Why Rudi cashed up and seven shares on his watchlist

James Marlay

Livewire Markets

Slowing growth, withdrawal of liquidity and the prospect of war. These three reasons forced Rudi Filapek-Vandyck, Editor of FNArena, to reverse his bullish view on the outlook for equities and cash up his portfolio.

Markets spent most of 2021 fixated on the prospect of higher inflation and interest rates, yet risk on trades (like tech, healthcare and cryptocurrencies) traded higher. 2022 has been a different story, with equities creeping into correction territory in late January. So, what has changed?

Earnings forecasts were still rising in 2021, and Rudi says this was an essential pillar of the bull market. But that dynamic has shifted, and high-profile companies, like Netflix and Meta, have been held to task by investors, as earnings and growth forecasts have fallen shy of expectations.

"Earnings forecasts are no longer providing support for the market as a whole. At the moment, they're supporting the commodities side of the market in Australia, but not so much the rest of the market."

Another shift relates to the necessary withdrawal of liquidity that has been propping up risk assets for the better part of the last decade. What does the unwind look like, and how will markets react? It's a big question, and in Rudi's view, this is a critical regime change facing investors in 2022.

"Central banks are withdrawing liquidity. This is a necessary process, and we don't know how this will pan out."

Markets hate uncertainty, and sectors like tech and healthcare, as well as speculative investments, have been ditched.

Geopolitical tensions and the prospect of war is the third risk that has prompted Rudi to take a more cautious stance. In a recent note, he told subscribers to FNArena that military conflict is a genuine possibility.

"Nobody really knows what Putin's real plan is. Does he want to test the West's resolve? Is he looking for longer-term bargaining power?

You can read Rudi's view in more detail here.

Raising cash by being ruthless with low conviction holdings

In anticipation of market volatility, Rudi takes the clippers to his portfolio and exits low conviction positions. I'm sure most investors have held stocks that made sense at the time of purchase that, upon reflection, don't stack up. Information changes or your thesis was wrong. Time to sell.

Whilst you would always like more cash when markets sell-off, Rudi says cleansing these 'low conviction' positions are an effective way of preparing for any opportunities that could arise from a broad-based sell-off.

Don't ignore all growth companies

Rudi maintains a shortlist of companies that he believes possess superior business models. While these stocks' share prices may have become 'bloated', they sit high on his shopping list in the event of 'indiscriminate selling.'

"As always happens, markets will push this too far, and there will be opportunities. But, and this important, you need cash to jump on those opportunities."

REA Group, Resmed, Breville, Carsales, Seek, NextDC, ProMedicus and Xero are examples of companies he believes are 'quite exceptional businesses' with multi-years of solid growth ahead. As a group, these shares are trading ~15% lower than they were at the start of this calendar year.

Rudi's top seven stocks to watch this reporting season

I asked Rudi to share five stocks he was following most closely this reporting season (he gave me seven). The first three fall into a bucket called the 'laggards'. It doesn't sound too exciting, but he expects these companies to start working on asset sales and returning this capital to shareholders.

You may recall that Telcos was the best-performing sector in 2021, thanks in most part to a ~30% rally Telstra (ASX:TLS). The share price has moved to $4, and Rudi reckons the stock has more upside potential as investors reward the strategic direction the business is taking.

"It's been a very long time since I've mentioned Telstra in a positive framework. But I think this is one of those times it is justified."

Rudi says Origin Energy (ASX:ORG) and Newscorp (ASX:NWS) are other laggards that have the potential to benefit from a rerating as they look to release value through asset sales.

The next group is what he calls 'highly-rated' stocks – these are companies that brokers and analysts believe have exceptional long-term growth prospects regardless of the prevailing macro environment.

Stocks that fall into this group include Breville Group (ASX:BRG), NextDC (ASX:NXT), Pro Medicus (ASX:PME) (which Rudi believes is the highest-quality growth stock on the ASX), Wesfarmers (ASX:WES) and Seek (ASX:SEK).

You can access my full interview with Rudi by clicking on the video player, and timecodes to our discussion topics are set out below.

Topics

  • 1:15 - What happened to the ‘healthiest bull market in years?
  • 4:24 – The factors behind the current share market weakness and volatility
  • 8:06 – Why and how Rudi has raised the cash position in his portfolio
  • 13:41 – Is the rotation towards Value sustainable this time?
  • 17:21 – Rudi's top seven stocks to follow this reporting season


Related links

Follow Rudi to receive his weekly Reporting Season Monitor

Listen to an interview with Dr Sam Hupert, CEO of ProMedicus (ASX:PME)

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James Marlay
Co Founder
Livewire Markets

Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading Livewire.

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