How Cochlear beat health sector blues
January 2024
The manufacturers of weight loss drugs like Ozempic captured headlines last year due to their potential to cure the obesity epidemic. Other high quality healthcare shares were initially ignored as the euphoria surrounding the new market darlings seduced investors.
But one of Cornerstone’s direct shareholdings in 2023 – hearing implant manufacturer Cochlear – defied this sentiment to return 48.3%1, including dividends, over the year. Record revenue and a 21% jump in its final dividend were two factors which drove its gains2.
As a reminder, Cornerstone’s parcel of direct shares is created by a quantitative model which uses algorithms to pick assets.
This model chooses holdings based on stock characteristics that our research shows are more likely to deliver returns over the long term. These five characteristics – or “factors” in technical terms – are value, quality, low volatility, momentum and growth.
Cochlear qualified for inclusion because it offered both growth and quality factors. It has since been replaced as part of a broader portfolio review which moved the overall exposure towards cheaper stocks, selling some quality growth names.
One example of a new holding is Fisher & Paykel Healthcare. It designs and manufactures medical devices to help treat obstructive sleep apnea, selling its products to more than 100 countries globally.
It had last year lost a significant amount of its market value in less than three months after investors became concerned the new weight loss drugs would crimp its earnings as sleep difficulties are often linked to obesity. In other words, the expectation was that people who shed kilos while using the new drugs would sleep better and no longer require Fisher & Paykel Health products.
This sentiment moderated as the initial hype around weight loss drugs subsided. Many commentators now believe investors may have underestimated the time frame in which the drugs will become widely available – and that other healthcare companies with strong credentials, potentially including Fisher & Paykel Healthcare, could outperform.
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Strong year for Cornerstone portfolios
1 Source: Bloomberg
2 Source: https://www.fool.com.au/2023/08/15/cochlear-share-price-lifts-on-21-dividend-boost-2/
Past performance is not a reliable indicator of future performance.
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