Fight the FOMO with 4 stocks the herd is overlooking

Stock markets are off to a flying start for 2025. The S&P ASX 200 is up nearly 5%, with gold, banks and technology companies continuing their bull runs from 2024. The consensus view is that banks and tech are expensive, but the market doesn't seem to agree, or at least it doesn't care.

Moments like this can be challenging for investors; fundamentals tell you to look the other way, but ignoring the temptation to follow the momentum is hard.

Is FOMO taking hold of markets?

Embracing momentum is a winning strategy, according to legendary investor Paul Tudor Jones, particularly in the post-Covid era. Tudor Jones says price action is a primary consideration, giving you time to let the fundamentals emerge - perhaps the market knows something you don't.

But as Seneca's Luke Laretive explains, you're not Paul Tudor Jones, and while his views make for compelling reading, it is near impossible for the average investor to implement the strategy of a leading global macro investor.

At times like these, you need to imagine you're in a vacuum, turn down the noise and get back to the basics of proven albeit less headline-grabbing asset allocation, according to Laretive.

The good news is that Laretive believes there is abundant opportunity for investors to find attractively priced opportunities, and his sweet spot is at the smaller end of the Australian market.

Mining services company XRF Scientific (ASX:XRF), online gambling website Pointsbet (ASX:PBH), WA-based broker Euroz Hartley's (ASX:EZL) and Australian Finance Group (ASX:AFG) are a handful of the lesser-known stocks where Laretive if seeing value.

In this episode of the Rules of Investing, Laretive shares some tips for keeping a cool head when markets are on fire, identifies some opportunities from the lower Aussie dollar, and discusses three stocks he thinks can deliver strong results in the upcoming reporting season.

You can watch or listen to the episode via the players or read the transcript below.

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Transcript created with the assistance of AI

James: It's been far from a dull start to the year. As I mentioned in the intro, January, looking to lock in some impressive gains. If you were to identify two or three of the most important driving forces behind this rally, what would they be?

Luke Laretive: So we're up almost 3% in January so far, but January is a pretty good seasonal performer. Historically, we look back, I think it's the third or fourth best performing month of the year seasonally. So it's pretty good, January has averaged sort of 1% returns over the long run.

It has been the banks driving returns. I think Macquarie got some good comps coming out of the US in terms of some of the peer investment banks over there reporting really well. Non-bank financials playing a bit of a catch-up trade to the big four. But over the last 12 months, we have seen bank valuations blow out 20 or 25%. So it was one of the big stories last year. The big story of last year in my view, particularly if you're talking about what's driving the index.

You can't ignore Gold, which you mentioned in the headline, Newmont's 2.4% of the benchmark and it's up 12% in January. So yeah, the gold stocks are moving as these sort of, as you mentioned, the Trump inflationary policies in the US are starting to drive bond yields higher, which typically is pretty good for gold. So they're the main drivers, I think some of the other interest rate and inflation sensitive sectors are also performing pretty well.

James: Now, my colleague Tom Richardson recently wrote a cracking article which covered the views of legendary investor Paul Tudor Jones, and he outlined nine asset classes he believes will perform best in a post-pandemic era. Tudor Jones, says you should be following price action as a guide rather than being wedded to fundamentals, which probably sends shivers down your spine as a fundamental investor.

For listeners, we'll put the link in the show notes, but it does pose a bit of a challenge to traditional views on investing. So what's your take on a view like that where you should just follow the money?

Luke: I think for me, James there's lots of ways to make money out of markets, right, there's lots of styles of investing. There's lots of things that work for different different characters in the market. Tudor Jones has been a long term momentum trader, that's that's his style. And I think certainly, it's an interesting way to play the market, he's been pretty successful at it over the longer run.

