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Quality Is Making A Come-Back

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 05 2017

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

In this week's Weekly Insights:

-Quality Is Making A Come-Back
-Sequel: Quintis Versus Californian Short Sellers
-Conviction Calls: Bell Potter, Goldman Sachs, Shaw and UBS
-New Website: A Sophisticated Search Engine
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

Quality Is Making A Come-Back

By Rudi Filapek-Vandyck, Editor FNArena

One swallow does not a summer make but it appears the upward trending share market in Australia became more inclusive in March in terms of high quality, premium priced corporate success stories.

Stocks like CSL ((CSL)), Ramsay Health Care ((RHC)) and Amcor ((AMC)) used to be the beez kneez, with everyone wanting to be on board, until mid last year when laggards turned into champions and vice versa, and all of a sudden nobody wanted to get on board anymore; everybody wanted to jump ship instead.

It has been a tough few months for yesterday's share market champions since. There was a brief recovery rally in December, but otherwise the post-Trump election rally has been all about banks, resources, and deep value cyclicals. Many an investor learned the hard way that industrial companies of exceptional quality like CSL and Ramsay might be the better performers in the long run, and through the cycle, but they do not perform always and all the time.

March seems to have changed the market's attention, at least a little bit. Consider, for example, that Amcor shares appreciated by more than 7% during the month. CSL added a further 6% on top of the +17% in the first two months. Pact Group ((PGH)) gained 5% and so did REA Group ((REA)). Bapcor ((BAP)) and Link Administration ((LNK)) are not far behind.

Ramsay's 0.2% gain doesn't look like much, but the shares made a remarkable come-back after plunging to $62.5 in the middle of the month.

Ex-dividends, the ASX200 advanced some 2.7% in March, or circa 3.6% including dividends. All of the above mentioned industrial All-Weather Stocks outperformed the broader market in March, which raises the question: what does it mean?

Why have investors again included expensive looking, more defensive-oriented growth stories when deciding where to allocate fresh money?

Is it because materials (read: mining stocks) and telecom stocks put in a rather disappointing performance? Is it maybe because all Big Four Banks are trading circa 6% above consensus price targets? Or is it because of the general pre-occupation with the ASX200 seemingly poised to sprint to 6000 and the but logical conclusion that the banks cannot possibly achieve this target on their own?

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Maybe some of the answers we are looking for can be found in recent surveys of institutional investors by Citi and by Goldman Sachs.

The Citi survey is limited to institutional clients of the international financial services provider in the USA. It shows institutional investors remain confident and positive, but less so than in December. The majority view seems to point to benign gains for the year ahead, with remarkably less emphasis on value stocks than in the initial phase of this rally.

In Australia, a survey into active fund managers by Goldman Sachs reveals a rather unusual overweight position for both banks and resources, but also a return to quality stocks now that the huge gap that existed between deep value and quality industrials has narrowed considerably. Active funds managers have thus far stopped short of embracing "junk", or "low quality stocks", reports Goldman Sachs. They've started buying quality again instead.

Equally noteworthy, the present combination of active fund managers being net long Resources and Banks at the same time has occurred less than 4% in such surveys over the past twelve years, reports Goldman Sachs.

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Another observation to make is that equity investors worldwide seem to have become more comfortable with the outlook for US interest rates, and, by extension, the future trajectory for US bond yields. No more are the gloomy predictions that were doing the rounds in 2016, as well as the panicked selling that saw shares in bond proxies dive by -15-20% within a brief time span.

Within this framework, I note shares in Transurban ((TCL)) are back within rallying distance from their all-time highs reached last year. In between, the shares sunk -24% and paid out two half-yearly dividends. Go figure. Sydney Airport ((SYD)) shares have rallied some 13% since March 7. Shares in Goodman Group ((GMG)) posted a new post-GFC high at the end of March.

Quality is back on investors' radar, or so it appears.

This possibly bodes well for investors whose portfolios contain a chunk of mid to small cap industrial growth stocks that have failed to fully participate in this global upswing since August last year.

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The FNArena/Vested Equities All-Weather Model Portfolio is built around the concept of owning high quality, industrial growth stocks for the longer term. The portfolio owns many of the stocks mentioned. We welcome the return of upward momentum for many of the stocks included in the portfolio and choose to ignore the noise about whether the ASX200 might reach 6000, or not, and if so, when?

I remain critical about whether 6000-plus is justified on the basis of local dynamics, this early in the calendar year. The Model Portfolio recently reduced exposure to Australian equities and increased its cash on the sidelines.

For more information about the All-Weather Model Portfolio: send email to info@fnarena.com

Paid subscribers can access a dedicated section to All-Weather Performers on the FNArena website. All price data have been updated until March 31st.

Sequel: Quintis Versus Californian Short Sellers

Last week I wrote about US-style of activist short sellers making their presence felt in Australia and little, hapless Quintis ((QIN)), formerly known as TFS Corp, had become their first public target.

With devastating consequences for existing shareholders, at least in the short term. The Quintis share price is doing its best to trade above $1, but only a few weeks ago it was trading at $1.47 and in December it was trading at $1.70.

