best Ideas’ list for investors

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Sean Aylmer: Welcome to the Fear & Greed Business Interview. I’m Sean Aylmer.

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Sean Aylmer: We’re certainly not an investing podcast, but we do enjoy

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Sean Aylmer: talking to professional investors about what they like and what

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Sean Aylmer: they look for when examining companies. It’s particularly interesting as

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Sean Aylmer: we get towards reporting season here. Of course, we’re in

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Sean Aylmer: the middle of reporting season on Wall Street. Finding out

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Sean Aylmer: just how companies have performed and more importantly, what lies ahead. Remember,

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Sean Aylmer: this is general information only and you should seek professional

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Sean Aylmer: advice before making any investment decisions. Brian Han is the

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Sean Aylmer: Director of Equities Research Australia, New Zealand at Morningstar. Brian,

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Sean Aylmer: welcome back to Fear & Greed.

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Brian Han: Hi, Sean. It’s a pleasure to be here.

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Sean Aylmer: Now I do like the Morningstar Best Ideas publication, comes

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Sean Aylmer: out monthly. Just explain what it is.

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Brian Han: Oh, sure. It is a report that we publish every

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Brian Han: month highlighting what our Morningstar analysts see as the most

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Brian Han: worthwhile stocks for investors to consider. So you won’t see

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Brian Han: any stocks on this list that happen to be the

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Brian Han: flavours of the month. You won’t see this list littered

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Brian Han: with stocks in sectors that are suffering from cyclical issues.

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Brian Han: And you certainly won’t see any penny dreadful stocks on

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Brian Han: this list that day traders and even some managers like

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Brian Han: to have a punt on. What you will see are

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Brian Han: a select number of stocks drawn from across the whole

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Brian Han: spectrum of the market that have passed some quality screens

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Brian Han: and are trading at decent discounts to our valuations. And

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Brian Han: we do these Best Ideas not just for Australia and New Zealand,

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Brian Han: but also for Americas, Europe and Asia.

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Sean Aylmer: Okay, so with that as background, let’s jump into it

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Sean Aylmer: and let’s start with Australia before we move on to

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Sean Aylmer: other parts of the globe. It’s a dynamic list, isn’t

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Sean Aylmer: it? So companies come on and off. And I know

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Sean Aylmer: in the last week or two there’s been a couple

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Sean Aylmer: of companies that have fallen off the list. Just who

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Sean Aylmer: were they and why?

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Brian Han: So yes, that is correct, Sean. Last week we removed

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Brian Han: WiseTech, which is a transport logistics software company and AGL.

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Brian Han: Both have been removed simply due to their strong stock

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Brian Han: price performance, so much so that they are no longer

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Brian Han: trading at a sufficient discount to our analyst valuations. But

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Brian Han: there will be other reasons why certain stocks would be

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Brian Han: removed in certain months, and that would be perhaps because

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Brian Han: the fundamentals have changed or some industry events have happened.

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Brian Han: So, as you say, Sean, it is a dynamic list

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Brian Han: that we update and reassess every month.

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Sean Aylmer: Okay. So AGL and WiseTech fell off last week. Did anything join?

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Sean Aylmer: Have you been buying anything?

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Brian Han: Yes, we added two companies. One is ASX. I don’t

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Brian Han: need to say too much about that. It’s essentially a

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Brian Han: natural monopoly providing essential infrastructure to Australia’s capital markets, and

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Brian Han: it is trading at a decent discount to our analyst’s evaluation.

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Brian Han: The second one we added is quite interesting. It’s a

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Brian Han: company called ResMed. It is a leading sleep apnea treatment company.

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Brian Han: It’s performing quite strongly. There is excess demand for ResMed’s

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Brian Han: products due to some supply shortages that we’re having, and

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Brian Han: also due to a competitor who’s having some internal issues. Now,

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Brian Han: you add to that the fact that we have aging population,

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Brian Han: obesity and under diagnosis of sleep apnea, I think these

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Brian Han: are all long-term trends which should support continuing demand for

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Brian Han: ResMed’s products.

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Sean Aylmer: Okay, so that’s Australia. Let’s look beyond Australia, and we’ll

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Sean Aylmer: start with the biggest market, which of course is Wall

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Sean Aylmer: Street. Tell me about Teradyne.

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Brian Han: Yeah, let me give you some background, Sean, because a

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Brian Han: constant frustration for Aussie investors is the lack of quality

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Brian Han: tech stocks on the ASX. Now, there are plenty of

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Brian Han: penny dreadfuls masquerading as such, but not many solid franchises. Well,

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Brian Han: there are a few in the US trading at decent

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Brian Han: discounts to our valuation, and one, as you say, is Teradyne,

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Brian Han: listed on NASDAQ under ticker symbol TER. It is basically

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Brian Han: a chip testing company, which invests a boatload of money

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Brian Han: into producing high quality automated testing equipment, and it’s highly

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Brian Han: leveraged to this whole industrial automation trend. It has a

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Brian Han: leading market share and superior products, profitability and customer relationships

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Brian Han: than peers. So that is one. And perhaps if I

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Brian Han: can give you another one, Sean, that would be Cognizant Technology,

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Brian Han: and that’s also listed on the NASDAQ under CTSH. Now,

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Brian Han: it is not just a small, dime a dozen mom

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Brian Han: and pop IT service provider, but a major player that

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Brian Han: makes a lot of money facilitating all the digital transformation

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Brian Han: work that’s going on in companies around the world.

