The stock the tech sell-off got wildly wrong

While share price weakness is warranted as rates have moved higher and investors question the near-term investment, we believe this is an attractive entry point given the scale and growth this can add to an already successful and fast-growing business.

Do you think the ASX has further to fall as earnings are downgraded?

Yes. We continue to believe that broad market earnings estimates remain too high. More recent market optimism surrounding peak inflation has masked the impending downgrades, with the market only off approximately 5 per cent calendar year-to-date despite all the talk of bear markets.

The Reserve Bank has a clear mission to slow the economy with its aggressive rate rises. This carries greater recession risk and a higher risk to the earnings outlook further out (FY24 and FY25).

In turn, we may be looking at more of a U-shaped recovery. With a cooling economy pushing up against optimistic earnings expectations, it is unlikely we have reached a floor and to guess (it’s always a guess) the market may have another 5 to 10 per cent more to fall.

What’s a stock that the market is materially undervaluing?

Treasury Wine Estates. The world’s largest wine company was surrounded by investor fear that the lack of China demand, following 2021 tariffs and lockdowns, couldn’t be offset by increased sales to other regions.

There are three key distinct tailwinds we see: we have evidence that China-bound premium wine is being successfully reallocated to other countries; margins are expanding from lower grape costs, currency tailwinds and the acquisition of the higher-margin Frank Family vineyards; and turnaround and restructure of their North American business, which is approximately 35 to 40 per cent of group revenue but where they have a small 5 per cent market share to grow.

Which stock surprised you, and disappointed you, most with their results this earnings season?

    Brambles was a positive surprise. The pricing power exhibited in their result was astonishing, with realised prices up 15 per cent, allowing the company to effectively manage higher lumber costs and other cost inflation.

    They are resetting the economics of their US pallets business, making it more profitable going forward. Rational competition, normalisation of lumber prices and the likelihood that customers begin to return pallets should continue to help their margins.

    Mining stocks were generally disappointing, with higher than expected cost inflation leading to earnings downgrades and higher capital expenditure leading to cash flow downgrades across the sector.

    Has the market moved into a new phase to be dominated by growth stocks? Which specific stocks do you expect to excel in this environment?

    I do believe we’ve moved to a new phase, but it’s less about value or growth and more about true earnings delivery – i.e., earnings quality.

    In this environment, I think quality growth companies with pricing power and durable earnings streams will outperform. Key picks for this environment include ResMed, Carsales and Goodman Group.

    Which of the big four banks do you like best, and why?

    We have a large underweight to the banks. These businesses are highly cyclical and sensitive to the domestic economy. As rates rise, we’re expecting the economy to slow, housing markets to weaken and loan loss provisions to increase.

    In addition, credit growth is expected to slow and increased competition will negatively impact the net interest margin expansion the market expects.

    With this negative outlook for the sector, we prefer NAB as the most resilient of the big four. We see NAB as having the best revenue momentum versus their peers. We believe their SME customers will deliver more resilient loan growth versus their retail banking peers, where households, in our view, will see a stronger weakening of loans in response to higher rates and their significantly increased leverage over time.

    Any TV shows or podcasts you’d recommend that you’ve enjoyed recently?

    Game of Thrones prequel House of the Dragon.

    Favourite local bar or restaurant you’d recommend? What’s your go-to order?

    Balcon. Good food, good wine, good atmosphere (and close to the office). The menu is all about sharing – it’s hard to go past the jamon, flat bread and lamb shoulder.

    Read More