Events have unfolded in quick succession and it is but fair to say this story already has generated sufficient intrigue to attract interest from aspiring Hollywood script writers. After the frontal attack-research report released by Glaucus Research, otherwise known as "the evil short sellers", the company responded by requesting a trading halt, and then releasing an official rebuttal that left quite a number of questions unanswered. A few hours later founder and CEO Frank Wilson had abandoned his position, officially to work on a potential take-over offer with a well capitalised but anonymous corporate suitor.

Stranger things have happened, no doubt, but we fail to remember a large number of precedents. Wilson is still a large shareholder in the company. Private equiteers at KKR are rumoured to have been circling for a while with, apparently, a lesser quality of sandalwood crop ready to merge with Quintis'. But is a financial bid realistic? Or is Quintis simply repeating the experience of board and shareholders at SurfStitch ((SRF)) in 2016?

SurfStitch shares are trading around $0.15 this month compared with $2 (not a typo) at the end of 2015, hence shareholders in Quintis in particular will be hoping any parallels between the two are purely coincidental, and temporary.

The company's ASX response contained the admission its largest customer in China, Shanghai Richer Link, hasn't placed one single order yet in 2017. A major embarrassment for the company who profiles itself as a pioneer in the industry, no two ways about it. Glaucus Research, for its part, followed up with yet another, super-dismissive research report, containing the following sentence: "When we called Shanghai Richer Link and asked them about TFS, at first the representative was confused, then said "we don’t do that business anymore."

Following the admission, credit rating agency Moody's placed Quintis' outlook on "negative" from "stable".

It now has also emerged that Quintis initiated a court case in 2014 against Adelaide-based stockbrokers Taylor Collison for an unpublished, critical research report, titled "A Foray into Sandalwood Accounting". The company, back then still operating as TFS Corp, lost the court case. The fact that sandalwood remains an opaque market, with Quintis seemingly an all-dominant player, does not make the company's case any clearer. Nor the fact it ended up outbidding all other participants in a number of auctions in recent years.

Irrespective of the ultimate outcome for suffering Quintis shareholders, it is most likely more ASX-listed companies might find themselves at the centre of short sellers' attention in the months, possibly years ahead. Here's hoping none of the future targets are found in any of our long term investment portfolios today.

Conviction Calls: Bell Potter, Goldman Sachs, Shaw and UBS

Stockbroker Bell Potter has a short list of Champion Stocks. These are high quality, ASX-listed entities whose business models have been tried and tested, at all points during the economic cycle, and management tends to enjoy a favourable standing throughout the local investment community.

Another way of looking at these stocks is by viewing them as Bell Potter's version of All-Weather Performers; solid, dependable, predictable, robust, must have, longer term portfolio members. Bell Potter's selection of ten members of this rather exclusive list of names was recently reduced to nine with the removal of Tatts ((TTS)) due to its proposed corporate "merger" with Tabcorp ((TAH)).

The nine remaining stocks on the list are: APA Group ((APA)), Transurban ((TCL)), Lend Lease ((LLC)), Challenger ((CGF)), Sonic Healthcare ((SHL)), Goodman Group ((GMG)), Link Administration Services ((LNK)), CSL ((CSL)) and Brambles ((BXB)).

FNArena subscribers can read up on All-Weather Performers (or: All-Weather Stocks) through the dedicated section on the FNArena website. The quickest way runs probably via the drop down menu starting with Analysis & Data on the grey-ish horizontal bar on the front page.

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Strategists at Goldman Sachs removed Hotel Property Investments ((HPI)) from their Australia/NZ Buy List after a rally in the share price, which has triggered a downgrade to Neutral by the analysts covering the stock.

Over the past ten months, explain the analysts, the shares have outperformed their REITs peers in Australia by some 10%. Equally important, Goldman Sachs does not think there's a lot additional upside left, at least not from a fundamental/valuation point of view.

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Amidst all the hullabaloo about new highs and further upside potential in this equities bull market, Shaw and Partners' head of research, Martin Crabb, remains stoic in his view: investors better not have too high expectations with the index at what appears to be stretched valuation. Twelve month return from current level is unlikely to exceed 5%, predicts Crabb, and that includes dividend payouts in the interim.

Stock picking and low expectations are thus key, in Crabb's view. He draws an analogy of picking up pennies in front of a steamroller. Meanwhile, staying overweight Resources stocks makes sense, in his view, as does owning banking shares.

It also makes sense to add global currency exposure to the portfolio, says Crabb, and as such he has increased exposure to QBE Insurance ((QBE)) and to Magellan Financial ((MFG)), while removing Perpetual ((PPT)) and Telstra ((TLS)).

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UBS strategists David Cassidy and Dean Dusanic have tried to find any remaining laggards in the ASX100 that should still be able to (potentially) return 20% or more in the year ahead. Their preferred selection includes BlueScope Steel ((BSL)), BHP Billiton ((BHP)) and Boral ((BLD)), as well as turnaround story Origin Energy ((ORG)).

