CSL Share Price Up 50% in a Year – Low Interest Rates Distorting the Market?

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Biotech blue chip CSL Ltd [ASX:CSL] will be on watch today after the company released their Research and Development Investor Briefing.

The report showed CSL’s commitment to R&D reached $832 million in the last financial year.

That equates to around 10% of the company’s global revenue.

The CSL share price is up over 50% year-on-year, and has produced reliable earnings and paid out steady dividends.

ASX CSL - Share Price Chart

Source: Market Index

The R&D report showed progress in CSL’s rollout of their immune deficiency product, Hizentra.

CSL also sees ample opportunity in plasma, recombinant, and gene therapy technology.

Any potential breakthrough that comes out of their significant R&D investment would add further upward momentum to the CSL share price.

That said, with a P/E ratio of around 45 at time of writing, it seems the CSL boat might have already sailed.

Today we discuss how low interest rates are causing flocks of investors to leap into ‘safe’ blue chips, like CSL.

In contrast to many blue chips, small-caps have underperformed relative to their ASX 200 peers — something which has opened up a major opportunity going into 2020.

You can get the inside track on the world of small-caps with a free Money Morning subscription.

CSL share price rising on fear

The CSL share price rose steadily throughout the past decade.

Investors have watched the share price climb from around $30 in 2010 to today’s price of $277.81.

Their last results presentation revealed an impressive NPAT increase of 17%.

Dividend payouts have also increased year-over-year, with FY19’s final dividend reaching $2.65 cps.

So CSL has strong fundamentals behind it.

SG Hiscock’s Hamish Tadgell agress, telling AFR that CSL ‘is a fabulous business’.

I’ve been following it for 20 years and I don’t think that it’s been in better shape than at the moment.’

However, CSL has changed little over the past 10 years.

As Tadgell, points out, ‘It’s just that the market has taken a different view around the discount rate that it is prepared to apply going forward.’

‘[It’s] endemic of where we are at at the moment. People don’t want to buy the banks, they don’t want to buy other things, they are scared of missing out,’ he added.

That leaves just CSL then.

But CSL’s more rapid rise over the last 12 months is a reflection of what low interest rates are doing to the big institutional investors.

They need yield, so smaller, and arguably ‘riskier’ stocks are far less appealing.

Big boring bets on big boring companies is the play apparently.

Tadgell said one broker he spoke to reported that some of his clients have 60–70% of their portfolio in CSL.

And if history is any lesson, this kind of blind investment strategy carries great risk.

What’s happening with the CSL share price is not an isolated case

We’re seeing this trend everywhere.

Consider, for instance, Woolworths Group Ltd [ASX:WOW].

The grocery giant is sporting a P/E ratio of 18.6 right now.

Now, let’s be real; Woolies is hardly going to change the world with their next ‘discovery garden’.

And yet, the company is only slightly behind tech behemoth Apple Inc [NASDAQ:AAPL] in terms of P/E ratio.

Apple are currently at 21.8 times earnings.

That correlation is cause for concern in my eyes. And is a factor to be aware of.

Yet if, as my colleagues believe, 2020 turns out to be a bull year for the markets, the big boy companies may not be the ones making the exciting leaps.

We could see a shift towards smaller, more exciting companies.


Imogen van der Meer,

For Money Morning

PS: Our publication Money Morning is a fantastic place to start on your small-cap journey. We talk about the big trends driving the most innovative stocks on the ASX. This week we discussed cyber security stocks and the rapid rise of Vault Intelligence Limited [ASX:VLT]. It’s up nearly 60% in a year. Learn all about it here.

About Imogen Van Der Meer

Imogen is a research analyst at Fat Tail Investment Research, she holds an RG146 certification in securities and is currently completing a Masters Degree at the University of Melbourne. She has a particular interest in fintechs and the exciting innovations coming out of ASX-listed small caps.

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