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SIMON BROWN: I’m chatting now with Michele Santangelo of Independent Securities. Michele, appreciate the early morning. Looking back first at last year, it was a story of rising rates then pausing rates. Inflation was coming down. In the stock market it really was all about the Magnificent 7.
But in a note you recently put out you say, hang on a second, there was also that medical sector due to popularity and, truthfully, the efficiency of obesity-fighting drugs. They were perhaps the under-reported and under-expected success of last year in the markets.
MICHELE SANTANGELO: Hi there, Simon. Thanks for having me on the show again. Yes, I think that went under the radar, the fact that you had Novo Nordisk and Eli Lilly produce these miracle drugs that are going to tackle obesity; they had a significant impact on many sectors – across medical health insurance sectors and snack foods, for example. And all those companies – not all of them but quite a big chunk of them – didn’t take significant selloffs because of that.
SIMON BROWN: Yes. You raised an interesting point there. To quickly go down that rabbit hole, if we have very effective obesity-fighting drugs and people are eating healthier and the like, it kind of sends ripples. You mentioned snack foods and like suddenly under pressure. Maybe the gym stocks sort of pick up. There are second-round effects that are going to come through over the medium term from these obesity-fighting [drugs].
MICHELE SANTANGELO: That’s right. These drugs typically suppress appetite quite significantly, so snack foods would be top of the list to be impacted. We saw that even the best energy drink companies like Monster got sold off on the back of that, because fewer people would be consuming energy drinks and sugary substitutes. So, yes. There are definitely those second-order effects in investing that you do need to be cognisant of.
SIMON BROWN: One of the losers last year was clean energy, which is truthfully a bit of a head scratcher, because you’ve got to say in theory clean energy is the way of the future. There’s a big move towards renewable and green locally and worldwide. Yet the sector took an absolute pounding.
MICHELE SANTANGELO: Yes, it did. A lot of even really high-quality clean energy companies sold off by 70%, 80%, even 90%. But I think we need to look at where their highs were. From 2021, 2022 I think they were significantly overbought and overvalued at the time, so they probably weren’t supposed to be at those elevated levels. But now we are looking at them and we are seeing a lot more opportunities in that space.
We did also see over the last year or two a lot of fund flows going into ESG (environmental, social and governance) type funds, and that all those flows had to go somewhere. I think they went into the clean-energy stocks, thereby just ramping up the share prices and pushing those valuations to unsustainable levels.
SIMON BROWN: I take your point on that. It was the early valuations that perhaps sort of skewed the thing.
Looking forward into the year, if we take the view that rates are coming down, probably when is the debate. But I think there is a level of agreement that they’re coming down. And certainly, as I said, clean energy is the future.
You mentioned in your note uranium had a really good year. We’ve chatted around that on this show before. China has 26 nuclear reactors under construction, aside from wind and solar. Is clean energy after this sort of shakeout one worth looking at for the year ahead?
MICHELE SANTANGELO: Yes, absolutely. But with that there is a caveat that I think you need to be a bit more discerning about which companies and which sectors within clean energy you’re focusing on. For example, I think wind energy is probably not looking very attractive there. There are some economics within that sector that aren’t that profitable, whereas companies on the solar side of things are looking more attractive.
And then as you go into the uranium side of energy, those are also looking more and more attractive. So there are definitely opportunities, but you need to be a bit more specific and discerning as to which companies you look at.
SIMON BROWN: Okay, I take your point. This isn’t just a jump in and grab all.
Let’s look at some of the others. You like the luxury goods sector. It had a fairly good strong run again. It got quite elevated prices. I’m thinking the likes of ….., Ferrari; there’s Richemont locally as well. They’ve come off. Richemont picked up a bit in the last week or so. This is one of your favourite picks in the sector. There is certainly some opportunity here in luxury.
MICHELE SANTANGELO: Yes, absolutely. I think that we have seen them all have a nice selloff last year. And what I think is happening if we start looking and digging down into the different companies’ numbers, the ultra-luxury brands particularly – like Ferrari and some of the brands that Richemont sells – are far more defensive in the current market and are still selling quite well compared to some of the other brands that are luxury brands but more for the affluent sector. So for people who are trying to aspire to getting a luxury brand like a Gucci bag, I think that’s where the sector might still be under a little bit of pressure. But the ultra-luxury – those who can afford Ferraris and the like – aren’t really feeling the impact of a slowing economy.
SIMON BROWN: And that’s a good point. It’s understanding that distinction. You know, Richemont really is those chronically overpriced watches. Ferrari we understand. LVMH is, what, 70-plus brands. Some of them are high-end luxury, but truthfully some of them are more mid-range. It’s knowing those nuances which is always so important within the business.
MICHELE SANTANGELO: Yes, that’s right. I think that’s why LVMH does have a reasonable valuation as well when you compare it to the likes of a Hermès. Hermès is really ultra, ultra-luxury. It trades at a PE of around 40, whereas LVMH is around half of that. So it does depend on your entry point in terms of valuation and what the company is actually offering.
SIMON BROWN: What about the tech stocks? I mentioned upfront Microsoft is now the first $3 trillion company in the world. It overtook Apple as the largest stock a week or two ago. Now it has gone through $3 trillion. The Magnificent 7 and the big-cap tech stocks have had a good start to the year after a really strong 2023. Are they likely to continue into this year? At this point I don’t know what stops them.
MICHELE SANTANGELO: Yes, they had a phenomenal run last year. They carried the global indices last year – and also for January so far. I think when you look at the expectations for top-line growth within all those businesses, the top-line growth is actually double, if not two-and-a-half or three times, what the average of the rest of the S&P 500 is. So they’re certainly growing a lot faster than the average company in the US and even globally. And if you look not only at the top line, their bottom-line earnings and in fact even their margins are still expanding as well. Maybe not all of them, but a lot of them are expanding quite well still.
So overall, when you look at them, their valuations are on the upper end of what they’re used to, and they certainly are growing fundamentally themselves a lot quicker than the rest of the market. When the market looks at them on a relative basis you’d rather put your capital into companies that are growing faster and increasing margins, versus companies that might just look cheap. So we still think there’s upside there.
SIMON BROWN: Yes. I take your point. They’ve got that growth. This isn’t sort of the dotcom boom of ’99, when there wasn’t any growth.
The last one – biotech was a really hot sector. The steam seemed to have gone out of it. You say some declining interest rates really could help some of the biotech stocks.
MICHELE SANTANGELO: Yes, that’s right. The biotech industry is one that’s a lot higher risk, but we have really been seeing a lot more M&A [mergers and acquisitions] happening within that sector in the last couple of months. Quite a few of the big pharmaceutical companies are now taking out some of the smaller companies that are coming with new drugs and new treatments to market. So we think there’s going to be a lot more activity there.
And one of the other main things about the biotech industries is that we think the acceleration of artificial intelligence is going to lead to a much faster drug-discovery process. So these smaller companies, where typically they would take years and years to do their research and bring a product or treatment to market, now they can all of a sudden use AI to speed up that process quite significantly. So we’ll probably start seeing a lot more activity within that sector in terms of M&A and the speed at which they’re producing new therapies.
SIMON BROWN: I take your point on that. I can’t remember – I think it was Alphabet engineers used artificial intelligence on battery tech and they basically did three years’ work in three months.
We’ll leave it there. Michele Santangelo of Independent Securities, I appreciate the early morning insights.
