Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. The earnings season kicks off this week with a handful of miners reporting results, including Rio Tinto tomorrow. There are a few more big names next week as well before activity really ramps up mid- August. It's going to be a very interesting earnings season because the market has been trading at all- near record highs. As Brian Han, Director of Equities Research Australia, New Zealand, at Morningstar puts it " We will get to see if actual company earnings justify the equity market's remarkable resilience." Remember, this is general information only. You should seek professional advice before making investment decisions. Brian, welcome back to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. The earnings season kicks off this week with a handful of miners reporting results, including Rio Tinto tomorrow. There are a few more big names next week as well before activity really ramps up mid- August. It's going to be a very interesting earnings season because the market has been trading at all- near record highs. As Brian Han, Director of Equities Research Australia, New Zealand, at Morningstar puts it " We will get to see if actual company earnings justify the equity market's remarkable resilience." Remember, this is general information only. You should seek professional advice before making investment decisions. Brian, welcome back to Fear and Greed.

Hi Sean. It's great to be back.

Hi Sean. It's great to be back.

Priced to perfection, that's what the market seems to think about a lot of these stocks. What are you looking at going into earnings season?

Priced to perfection, that's what the market seems to think about a lot of these stocks. What are you looking at going into earnings season?

Look, Sean, I can say the usual things like we should look out for rising costs, impact of inflation, higher interest rates, and the uncertain economy, but as you alluded to, Sean, ultimately, this is a reporting season that needs to justify the market rally that we have enjoyed over the past six to 12 months. It needs to justify in terms of earnings, the sustainability of those earnings and the outlook, because despite all these macro uncertainties, as you said, the market is near its all- time highs. So what we're looking for is you really want to look out for companies that are well positioned if interest rates keep on rising, if geopolitical risks escalate, if technology creates even more havoc for businesses, and if the proverbial really hits the fan, you want to look out for companies that are resilient enough to withstand these risks. So that's what we'll be focusing on in the upcoming reporting season.

Look, Sean, I can say the usual things like we should look out for rising costs, impact of inflation, higher interest rates, and the uncertain economy, but as you alluded to, Sean, ultimately, this is a reporting season that needs to justify the market rally that we have enjoyed over the past six to 12 months. It needs to justify in terms of earnings, the sustainability of those earnings and the outlook, because despite all these macro uncertainties, as you said, the market is near its all- time highs. So what we're looking for is you really want to look out for companies that are well positioned if interest rates keep on rising, if geopolitical risks escalate, if technology creates even more havoc for businesses, and if the proverbial really hits the fan, you want to look out for companies that are resilient enough to withstand these risks. So that's what we'll be focusing on in the upcoming reporting season.

I want to go through some of the overvalued and undervalued stocks that you and Morningstar have put together, but just before we get to that, are we running into an earnings season where we could get a lot of price volatility? Because if you take the June quarter earnings season in the US last week we had tech stocks reporting, even I think it was Alphabet actually beat revenue and earnings expectations and then fell 5%. Tesla dropped 12% on its result. Are we expecting to see a bit more price volatility during our earnings season?

I want to go through some of the overvalued and undervalued stocks that you and Morningstar have put together, but just before we get to that, are we running into an earnings season where we could get a lot of price volatility? Because if you take the June quarter earnings season in the US last week we had tech stocks reporting, even I think it was Alphabet actually beat revenue and earnings expectations and then fell 5%. Tesla dropped 12% on its result. Are we expecting to see a bit more price volatility during our earnings season?

I think we will. And I think we say that before every reporting season because as you know, information is quickly flowing and there's algo trading and all sorts of things going on. But Sean, I think you raised a good point there in terms of a segue into one of the things that we really focus on, which is expectations. Now, in my recent report, I had a subtitle called happiness equals result minus expectations. So all those results that you just mentioned there, Sean, a result in and of itself is sort of meaningless when you think about it. When one of my sons tells me what he got for his exam, my reaction depends on what he got last time, how the result compares with other students and whether he came home happy or sulky on the day he did the exam. So what I mean is you need a benchmark, a reference point for an ASX- listed company, or whether it's Tesla and Google, that reference point is usually the consensus expectations or the expectations of the analysts and the fund managers following that company. And Sean, that's why sometimes you see what looks like a good result where say, profit is up 30%, but the stock price is down 15% because consensus expected the company to do much better than whatever increase it did. And Sean, this is also why you have this industry called investor relations that specializes in managing expectations. So as a longterm investor, I think you should be aware of these consensus expectations and it is these consensus expectations that probably will drive a lot of volatility in the upcoming reporting season.

