The Wulff: Debunking the Big Bank-tank narrative

The Wulff is Stockhead’s regular wrestle with the savage heart of ASX-trading as per the free-ranging mind of Bell Direct’s market analyst Grady Wulff.

Grady says news moves markets, but offers a few recent examples of why simply plugging in and turning off your reason, isn’t the best of investment strategies.

“It is important to be aware of, and stay up-to-date with company updates, however, basing investment decision on media news and speculations has exposed many investors in recent times, often leading to missed opportunities for prematurely selling out of, or buying into equities.

“The most recent example of noise moving a share price for the wrong reason has been the headlines around weight-loss injections and drugs like Ozempic diminishing the need for sleep apnoea products from companies like ResMed (ASX:RMD).”

Ozempic V. Resmed

Grady says the first headlines of Ozempic’s impact on sleep apnoea demand hit the ResMed share price around August last year (as shown in the above share price chart from the ASX). Investors listened to the news that Ozempic’s ‘wonder’ weight-loss status would be a key driver of demand shrinkage for sleep apnoea and subsequently, ‘end’ companies like ResMed according to some headlines.

“These headlines came at the same time ResMed reported declining gross margins for Q4FY23 which investors took as double whammy for the global leading sleep-tech business.

She says deep diving into research and ResMed results of late paints a starkly different picture to what the fear driven by headlines.

“According to the National Library of Medicine, 58% of moderate to severe cases of Obstructive Sleep Apnoea (OSA) is attributable to a BMI greater than or equal to 25. Other causes of sleep apnoea include age, naturally narrow throat or nasal passages, hypertension, type-2 diabetes or a family history of OSA.

“Therefore, it isn’t correct to say that being overweight is the only cause of sleep apnoea, thus demand for ResMed’s products may be slightly impacted by weight-loss wonder drugs like Ozempic, but not completely diminished.

“Looking into ResMed’s most recent results we can also see that the rise in weight-loss drugs has made little impact on ResMed’s bottom-line and overall product demand.”

For Q3FY24, ResMed reported revenue growth of 7% to US$1.2bn, gross margin grew 260bps to 57.9% which indicates strong cost management and a recovery to margin expansion, income from operations also rose 25%, cash flows of US$402m, debt repayments of US$220m and the company declared a 48cps dividend.

“The results speak for themselves in proving weight-loss drugs have little impact on the demand for ResMed’s product suite.

“As the market now realises that the rising demand for weight-loss drugs has minimal impact on demand for sleep apnoea products, ResMed shares hit a 10-month high on the back of reporting solid Q3FY24 results.”

Big banks under pressure

Grady says another recent example of headlines instilling fear sell-offs in the market is Aussie banks coming under pressure, both large and smaller banks, following the collapse of numerous US regional banks.

“In 2023, we saw many investors get the jitters and panic sell out of Aussie banks following the collapse of US lenders including First Republic Bank, Silicon Valley Bank and Signature Bank to name a few.

“The collapses in the US were the result of their assets declining in value as interest rates increased and due to mass amounts of customers withdrawing deposits.

“The reason Australian banks were not facing the same collapse concerns is partially due to the stricter governance laws imposed by the Australian banking regulator, APRA, and also due to Aussie banks not having significant amounts of their deposits sitting in treasury securities that are vulnerable to valuation fluctuations,” Grady says.

“Despite this, the fear of bank collapses worldwide spread and Aussie banks faced a mass sell-off with the Commonwealth Bank (ASX:CBA) share price falling from $110.5/share in February 2023 to $97.56/share at the end of March 2023, while smaller lender Judo Bank shares fell from $1.46/share in February 2023 to $1.19/share by March 2023.

“Fast forward to the present day and the banks have recovered with CBA sitting at $113.94/share in May 2024, and Judo shares selling for $1.33/share as at 1 st May 2024, as investors regained confidence in the fundamentals behind Australian banks’ ability to weather economic cycles, and investors holding confidence in the strict governance nature of APRA to prevent a crisis to occur here like we saw unfold in the US.”

So, while media and news plays a handy role in our capitalist speculations, it’s always best to do your own research, especially given the high volatility experienced in markets at present.