How to use negative news to your advantage
Airlie Funds Management's Emma Fisher believes times of "maximum pain" can often be the best time to buy. In this wire, you'll learn why.
It's well known that the pain of losing is far more powerful than the pleasure one would receive from gaining the same thing. In behavioural economics, this is called "loss aversion" - a cognitive bias that has the tendency to stop people from taking risks (for possible gain) so as to avoid loss.
Simply put, the vast majority of humankind would prefer not to lose $100 than to win $100.
But those able to recognise this bias within themselves can use this to their advantage. That's according to Airlie Funds Management's Emma Fisher, who, over her career, has learnt to cut through the noise and identify points of "maximum pain" for better long-term returns.
"Often, when I'm feeling the worst about something - when I'm feeling like I never want to see that ticker again - that's usually the point of maximum pain, and that's usually when the stock is a buy," she says.
The one caveat to the rule is when a company's balance sheet isn't intact, Fisher says.
"If there's any reflexivity between earnings falling and suddenly the balance sheet gets called into question, you don't want to go there," she says.
"That's actually when you probably should cut your losses and sell. But if the balance sheet's good, the lower the share price, the lower the risk, that's all there is to it."
Sometimes, it's near impossible to ignore the negative news. I get it. I too am mystically drawn to reading pessimistic predictions foreshadowing the calamity that is supposedly to come.
And while, of course, central bank moves and macroeconomic data are important, it's equally if not more important to have perspective, think rationally and remain cool-headed when it comes to our hard-earned cash.
After all, the total return of the S&P/ASX 200 was only negative in seven years out of the last 35. Put differently, 80% of the time the local bourse delivers a positive total return. As the saying goes, time in the market beats timing the market.
In this wire, Fisher provides an education on why you should lean in when your brain is screaming at you to do otherwise and points to a few sector and stock-specific examples to illustrate why investors should use negative news to their advantage.
Note: These quotes are taken from Emma Fisher's recent interview on Livewire's Rules of Investing podcast, which you can check out below:
Don't like Apple Podcasts? You can listen to the whole interview on the below platforms as well:
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Why you should be greedy when others are fearful
Fear is an incredibly powerful force. It's probably why we pay so much heed to what the market's permabears say - despite knowing full well that, over the long term, the market trends bottom left to top right.
In fact, the S&P/ASX All Ordinaries Accumulation Index has returned an average of 13.2% per annum since 1900. The Aussie market only delivered a negative return in 19% of these years, while 81% of the time it was positive.
Interestingly, however, earnings actually fall far more frequently than the market itself.
"There have been seven instances when the market has fallen in the last 35 years and posted a negative return, but there have been double that (14 times) when earnings have fallen," Fisher explains.
"The reason that earnings are more volatile than the market is because you're also getting dividends. The market is pretty smart. When earnings fall out of bed, it usually re-rates those earnings and puts them on a higher multiple. That can offset some of the damage."
Sure, some news can change the long-term value of a company, but it's far rarer than one would think.
Take 2019, "the last boring year that we all lived through", as an example.
"I can't think of one historical event that happened in 2019 and yet, the [difference between the] 52-week high and low for the top 20 most boring stocks in Australia was 45%. And then if you look at the ASX 100 hundred, that number was something like 60%," Fisher says.
"Their values are changing so quickly, but their value in the real world is changing over years and decades. So I'm always interested in exploiting that tension between the short-term fanaticism of the share market and how things actually really change for businesses in the long term."
"If it's in the papers, it's probably in the price."
So how do you exploit this tension? Great question. As Fisher explains, it's all about identifying areas of negative momentum or "maximum pain" in the market.
"I remember when I first launched the Airlie Australian Equity Fund just over five years ago, our largest position was Reece (ASX: REH) because Matt Williams loved Reece and had invested in it for decades," Fisher recalls.
"Day one, it was trading at $12. If you go back to 2018, Aussie housing was on the nose. Bill Shorten was looking like a certain to get in, he was going to remove negative gearing, and basically anything related to housing was absolutely smoked."
And so, the stock sunk from $12 to $9.
"Of course, I get to the point of maximum fear at $9 and reduce the position and three years later it's $27. Totally wrong decision," Fisher says.
"Now I [focus on] where fear around the short-term cycle is giving us an opportunity to buy a great business at a reasonable price."
It's rare that the market gives investors the opportunity to buy a great business at a reasonable price. Usually, investors have to cough up for quality business.
Take James Hardie (ASX: JHX) as an example.
"A year ago, the outlook for the US housing market was so dire, the stock derated from the mid-twenties, which is usually where it sits, down to 13 times earnings," Fisher explains.
"13 times is incredibly cheap, and this is a business with a much better track record than the average company. So you could buy it cheap then and now it's nearly doubled."
Medibank Private (ASX: MPL) similarly sold off on negative news.
"I asked everyone I knew - mates, people like that - sent out a bulk text like, 'Are you with Medibank and will this cyber attack make you switch?' And actually, quite a lot of people came back and said, 'Yeah, it's my health data, so I am quite sensitive to it, so I think I'm going to switch', but not one person said they had," Fisher recalls.
