The Biggest Granddaddy of All

Friday, 17 January 2020
Melbourne, Australia
By Matt Hibbard

We’ll begin your Friday edition of Insider, dear readers, with a quick quiz.

And please don’t worry. After a taxing week, you won’t have to think too hard. I expect you to yell out the answer — in your head, at least — before you’ve even finished reading the question.

By the way, if you’re the sort of person who finds quizzes annoying and don’t want to participate, that’s fine. You won’t need to pull out paper and pen…you can just read along instead.

OK, here goes: What’s the biggest stock on the ASX?

No, it’s not a trick question. And yes, you know the answer…Commonwealth Bank of Australia [ASX:CBA].

If you went for BHP Group Ltd [ASX:BHP], you weren’t too far off the mark. BHP is currently worth around $118 billion — a little over $30 billion shy of CBAs near $150 billion market cap.

You might find the second part of this two-part quiz just as easy. Can you name the second largest stock on the ASX? And here’s a hint…it is not BHP. BHP comes in at number three.

If you do know the answer, then show your knowledge by continuing to part (b) of the question. That is, can you estimate, within $10 billion, the market cap of the second largest stock?

Want to know the answer? I’ll be right back after a quick look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 29,297.64 points, or 0.92%.

The S&P 500 closed up 27.52 points, or 0.84%.

In Europe the Euro Stoxx 50 index closed up 5.18 points, or 0.14%. Meanwhile, the FTSE 100 lost 0.43%, and Germany’s DAX closed down 2.87 points, or 0.021%.

In Asian markets Japan’s Nikkei 225 is up 117.03 points, or 0.49%. China’s CSI 300 is up 0.17%.

The S&P/ASX 200 is up 33.80 points, or 0.48%.

West Texas Intermediate crude oil is US$58.51 per barrel. Brent crude is US$64.61 per barrel.

Turning to gold, the yellow metal is trading for US$1,553.58 (AU$2,253.61) per troy ounce. Silver is US$18.01 (AU$26.12) per troy ounce.

One bitcoin is worth US$8,820.99

The Aussie dollar is worth 68.91 US cents.

*****

If you said CSL Limited [ASX:CSL] is the second largest stock, then you are right on the money.

And, if you put CSL’s market cap somewhere near $135 billion, then well done to you. Straight to the top of the class you go.

The reason why I ask these questions is not to trick, but to highlight an anomaly. That is, CSL’s membership in that exclusive group of Australia’s biggest stocks.

But, what of the other constituents?

As the leader of the pack, CBA is joined by the other big three banks in the ASX top 10. Nothing earth shattering there. Another bank, Macquarie Group Ltd [ASX:MQG], makes it five banks in the top 10.

Add in the two mega-supermarket stocks in Wesfarmers Ltd [ASX:WES] and Woolworths Group Ltd [ASX:WOW], on top of the aforementioned BHP and CSL, it is Telstra Corporation Ltd [ASX:TLS] that rounds out the top 10.

Investors are only too familiar with these other nine stocks. Yet CSL often slips through the cracks.

CSL Limited — formerly Commonwealth Serum Laboratories — was founded in 1916 for the purpose of providing healthcare services to Australians, who were cut off by both war and distance.

CSL developed and provided vaccines for flu (including swine flu), tetanus and polio. It helped develop antivenenes for tiger snakes, red back spiders, and after a great deal of effort, the dreaded funnel-web. Not to mention a myriad of other maladies.

Today, you could only describe CSL as a juggernaut. CSL is the largest blood plasma group in the world, and is the second biggest player in the flu vaccine market.

As privatisations became a theme of that time, the then government listed CSL in 1994, at a float price of $2.30 a share. And that’s if you could get them.

Taking your broker out to lunch or buying them a set of golf clubs didn’t cut it. It proved to be an IPO where demand clearly outstripped supply.

Today, the CSL share price is pushing $300, but that alone only tells part of the story. Include the share splits earlier on, and the entry price for those that got in on the float is just over 76 cents a share.

That is one almighty home run!

The thing about CSL is that — whether you bought in on the float or later — you wouldn’t have done so for the yield. With a share price of $300, CSL trades on a measly current yield of less than 1%.

And for those that avoid expensive stocks — that is, a high price to earnings ratio (P/E) — CSL has always been expensive. Never more so than now.

Yet onwards and upwards the CSL share price has run. What’s more, it could soon be closing in on the granddaddy of all. That is, surpassing CBA as Australia’s biggest stock.

However, if I were to make a wager, I’d bet CSL is one of the least held stocks by private investors.

A widely quoted research paper by the RBA, ‘The Australian Equity Market over the Past Century’, dives deeply into the composition of the Australian market.

It’s main finding?

The composition of the stock market – in terms of the types of companies listed – is very similar to its composition of 100 years ago. Financial corporations (particularly banks) and resources companies (particularly miners) account for about half of the market by market capitalisation, which was also true in 1917.’

Yes, the balance between mining and resource stocks against financial stocks has varied widely at times. Yet, after a century, their total returns (share price plus dividends) comes out almost exactly the same.

Consider this table of total returns from the same RBA report.

 


chart image
Source: RBA
Click to enlarge
 

 

As you can see, total return for resources is 10.2% — just 0.1% below financials at 10.3%. As the research paper states: ‘In real terms – i.e. after accounting for inflation – the average annual return was about 6 per cent.’

While the similar returns between financials and mining is interesting, the one that interests me the most is the ‘Other’. As the name implies, it represents all the stocks other than financials and resources. Stocks like CSL.

Clearly, a stock like CSL doesn’t come along every day…let alone a year. In truth, you could say that it is a once-in-a-generation stock.

And no, I don’t own any…they are still too expensive in my tired and (very) old investment playbook. Woe is me.

But what the performance of CSL shows, is that there is a lot more to the Australian market than mining and the banks. You know, the usual old players. That is backed up by the 10.4% in the table above.

By all means, if it makes you more comfortable, then stick with the stocks you know. But don’t let that stop you from checking what else is out there in the market.

For all you know, a future CSL might be sitting just under your nose.

All the best,

Matt Hibbard,
Editor, Options Trader