Despite ongoing market uncertainty, the 2023/24 half-year company reporting season delivered strong results for Mirrabooka’s portfolio, says portfolio manager Kieran Kennedy.
Our assessment of the results in the Mirrabooka portfolio in the half-year to 31 December 2023 saw significantly more companies delivering better results than those that disappointed. Importantly, there were also very few instances of dissapointments that were enough to make us question our continued investment.
Despite this, when it comes to valuations, we are increasingly cautious and are taking into account implications for future returns from high current share prices across many companies.
Companies still riding post-COVID boosts
We have been cautiously monitoring several companies in our portfolio that we felt were over-earning following a post-COVID boost. Despite our concerns, companies including Reece (ASX: REH), ARB Corporation (ASX: ARB), JB Hi-Fi Ltd (ASX: JBH), AP Eagers (ASX: APE), Lindsay Australia Ltd (ASX: AAU) and Redox (ASX: RDX) showed impressive earnings resilience.
Whether some normalisation is still coming remains to be seen and we will continue monitoring their performance.
Mixed messages on pricing, cost inflation and spending
When there are concerns relating to over-earnings it often results in pricing misalignments. While pricing in insurance, online classifieds and building materials sectors remains strong, we are seeing pricing in airfares, used cars and food categories have fallen in line with expectations following their sharp post-COVID increases.
Cost inflation poses more of a mixed picture, with wages cooling and labour availability improving. At the same time, raw material prices have remained buoyant and energy costs have fallen, while freight costs have once again re-accelerated due to persistent geopolitical issues.
When it comes to consumer spending, the mixed messages continued, with different households experiencing very different effects from the economic environment.
Reduced spending over the Christmas and traditional Boxing Day sales period appeared to have more impact for categories with higher exposure to indebted households. Conversely, baby boomers benefiting from higher interest rates seemed to provide an offset that may have been underestimated in the gloomier forecasts of 2023.
Further, despite the increase in mortgage rates and fixed rate mortgages rolling off, delinquencies remain low, for the moment at least.
Tech and consumer strong, with healthcare and resources under increasing earnings pressure
A continuing theme across the period has been the strength of technology stocks, which were up 20% in February. While driven by ongoing growth, they were supercharged by surging interest and investment in Artificial Intelligence (AI) which produced a large lift in valuations.
Consumer discretionary stocks were strong, up 9% in February despite the pressures on consumers. A combination of economic resilience, especially in relation to employment, along with approaching tax cuts and the hope for relatively near-term potential interest rate cuts also saw the market upgrade its outlook on future earnings.
As is to be expected in sectors with limited ability to recoup rising costs, both healthcare and resources stocks faced the most earnings pressure and disappointment.
Outlook includes cautious monitoring to help maintain performance
Following our half-year results, our transaction activity has increased due to ongoing strong price appreciation in many of our large holdings. This was particularly due to elevated market volatility which was, in our view, often divorced from fundamental company value changes.
Given the disconnects in pricing and other fundamentals, we will be paying very close attention to market signals in conjunction with the insights and fundamental philosophy our investors rely on, as we aim to maintain strong performance over the long term.