Market correction an opportunity to capitalise on | Australian Markets

Increasing volatility in equities markets – spurred by an erratic US policymaking machine and an overegging of staple stocks in 2024 – is unearthing ‘diamonds in the rough’ corporations, presenting a huge opportunity for traders to buy up high quality companies at engaging costs, says DNR Capital CIO Jamie Nicol.

“We embrace the volatility,” Nicol wrote in a latest evaluation, “because it allows us to buy good companies at better prices.”

Sclerotic growth in bank and insurance coverage stocks has challenged equities traders of late, including that corporations with sturdy structural growth have been trading at vital premiums.

“Those companies needed to perform exceptionally well to justify their share prices,” Nicol stated. In many circumstances, this has not come to go.

Instead, he famous, stocks that did carry out properly have been an “eclectic group of companies that surprised to the upside”.

“The market is struggling to find its setting, and this is undermining business confidence,” he wrote.

“We’ve seen a reduction in bond yields and the potential for interest rate cuts to emerge again. This uncertainty is playing into the market’s volatility, just as we have seen several times over the past year.”

‘Like twins, but opposites’

While many tried and true stocks are underperforming, the early 2025 market ructions are exposing high quality undervalued alternatives.

Referencing DNR Capital’s portfolio positioning, Nicol contrasted the firm’s largest obese in opposition to its most underweight stock: Commonwealth Bank of Australia (CBA) and CSL Limited (CSL), respectively.

He famous that whereas CBA has bounced back strongly over the past 5 years, for the reason that starting of the Covid disaster, CSL, a biotechnology researcher and developer, has lagged.

CSL is at the moment trading at simply over $255, not far off its five-year low of round $233.00.

“CBA is trading at a record multiple, whereas CSL is at its lowest multiple in 15 years.”

However, whereas CBA stays a standout of Australia’s huge 4 banks “with a solid competitive advantage in deposit accounts”, competitors stays tight, with the bank “earning slightly above its cost of capital, with growth expected to be just 3-4% per annum,” he stated.

At its present valuation of 26-27 occasions earnings, Nicol believes CBA is considerably overvalued.

“Historically, CBA’s average multiple is about 16 times earnings. Even if we assume zero bad debts next year, our valuation suggests the stock is 30% overvalued. At that price, investors are unlikely to see strong returns.”

By distinction, he argues, CSL presents a compelling investment opportunity, with sturdy prospects for growth – regardless of some hiccups surrounding the Vifor acquisition.

He notes that, traditionally, CSL has traded at an average a number of of 35 occasions earnings, however estimates that, at its present valuation, the stock is at the least 30% undervalued.

“In an expensive market, CSL looks attractive. It’s defensive, and demand for its life-saving drugs should persist regardless of macroeconomic trends,” he stated.

With a market correction more than overdue after an 18-month bull run – and optimism across the Trump Bump, now a Trump Dump, and Magnificent Seven stocks starting to fade – Nicol sees alternatives for a vary of high quality undervalued stocks.

“This is a healthy correction and could present opportunities,” he stated.

He provides that DNR Capital is taking an curiosity in corporations that will benefit from a Fed price cut, notably these within the US housing market.