3 stocks for your cellar

Financial journalist and commentator on 3AW and Sky Business
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Placing a stock “in the bottom drawer” doesn’t mean forgetting about it – there is too much about holding shares in companies that requires constant monitoring for that to be a valid investment strategy. An investor must always be ready to make big decisions on any stock. But stocks that will reward a long-term view is another thing – maybe the better term would be “cellaring” stocks, with its connotations of monitoring and turning the bottle every now and then. Here are 3 candidates that should reward an investor laying them down for a while.

1. CSL (CSL, $234.40)
Market capitalisation: $106.3 billion
One-year total return: 17.4%
FY20 estimated dividend yield: 1.3%, unfranked
Analysts’ consensus target price: $250.03 (Thomson Reuters), $241.99 (FN Arena)

Australia’s biotech giant is a candidate for the bottom drawer mainly because of the strength and quality of its CSL Behring and Seqirus businesses: CSL Behring is the world’s largest maker of plasma-based therapies, derived from immunoglobulin (IG), a component of blood plasma, while Seqirus is the second-largest company in the influenza vaccines industry. CSL’s history, size and scale give it a competitive advantage over most of its competitors, and the company’s entry into the China plasma market in 2017 – it was the first foreign company to gain full access to the Chinese market – positioned it well in the second largest market in the world, with immunoglobulin sales expected to grow at around 15% a year.

CSL’s accumulated advantages give it a very strong market position in two “thematics” that have all the characteristics for long-term growth, in its plasma and influenza businesses. CSL has growth potential in both emerging markets and developed markets: for example, the US health department has recommended that the entire population of the US over the age of six months be vaccinated against influenza, where previously, it only recommended vaccination for children aged between six months and four years.

Investors are often put off CSL because it usually trades on a high valuation multiple due to its strong market position, high margins and track record of innovation – the company historically ploughs 12% of sales back into R&D every year. At present, investors are being asked to pay about 35 times projected FY20 earnings, which is not as expensive as CSL has been in the past – for a company that is likely to compound its market advantages for a long time to come.

2. Altium (ALU, $34.16)
Market capitalisation: $4.5 billion
One-year total return: 26.9%
FY20 estimated dividend yield: 1.7%, unfranked
Analysts’ consensus target price: $37.19 (Thomson Reuters), $33.53 (FN Arena)

Altium is another of the local market’s high P/E stocks: paying 50 times forecast earnings is something that Australian investors aren’t used to doing. It develops software and hardware used for the design and development of electronic products globally, especially in printed circuit boards (PCB).

The stock is one of the ASX’s genuine global tech stars, and is positioned exceptionally well in one of the big “thematic” investment propositions – the “Internet of Things” (IoT). That is the emerging world of machines talking to each other, with microprocessors and sensors in machines swapping and processing information in real time – effectively monitoring each other – and computer-connected humans observing, analysing and acting upon the resulting ‘big data’ explosion.

Modern cities are increasingly built to be “smart cities,” combining physical, information and operational technology in increasingly networked infrastructure systems. Research firm Statista estimates that the IoT market will grow from 23 billion devices in 2018 to 75 billion devices by 2025. Altium is right at the heart of this theme. While ALU competes with major rivals Mentor Graphics (part of Siemens) and the Nasdaq-listed Cadence Design Systems, it is a big player – and has a potentially huge opportunity in China.

Altium says it expects to achieve its 2020 revenue target of $US200 million, but further out, chief executive Aram Mirkazemi has gone on-the-record with a target to achieve dominance in the PCB design market by 2025, with 40% market share and 100,000 global subscribers. Many investors will want to let the stock sit in their portfolios and back Altium to achieve that.

3. Volpara Health Technologies (VHT, $1.605)
Market capitalisation: $350 million
One-year total return: 78.6%
FY20 estimated dividend yield: no dividend expected
Analysts’ consensus target price: $1.97 (Thomson Reuters), $1.84 (FN Arena)

I looked at the then-recently-listed Volpara Health Technologies in March 2017 when it was trading at 52.5 cents, as a stock with a great deal of potential. The New Zealand-based company has delivered the goods, and I think it still has plenty of room to grow, and can scale-up its product globally.

Volpara’s breast imaging analytics software has a crucial point of differentiation – it measures breast density, which is both a key indicator in early breast cancer detection, and a flaw in the current standard procedure of a mammogram X-ray, because breast density can hide cancer in a mammogram. Studies suggest that mammograms detect only 65% of cancers in women with dense breasts: Volpara’s software analyses breast density and also the probability of missing potential tumours, helping to determine whether further scans are required. The Volpara technology enables personalised, high-quality screening to give a better chance of early detection of breast cancer.

In March, the US Food & Drug Administration (FDA) gave the Volpara technology a huge push, with its decision to introduce mandatory reporting of breast density in mammograms in the USA. The FDA now requires all US screening facilities to provide information on breast density to women and their healthcare providers after a mammogram, on the basis that breast density data can help doctors and patients make more informed decisions about breast cancer risk.

The Volpara product is a software-as-a-service (SaaS) system that uses AI algorithms to analyse mammogram images and associated patient data to provide objective measures of the breast – it is a more accurate procedure, that has the ability to be a disruptive technology in its space. Earlier detection improves survival and reduces treatment costs, and given that 75 million women are screened globally each year – and there are 500,000 deaths a year from breast cancer – the potential market is huge. Volpara says its annual recurring revenue (ARR) opportunity is USS$750 million ($1.1 billion), and the company has first-mover advantage, with users in 38 countries at present. However, Volpara is not yet profitable, and is not expected to be for FY20 or FY21 (year ending March) – thereby requiring some faith, to stick it in the bottom drawer.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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