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)).
Small cap stocks specifically mentioned for the likelihood of a disappointment include Freelancer ((FLN)) (proved to be accurate), Admedus ((AHZ)), Blackmores ((BKL)), Cabcharge ((CAB)), Retail Food Group ((RFG)) and TOX Solutions ((TOX)).
Stocks mentioned as candidates for an upside surprise include a2 Milk ((A2M)) (proved to be accurate), Alumina Ltd ((AWC)), BlueScope Steel ((BSL)), Boral ((BLD)), Janus Henderson Group ((JHG)), South32 ((S32)), ANZ Bank ((ANZ)), Bapcor ((BAP)), Iluka ((ILU)), Carsales ((CAR)), Fortescue Metals ((FMG)), Goodman Group ((GMG)), Harvey Norman ((HVN)), Star Entertainment ((SGR)), Qantas ((QAN)), Origin Energy ((ORG)), Woolworths ((WOW)) and JB Hi-Fi ((JBH)).
Small cap stocks specifically mentioned for their upside surprise potential include AMA Group ((AMA)), Capitol Health ((CAJ)), Class ((CL1)), Cleanaway Waste Management ((CWY)), MNF Group ((MNF)), NextDC ((NXT)), Costa Group ((CGC)), WiseTech Global ((WTC)) and Integrated Research ((IRI)).
Stocks that are mentioned in both categories (depending on which angle or broker) include CSL ((CSL)), Telstra ((TLS)), Premier Investments ((PMV)), Treasury Wine Estates ((TWE)), Healthscope ((HSO)) and Woodside Petroleum ((WPL)).
Analysts at Morgan Stanley might have summed it up best when they stated in a preview in late July: "Confession season has been relatively quiet – we see low prospects of broad based significant beats and note that across the market, breadth of earnings revisions has been negative and outer year growth forecasts anchored in mid single digit territory."
All in all, consensus forecasts are for high double digit growth on average for FY17, but this is mostly carried by mining companies on the back of last year's surge in commodity prices. The outlook for FY18 and FY19 is for single digit growth only.
On FNArena's calculations, which exclude excess from resources and related companies, consensus forecasts currently project 6.6% EPS growth for the ASX200 in FY18, and 9.4% in FY19. History shows these numbers are likely to face downward pressure in the year ahead.
Corporate outlook statements will be key in particular in light of the strong AUD, the spike in electricity costs, the uncertain outlook for housing construction and subdued consumer spending; all can be serious headwinds in their own regard.
Companies potentially under pressure from higher electricity costs include Asaleo Care ((AHY)), Coca Cola Amatil, Inghams Group ((ING)), Myer ((MYR)), NextDC, Orora ((ORA)), Orica ((ORI)), as well as Wesfarmers and Woolworths.
The AUD is circa 10% above most analysts' currency input, virtually guaranteeing some level of negative impact. Here the question is whether this has already been priced in with recent pull backs in share prices. Paying subscribers are being reminded bonus items that come with a paid subscription include "The AUD and the Australian Share Market" – see Special Reports on the website.
On the positive side, more dividends and share buy backs are expected to feature prominently, not only among cashed up miners, including local gold producers, but also from A-REITs such as Stockland ((SGP)), Shopping Centres Australasia ((SCP)) and Investa Office Fund ((IOF)).
One extra factor that might come into play is the upcoming change in international accountancy rules for retailers, which will see lease-obligations for shops and premises come onto balance sheets from January 2019 onwards. I wrote earlier this year about it under the title Aus Retailers: Next Up, The Accountancy Disruption; that story can be accessed here: https://www.fnarena.com/index.php/2017/03/22/ramsay-health-care-rumour-hearsay-speculation-innuendo-and-rubbish/
Analysts at Goldman Sachs predict only 29% of companies reporting will be able to grow faster in the years ahead than their pace throughout the years past. This suggests not only that outlooks will be key, but also that the onus remains to the downside, including for companies that have performed well thus far.
A Change In Format For Weekly Insights
Weekly Insights had become a lengthy affair this year and feedback received is readers were reading less and skimming more; quite the opposite of what we are trying to achieve.
We don't want to reduce the quality, which is why we are changing the format. From this week onwards, Weekly Insights is published in two separate parts. The second part shall be made available on Thursday morning, via a story on the website.
Both parts can be accessed via Rudi's Views on the FNArena website (assuming readers have full access, which requires a paid subscription).
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: email@example.com
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, between 7-8pm on Switzer TV
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm on November 14th inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update
(This story was written on Monday 7th August, 2017. It was published on the day in the form of an email to paying subscribers at FNArena. This is part one. The second part will be published on the website as a separate story).
(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: firstname.lastname@example.org or via the direct messaging system on the website).
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