Some investors love to second-guess how megatrends will play out and the stocks to benefit. Inevitably, they end up in knots trying to predict emerging trends such as cybersecurity, artificial intelligence, the Internet of Things or self-driving vehicles.
Often, the most rewarding trends are the simplest. Consider urbanisation, a trend I have covered several times for The Bull this decade. It’s a no-brainer that high population growth means more people living in capital cities and greater traffic congestion.
Investors who bought toll-road operator Transurban Group have enjoyed a five-year annualised total return (assuming dividend reinvestment) of 17 per cent. More people means more cars that are forced to use Transurban roads and pay its tolls.
Then there’s the Asian tourism boom to Australia, another favoured trend covered in The Bull. Sydney Airport is an obvious winner: it has an annualised total return of 21 per cent over five years, thanks partly to more tourists being forced to use its monopoly asset.
The greatest megatrend of them all – the ageing population – rolls on. Investors who bought hospital operator Ramsay Health Care on the presumption that an ageing population means higher demand for hospitals, were reward. Ramsay’s five-year annualised total return of 17 per cent continues a remarkable run of outperformance from the stock.
This analysis is not meant to downplay the risks of investing around megatrends. The ageing population and other seemingly straightforward trends still produce plenty of casualties: witness problems in several aged-care stocks in the past few years.
Regulatory risk is an issue and there is valuation risk in stocks such as Sydney Airport and Transurban, which have monopoly assets, at current prices. Both look fully valued. Moreover, basing investment decisions solely on top-down trends is dangerous.
Risks aside, the ageing-population theme will strengthen in the next five years as more baby boomers leave the workforce and look to fully or semi-retire. Demand for age-specific accommodation, financial services and products tailored to this market will rise.
Retirement-accommodation provider Aveo Group is an interesting play on this trend. Four Corners on ABC investigated Aveo over its contract structure for residents and claims of poor product quality and service. After rallying for several years, Aveo shares fell from about $3.50 in mid-2016 to $2.39 later that year amid the barrage of negative publicity.
But every stock has its price. Aveo asserts that the sales downturn after its reputation was slaughtered was relatively short-lived and that initiatives to improve contract transparency and provide six-month, money-back guarantees are working. Morningstar’s fair-value estimate of $3.10 for Aveo suggests the stock is undervalued at the current $2.67.
Chart 1: Aveo GroupSource: The Bull
Micro-cap Apollo Tourism & Leisure is another. It makes, rents and sells recreational vehicles (RVs) such as motor homes, camper vans and caravans – a boom market for Australia’s legion of “grey nomad” baby boomers who favour road trips.
Apollo soared from a $1 issue price in November 2016 to a 52-week peak of $2.10, then retreated to $1.50 on profit taking. It is an interesting twist on the ageing population and looks better value after price falls. The micro-cap suits experienced, risk-tolerant investors.
Chart 2: Apollo Tourism & LeisureSource: The Bull
Financial-services group Challenger is my preferred play on the ageing population theme, at the current price. It has built a strong market position in annuities and other fixed-income products – a market tailored for conservative investors in retirement.
I first wrote favourably about Challenger for The Bull in August 2014 at $7.76. It hit a 52-week high of $14.42 this year but has since retreated to $12.52 (the shares have spiked this month).
Challenger’s third-quarter update on assets under management, released in April, spooked investors a little. It showed a 13 per cent fall in Total Life sales over the years, although some brokers argue this was part of a deliberate strategy by Challenger to improve its asset quality.
The long-term story remains intact: greater use of annuities in retirement-income strategies; and Challenger capturing more assets under management as baby boomers move from the accumulation to retirement phases of investing and seek lower-risk products.
Poor sentiment towards the financial-services sector generally has created a buying opportunity in Challenger for portfolio investors. Morningstar has an outperformer recommendation and values Challenger shares at $12.90. It says the company’s share price falls are “overdone”.
Macquarie has a $13 share-price target over 12 months. It says Challenger is trading at a 17 per cent valuation discount to large-cap industrials (excluding banks) when it traded at a slight premium for most of 2017. Macquarie in April upgraded its recommendation to outperformer.
The consensus view also implies emerging value in Challenger. An average share-price target of $12.14, based on the combined view of 13 firms, suggests Challenger is modestly overvalued at the current price. The market view looks a touch bearish.
Chart 3: ChallengerSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article you should consider the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at May 9, 2018.