And there are others who do really well out of these momentum based strategies. I don't know whether the average two or three million dollar SMSF in Australia can learn a lot from Paul's strategy, I think it's probably not that executable, or implementable for the average person. And I think it's very well and good to kind of highlight macro themes and the kind of drivers of the thinking behind what he's doing. But that's not actually what they're doing at a fund level. You know, that's going to be, if you've got a view on bond yields, you've got a view on currency, you've got a view on whatever, you know, that's going to be a hedged position is probably going to be some sort of structured product, that's going to be some sort of derivative or leverage position. It's not just they're out there just buying TIPS. So I think it's interesting to think about and chat about. It kind of makes you feel like you should be doing all this other stuff. But in reality, you know, what works for people repeatedly, sensibly, in my experience is pretty boring and the same. And while you can have these things as interesting conversation points, they're not actually that relevant.

James: Well, I guess it brings me to our next point, which is for investors that are looking at markets and, and doing the 2024 reviews, what was the best performing asset class conversations around should you own Bitcoin, we were talking earlier about the Trump meme coin.

I imagine a lot of investors are even looking at something like CBA and asking should they be allocating capital to these really momentum driven and strong performing assets? And how should they be thinking about it?

Luke: I think when you're talking about asset allocation as a family, as an individual investor, as someone who's managing the wealth of your household, you've got to first start from a point of like, what is my reference portfolio? If all of this noise that we talk about, all this news, all the things, it all just disappeared and we're in a vacuum, what's our asset allocation actually look like? How much do we have exposure to defensive and growth assets? And under that, you know, how much have we got in each of the sort of major asset classes at a neutral setting? From there, you can start to maybe think about, okay, we can tilt this based on a view or tilt that based on a view, but ideally, you'd want to know what those tilts are, how much tolerance you are willing to take on a view.

So from my perspective, I think it's all well and good to say I'm going to swing the portfolio this way, but you end up just getting whipsawed around, particularly if you’ve got 50 grand, well, maybe not, but if you're talking about substantial amounts of money, you know, which is the kind of people that we help at Seneca. So you can't really be doing that. It's more nuanced. It's more just tilting things. We think non-US equities at the moment are a big opportunity relative to the US. I think emerging market equities, you know, median valuation at the moment and US equities are standard deviations above median. So I think there's clearly an opportunity there. We think smalls over large broadly across the world. In fixed income, also, you know, non-US focused fixed income, particularly government and semi-government, we see some opportunities there, some really good yields on offer and pretty compelling opportunities. Tudor Jones is going to continue to trade that sort of absolute return global macro type strategy, I think his particular style maybe isn't sort of how you should be allocating capital in your super or your family trust.

James: As we talked about January, up over 3% for the month, this is off the back of two strong years where we've seen the S&P do 20% plus returns in 23 and 24.

Do you think we're starting to see FOMO take hold of markets or is what we're seeing a healthy broadening out of, you know, of the rally into other parts of the market?

Luke: I don't really think about it as, you know, up or down in aggregate, I suppose it's more about like money flows and rotations and how money moves around the markets rather than sort of through them. I think it's always important to sort of have some level of specificity when we talk about markets and we talk about FOMO, you know, which stock we're talking about, which market are we talking about?

Like I said, the US is a completely different story to what's happening in China. And that's different to India. And that's different to the ASX. And it's different from ASX smalls to ASX large, you know, so I think having some level of specificity, not getting caught up in broad based narratives. Like we were talking about before, that's kind of how we think about the markets. We want know the broad based narrative and ask is that actually supported by data? For me at the moment, I don't have any issues investing in this market. I think there's heaps of opportunities out there, whether that's the more value end, whether that's you know, good quality growth companies that maybe they're gross under appreciated. I think there's plenty of opportunity out there for investors at the moment. It's just not necessarily at the aggregate index level that's nice and easy for you to go and pay two basis points and get the job done.

James: Well, let's get a little bit more specific. I guess what I was referencing then was some of the big names that have been leading the charge, US Tech, I'm going to put Bitcoin or digital currencies in there and even, you know, the Australian banks. I guess the question is, should investors be embracing this momentum?

Should they be fearful of it? How do they deal with this part of the market that's capturing so much attention?

