Economic conditions in the United States have been a bright spot in a dim world, attracting Aussie investors to ASX stocks with significant US exposure. The performance of US sharemarkets has outpaced share markets everywhere. Recent events suggest the “herd” of investors in US equities may be moving elsewhere. Contrarian investors should be watching this trend.
On 6 May the investing world read the statement from US Federal Reserve Chief Janet Yellen regarding US markets. She said: ‘I would highlight that equity market valuations at this point generally are quite high. There are potential dangers there.’
This was not welcome news to bullish investors and could accelerate a trend already in place. The following graph tracks funds flow from long-term mutual funds globally and in the US.
The Investment Company Institute that prepared the data reports the year-to-date totals for outflows from US stocks are $13.79 billion, with inflows to international stocks at $41.12 billion. To underscore the strength of this move one needs to keep in mind the figures do not include fund flows from ETF’s (Exchange-Traded Funds). Another research firm, TrimTabs Investment Research, reports $15.4 billion fleeing US ETF’s.
For quite some time we have been treated to a bevy of articles touting the advantages of investing in ASX stocks with exposure to the expanding US economy. In 2014 group performance of US exposed stocks showed a 12.7% gain. Some analysts expected that trend to continue into 2015.
We checked the price performance of the big-name stocks and selected five with positive growth forecasts that have underperformed the ASX All Ordinaries Index (XAO) over the past month (following solid performance in the first three months of 2015). This is not to suggest a definite correlation between the stampede of investors out of US funds and the price performance of these stocks. It does suggest that should the trend continue such stocks might represent potential buying opportunities.
The following table includes the five stocks we found, all with earnings growth forecasts of more than 10% over the next two years and all underperforming the XAO over the past month. The following table lists the five stocks by market cap, with share price performance over one, three, and six months. The figures represent the closing price as of 6 May, 2015. Here is the table.
1 Month % Change
3 Month % Change
6 Month % Change
2 Year Earnings Growth Forecast
James Hardie Industries
While its share price has shown the least depreciation over the last month, James Hardie Industries (JHX) has by far the most attractive growth prospects of any share in the table. The company manufactures and distributes fibre-cement building products in the US, Europe, and the Asia Pacific Region with more than 75% of revenue coming from the US and European markets. JHX has a history of technological innovation in the segment with continual introduction of new and improved products.
Given its reliance on the construction sector and the housing declines in the US it is surprising to learn that over five years the company has managed to reward its shareholders with an average annual rate of total return of 18.9%, and 33% over the last three years. JHX has a current dividend yield of 3.2%, unfranked. The stock price is up about 90% over five years. Here is the chart.
The housing market in the US has yet to fully recover and now there are signs the US economy as a whole may be slipping. Whispers of a possible “mini-recession” are beginning to pop up in the US financial news. First quarter GDP in the US came in at a reported +0.2% and the latest trade figures suggest the real Q1 number may be negative. Bulls attribute the decline to bad weather, rising oil prices, and labor problems in US ports along the West Coast.
Add to the mix the ongoing concern about when and by how much the US Fed will raise interest rates and you have the potential for further declines in US stocks.
Cochlear Limited (COH) has the second highest growth rate in the table at 38.9%. Cochlear’s fall from grace is well known, stemming from a product recall in 2011. Many analysts feared the recall presented an opportunity for competitors to grab market share, which has happened. However, Cochlear still managed to post a +5.6% total shareholder return over a five year period and 12.6% over three years.
In February the company reported spectacular Half Year results, with new hearing aid and implant products driving revenues up 18%. Underlying net profit rose 94% and the stock price shot up to around $93. The largest percentage increase in revenue came from the US market. Total revenue was flat, which the company attributed to falling sales in developing countries. Analysts jumped on continuing flat revenues as further evidence Cochlear is losing market share since the total implant market is growing between eight and then percent.
The share price is down to $80 and Morgan Stanley recently predicted further falls. Cochlear has surprised before and still controls between 60 and 70% of the market. Cochlear implants are high-end products less likely to be negatively impacted by a slowing US economy.
Protective device manufacturer Ansell Limited (ANN) is classified as a healthcare stock which would lead one to believe it could withstand an economic downturn in the US. The company offers hand and arm protection in four segments – Industrial, Medical, Single Use and Sexual Wellness. The Industrial segment includes oil and gas and mining companies, which could hurt should the US economy prove to be in trouble.
Ansell generates about 70% of its revenue from beyond Australia’s shores, with approximately one third of that coming from North America. The mainstay product lines are a diverse array of gloves essential for protection. As such, it only seems common sense these are not the kinds of products industrial users would look to include in any cost cutting measures.
Ansell embarked on a “restructuring” initiative back in 2010 and has since made five key acquisitions, the latest being UK-based Microgard Ltd, a manufacturer of chemical protective clothing.
The company reported Half Year results in February, with positive results driving up the stock price. Profit was up 33.7% and revenues rose 20.4%. Ansell management attributed the results to the success of its acquisition strategy and increasing demand in the US. Common sense sometimes proves to be wishful thinking, so as successful as this company has been, there is still a risk to be considered should the US economy slip further, weakening demand for protective industrial products.
Over the past five years Ansell stock has appreciated more than 100%. The remaining healthcare stock in our table, ResMed Inc (RMD) performed even better. Here is a share price movement chart comparing the two companies.
ResMed makes products to treat sleep disorders and other respiratory disorders. The company began in Australia in 1989 and is now headquartered in California. The stock trades on the ASX and the NYSE (New York Stock Exchange.) ResMed reports earnings quarterly and the latest report saw the stock price drop from $9.37, sliding down to the current $8.18.
The culprit here appears to have been declining margins. To worsen investors’ moods was the downgrade of gross margins for the coming quarter. Going into the 24 April release, the share price was up close to 80% year over year. Here is the chart.
Analysts and investors alike can be very unforgiving when it comes to high growth stocks. ResMed is the global leader in sleep-apnea treatment, a condition expected to worsen due to a rise in obesity in the developed countries. In addition, the company is developing products to treat other respiratory disorders, among them cardio-respiratory conditions and even heart failure.
At this point in time the possibility of the US falling back into recession exists primarily in the minds of bearish investors. However, should upcoming economic data support the bearish view, “pooling” solutions provider Brambles Limited (BXB) could suffer. Long-term it is hard to argue with this company’s business model. Revenue is recurring and the ease of pooling yields strong ties between the company and its customers. Brambles delivers needed pallets, reusable plastic containers (RPCs), and crates to the customer for use in their supply chain system. Customers can return unneeded product directly to a Brambles Service Centre or to another Brambles customer.
Brambles derives more than 50% of its revenue from its North American operations; but along with that revenue comes costs delineated in the stronger US dollar, providing a headwind to the company’s profitability. US costs are a cause of concern for analysts as is the recent acquisition of the Ferguson Group, a provider of containers to the beleaguered Oil & Gas sector. Management reiterated 2015 Full Year guidance and told shareholders to expect continued increased efficiencies from its business improvement program called One Better.
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