My current role involves a lot of administrative work, which is suboptimal because would much prefer simply spend my days formulating long term theses, and trade ideas. Of course, not every trade idea I have is a good one. But the point is that we often see weird little dislocations on the share market, where prices are slow to react to good news, or massively overreact to bad news.
For example, look at StepOne (ASX: STP). Since I covered it as a trade idea the share price has gained 3c, and shareholders have received a dividend of 5c, which is worth a little more than 7c, once you consider franking credits. That’s a sneaky franking-credit-inclusive gain of about 19%.
So if I could trade freely, maybe I’d take that gain, not bad for a month’s “work”, and roll it into Resmed (ASX: RMD). (Actually, I would have already done it, like I would have already bought the StepOne shares when I wrote about it.)
Why I Like Resmed Today
Resmed (ASX: RMD) is large cap stock selling sleep apnea treatments, but the market is currently panicking about the impact of new weight loss drugs like Ozempic. You can see below how the hype about ozempic may have already peaked.
Many have been talking about Resmed (ASX: RMD), because the share price dropped so hard and fast. I couldn’t help paying attention myself. While I am no enthusiastic acolyte of Resmed, it is obviously well worth looking at, just because of how incredibly far it has dropped on nothing more than speculation. What I found interesting were claims that the company would stop growing due to the new weight loss drugs.
Basically, I feel that people are overconfident that the weight loss drugs will harm ResMed’s growth. You can see my basic argument below: we simply don’t know if these drugs are impacting Resmed, yet.
The opportunity to my mind comes from the fact that at some point between now, and whenever ResMed does go ex-growth, I have a feeling that the market will be less worried about the impact of weight loss drugs. Even if ultimately those drugs do make an impact on ResMed, the impact will be slow, rather than fast. My hypothesis is that the market’s attention span is limited and eventually the panic over the impact of weight loss drugs on Resmed will reduce.
That would be what I would have liked to trade. In my opinion the obvious entry point was when the stock opened up on super high volume, yesterday morning. To me, that was the sign the bounce was on.
As I write, the stock is up 6.6% in two days and about 11.6% from the bottom.
Admittedly, I reckon the easy money has been made; and the ideal trade entry missed.
However, if that is correct then that means I also think the short term bottom is in.
In my current role, the administration involved in me making trades like this is a nightmare, so I don’t do it. However, if I were to be in a position to make a short term sentiment based trade, I would still be interested in buying ResMed shares at the current price of $24. I would probably accept my thesis was broken if the stock dropped below around $21.50, since the large volume at ~$22 should have shown where buying support overwhelms panicked supply.
Because ResMed is a high quality business, I would consider just buying a small holding and not worrying about it too much. I don’t think that obesity drugs will fundamentally destroy the ability for ResMed to grow, but I don’t know when (if ever) the market will revise its current opinion. However, as you can see below, the market is now pricing ResMed at a much lower multiple of trailing earnings before interest and tax than it has since about 2016.
My speculation would be that at some point in the next six months the multiple of earnings rebounds somewhat, perhaps at least to a EV/ EBIT multiple of about 25 times. To me that would be a more reasonable response to the threat of fewer obese people. In any event, with more than 40% of the US population categorized as obese, it scarcely seems sensible to count on further penetration of that particular epidemic. However, my main view is simply that sentiment will revert (and Resmed will not face immediate impacts).
But I am also cognisant of the fact that obesity is not the only driver of sleep apnea; there is also age.
According to the USA department of health the US population age 65 and older increased from 40.5 million in 2010 to 55.7 million in 2020 and is projected to increase to 80.8 million by 2040, growth of a little under 2% per year.
So overall, the total addressable market growth is probably modest. For Resmed, the goal will be to increase the penetration of treatment within that market. However there is plenty of undiagnosed sleep apnea: “According to a recent report by American Academy of Sleep Medicine (AASM), OSA affects 12% of US adult population totaling 29.4 million individuals and 80% of these are undiagnosed.”
So all in all, if it was possible for me to simply buy shares in Resmed now, never write about it, and just sell if they dropped below $21.50, I would probably do that. My aim would be to sell once the multiple of earnings returns to a more normal level (relative to the last decade, anyway).
However, I wanted to share the trade idea with you immediately, while it’s on my mind. Of course, if the share price continues to languish at these levels, I will be adding Resmed to my watchlist, and may consider it for an official recommendation one day! Ah, the road not taken.
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth.
Disclosure: The author of this article Claude Walker does not own shares in RMD and will not trade shares in RMD for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. Equity Story Pty Ltd and BlueTree Equity Pty Ltd t/a A Rich Life do not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.