Rudi's View | Aug 09 2017
First part of this week's Weekly Insights, containing:
-Preview August Reporting Season 2017: Caution Rules
-A Change In Format For Weekly Insights
-Conviction Calls: Goldman Sachs, Wilsons, Citi, CS, UBS
-Worry About The '7' In 2017
-2016 - L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appear in part two on Thursday]
Preview August Reporting Season 2017: Caution Rules
By Rudi Filapek-Vandyck, Editor FNArena
One of the reasons behind the local share market's stasis throughout July and early August is because of professional funds managers' unwillingness to make large changes in portfolios and market positioning. The local confession session has been remarkably mild, but many are keeping a close eye on US indices, the Nasdaq in particular, for any sign of a sizable pull back.
It's not like the macro picture has become any clearer either. Is the Federal Reserve still expected to continue hiking interest rates? If so, why are US Treasuries suggesting otherwise? Why is the US dollar so weak when all and sundry were expecting it to be much stronger? What's with iron ore priced back above US$70/tonne? Coal prices remaining high? Gold not moving?
The Bank of England was expected to start hiking rates, not downgrade its expectations for growth and alert everyone to ongoing uncertainties surrounding Brexit. Boy, did commentators misread the RBA's intentions!
Valuations are on the high side. Volumes are low. And that benign confession period pre-reporting season; it turns out that's not necessarily true either. Analysts at Canaccord Genuity, who tend to focus on the smaller segment of the ASX, counted no less than 69 disappointments and profit warnings from small cap companies, including iSentia, Billabong, Mitula Group, Seymour Whyte, Countplus, Matrix Composites and Engineering, Yowie and National Veterinary Care.
Oliver's Real Food ((OLI)) issued a profit warning only six weeks after ASX-listing. Surely, this must be one of the worst starts as a publicly listed company in Australia, ever?
Though most investors would have no exposure to any of these small cap stragglers, for those with a wider focus alarm bells are ringing that exposure to risky stocks in August can inflict a lot of pain. The past year has been nigh impossible for most funds managers to outperform the ASX200 Accumulation Index (including dividends). A few profit warnings too many in August can easily sink prospects to do any better in calendar 2017.
Local reporting season has arguably hardly gained any traction, but the early signs are worrisome for those who might be too bullish on corporate momentum in Australia. The first week saw 13 companies reporting that are covered by FNArena. Out of these, only two -Cimic and Genworth Mortgage Insurance- clearly beat analysts' expectations.
Six companies -almost half- disappointed, including Suncorp (previously seen as potentially delivering upside surprise), Rio Tinto (idem), Crown Resorts (same as for SUN and RIO) and ResMed. For good measure: it is way too early to draw any firm conclusions as yet, but a false start has to be acknowledged and the first week of August would have contributed to general cautiousness.
Yet another potential scandal at the Commonwealth Bank further reinforces the case. See also FNArena Reporting Season Monitor, updated now every day on the website until the first week of September.
Mesoblast shares are down -38% since peaking in May. Myer shares are down -33%. Australian Pharma shares have lost -30% of their value, while for Mayne Pharma the losses have rapidly accumulated to -28%.
For many investors, large and small, avoiding being dragged down by any of such land mines shall remain high on the agenda this month. Analysts at Ord Minnett, in a preview on August, estimate 25% of stocks reporting can potentially beat expectations, while 26% seem poised to deliver a miss.
Traditionally, securities analysts at stockbrokerages, as well as macro-oriented investment strategists, update their thoughts and projections ahead of the tsunami in corporate results releases that will be unleashed from around the middle of August.
Stocks mentioned as a potential risk for a negative surprise include Crown Resorts ((CWN)) (turned out to be accurate), Ardent Leisure ((AAD)), FlexiGroup ((FXL)), QBE Insurance ((QBE)), Wesfarmers ((WES)), Domino's Pizza ((DMP)), Mantra Group ((MTR)), Westfield ((WFD)), InvoCare ((IVC)), Brambles ((BXB)), APN Outdoor ((APO)), Pact Group ((PGH)) and Medibank Private ((MPL)).