We are very positive on the outlook for CSL. After a period of high donor fees and underutilised assets, CSL is now seeing volume growth alongside a decrease in the cost of plasma collections.
Capex is set to reduce 30 per cent this year and its future growth will be less capital intensive with the introduction of more efficient plasma collection devices and a yield enhancement program.
All of these factors should see its return on capital substantially improve over the next five years. The market also often underestimates the value of its countercyclical earnings profile. We’d be happy with $500 in five years.
Which stock in the fund do you think is the most undervalued?
One standout is ResMed. Towards the end of 2023, the company derated due to the frenzy surrounding the new weight-loss drugs known as GLP-1s. This raised concerns about the future of ResMed’s sleep apnoea treatment. We materially upweighted into that sell-off, but even after the recent rebound, we find the valuation very appealing.
Its main competitor (Philips) is expected to be sidelined for longer and feedback from ResMed’s distributors points to continuing healthy demand despite the rising adoption of the novel GLP-1s.
How are you reading investing in small caps amid the current economic conditions?
The performance of small caps as a class of stocks has been pretty poor of late. This is most likely due to proportionally higher labour costs and more domestic revenue exposure weighing on profitability. However, these headwinds seem to be abating, and we do not base our investment decisions solely on these factors.
Our approach is to be highly selective and do deep due diligence to minimise the risk of permanent capital loss. We are still finding plenty of attractive opportunities in small caps.
What one piece of advice and/or anecdote has influenced your approach to investing?
I try to grow as an investor by learning from my many mistakes. One mistake that has stuck with me is my experience investing in a cash-burning wealth platform called Investorfirst (now Hub24) in 2013, which was trading at less than 40¢ a share.
The stock hit $1 in 2014 and looked expensive to me on near-term profits. I sold out and was very proud of my return. By 2017, it was painfully clear how wrong I was when it reached an unbelievable $8 per share. I had monumentally underestimated the growth potential.
By then I had joined ECP; it took the work of another team member to recognise the opportunity, and we invested in the company in 2017 at around $8 per share. This was not an easy thing for me, having sold out at $1. Today the stock is trading at $40 and we remain a happy shareholder. I would have made more money buying it at $1 than I did buying it at 40¢.
I now think much more deeply about the long-term opportunity, a company’s sustainable competitive advantage and the power of compounding.
Favourite local bar or restaurant? And go-to order?
I try to incentivise my kids to have breakfast with me with an early morning marshmallow at Maggio’s Cafe in Cammeray.
Any podcasts that you recommend?
I love listening to Ben Thompson on the Stratechery podcast. His long-form interviews on technology strategy are a daily reminder of how much I do not know. It’s a paid podcast, but worth every cent.