Future winners: John Addis
Focus on what’s happening in the present, not try to guess what might happen in the future
There’s a conundrum at the heart of successful investing. It’s impossible to predict the future with any accuracy but what happens in the future defines the value of any investment. In the end, you have to give it a go. The key is to keep your assumptions firmly rooted in the present. So instead of thinking about how things are likely to change, you think about how they are likely to stay the same.
There’s a subtle but important difference between these two approaches, because change compounds quickly, leading you down a multitude of dark alleys, whereas the same, well, stays the same – at least until it changes.
With stocks, this means focusing less on trying to guess how things will actually turn out and more on the factors – which are apparent now, in the present – that will serve a company well whatever the future holds.
These qualitative factors must then be blended with price, which is where much of the art of investing lies: a great company can make a terrible investment if you pay too much for it.
Over the short term, the price – what people are prepared to pay – makes the most difference to an investment. But over the long term, quality comes to the fore.
So, here are five stocks we think will still be around in 20 years, having grown at least in line with the economy. Remember, though, that this is not a stock pick for now. Your aim should always be to buy great businesses at attractive prices.
1 Sydney Airport
Great businesses have protections in three main areas: they have a product that people want; they have a competitive position that allows them to deliver it without too much interference; and they have the management and culture not to stuff things up.
Based on the idea that we can’t sell for 20 years, it makes sense to pick businesses that could be run by monkeys because, as Warren Buffett notes, sooner or later they probably will be. Sydney Airport fits the bill nicely.
If you had to boil “sustainable competitive advantage” down to two words, Sydney Airport would be it. This 901-hectare site sits on the edge of Australia’s largest city with 44 million passengers moving through it each year. Historical passenger growth was barely dented by 9/11, the GFC or the collapse of Ansett.
In 20 years, Sydney Airport will be one year out from finishing its 2039 master plan, under which passenger numbers are expected to rise 50% to 66 million. What’s more, the airport has “light touch” regulatory oversight, allowing it to take advantage of its monopoly position, whether that’s through high-margin parking fees, aeronautical charges or retail sales.
Given its prime location, we expect demand to remain strong even when the Western Sydney Airport
opens in a decade. While the airport’s lease is due to expire in 81 years, revenues should grow well ahead of GDP while the lease’s value might only decay by 10%-20% in the next 20 years. That’s a very nice recipe for investment success.
2 Ramsay Health Care
Hospitals are hard to build and even harder to run effectively. Ramsay appears to excel at both. Most of its hospitals are local monopolies and in Australia Ramsay accounts for more than one in four private hospital beds. That gives it negotiating power with private health insurers and suppliers of medical consumables.
The proportion of Australians over 65 is expected to double over the next 40 years, and yet debilitating conditions like obesity and diabetes are at record highs. Rapidly improving medical technology means we’re almost certain to be spending more of our wealth on health care in 20 years than we are now.
The cost of building hospitals makes Ramsay rather capital intensive, with a return on capital of just over 15%. That means you need to be particularly careful about how much you pay for this business. At the moment, though, with a free cash flow yield of around 5%, we think it’s attractive, which is why it’s on our buy list right now.
As Australia’s largest private hospital company, Ramsay could easily take a greater share of the industry over time. Greater privatisation and overseas expansion also offer opportunity.
Often underestimated, Woolworths is one of the best businesses in the land. As one half of a powerful duopoly and with Australia’s unique population characteristics (low density, large landmass), online retailing is unlikely to ever pose a serious threat to this business.
Add to that a superlative supply chain, a hard-to-replicate store network and fine operating nous (notwithstanding some poor strategic decision-making), Woolies is a good shout for doing well decades from now.
Competition is increasing from the likes of Costco and Aldi and margins may come down a little but Woolworths remains a good business with a dominant market position. It’s likely to at least grow in line with the economy over time.
CSL is the ASX’s king of healthcare. Despite its categorisation, the company has a formidable set of competitive advantages that should ensure another 20 years of growth and profit.
As the world’s largest plasma therapy maker with a market-leading network of difficult-to-replicate plasma collection centres, CSL has a more stable supply of raw plasma than its competitors, making it the industry’s lowest-cost operator.
CSL focuses on niche therapies for patients with compromised immune systems or other blood diseases and many of its drugs have no viable substitute. That means it can charge through the nose and there’s little health insurers or governments can do.
Top this off with a few lottery tickets like a new cholesterol drug currently in clinical trials but potentially worth billions of dollars, and there’s little doubt this behemoth will still be with us 20 years from now.
The conventional view is that store-based retailing will be damaged by online. We think online sales will eventually hit a ceiling. Some goods don’t lend themselves to online selling, including many of those sold by Bunnings and even much apparel. In any case, there’s no reason why Wesfarmers can’t capture its fair share of online sales in its existing retail brands.
More importantly, Wesfarmers may not even own any retail businesses in 20 years – it’s an industrial conglomerate utterly agnostic about its portfolio. Management’s sole task – facilitated by the company’s long-term culture – is to generate good returns on the capital deployed. History shows it’s done a very good job of exactly that.
Over time, we expect management to recycle capital into high-returning business opportunities within and beyond the existing portfolio.
John Addis is founder of Intelligent Investor, part of the InvestSMART Group. To unlock more stock research and buy recommendations, register for a free trial at investsmart.com.au/money. This article contains general investment advice only under AFSL 226435.
A great company can make a terrible investment if you pay too much for it