I think we will. And I think we say that before every reporting season because as you know, information is quickly flowing and there's algo trading and all sorts of things going on. But Sean, I think you raised a good point there in terms of a segue into one of the things that we really focus on, which is expectations. Now, in my recent report, I had a subtitle called happiness equals result minus expectations. So all those results that you just mentioned there, Sean, a result in and of itself is sort of meaningless when you think about it. When one of my sons tells me what he got for his exam, my reaction depends on what he got last time, how the result compares with other students and whether he came home happy or sulky on the day he did the exam. So what I mean is you need a benchmark, a reference point for an ASX- listed company, or whether it's Tesla and Google, that reference point is usually the consensus expectations or the expectations of the analysts and the fund managers following that company. And Sean, that's why sometimes you see what looks like a good result where say, profit is up 30%, but the stock price is down 15% because consensus expected the company to do much better than whatever increase it did. And Sean, this is also why you have this industry called investor relations that specializes in managing expectations. So as a longterm investor, I think you should be aware of these consensus expectations and it is these consensus expectations that probably will drive a lot of volatility in the upcoming reporting season.

Okay, so let's get into some of the stocks. Let's look at the ones that you think are overvalued with high uncertainty. Now, the point being, if some of these disappoint against expectations, you could end up with sell- offs here. Polynovo, the medical device stock is one that you are not a big fan of at the moment. Well, we think it's well priced, shall we say, or fully priced.

Okay, so let's get into some of the stocks. Let's look at the ones that you think are overvalued with high uncertainty. Now, the point being, if some of these disappoint against expectations, you could end up with sell- offs here. Polynovo, the medical device stock is one that you are not a big fan of at the moment. Well, we think it's well priced, shall we say, or fully priced.

Yeah. One thing we need to make clear is we're not saying we're fans or not fans of any of these companies. What we are saying is that our analysts have a mid- cycle view about what the earnings, ultimate earnings potential is for these companies.

Yeah. One thing we need to make clear is we're not saying we're fans or not fans of any of these companies. What we are saying is that our analysts have a mid- cycle view about what the earnings, ultimate earnings potential is for these companies.

Yes.

Yes.

So for a company like Polynovo, we just think the market is sort of getting ahead of itself about what the earnings may look like five years time or three years time. But perhaps, Sean, I can give you a more topical choice. Let's take, say, the Mexican fast food joint, Guzman y Gomez. So judging by its sky- high price- to- earnings multiple, and the fact that it's trading at, I think, more than twice our analysts valuations, the expectations are high. Now, I mean, Sean, their burritos are pretty good and their stores are pretty funky, but the current stock price is assuming that we each eat a lot more of these burritos and that they open a bucket load of new stores, not just in Australia, but also in the US. And the last time I checked, these Americans, they're pretty concerning with their Mexican food. So we are just not sure whether investors are paying enough attention to the risks to the growth hype that's already built into the stock price.

So for a company like Polynovo, we just think the market is sort of getting ahead of itself about what the earnings may look like five years time or three years time. But perhaps, Sean, I can give you a more topical choice. Let's take, say, the Mexican fast food joint, Guzman y Gomez. So judging by its sky- high price- to- earnings multiple, and the fact that it's trading at, I think, more than twice our analysts valuations, the expectations are high. Now, I mean, Sean, their burritos are pretty good and their stores are pretty funky, but the current stock price is assuming that we each eat a lot more of these burritos and that they open a bucket load of new stores, not just in Australia, but also in the US. And the last time I checked, these Americans, they're pretty concerning with their Mexican food. So we are just not sure whether investors are paying enough attention to the risks to the growth hype that's already built into the stock price.

Okay. I'm just going to mention another group of funds, and kind of in that wealth management area, Netwealth, Hub24, GQG Partners, some of those have done really well in recent times. Is there a feel that some of the players in that sector might be overvalued, or sorry, not at fair value is a better way of putting it?

Okay. I'm just going to mention another group of funds, and kind of in that wealth management area, Netwealth, Hub24, GQG Partners, some of those have done really well in recent times. Is there a feel that some of the players in that sector might be overvalued, or sorry, not at fair value is a better way of putting it?