Luke: I think again, you know, if you want to talk about Aussie banks kind of more in my wheelhouse, I've sort of, you know, I'd defer to someone who's a specialist in Nvidia to talk to you about that. My gut feel for it is I think on this pullback, those things look okay. But certainly, you know, for the Aussie market, I don't think you're going to outperform the ASX buying CBA on 25 times earnings. I don't think you're going to outperform buying a stock like Pro Medicus on 200 times earnings. That's just my view.

I might be wrong. But certainly, from my perspective, you know, they're numbers where if I own those stocks, I'd be happy to take profits. And certainly, I can point to other stocks across the market that are trading on much more reasonable valuations that are offering, from my perspective, more attractive fundamentals.

James: The Aussie dollar has had a big fall, circa 10%. It is obviously a consideration for investment portfolios.

As an adviser, what are some of the practical tips you can share with investors when it comes to thinking about the role of currency and investing?

Luke: We think trying to forecast currency is a bit of a fool's errand and, you know, haven't really found anyone who can do it well, you know, repeatedly.

I think there are some good rules of thumb around there that can give you maybe what I've called an inkling towards what's gonna happen. A nice sort of thing I learned at uni is interest rate parity, you could always use two relative bond yields to determine, okay, is money going to be flowing to that currency or probably away from that currency relative to the major pairs. So a little ratio chart of a 10 year bond or a five year bond between two countries will give you a pretty good proxy for where the currency is going to go. That being said, we don't rely on that sort of thing. Again, it's kind of one of those inputs that it's good to know, but can you really make a decision on the back of it or do anything about it? Probably not.

Our approach to hedging and managing currencies that not all the products that we want to invest in from a global perspective offer a hedged alternative. So when they are available, we often will take them up for the simple factors that we want to sort of be halfway, you know, a leg on either side of the fence for lack of a better word. So we have some products that are hedged, some that aren't. Relative to the benchmark and our global strategy, we are much more unhedged, but that just happens to be, because the products we want to use at the moment and our decisions are always gonna be first and foremost, do we want to invest with this manager? Does this product particularly fit with the rest of the products in our portfolio? And we're more focused on the things that are in our control, rather than worrying too much about currency.

Sometimes it's going to burn you and other times it's not, it's going to work in your favour. That's just investing. Anyone who says investing is a little bit of luck hasn't done it before.

James: I guess the thrust of my question is, after such a big move, you know, we've seen the Aussie dollar often trades around 73 cents against the US dollar, it's quite a long way from that. It's been further in the past around that 49 cent mark.

But does it create an opportunity for investors or does it remain a secondary consideration for you?

Luke: It's always going to be a secondary consideration for us. I think trying to trade that, as I said, it is difficult. You might buy it at 63 and think that's the best deal and it might go to 55. And it's probably just as likely to go back to 68.

I think there are people out there trying to sort of strategize around these things. I just don't really see it as a sustainable source of outperformance, or strong returns. Sometimes it is going to work for you, sometimes going to work against you. I think the AUD is not a bad bet at the moment, you know, on a sort of punt basis, but I wouldn't be getting too carried away with trying to trade that.

James: What about specific stocks that might benefit from, you know, that interest rate differential that might potentially, you know, sell goods in US dollars and bring that currency back to Australia, particularly since the move has sort of happened between reporting periods, you know, and you talked about gold, the gold stocks earlier, you know, are there some specific examples where you think there could be a tailwind from that, from that weak Aussie dollar?

Luke: Obviously, I think, you know, with macro and stuff like the currency, we kind of have a just the saying like play the balls as they're bowled, don't try and be a forecaster, don't try and be a hero. Just just play it as a bowled and try and find some good expressions and some good niches to make money out of whatever's happening at the moment.

We're an export economy. So anything that's a commodity exporting, you know, BHP, Rio, we think that's all supportive lower dollars all supportive for them, whether it's a sort of, you know, an international success story, like a James Hardie, a Breville and ARB, all good businesses, all the gold miners, same sort of story there.

