Sam Dickie: For the best long-term gains, block out the noise


Twenty years ago, information was scarce. So investors who could get the right information had a real advantage. Today it’s the opposite and investors big and small often have way too much market information, which can lead to poor investment decisions.

Similarly, 20years ago there was very little high-frequency share trading, algorithmic share trading and day trading. These techniques seek to profit from infinitesimal price discrepancies that might only exist for a second, an hour, a day. Today, this type of share trading accounts for more than 60 per cent of total trading in some markets.

Add in 24-hour news cycles, Twitter, Reddit and share chat forums, and we are nearing maximum noise. But for investors whocan ignore the noise and focus on the bigger picture, the volatility caused by short-term news can create investment opportunities.

During the June quarter, three large New Zealand companies reminded us of the importance of not getting distracted by market noise. In the process, they highlightedthe opportunity that short-term, sentiment-driven trading can create for longer-term investors.

Fisher & Paykel Healthcare’s Optiflow technology became the global standard for treating Covid-19 last year. Demand for Optiflow surged.

And for the past 15 months, the market has been desperately trying to pre-empt — and price — the end of that surge. The market thought it saw the end of the surge in May, when the company delivered weaker-than-expected results and an uncertain short-term outlook.

The share price fell by 15 per cent.

When we see a sharp drop in the share price of a portfolio stock, we go back to the reasons why we invested in the company, our views on the quality of the business and its future profitability.

A key part of our Fisher & Paykel investment thesis is the exceptionally long runway for growth. Around 50 million acute respiratory-illness patients a year would benefit from the Optiflow product. But last year Optiflow treated 7 million patients. Investors who focus on a short-term, post-Covid slowdown in demand will miss out on that big runway for growth ahead.

The stock price has subsequently bounced by 15 per cent from the May lows as the market ignored the short-term noise and focused on the longer term.

In May, the market also punished Xero for reporting earnings below analysts’ expectations. That’s despite the company previously flagging that its approach to managing costs would deliver strong earnings in the first half of the year, and lower earnings in the second half, as costs grew.

The sharp fall in Xero’s share price — down by 23 per cent at one point — reeked of short termism that missed out on the bigger picture.

Again, we went back to our longer-term investment thesis. Global penetration of Xero’s core cloud accounting business is less than 5 per cent. We see no reason why that figure won’t approach 100 per cent in the years to come. Xero was deliberately re-accelerating investment in the business soit could re-accelerate its move along that exceptional growth runway.

We also noted that many of Xero’s fundamentals are getting better, not worse. Global subscriber growth was better than expected. Average revenue per user was only held back by a deliberate delay inprice rises, given the Covid backdrop.

Metrics like the ratio of customer lifetime value to customer acquisition costs were strong, driven by good gross margins and lower customer churn. The pandemic made small business customers realise that a real-time view on their cashflows is more critical than ever.

The stock price has subsequently bounced 27 per cent from the May lows as the market has again focused on the longer term.

Auckland Airport investors were hit by a slew of short-term negative news recently.

Negative news flow included the start-stop transtasman bubble, the pending departure of chief executiveAdrian Littlewood, and near-term earnings downgrades. Enough to make any short-term bear lick their lips.

But the stock is trading at similar levels to where it has been for the past few months. This is helped by news of a takeover bid for Sydney Airport. This is encouraging because it means investors are focusing on the long-term picture. We will travel again. And when you own a long-life, critical infrastructure asset, looking at the long-term picture is the right thing to do.

Trying to profit from small price discrepancies, news headlines and real-time stock tips in chat forums can be tempting but it is hard work and this short-term investment area is crowded.

With genuine long-term thinking rarer than ever, now is the time to prioritise it as part of a balanced investment approach. Think long term and invest away from the crowds.

– Sam Dickie is a senior portfolio manager (New Zealand shares and property and infrastructure) at Fisher Funds.

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