10 Quality stocks on Rudi’s watchlist (and why Nvidia isn’t one of them)

Value investing is undergoing a seismic shift that holds important implications for the mega-theme on everyone’s lips currently – artificial intelligence. This was a key topic traversed in the latest episode of The Rules of Investing with FNArena’s Rudi Filapek-Vandyck.

He argues that many investors are still relying on books written as far back as the 1950s for insights on how to arrive at a fair value for specific companies.

“While decades ago, you could poke a lot of fun at how analysts on Wall Street were doing stuff, today I can guarantee you they're a lot more sophisticated and knowledgeable and up to date in how they value stocks. It has become a lot more sophisticated,” Rudi says.

In simple terms, he notes that companies that are of higher quality and that provide investors with greater security will be valued more highly.

“In broader terms though…I’d rather put my money in something that is about to explode in the years ahead than try to pick something that is cheaply priced for the moment,” Rudi says.

What is Quality?

To arrive at a definition, Rudi breaks the answer into two parts.

• Companies must be able to perform in most circumstances, and
• They must demonstrate an ability to invest capital wisely.

He turns to Australia’s big four banks as an example, where Commonwealth Bank (ASX: CBA) stands out as the only one whose share price has risen substantially in the past 15 years. Rudi notes CBA made investments around a decade ago that its competitors are only now considering.

“Once you recognise the importance of making those investments ahead of the pack and making them consistently, you can attach a quality label to that company. If those investments are being made on a consistent basis, you can quite reliably predict that even if they run into headwinds at some stage, they will come on top of it,” Rudi says.

Some companies Rudi points to as examples of management teams displaying their skill in deploying capital wisely include:

• Aristocrat Leisure (ASX: ALL)
• Webjet (ASX: WEB)
• CSL Limited (ASX: CSL)
• Goodman Group (ASX: GMG)
• ResMed (ASX: RMD)
• Technology one (ASX: TNE)
• Car Group (ASX: CAR)
• REA Group (ASX: REA) and
• Seek (ASX: SEK).

Rudi also emphasises there are companies that appear, incorrectly, to tick the Quality box, some of which he has learnt lessons from over the years.

“In my all-weather portfolio, I always have a percentage in gold and a segment that I dedicate to dividends. That’s the weak point in my portfolio, I find,” he says.

An example he points to as a lesson learned - though not among the miners – is Telstra (ASX: TLS). Rudi bought the telco leader at a discount and held onto it with the expectation its planned infrastructure asset divestments would mean ongoing income growth.

“Never have high expectations about a sub-par quality company. The reason that I benefited a lot from Telstra…I was just lucky, and I should have very moderate expectations,” Rudi says.

“Telstra is not a high-quality company. It's a moderate quality company and the stock’s not going to do much, just like three of the four banks haven't done much over the past 15 years.”

Why Nvidia isn’t an “all weather’ stock

In discussing Rudi’s all-weather portfolio, which includes many of the companies mentioned earlier, some names heavily exposed to the AI theme also feature. But the biggest of them all, Nvidia (NYSE: NVDA), doesn’t clear Rudi’s hurdle.

“They have this tremendous growth coming towards them now. But… there will come a time when that whole AI story will have an interruption or something going sideways. I'm not so sure a chip manufacturer can withstand that,” Rudi says.

Rudi’s five-year stock picks

Long-time followers of Rudi won’t be surprised to learn CSL Limited makes his list of companies he would buy and hold for the longer term. He maintains his conviction in the biopharmaceutical firm, even as many investors question its sluggish share price of recent years.

Rudi argues investor sentiment on the stock has been upside down, with many piling into the stock mid-COVID over fears about the pandemic but dumping it on the softer updates more recently.

“Everyone's now convinced that the stock is dead. Nothing's going to happen there. I think it should turn around…now is the time to own them. So, for the next five years, I'd be more than happy to have CSL in there.”

Two others he mentions are Goodman Group and NextDC (ASX: NXT), which Rudi nominates among the “picks-and-shovels” beneficiaries of the AI revolution.

"The likes of Goodman Group and NextDC are now seeing this enormous demand coming towards them,” Rudi says.

The challenge for investors from here is deciding how much additional upside they see in share prices.

“The share price of NextDC, for example, might well go to $40 in three to five years’ time. Let's say it doesn't get there. Let's say it stops at 30,” Rudi says.

“Are you going to be deterred at $16 because the share price looks expensive right now or are you going to stay the course or get on board, and in three to five years’ time you look back and you’ve made a 100% return?”