Bull or Bear

Henry Jennings | Marcus Today 

"Turn! Turn! Turn! ... To everything there is a season, and a time to every purpose under heaven." – The Byrds.

Last month, I wrote about the Kennel Club. Those stocks and sectors that had been pummelled in the last financial year might be due for a bounce. I singled out two sectors, Healthcare and Technology.

It is fair to say one out of two ain't bad. 

The Healthcare sector has definitely enjoyed a renaissance, but the tech sector? I am afraid not. It has shown signs of life, but there has been no real follow-through. CSL, on the other hand, has managed a decent bounce, as has my perennial bear stock, ResMed (RMD).

I have been a vocal, loud and proud bear on this one for many months, perhaps even years. Everyone around me always seems to be a bull. "Look at the growth," they say. "Look at the margins," they say.

I say, tos!  Well, I did for a long time!

Look at the price of the machines. Look at the business model. Look at the competition.

RMD should have been making hay, much more hay, while Philips was in the doghouse. But the business model is somewhat flawed. The problem is that wearing a CPAP mask, whichever way you cut it, is not a pleasant experience. Not for the user and certainly not for their partner. It is like going to sleep with the cast of The Dam Busters.

In fact, many users give up within a relatively short period of time. Which means two things. First, there is no ongoing revenue. Second, that user has to be replaced.

The fact is that, despite everyone's best endeavours, once you have bought a CPAP machine, you are pretty much done. Also of note is that the new AirSense 11 was originally priced at more than $2,100 in Australia and is now on "special" for less than $1,500. So much for brand leadership.

There is also a cheaper Chinese knock-off that undercuts RMD and looks remarkably similar. It also just blows air up your nose.

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However, and this applies to every stock, there is always a price. Having been a bear for so long, I changed my tune and became a cautious bull between $26 and $27. It was something of a red-letter day when I went on Ausbiz, calling the bottom. The stock has rallied well since. It has surpassed my target. 

When you go to the ‘Kennel Club’ or the ‘Dog Rescue’ centre, there is always one puppy with big, gooey eyes that you simply cannot resist. In my case, it was RMD. CSL also fitted the bill, and that one has rallied, too.

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I cannot remember a time when an analyst was bearish on CSL. COH also belongs in that basket. All bulls, no bears!

So, with a month having passed and a lot of water flowing under the bridge, is the tech sector now too puppy-eyed to ignore?

I have thought so before. I was wrong. I was simply too early. 

Lately, we have seen WiseTech Global (WTC) bounce around on the news that the company has appointed a new non-executive chair. That is a step in the right direction and welcome news. Richard White has also managed to stay off the front page, although I doubt that will last. There are still several investigations continuing.

The best thing White could probably do would be to take the company private and try to put all its issues behind closed doors. But that is a very big call. It is a standard bearer for the sector, though. Where it goes, the tech sector will follow.

There is, though, a price for everything. A price to be a bull and a price to be a bear.

What we are seeing is the adage that nothing goes up in a straight line forever and, conversely, nothing goes down in a straight line forever. Some sectors may feel as though they have done exactly that, but sooner or later, they come undone. We are seeing that at the moment with semiconductors. The best way to play that theme here is the SEMI ETF.

  
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We have also seen massive leverage applied in the Korean market, causing all sorts of swings and increased volatility. Being tossed around in a Korean wave pool is not much fun. Investors are voting with their feet, locking in gains and rotating into more defensive sectors, and those that still have those gooey puppy-dog eyes you just want to take home. Rotation is the name of the game. In the US, the equal-weight S&P 500 continues to set records. 

Healthcare in the US is one beneficiary, just as it has been here. That rotation again.

So far, though, that has not translated into the Australian tech sector, mainly because we do not really have one. Many of our leading technology stocks are SaaS businesses, and that part of the market has been out of favour too.

There will come a price when they are simply too hard to resist. Then we will see rotation, perhaps. But at what price point?

You get the feeling that markets are getting somewhat divorced from reality. Momentum trumps fundamentals, at least for a while. The herd is a dangerous animal. It can push prices well beyond what is rational, both on the way up and on the way down. Maybe the US earnings season will steady the ship. Maybe our own earnings season will bring some clarity.

I notice that herd mentality even amongst the biggest and brightest. Take SpaceX. Every broker, every analyst seems bullish. Not a bear in sight. Hardly a surprise given the fees that a broker would have got in this huge IPO. You do not bite the hand that feeds you, especially if that hand is going to be out for more money in the future. Debt or equity, it doesn’t matter, fees and fees! Space is expensive. 

In the meantime, the markets are frustrating. The ASX in particular. Massive underperformance at an index level for a long time. We are being tossed around. One day things look bright, the next day shades are required. Red across the board. It is hard to find a trend. It is hard to make money. Trying to pick your way through the maelstrom is tough work. Maybe we need a guide dog rather than a rescue dog! Makes more sense.

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