I have been a bull on CSL for such a long time that I find the question “should I buy CSL at $330” a little too easy to dismiss. But I do want to answer it because I sense it is a question many investors are asking themselves right now.
While some retail investors did spectacularly well out of backing the privatisation of the Commonwealth Serum Laboratories in 1994 and paying just $0.77 per share (yes, 77 cents), many investors shunned CSL in part because of its very low dividend yield (around 1%) and absence of franking credits. This has also been the case in the institutional market, but more so because investors maintained that the stock was too expensive, particularly when compared to global health care peers.
It was easy to write CSL off when it was a small stock, but now that it is the second biggest stock on the ASX by market capitalisation, with a weight approaching 8% and on track to be the biggest, an underweight position is a big call by a fund manager. In the institutional funds’ management business, consistent underperformance relative to the benchmark index is death. An underweight position in CSL is a huge risk, even for defensive, income-oriented funds, and many managers have been forced into buying CSL to minimise the tracking risk. I think this has been a huge factor in CSL’s recent run up from $270.