Yeah, we definitely think, for instance, investment administrations provider, Netwealth, is overvalued. I think there is a bit of an industry consolidation and rationalization angle, that people are playing it. There's also a bit of rotation because as you know, the fund managers themselves are struggling in this age of passive investing popularity and all of that. So some of the money, perhaps, is rotating out of pure asset managers into these administration and platform providers. A bit more like when you have a gold rush, instead of investing in the gold miners you invest in the shovels and picks companies. So I think there might be a little bit of a rotation on that front.

Yeah, we definitely think, for instance, investment administrations provider, Netwealth, is overvalued. I think there is a bit of an industry consolidation and rationalization angle, that people are playing it. There's also a bit of rotation because as you know, the fund managers themselves are struggling in this age of passive investing popularity and all of that. So some of the money, perhaps, is rotating out of pure asset managers into these administration and platform providers. A bit more like when you have a gold rush, instead of investing in the gold miners you invest in the shovels and picks companies. So I think there might be a little bit of a rotation on that front.

Stay with me, Brian. We'll be back in a minute. I'm speaking to Brian Han from Morningstar. Okay, so there are some of the overvalued stocks. What about the undervalued stocks where it'll be interesting to see what earnings season means for them? DEXUS is a good place to start. That's the property group, DEXUS. Undervalued, Brian?

Stay with me, Brian. We'll be back in a minute. I'm speaking to Brian Han from Morningstar. Okay, so there are some of the overvalued stocks. What about the undervalued stocks where it'll be interesting to see what earnings season means for them? DEXUS is a good place to start. That's the property group, DEXUS. Undervalued, Brian?

Yeah, we believe so because I think it's suffered a lot of headwinds in terms of as interest rates go up, obviously, that has a negative impact on these property developers whose balance sheets are usually quite leveraged in terms of their development and their funds' management pipelines. But also, you have, obviously, the working from home phenomenon, which is putting some doubts into investors' minds about what the future of office towers and their occupancy and the price that they can charge would be in the long term. But we think those headwinds are more than reflected in the current stock rise. And we do feel that people are underestimating what the mid- cycle earnings potential could be for a company like DEXUS. And also, I think people might be over- estimating debt pressure that's on DEXUS. We think DEXUS, at a corporate and consolidated level, the balance sheet gearing is actually pretty reasonable.

Yeah, we believe so because I think it's suffered a lot of headwinds in terms of as interest rates go up, obviously, that has a negative impact on these property developers whose balance sheets are usually quite leveraged in terms of their development and their funds' management pipelines. But also, you have, obviously, the working from home phenomenon, which is putting some doubts into investors' minds about what the future of office towers and their occupancy and the price that they can charge would be in the long term. But we think those headwinds are more than reflected in the current stock rise. And we do feel that people are underestimating what the mid- cycle earnings potential could be for a company like DEXUS. And also, I think people might be over- estimating debt pressure that's on DEXUS. We think DEXUS, at a corporate and consolidated level, the balance sheet gearing is actually pretty reasonable.

Another one close to you is TPG Telecom, which is sort of morphed as a business, well, has always morphed as a business that one. You think that that could be undervalued. There has been quite a bit of hype around some of these telcos. What do you think of TPG?

Another one close to you is TPG Telecom, which is sort of morphed as a business, well, has always morphed as a business that one. You think that that could be undervalued. There has been quite a bit of hype around some of these telcos. What do you think of TPG?

Yes, we do feel that it's undervalued compared to what it can truly earn at a mid- cycle basis. As you know, Sean, it owns Vodafone and Vodafone is raising its mobile prices along with Telstra and Optus. And that's a really good thing at an industry level where after, perhaps four, 4 1/ 2 years of heavy discounting now that the 5G is coming on board and these companies are becoming more rational, we are seeing real rationality returning to the space and all three players raising prices. So that's one tick. Its corporate telecom business is doing very well, that's another tick. And it's finally cutting costs and improving operating efficiency after all those mergers and business disruptions that it's suffered. So that's another tick. And ultimately, I don't think the market is factoring in any of these upside, so therein lies the opportunity for longterm investors.

