Sectors and stocks for the late cycle

As the cycle matures, finding opportunities gets harder. So we sat down with Matthew Haupt, Portfolio Manager at Wilson Asset Management to hear his perspective. Here Matt talks about several sectors and stocks for the late cycle.

We also asked what the big surprise was in earnings season, which was: “The PEs of these companies in the top quartile went up about 4.5 PE points, so earnings didn't really change and you had a whole lot of money flow back into the high momentum, high PE stocks.” Watch the video, or read the transcript, for the full story, and to hear which stocks he thinks have catalysts to keep rerating. 

Transcript

“I think the biggest surprise during August was around expensive companies. They got more expensive. We thought the results wouldn't be catalysts for a re-rating, so we got this wrong. We thought the expensive companies, they were done, they wouldn't re-rate. But what we saw was earnings pretty well came in line with expectations, but there was a big PE re-rate. 

The PEs of these companies in the top quartile went up about 4.5 PE points, so earnings didn't really change, but the market's willing to pay a lot more for these companies even though their earnings weren't accelerating faster than the market thought. So you had a whole lot of money flow back into the high momentum, high PE stocks, and that's surprised us. 

Also, some of the companies which were very much on the nose, like Boral, Brambles, and QBE, all performed well. The results were just in line, but they were re-rated as well. So, some of that deep value action did perform okay, too. 

We're looking at where we are in the cycle, and it feels like we're late cycle, so we're looking in the sectors that perform well, so healthcare. Healthcare's really expensive sector, so we're debating whether there's an opportunity there or not. 

You could look down the bottom of the food chain, like Primary Health. They did the capital raising raising during August, not a great company. They were in turnaround phase, but cheap. So you can look at those sort of things. We do have a holding in primary. 

Other areas, consumer staples appear to be a good sector to be into. They've re-rated, but you've got a high degree of certainty around earnings. 

So, you could look at Woolworths and Wesfarmers as companies where you're going to be pretty well right with earnings, and we think there's enough catalysts to keep these companies re-rating too.” 

Wilson Asset Management take advantage of short-term mispricing opportunities in the Australian equity market, providing investors with diversified exposure to a portfolio of undervalued growth companies. Find out more