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Sean Aylmer: It’s interesting, both as companies, Cognizant Technology and Teradyne, they

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Sean Aylmer: are service providers to what’s happening in the technology world.

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Sean Aylmer: There’s opportunities not just about the NVIDIAs of the world,

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Sean Aylmer: it’s actually the service providers to those companies.

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Brian Han: Yeah, Sean, it’s like the old days when the gold

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Brian Han: rush was on, and you can go on get the gold,

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Brian Han: or you can buy actually shares in businesses that sell

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Brian Han: the shovels and the picks. And these are the companies

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Brian Han: that sell their services to, as you say, facilitate not

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Brian Han: just things in technology world, but in the real world

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Brian Han: such as automation and digitisation and transformation, which have become

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Brian Han: the buzzwords ever since we had that pandemic.

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Sean Aylmer: Stay with me, Brian, we’ll be back in a minute.

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Sean Aylmer: I’m speaking to Brian Han, Director of Equities Research Australia,

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Sean Aylmer: New Zealand at Morningstar. So let’s shift to Europe. That

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Sean Aylmer: economy isn’t traveling as well necessarily as the US economy,

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Sean Aylmer: nor the Australian economy for that matter, but you’ve picked

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Sean Aylmer: out Accor, the hotels group, Anheuser-Busch. Tell me about Accor

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Sean Aylmer: and Anheuser-Busch.

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Brian Han: I guess that’s one of the reasons why we wanted

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Brian Han: to highlight these best ideas because as you say, Sean,

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Brian Han: not many people know that there is a company called

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Brian Han: Accor and that it is one of the largest hotel

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Brian Han: groups in the world. And it is leveraged to that

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Brian Han: whole post pandemic recovery in global travel activities. Now, it

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Brian Han: has brands catering to all segments of the market from

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Brian Han: Raffles and Sofitel for rich people like yourself, Sean.

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Sean Aylmer: Yes, yes, yes. Talking my language here, Brian.

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Brian Han: To Ibis. To Ibis and BreakFree catering to cheapskates such as myself.

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Sean Aylmer: I think you’ve got that confused somewhat. I think you’ve

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Sean Aylmer: got the names mixed up there, Brian, but go on.

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Brian Han: Yeah, but the interesting thing is the shares are still

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Brian Han: undervalued relative to what our analysts thinks they’re worth. But another one,

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Brian Han: as you say, is Anheuser-Busch InBev, which is listed on

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Brian Han: the Brussels exchange. And it makes 500 different kinds of

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Brian Han: beer brands, including Corona, Budweiser, and Heineken. And the company

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Brian Han: has dominant market positions and much lower cost structures than peers,

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Brian Han: and especially leveraged to big, developing markets such as Africa

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Brian Han: and Latin America.

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Sean Aylmer: Okay. Now, we often talk about Wall Street, we sometimes

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Sean Aylmer: talk about Europe, here on Fear & Greed we don’t actually

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Sean Aylmer: talk a lot about the companies to invest in Asia,

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Sean Aylmer: but it’s such a big part of our market, and

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Sean Aylmer: China specifically. Couple of examples there that you think investors,

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Sean Aylmer: it’s worth having a look at, China Merchants Bank and

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Sean Aylmer: then China Overseas Land & Investment.

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Brian Han: Yeah, exactly. And it’s funny you should mention that because

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Brian Han: Asia is full of developing countries with huge populations and

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Brian Han: growing wealth. So if you can find shares in companies

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Brian Han: that serve these markets and can buy them at a

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Brian Han: discount to what they may be worth intrinsically, why wouldn’t

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Brian Han: you consider them? And the two that you mentioned, one

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Brian Han: would be China Merchants Bank. It has a leading market

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Brian Han: position in the Chinese retail banking space and is also

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Brian Han: making big inroads into wealth management. The bank has a

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Brian Han: industry-leading return on equity because it has such a asset

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Brian Han: light business model. It has a very well-off customer base,

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Brian Han: prudent lending practices, and pretty low funding costs. And at

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Brian Han: the current discount to our analyst valuation, I think is

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Brian Han: certainly worth a look for Aussie investors who may be

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Brian Han: filled to the gills with our four major banks. And the

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Brian Han: other one you mentioned was the China Overseas Land & Investment. Now,

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Brian Han: this real estate company operates in the very competitive and

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Brian Han: fragmented Chinese property development space, but it has been one

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Brian Han: of the few to achieve market share growth in recent periods.

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Brian Han: And they have done this by focusing on land bank

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Brian Han: quality upgrades and acquisitions. And it mainly operates in wealthier

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Brian Han: cities in China, so it should do well as home

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Brian Han: buyer sentiment in China continues to recover.

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Sean Aylmer: Brian, plenty to think about in all that. Thank you

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Sean Aylmer: very much for talking to Fear & Greed.

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Brian Han: Pleasure, Sean. Thank you.

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Sean Aylmer: That was Brian Han, Director of Equities Research Australia, New

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Sean Aylmer: Zealand at Morningstar.
This is the Fear & Greed Business Interview.

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Sean Aylmer: Remember, you should get professional advice before making any investment

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Sean Aylmer: decisions. Join us every morning for the full episode of

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Sean Aylmer: Fear & Greed, Australia’s most popular business podcast. I’m Sean Aylmer,

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Sean Aylmer: enjoy your day.