The 2024-25 half-year reporting season generally met our expectations; while some businesses reported strong earnings and positive outlooks, others faced headwinds as market sentiment shifted. However, the market has since experienced significant volatility, as a light has been shone on the overvaluation of a lot of stocks, and various global risks are now beginning to be more realistically reflected in share prices, according to Mirrabooka’s portfolio manager, Kieran Kennedy.
In this article, Kieran outlines Mirrabooka’s response to the recent company reporting season, where the opportunities lie, and what the outlook is.
While the volatility that the market has experienced in recent months can be unsettling, we continue to look for opportunities with long-term stability. We’ve witnessed a disconnect between short-term market reactions and long-term fundamentals in a number of companies. However, the market has been overvalued for some time, and we’re now seeing a correction as valuations normalise. This creates opportunities for us to deploy cash into high-quality companies that have been sold off disproportionately.
Shifting market sentiment towards the tech sector: An Opportunity
One key trend leading into this reporting season was the market’s enthusiasm for the technology sector, specifically AI companies, which has since come under significant pressure. We’ve recently taken a cautious approach to this sector, recognising that soaring valuations were driven more by hype than fundamental value. Recent developments, including innovation from China, have raised concerns about increased competition, leading to a reassessment of the sector’s growth prospects.
We’ve recently deployed a more defensive strategy, focusing particularly on businesses with strong cash flows, solid balance sheets, and tangible assets, but not necessarily as strong earnings growth prospects as we typically seek. Infrastructure assets, such as ports, have been key investment areas, offering stability and good value.
As the market recalibrates, our more defensive recent investment strategy has held up well, allowing us to again focus on reinvesting in higher-growth companies as valuations become more reasonable.
An example of such an opportunity is Macquarie Technology Group (MAQ), our largest holding. MAQ has been under pressure due to a broader market correction in tech stocks.
Macquarie’s main division is in data centers, and as the hype around AI and technology has cooled off, we’ve seen a sell-off in stocks exposed to that space. MAQ’s valuation soared in recent years from where we initially bought it at around $14 to over $90, but more recently it has dropped back and is trading under $70. However, we see more unrealised value in this stock and view this as an opportunity to buy more of a company we know well at a good price. The company is expanding its data centre in Macquarie Park, and we believe the value of that expansion is not reflected in the current share price.
Portfolio movements: stand-out performers and strategic opportunities
Despite the broader market volatility, several companies in the Mirrabooka portfolio delivered strong results. Particularly pleasing were those where we felt that we had formed a differentiated view from many in the market.
One standout was EVT Limited, which operates hotels and cinemas and is backed by latent property assets. We've consistently bought EVT over the last 12 months, and it’s been a solid performer. They recently announced plans to realise some of their property assets and reinvest in their hotel business, which aligns with our long-term thesis. The market reacted positively, and the stock performed well in February.
Another standout was Vista Group, a New Zealand-based software company that supports cinema screens globally. Vista has been transitioning its customers to cloud-based solutions, and we’re starting to see the benefits of that shift. The stock has performed exceptionally well, more than doubling in price over the last couple of years.
We also made a significant new investment in Treasury Wine Estates, a leading premium wine producer globally. We’ve owned Treasury Wine Estates before and have been following the company closely. With China reopening and tariffs on Australian wine being lifted, we see strong growth potential in the premium wine market. The company’s assets in the U.S. and Asia position it well for long-term success, and we believe the current valuation is attractive.
A company that has been a difficult investment for us but one where our conviction in the business remains strong is IDP Education. IDP essentially places international students in Western universities. Due to a unique situation where concurrent election cycles in key markets like Australia, Canada, and the UK all led to stricter immigration policies, student placements have been directly impacted. Companies reliant on international mobility, like IDP, have seen significant short-term headwinds. However, the structural demand for international education remains strong, and we expect a recovery in student flows once policy settings normalize.
Outlook: Patiently positioned to seize opportunities
Factors such as potential U.S. policy changes, shifting interest rates, and geopolitical instability are contributing to the recent equity market downturn. While these conditions create short-term challenges, they also present opportunities for disciplined investors.
Valuations are retracing; while this impacts the value of the portfolio in the short term, it’s exactly the kind of environment we’ve been preparing for. We’ve been cautious for the last few years, building up cash and investing with an elevated degree of caution. If the market continues to sell off, we’ll deploy that cash to buy companies in high-growth sectors that we believe have been oversold.
Patience and discipline are key in markets like these. We are not rushing in, but we are also prepared to take advantage of opportunities in key sectors as they arise.