A closer look into their research reveals Cassidy and Dusanic still see plenty of opportunities to achieve above market returns on the ASX. Candidates include JB Hi-Fi ((JBH)), Healthscope ((HSO)), Domino's Pizza ((DMP)), Harvey Norman ((HVN)), Rio Tinto ((RIO)), Flight Centre ((FLT)), Iluka Resources ((ILU)), Primary Healthcare ((PRY)), Evolution Mining ((EVN)), Crown Resorts ((CWN)), Santos ((STO)), Vocus Communications ((VOC)), Magellan Financial ((MFG)) and Fortescue Metals ((FMG)).

Stocks the duo absolutely dislikes include: Newcrest Mining ((NCM)), Fairfax Media ((FXJ)), Treasury Wine Estates ((TWE)), Seek ((SEK)), Bendigo and Adelaide Bank ((BEN)), Cochlear ((COH)), Perpetual ((PPT)), Ansell ((ANN)), DuluxGroup ((DLX)) and Bank of Queensland ((BOQ)).

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Note to readers: This is the fifth consecutive update on brokers' Conviction Calls. The previous four can be found in Weekly Insights from March 27, March 20, March 13 and March 6 which can be accessed via Rudi's Views on the FNArena website.

New Website: A Sophisticated Search Engine

"Search Stocks & Stories" it reads on the far right of the FNArena website. Behind the simple looking, rectangular input field attached to a blue button that says "Search" hides a wealth of information for the investor looking to broaden his insights on a specific topic, sector or ASX-listed company.

Type in "LNK" (for Link Administration Services) and a page appears showing "Most relevant stocks from your search", which, in this case, means you have been directed to Link, but also to Macquarie Group (MQG), AMP (AMP) and Perpetual (PPT). Further below are "Related Stocks" which includes the likes of Bravura Solutions (BVS), Class (CL1), GBST (GBT) and Iress Market Technology (IRE).

This all makes a lot of sense if one considers Link is far more than simply IT, or a software services company, or a shareholders registery, a definition most commentators and labeling services elsewhere would use for the company. As a major back office services provider for super funds and professional funds managers in Australia, FNArena thinks showing Link in connection with Macquarie, Bravura and Iress is a far more accurate environment for investors researching this company and its shares.

To be able to offer this level of sophistication, FNArena has developed its own corporate sectors structure and proprietary algorithms, and both are subjected to regular reviews and amendments. This should ensure that investors looking for in-depth research into the companies of their interest will find the Search facility on the FNArena website is the ideal starting point.

News stories and broker updates that populate Search results stretch out more than ten years. Results are ranked by "relevancy" (again, another algorithm), though settings can be changed to rankings per "date" if that suits better.

To accommodate easier and higher quality researching, Search outcomes include direct access to FNArena's Stock Analysis, not just for the ASX code entered, but for all related peers.

So if you agree that "Amcor" and "BHP Billiton" have very little in common, even though both are included in the S&P/ASX 200 Materials index, and that Seek (SEK), Carsales (CAR) and REA Group (REA) should no longer be grouped together simply because they all originate from what once were print media's "rivers of gold', than you are likely going to enjoy researching your stocks, and the share market, through the FNArena Search engine.

Do note this very much remains work-in-eternal-development. All feedback for further improvements and adjustments are at all times appreciated and welcome.

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday around 11.15am, Skype-link to discuss broker calls
-Thursday, 12.00-2.00pm, co-host in the studio
-Thursday, between 7-8pm, interview on Switzer TV
-Friday around 11.15am, Skype-link to discuss broker calls

Rudi On Tour

Your Editor has been invited to present at the Australian Shareholders Association's (ASA) 2017 Securing Your Investing Future Conference to be held at the Grand Hyatt Melbourne from 15-16 May.

The conference details – www.australianshareholders.com.au/conference-2017

Speaker information – www.australianshareholders.com.au/speakers

Program information – www.australianshareholders.com.au/program

Those who register before 31 March 2017 will receive $70 off the registration fee. Telephone: 1300 368 448

(This story was written on Monday 3rd April, 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

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CHARTS

AMC ANN APA BAP BEN BHP BLD BOQ BSL BXB CGF COH CSL CWN DMP EVN FLT FMG GMG HPI HVN ILU JBH LLC LNK MFG NCM ORG PGH PPT QBE REA RHC RIO SEK SHL STO SYD TAH TCL TLS TWE VOC

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: ANN - ANSELL LIMITED

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED

For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BLD - BORAL LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: BSL - BLUESCOPE STEEL LIMITED

For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: CWN - CROWN RESORTS LIMITED

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: EVN - EVOLUTION MINING LIMITED

For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: HPI - HOTEL PROPERTY INVESTMENTS LIMITED

For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED

For more info SHARE ANALYSIS: ILU - ILUKA RESOURCES LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: NCM - NEWCREST MINING LIMITED

For more info SHARE ANALYSIS: ORG - ORIGIN ENERGY LIMITED

For more info SHARE ANALYSIS: PGH - PACT GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: PPT - PERPETUAL LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: SYD - SYDNEY AIRPORT

For more info SHARE ANALYSIS: TAH - TABCORP HOLDINGS LIMITED

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED

For more info SHARE ANALYSIS: VOC - VOCUS GROUP LIMITED