1) It's turning out to be a tough day for the S&P/ASX 200 Index (ASX: XJO), down 92 points or 1.2% in early afternoon Wednesday trade.
The big four banks are doing most of the damage, coming after Commonwealth Bank of Australia (ASX: CBA) reported first half results. More on that below.
The biggest faller in the ASX 200 is the Corporate Travel Management Ltd (ASX: CTD) share price, down 8% to $15.86 despite guiding to a record full-year profit and saying "travel demand remains strong with no signs of macroeconomic factors impacting the recovery".
Based on the share price reaction, the market sees things differently. Corporate Travel Management shares have plunged 38% from their 52-week high despite a very strong travel recovery. Animal spirits and speculation may have seen Corporate Travel Management shares previously get ahead of themselves. Investing can be tough.
2) Tough crowd these stock market investors, with the Commonwealth Bank of Australia share price falling 6.1% despite it reporting a 9% lift in cash profit and a hefty 20% hike in its interim dividend.
According to the Australian Financial Review, investment bank Barrenjoey "has warned analysts are likely to downgrade profit margin forecasts for CBA after its net interest margin – as a key measure of profitability – peaked in October".
"Given CBA is trading on 19x P/E, we expect the shares to be soft today."
I've been wrong on CBA shares for as long as I can remember. More recently, in August last year, with the CBA share price trading around $100, I said it looked "downright expensive".
That didn't stop CBA shares recently hitting an all time high of $111, although with the CBA share price now trading at around $102 after today's sell-off, and Barenjoey calling out the high valuation, I feel a fraction closer to the mark.
Putting the CBA results to one side, from a "Team Australia" perspective, it was heartening to see CEO Matt Comyn say consumer spend is remaining resilient, with the bank remaining optimistic that a soft landing for the Australian economy can be achieved.
3) This is in stark contrast to outspoken columnist Christopher Joye who, writing in the AFR, recently said "in their quest to crush inflation, central bankers are going to crush everything".
Joye says the number one focus of central bankers is demand destruction as they are singularly committed to creating job losses to reduce elevated wage growth.
"The bottom line is that this is bad news for everything except cash. It means lower earnings and income growth, deeper economic retrenchments, and lower valuations as the risk-free hurdle rates inexorably rise. It means the coming default cycle is probably going to be the worst we have seen since the 1991 recession, which will be terrible for anyone who has lent money to risky borrowers or invested in junk debt."
This is hardly the stuff of soft landings.
So who is right? CBA or C Joye?
I have no idea. The optimist in me struggles to think we're heading for a deep recession. Like CBA, I see consumers still spending and restaurants still busy. The unemployment rate remains hovering near half-century lows at just 3.5%.
Yet storm clouds are ahead.
With the Reserve Bank of Australia's latest cash rate hike, which marks the ninth increase since May, households are preparing themselves for increased mortgage repayments.
Consumer confidence has plummeted, sinking to its lowest levels since the early days of the pandemic.
The AFR reports today that TD Securities is tipping the Reserve Bank of Australia to take its terminal rate to 4.35%, a full 100 basis points – or four more lots of 25 basis point hikes – ahead of the current cash rate of 3.35%.
That just might "crush everything," including CBA's prediction of a soft landing.
4) Meanwhile, at Wesfarmers Ltd (ASX: WES), consumers are continuing to spend up, with sales at value-orientated retailers Kmart and Target up an impressive 24% for the first half of FY23. Wesfarmers also reported sales growth at Bunnings and Officeworks, albeit more modest single-digit percentage gains.
In aggregate, the conglomerate reported profits up 14% and increased its interim fully franked dividend by 10% to 88 cents per share.
Like others, they see the storm clouds ahead, although Wesfarmers says its "strong value credentials and low-cost operating models mean they are well positioned to meet changing customer demand as customers adjust to cost pressures".
On a day when the ASX 200 is taking it on the chin, the Wesfarmers share price is up 1% to $49.20 where it trades on around 23 times forecast earnings and on a forecast fully franked dividend yield of 3.7%.
Like a number of high-quality ASX blue chips, Wesfarmers shares are still trading on a valuation that's appropriate for a lower interest rate environment.
If TD Securities is right and the RBA cash rate gets as high as 4.35%, by comparison to Wesfarmers shares, cash in the bank will look very attractive.
It's hard to see Wesfarmers shares being "crushed" but the risks might be more skewed to the downside. A re-rating to a forward P/E of 20 times implies a Wesfarmers share price of $43.50.
5) One stock whose valuation continues to defy conventional logic is healthcare imaging software company Pro Medicus Limited (ASX: PME).
The company reported solid first-half revenue growth, up 28% to $57 million, with net profit up 32% to $27 million.
Pro Medicus has been winning long-term contracts with US healthcare companies. Such a high level of recurring revenue, coupled with clear operating leverage as demonstrated by a near 50% net profit margin, would deservedly translate to a premium valuation for Pro Medicus. The company is debt-free and sits on cash reserves and other financial assets of $94.5 million.
For a company with around $100 million of annual sales, Pro Medicus sports an eye-watering market capitalisation of $6.73 billion. It trades on roughly 116 times forecast earnings.
If Pro Medicus grew profits at 25% per year for the next five years – no mean feat – my back of the envelope calculations would have Pro Medicus shares trading at 32 times earnings, something far more palatable and arguably reasonable at that stage.
In effect, growth for the next five years could arguably already be priced into Pro Medicus shares.
Despite all that, I still hold the shares. It's a risk I'm willing to take for one of the highest-quality companies trading on the ASX.
As investing legend, 99-year-old Charlie Munger has once said…
"The first rule of compounding: Never interrupt it unnecessarily."
Pro Medicus is a core holding of the Hyperion Small Growth Companies Fund. Its stated philosophy is…
"The highest proven quality businesses with the strongest competitive advantages and organic growth opportunities produce superior shareholder returns over the long term."
Whilst I hope to hold Pro Medicus shares for many years to come, I realise I'm unlikely to see the huge gains I've seen since first buying the shares at just $1.50.