I think the real opportunity here, though, with a lower AUD is the M&A story. And I think that's going to be the story this year, it's not going to be so much about BHP is making an extra, you know, X dollars a ton in AUD equivalent. I think it's more about the fact that some of these big global international names, we're already starting to see in the smaller end of the market, are going to start looking at some of the things in Australia that we do really well here and go, hey, we can get we can get a bite of that for 20% discount. Yeah, so I think that's the story this year.

James: We've heard a lot about M&A activity starting to ramp up and I guess for an offshore particular US buyer, that move makes it a little easy to get it done.

Luke: Yeah, and even, you know, some of the emerging markets, I think can sort of benefit from that and Australia is kind of the developed way to play emerging markets in a lot of ways. So I think that as we talked about, you know, where the money is moving and the rotation of money, I think I'm not the only person in the world who thinks US equities are expensive.

And now it's not a bad time to trim and that money doesn't go to cash. It goes to other markets where there's better there's better value opportunities out there.

James: You mentioned there's been some examples of some M&A activities, is there something specific to talk to there?

Luke: I was thinking about that Dropsuite deal from this week sort of top of mind but I think we've kind of identified and we've written about it on Livewire about sort of our M&A thesis for this year around the resources sector and even into some of the Aussie listed tech names.

I mean I could say it Pointsbet getting a takeover bid this year they've got a lot of sort of global potential suitors and their Australian gambling license is significantly valuable

James: Okay, well, let's change gears. You've had your advisor hat on, but as I mentioned in the introduction, you recently celebrated the one-year anniversary of your small cap fund.

We've also seen small caps starting to gather a bit of momentum. They did spend a lot of time on the sidelines. What are some of the high conviction opportunities you're seeing in small caps at the moment in the Australian market?

Luke: Sure. I think for us, it comes back to kind of stuff we've written about and expressed on Livewire before, not so much in the terms of the names, but in the kind of the kind of companies we want to own. We like those underappreciated growth opportunities.

We think with growth decelerating around the world and inflation is coming down, growth becomes more scarce. So if you're a business that can grow in a lower growth environment, you're worth more. So whether that's something like a Catapult, or, you know, something that reports really well every February is XRF Scientific, you know, a really stable sort of growing business over in WA.

James: Can you tell me a bit about what it does?

Luke: XRF essentially produces products that go into making lab samples for drill cores. So if you want to test what minerals are in the thing you need to use some of these different chemicals that they produce and it's kind of a razor blades model where you sell a machine up front but then most of your margin comes from selling the ongoing consumables. Really well managed business kind of integral to what you know an ALS or an SGS type lab would need.

James: But a bit cyclical is it?

Luke: People think it's a bit cyclical it's probably a lot less cyclical than people realize and I think at this point in the cycle particularly for the work that they do I think you're getting it at sort of cyclical lows of earnings and it's been a really reliable earnings growing business every year so going to February I think business people need to pay more attention to.

James: What are you avoiding in small caps? What won't we find in the fund?

Luke: You won't find, you know, those really expensive, everybody loves them, every fund manager owns it. I don't own Pinnacle, it's a great business but I think you can get GQG on five times, six times, cheap evaluation that does essentially the same thing with the same drivers and I'd argue even better products.

We don't own Pro Medicus. It's these sort of businesses I think, whilst they're going great and everything's roses and sunshine, they'll keep going up. But as we saw with say Audinate in February last year, when everybody loved that on a hundred times earnings, we had it written up in Livewire saying, we think it's too expensive and you should sell it. And within four weeks, it had an earnings downgrade and got absolutely smoked and it's down 50% since and it's still expensive in our view. So, I think, you know, in this business, you've got to be brave enough to be wrong until you're right. And everyone's going to call you a moron until they call you a hero. So, that's just the nature of what we do and why, you know, it's important to, I suppose, stick to your convictions, stick to your process. Because otherwise, if you're just sort of flipping with the breeze, trying to find the latest, you know, momentum opportunity, you can get caught doing things that you later can't explain.

James: Could talk us through the thesis on a recent edition that you've uncovered.

