Rudi's View | Aug 10 2017
Second part of this week's Weekly Insights, containing:
-Conviction Calls: Goldman Sachs, Wilsons, Citi, CS, UBS
-Worry About The '7' In 2017
-Resources Stocks: It's Different In August
-Rudi On BoardRoomRadio
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
Conviction Calls: Goldman Sachs, Wilsons, Citi, CS, UBS
By Rudi Filapek-Vandyck, Editor
Bankinsurer Suncorp ((SUN)) was tipped by some to likely surprise to the upside this August reporting season, but the opposite materialised. Even those with a positive bias had to admit: this was an unexpectedly weak performance from Queensland's largest financial institution.
Analysts at Goldman Sachs had included Suncorp in their Australia/NZ Buy List, but the weak result has triggered a downgrade to Hold and the stock has swiftly been removed from what is best described as Goldman Sachs's select list of Conviction Buys in the Australian share market.
It is the analysts' conclusion now that "earnings trajectory is less compelling in the near term", plus "less prospect of capital management". This is not to say the share price will continue to fall as investors grapple with the shock financial performance. FNArena's market consensus has the shares trading on 5.5% dividend yield, ex 100% franking, and that should keep a firm hand under the share price during times of still exceptionally low bond yields.
Let's just say that Suncorp has instantaneously become less boring, but also not as safe as most investors thought it was pre last week. But with low risk for dividend reductions in the years ahead, no doubt yield hunters have the stock now firmly on their radar.
Another stock that lost a little bit of its glamour recently is TechnologyOne ((TNE)), still firmly on my list of All-Weather Performers in Australia (see also dedicated section on FNArena website). Wilsons has decided it is best to remove the stock from its Conviction Calls list following a nasty fall-out with the Brisbane City Council.
From the outside it appears TechnologyOne had to endure local governmental incompetence, which ultimately led to a break-down in communication and in the commercial relationship. But appearances are not necessarily the full story and Wilsons is acting in the best effort to contain any fall-out risks.
Begrudgingly, one must add, as revealed by the following statement: "We remain buyers of TNE supported by a view that the group remains well placed to prosecute a multi-year earnings growth trajectory."
To remain on Wilsons Conviction List one must be as impeccable as possible, and certainly a public stoush with a very vocal Brisbane Council is not included. The conflict has moved into legal arbitration.
On the positive side, Wilsons has picked up Pinnacle Investment Management ((PNI)) as the next potential source of investor excitement among Australia's small and mid-cap stocks. The analysts see potential for "a significant and sustainable earnings growth cycle", carried by seven high quality investment managers and a highly effective distribution team.
Pinnacle Investment Management has replaced TechnologyOne on Wilsons' Conviction Calls list which further includes EML Payments ((EML)), AfterPay Touch ((APT)), Elmo Software ((ELO)), Class ((CL1)), Rural Funds ((RFF)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), Nanosonics ((NAN)), SomnoMed ((SOM)) and Opthea ((OPT)).
It's not a conviction call per se, but Citi's reversal in appreciation of the quality and growth levers at a2 Milk ((A2M)) since initiating coverage with a Sell rating in October last year deserves to be highlighted in this week's update. The share price performance has market observers scratching their heads with glazy eyes and jaws wide open and Citi's upgrade to Buy last week with a price target of $5 has at least been partially responsible.
To recap the story: Citi analysts initiated coverage on the sector in October last year, concluding specific regulatory and country risks connected with selling dairy products into China were too large to ignore; they thus initiated with Sell ratings. At first, this seemed prescient as problems at Tasmania's Bellamy's ((BAL)) developed from bad to worse, but a2 Milk used the opportunity to rise above the field and position itself as the quality performer since.
Its share price moved from $2 (when it already was considered "too expensive" for many) to above $4 in a heartbeat or two.
It wasn't until Chinese authorities indicated they would be more lenient towards Australian importers, in March this year, that Citi decided to upgrade the stock to Neutral, with a price target of $2.60. That target became $3.10 in April; $3.65 in June after yet another guidance upgrade from company management.
As the momentum for a2 Platinum products has shown no sign of abating, the analysts finally threw caution overboard and upgraded to Buy with a price target of $5.15. For the first time since October, there's a sizable gap between the share price and Citi's price target. On Monday, a2 Milk shares were trading around $4.47.
Stockbroker Morgans has added Motorcycle Holdings ((MTO)) to its selection of High Conviction Stocks. The share price deflated since March from near $4.50 to below $3.50 but expectations are rising the upcoming FY17 results will outdo market expectations and that is underpinning the share price in recent weeks.
