What did Morningstar subscribers buy and sell during June?
ETFs took centre stage in June alongside renewed interest in beaten down growth names.
Mentioned: CSL Ltd (CSL), WiseTech Global Ltd (WTC), Xero Ltd (XRO), Pro Medicus Ltd (PME), BHP Group Ltd (BHP), Commonwealth Bank of Australia (CBA), Vanguard Australian Shares ETF (VAS), Vanguard MSCI Intl ETF (VGS)
This monthly review of our subscribers’ top trades from Sharesight marks the end to the financial year. In the past six months, we have seen large swings in the most actively traded companies and ETFs. The core themes driving market sentiment have evolved around AI narratives, global conflict and resource bottlenecks.
Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows the top 20 trades by Morningstar subscribers in June. Sharesight’s data below ranks total trading activity which is split between sells (orange) and buys (yellow).
Trends in June
Vanguard Australian Shares ETF (ASX:VAS) claimed the top spot as the most traded security in June, overtaking both CSL (ASX.CSL) and WiseTech (ASX.WTC). The Vanguard MSCI International Shares ETF (ASX:VGS) also surged to second place. WiseTech has remained firmly in the top three, highlighting continued investor interest following a 70% fall in the share price over the past year.
Amongst direct equities, Xero (ASX:XRO) re-entered the top 20 after dropping out in April and May, while Pro Medicus (ASX:PME) returned following a one-month hiatus in May. The data continues to indicate a notable shift towards broad-based portfolio products, with 8 of the Top 10 most traded securities in June being ETFs.
Let’s dive into the three biggest investment trends from June and test the narratives against our analysts’ views.
Xero (ASX.XRO)
- Fair Value Estimate: $100 (36% discount at 10 July)
- Rating: ★★★★
- Moat: Narrow
Xero is a cloud-based accounting software company which provides solutions for small to medium businesses. The business was launched in New Zealand, before expanding its operations to Australia in 2009. Xero now owns approximately 60% of market share in Australia and around 80% in New Zealand across small to medium businesses. Xero has a first mover advantage which has allowed them to entrench themselves as a “must need” software for SMEs. This has created broader network effects which is a key contributor to its narrow moat rating.
The company’s addressable market is now largely impenetrable for new competitors which is reflected in Xero’s capture rate of new SMEs and attractive customer acquisition costs. Our analyst Roy van Keulen notes that the Australian and New Zealand businesses are expected to remain highly profitable for Xero over the long run.
However, Roy is less optimistic about Xero’s international endeavours particularly in the US. Although there is growth potential overseas, fiercer competition is expected to degrade the attractiveness of Xero’s cost to acquire new customers. The cost of acquisition is a key metric for profitability particularly for software companies.
Xero shares have fallen 58% over the past 12 months and now screen as materially undervalued. Roy notes that while the expansion into the US is a relatively unattractive investment opportunity, the market is currently underestimating the value of the ANZ business.
Pro Medicus (ASX.PME)
- Fair Value Estimate: $54 (264% premium at 10 July)
- Rating: ★
- Moat: Narrow
Pro Medicus is a provider of software for radiologists to quickly view, enhance and manipulate images from any device and make a diagnosis. Shares have fallen 37% in the last year due to increasing angst that advances in artificial intelligence will affect software firms such as Pro Medicus.
Its narrow moat rating is derived from the switching costs associated with its lengthy customer contracts which typically range from five to 10 years. Lengthy contracts allow Pro Medicus to entrench itself at hospitals as the preferred provider.
Our analyst Brian Han estimates that Pro Medicus’ addressable market share is around 12% in the US currently. Assuming the market grows at 4% on volume and price increases, this implies that its market share doubles to 24% by fiscal 2035, covering most key target academic hospitals. While Pro Medicus is expected to gain market share in the medium term based on current speed advantages and fast deployment, Brian sees competitors closing the gap over the long term.
Advances in artificial intelligence, harnessed by software developers also increase the threat of competition. There are relatively low barriers to entry into the industry and competitors are increasingly better positioned to catch up.
Despite the recent correction in the share price, PME is still significantly overvalued based on our $54 price target. The primary valuation concern evolves around the core addressable market which remains limited. However, Brian notes there are avenues for growth outside of radiology which include speciality departments in hospitals. The key question for PME will be whether its product differentiation is durable, with low barriers to entry and larger competitors already utilising server-side rendering and cloud-native architecture.
Vanguard Australian Shares ETF (ASX.VAS)
Rating: Bronze
The Vanguard Australian Shares ETF follows a passive strategy, aiming to replicate the S&P/ASX 300 index. The ASX 300 Index is a market cap weighted index adjusted for free float. This includes approximately 300 of Australia’s largest companies and the index is rebalanced semi-annually.
This broad index has attributes which are unique to the Australian market. For example, BHP Group (ASX.BHP) currently makes up around 11% of the index while Commonwealth Bank (ASX.CBA) makes up 10%. The top 10 holdings make up roughly half of the index.
In terms of sectors, the Aussie market is also very narrow. This means that the financial services and mining dominate weighting. This index has a tilt toward cyclical sectors which tend to align with the performance of the wider Australian economy.
This concentration should be considered, especially when combining multiple ETFs in a portfolio. Overall, our manager research team believe that this ETF is an acceptable choice for core Australian equity exposure, awarding it a Bronze medallist rating.
The ETF fees are 0.07% per year which translates into a Medallist Rating Price Score of 2.37. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.