Luke: All right, so it's really new in the portfolio. We only owned it for a couple of months and that's Euroz Hartleys. So the broker out of Perth. There's no broker analysts coverage on this stock at all. In fact, I don't think there will be because everyone's a competitor and no one wants to cover their competitors in this market.

It's kind of been discarded by the average fund manager out there as you know, too cyclical. It's just a WA mining name. If there's lots of capital activity, they're making a heap of money. If they're not, it's a dead business with nothing to talk about. It's got 78 million bucks of unrestricted cash. It's 140 mil market cap. And they have a $22 million a year recurring revenue financial planning business. Now, I happen to be in that financial planning business and I can tell you that those kind of books trade for three times sales. So, okay, that's worth 66 million bucks. I got 78 million bucks for in cash. You don't have to be a rocket scientist, right? So, I think for us, that's a perfect example of buying something on a margin of safety. I'm buying a good business. It'll pay me 5% or whatever in dividends. It's not going anywhere. It's essentially a duopoly over there. You've got Canaccord and them doing all the deals and then daylights of tier three and four broker who are running around in WA trying to make a quid. It's well established in the community from my perspective, you get all the blue sky upside if the capital markets do come back for them and the resources industry does start coming back, raising money, doing an M&A, which happens to be our view anyway, in which case, the stock could be about 2 bucks.

James: Do you ever get worried when you find ideas where it stacks up so well but in the small cap part of the market you don't know who the next buyer is going to be so you lack that price discovery.

Luke: Stuff that's illiquid,yeah, potentially.I think from my perspective, I always want to buy something where my bailout position is cash. So you won't find Seneca owning a whole lot of stuff where I need to find, the greater full to flip this to at a higher valuation.

I'm not saying that we don't do it, but it's a relatively small part of what we do. I think that cash backing is an important one.

James: Now we're going to get into our three regular questions in just a moment, but reporting season's right on our doorstep.

What are three stocks you think can deliver a solid result and potentially give investors a little surprise in February?

Luke: I sort of mentioned the commodities so XRF. We think also, and we own Imdex as well, so we think both of those have got some green shoots appearing. We've seen some nice activity from some peers in comparable businesses. So I think the market's kind of missing both of those.

I've got a really Western Australian flavour. I'm being quite parochial today, but AFG Group, Australian Finance Group, Australia's largest mortgage aggregator. If you think the banks are going to win, like that's going to win a lot bigger from its current valuation if you think the banks are going to do what they're going to do and make an incremental net interest margin. So we think that can report well. And I'm doing ResMed for Livewire as well, which we also own and think could report well. I think some of the developments, I suppose, in the GLP1 market and how that's playing out for ResMed, there's been plenty of fund managers out there talking about it. So you definitely don't need me to rant on about ResMed, but that is a good trade at the moment, I think, and probably will report well.

James: Well, we're going to get into our three regular questions, Luke. They made it to be a bit of fun, a bit of a thought experiment, but hopefully push you for a few views.

Could you share a story about a big win or a big loss during your career? What happened? And the more detail, the better? And what did you learn?

Luke: I had a long hard thing when you sent the run sheet because yeah it's actually a hard question to answer.

I think one of the biggest wins I ever had was investing in Zip. I was in the backdoor listing shell for that business, Rubiana Resources. But again, that was like a sliding doors moment, a lot of what I would call luck involved. I'd kind of committed to invest my money and client money in this other peer to peer lending business, it's called Direct Money, it went on to become Wise. So like that business, but that went essentially to zero before like getting recapped and kind of sorted out again and, and kind of recovered some but I would have got wiped out. But I committed and then Ben Hughes from Perth, who was another broker from Shaws at time when I was at Shaws said, Oh, mate, you should have a look at this thing we're doing, you should put your clients in with me and you know, we're going to do it with the office there. And one of the guys who worked there is John Winters from Superhero. He was best mates with Larry from school. And that's kind of how it came in.