"I know my mates, they're pretty lazy. Inertia is a very, very powerful force... I figured once it's off the front page, the impetus is gone."
So, Fisher and her team bought when others were running for the hills. And, since hitting a low in late October last year, the stock has rebounded around 24%.
"It ended up being the right call because it was a short-term factor. And this just happens all the time. So many things just seem to dominate the story," she says.
Two examples today
Today, there are two stocks that are receiving the lion's share of negative news, Qantas (ASX: QAN) and ResMed (ASX: RMD) - both of which have seen their share prices fall around 30% over the past six months.
"Part of me definitely wants to go out and buy [Qantas] because I'd say it's got everything going against it right now," Fisher says.
"But the thing that holds me back is the fact that they have an incredibly large CapEx program ahead of them. They need to fund something like $15 billion worth of fleet renewal over the next few years. And if I come on board as a new shareholder, I'm funding that."
If you bought Qantas shares today, you are really only buying into a brand - and one that has been tarnished at that, she adds.
"So, do I want to come on board and fund that fleet renewal so that at the end of that period I suddenly own a business that has hard assets and a brand? I'm not sure. I don't think it's obvious," she says.
"What could make it obvious would be another big leg down in the share price. That would be an instance where suddenly the valuation accounts for all of the risks."
In comparison, Fisher believes that ResMed is "the most interesting or outstanding buy idea on the ASX right now".
"It is probably one of the top three highest quality businesses of the last 20 years listed on the ASX. It's been a 17-bagger since 2004, so it's a very high-quality company and right now it's trading on a PE of 19 times," she says.
For context, industrial businesses (the ASX sans banks and miners) are trading on an average PE of 20.6 times.
"This is a business that has one of the best track records on the ASX and it's cheaper than the bog average industrial business," Fisher says.
"It's cheaper right now than Telstra (ASX: TLS). Not to pick on Telstra, but I know which business has a better track record of creating value."
So, why the panicked sell-off? Well, there's recently been a slew of media (and a Kardashian endorsement) covering the rise in popularity of GLP-1 medication, better known by the brand name Ozempic (although there are other brands too) - which was originally approved in 2017 for use in adults with type 2 diabetes.
Ozempic is a weekly injection that helps the pancreas make more insulin and lowers blood sugar. And while there are definitely diabetics that are using the drug, it's become far more infamous as a quick solution for weight loss. And ResMed, as the creator of medical devices for sleep apnea, is front and centre on the firing line.
"About 70% of people with sleep apnea are obese. So [ResMed has] gone from being this company with basically 6-8% top-line growth at infinitum because nothing is holding back obesity growth rates... And then suddenly, we've got something that looks like it could be a solution," Fisher explains.
However, Fisher is happy to take the other side of that bet.
"The share price is pricing in very extreme degradation of its end market," she says.
And yet, a third of ResMed's customers are not obese, and a third are so obese that even if they use Ozempic they will still need ResMed's sleep apnea devices. The remaining third would have to battle the well-documented side effects of Ozempic (not limited to serious digestive problems and suicidal thoughts) for the rest of their lives for there to be a real impact.
"For all those reasons, I think it's overblown," Fisher says.
"The share price has fallen about 35% in the last couple of months and now is trading at a very attractive valuation for a great business."
Other areas of maximum pain in the market today
Three months ago, the obvious answer would have been retailers, Fisher says. However, since then, many of these names have experienced a "pretty big bounce".
Interestingly, Airlie recently found that 90% of the time when consumer confidence bottoms, the ASX 200 Discretionary Retail Index will lift over the following six to 12 months.
"It's actually like a reverse signal. When consumer confidence is low, it's almost like it can only get better and it's a good time to buy the stocks," Fisher says. (see below)
Take Premier Investments (ASX: PMV) as an example - the parent company of brands such as Dotti, Jacqui E, Jay Jays, Peter Alexander, Portmans, Smiggle and Just Jeans.
"It's got $400 million in net cash, it owns 25% of Myer (ASX: MYR) and 25% of Breville (ASX: BRG), so listed equities, which puts it at over a $1 billion fortress-like balance sheet," Fisher explains.
"No matter what happens in the cycle, it's not going anywhere."
And, since bottoming in June, Premier's share price has soared around 20%.
"Again, it brings it back to the fact that if it's in the headlines, it's probably in the price," Fisher says.
While the retailers may have rebounded, REITs continue to be in investors' bad books (the S&P/ASX 200 A-REIT Index is still 26% off the high it hit in December 2021).
"We own a couple of REITs, no major swings, but the largest position we have is in Charter Hall (ASX: CHC)," Fisher says.
As a fund manager, Charter Hall has "great economics", doesn't need capital to grow its business, and also has very sticky funds under management, she explains.
"You've got seven-year redemption windows in a lot of their funds. Some of their funds are a partnership with large institutional clients, and those partnerships are evergreen - they can never get out, and if they want to get out, they find another partner to basically buy-in. So it's very, very sticky money," Fisher says.
"Do I know what the 10-year is going to do? Absolutely not. I don't spend my time trying to figure that out. What we're reacting to is what valuations are implying, and I think that's one where the valuations are implying a pretty bearish outcome."
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
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