Yes, we do feel that it's undervalued compared to what it can truly earn at a mid- cycle basis. As you know, Sean, it owns Vodafone and Vodafone is raising its mobile prices along with Telstra and Optus. And that's a really good thing at an industry level where after, perhaps four, 4 1/ 2 years of heavy discounting now that the 5G is coming on board and these companies are becoming more rational, we are seeing real rationality returning to the space and all three players raising prices. So that's one tick. Its corporate telecom business is doing very well, that's another tick. And it's finally cutting costs and improving operating efficiency after all those mergers and business disruptions that it's suffered. So that's another tick. And ultimately, I don't think the market is factoring in any of these upside, so therein lies the opportunity for longterm investors.

Okay. It's interesting, in your top 10 most undervalued stocks, we mentioned TPG and DEXUS, but it's a very eclectic mix. You've got Ramsay Health Care in there, you've got Bapcor, which is the retailing group. You have Charter Hall, another property... Rizen, which is a transport group and seller/ manufacturer. I suppose, it's interesting, it's not like a sector view here, it's very much a stock picker's view on what's cheap and what's not cheap.

Okay. It's interesting, in your top 10 most undervalued stocks, we mentioned TPG and DEXUS, but it's a very eclectic mix. You've got Ramsay Health Care in there, you've got Bapcor, which is the retailing group. You have Charter Hall, another property... Rizen, which is a transport group and seller/ manufacturer. I suppose, it's interesting, it's not like a sector view here, it's very much a stock picker's view on what's cheap and what's not cheap.

Sean, we, analysts and fund managers, we always harp on about you have to know the stock, you have to be a stock picker. And we say that because we want to keep our jobs, but more importantly, we say that because ultimately, it is all about specific company fundamentals and how its mid- cycle might be impacted by short- term factors and people extrapolating those short- term factors. So when you look at all these undervalued stocks that we have on that table, the common theme really is each of these companies, for better or worse, are suffering from some near- term pressures, whether it's interest rates, whether it's customer demand, or whether it's company specific, for instance, one of its businesses is not doing as well as it promised. And what we're saying is we think the market is extrapolating these bad things forever out into the future, and we or our analysts think that that is a short to medium term blip. We are willing to look over the value and we are willing to value this company on what it is capable of earning on conservative and reasonable assumptions. So if you wanted a common theme among them, that would be the theme that we are mid- cycle, it can earn much more than what the market is currently extrapolating it.

Sean, we, analysts and fund managers, we always harp on about you have to know the stock, you have to be a stock picker. And we say that because we want to keep our jobs, but more importantly, we say that because ultimately, it is all about specific company fundamentals and how its mid- cycle might be impacted by short- term factors and people extrapolating those short- term factors. So when you look at all these undervalued stocks that we have on that table, the common theme really is each of these companies, for better or worse, are suffering from some near- term pressures, whether it's interest rates, whether it's customer demand, or whether it's company specific, for instance, one of its businesses is not doing as well as it promised. And what we're saying is we think the market is extrapolating these bad things forever out into the future, and we or our analysts think that that is a short to medium term blip. We are willing to look over the value and we are willing to value this company on what it is capable of earning on conservative and reasonable assumptions. So if you wanted a common theme among them, that would be the theme that we are mid- cycle, it can earn much more than what the market is currently extrapolating it.

Do you get excited during earning season, Brian, or is it just a lot of hard work?

Do you get excited during earning season, Brian, or is it just a lot of hard work?

Oh, I get excited in the morning at about 8: 30 P. M. I get a little bit depressed because I want to have dinner and I want to watch Netflix and spend some time with my kids, but what's got to be done, it's got to be done.

Oh, I get excited in the morning at about 8: 30 P. M. I get a little bit depressed because I want to have dinner and I want to watch Netflix and spend some time with my kids, but what's got to be done, it's got to be done.

Very busy. Well, good luck with it. And thank you for talking to Fear and Greed.

Very busy. Well, good luck with it. And thank you for talking to Fear and Greed.

Thank you, Sean.

Thank you, Sean.

That was Brian Han, Director of Equities Research, Australia, New Zealand, at Morningstar. This is the Fear and Greed Business Interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, business News for people who make their own decisions. I'm Sean Aylmer. Enjoy your day.

That was Brian Han, Director of Equities Research, Australia, New Zealand, at Morningstar. This is the Fear and Greed Business Interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, business News for people who make their own decisions. I'm Sean Aylmer. Enjoy your day.