And Larry came in gave me like a two and a half hour download on the entire payments ecosystem from his perspective and what he'd been seeing at FlexiGroup. And I was just quite impressed with it. I've been interested in payments, ecommerce and that kind of stuff. Hence why I was trying to find stuff to invest in and he kind of blew me away. So pulled I that Direct Money investment, put it in Zip at whatever that valuation was on that backdoor listing and the rest is history.

That's definitely been one of the best things I've invested in. The lesson I suppose is that it's just sliding doors moments. I could have easily torched my dough. And you could say, you could attribute it to yourself and say it's because I was good at assessing Larry's management. And I liked the idea that Zip didn't have really a cost of customer acquisition, whereas a peer to peer lender did. But it's also probably just luck. So I think sometimes people are very hard on themselves, the things they do or don't do. In hindsight, it's all really easy in hindsight, there’s a big element of luck to it.

James: You talk a little bit about market narratives and how narratives are used for marketing and they're convenient and that as an investor you need to think differently.

What do you think investors are getting wrong about markets right now?

Luke: How we invest it's we kind of think about what does everyone else know? What's the story out there? What's the narrative? What do we know? Is there a difference between those two things and if so what's the best way to exploit that difference and to make money out of that gap between what everyone else thinks and what we think? Essentially, so it's kind of how we look at every stock that we invest in what does everyone getting wrong at the moment?

I mean we own 70 companies across two portfolios roughly James, so we think they're getting something wrong with all 70 of them. Talking to a lot of retail investors and talking to people across the market quite regularly now I think the common things that people get wrong is that they're really good at buying but they're not very good at selling. They lack the ability to say hey Pro Medicus at 200 times earnings is expensive And I'm happy to sell it. But because they're so worried about getting rid of the green number in their portfolio that makes them feel good or they're so worried that they've missed something and they're not confident to make the decision. They're confident to buy it, they're happy to chuck a bit of money at it but they can't seem to realize that if you've got a hundred grand capital gain, that's a hundred grand reinvested at the Pro Medicus price today. It's because the alternative is cash, so I think that selling discipline. The ability to have the understanding that from high valuations your expected return is lower. And that what has happened may not continue to happen in the same way that's always happened

James: I think one of the challenges there, something I encountered myself recently is you get yourself to that point of selling, but you need to sell and you need to have your next best ideas queued up and ready to go. Because even if you get to that conclusion that it's time for me to move on from this investment, I've done well, you need to have those next ideas.

I think that's actually, along with the challenge of selling itself, it's that process of what do I replace it with?

Luke: What you're doing is you're taking something that's emotionally positive for you in this good decision that you've made. And you're like essentially nuking it. And then you're giving yourself work. So it's not a very comfortable thing to do.

So these aren't isolated sort of issues in a portfolio, everything's always about sitting on both sides of the seesaw and balancing your risk and return. So I don't think that you're alone in that kind of quandary. I think it's quite common, but it's probably the difference between a professional investor and a punter at home.

James: Luke, if markets were to shut for five years, and you could only own shares in one company, what would it be and why?

Luke: I think if people couldn't punt on stocks, they'd punt on gambling. So I'd say like a Pointsbet.

I think that if you're talking about picking a stock for the next five years and kind of just owning it passively, I think it's indicative of how people get investing wrong, that question. So I think the idea that I can give you a name and you can just passively buy it for five years, and then you'll make a really good return on your investment over five years. It's like the Big Short idea. I probably would put it to the Michael Lewis book. The idea that you've got this crazy, this really well researched and thought out counter consensus idea, this home run. When in reality, I kind of think investing's a lot more like Moneyball, like the other Michael Lewis movie, which is you want to find a portfolio of misfit toys that other people don't really see the value in or they're not looking at the right way. And you can put those together in a portfolio and they might not all hit, but in the aggregate, you can win. And I think with win rates of the best fund managers around the world in the fifties, the math says that it's only in the aggregate that there is value. And as much as we love talking about stocks and we love talking about our portfolios and it's great for marketing and people get excited about them. At the end of the day, the value is in the team building, it's not in the name. So I'm probably going to annoy you with this answer, but I think it's kind of relevant.