Morgans has high expectations, also because management is executing a multi-year acquisition and consolidation strategy for this specific market niche. Other inclusions on the stockbroker's list are ResMed ((RMD)), Westpac ((WBC)), Oil Search ((OSH)), Bapcor ((BAP)) and Australian Finance Group ((AFG)).
Small cap specialists at Credit Suisse used their recent sector update to highlight their top picks: Capitol Health ((CAJ)), Eclipx ((ECX)), HT&E ((HT1)), Huon ((HUO)), Inghams Group ((ING)), Integral Diagnostics ((IDX)), iSelect ((ISU)), NextDC ((NXT)), Speedcast ((SDA)), Steadfast ((SDF)) and Southern Cross Media ((SXL)).
The team researching emerging companies at Morgan Stanley has communicated its top picks for the August reporting season, specifically labelled "conviction calls", with Morgan Stanley staying true to their optimism that Aconex ((ACX)) will be able to reverse share market momentum, even though the company is unlikely to shoot the lights out this month.
Morgan Stanley is banking on management providing the market with a positive medium term outlook.
Undervalued, and undeservedly so, is MNF Group ((MNF)) with the company expected to unveil high growth and a positive outlook. Baby Bunting ((BBN)) should surprise the nay-sayers while IDP Education ((IEL)) might surprise with a quicker than projected operational turnaround.
Lastly, Bapcor ((BAR)) has been treated harshly and Morgan Stanley remains of the view, with clear conviction, this will be but a temporary phenomenon.
The team doesn't think recent momentum for both AP Eager's ((APE)) and Automotive Holdings ((AHG)) will prove sustainable. Analysts at Moelis beg to differ, even though they did downgrade AP Eagers to Hold (price target $9.04) while retaining Automotive Holdings on Buy with a revised price target of $4.20 (up from $4.11).
Finally, portfolio strategists at UBS has used this month's weakness in banking shares as an opportunity to move Overweight on the sector. The UBS Model Portfolio remains Overweight resources. The analysts have also reduced their Underweight portfolio exposure to A-REITs given recent share price weakness.
UBS continues to view AUD strength as unsustainable, but the Portfolio has nevertheless removed QBE Insurance ((QBE)) and CSL ((CSL)) while adding Incitec Pivot ((IPL)), Star Entertainment ((SGR)) and GPT Group ((GPT)). The removal of CSL follows the concern that market expectations for growth in FY18 might be above what the company can deliver.
Note to paying subscribers: all Weekly Insights updates since early February this year have included updates on Conviction Calls, with the sole exception of the July 3 edition. See Rudi's Views on the FNArena website to access the archive of past updates.
Worry About The '7' In 2017
Too often market predictions are based upon seasonal patterns. Alas, these seasonal patterns are not always an accurate guide as shown by the local share market's performance last month. Historically, July should be among the strongest performers in any given calendar year. This year proved different.
Investors might want to keep this in mind when considering the fact that many share market corrections/sell-offs have historically occurred in calendar years ending with '7'. Think 1937. And 1987. Even 2007 had one big sell-off on the back of Bear Stearns defaulting, before leading into the 2008/early 2009 bear market.
Going back into history, it turns out 1907, 1917, 1957 and 1977; they all delivered the big share market sell-down.
Given US equities are currently experiencing one of their longest streaks without a 5% correction, and valuations are high, and market breadth is low, and the calendar shows the year 2017… you get the picture.
Here's a deeper look into the worries that keep investors in the USA awake at night:
Resources Stocks: It's Different In August
Since every financial commentator and his dog likes to refer to Sir John Templeton's famous statement about the four most dangerous words in investing being "This Time It's Different", I reshuffled the wording in the title above this piece on resources stocks.
BHP ((BHP)) shares were supposed to be near $30 by now, but they are languishing in the mid-$20s instead. And Rio Tinto ((RIO)) doesn't seem to get past the mid-$60s while many a price target sits well above $70. Both share prices have rallied recently on unexpectedly positive momentum for iron ore in China.
The "secret", point out analysts at Shaw and Partners, is earnings momentum. The sector thrives on upward momentum, but commodity prices peaked during the February reporting season and thus analysts have been cutting forecasts since. Not an environment that allows BHP, RIO, or any of the other resources stocks to reach full capacity in terms of share price performance.
But August is different. This time, it appears, commodity prices have once again bottomed and thus analysts should soon be in upgrade mode. At least that's what the Bloomberg Commodities Index is suggesting.
Rudi On BoardRoomRadio
My latest interview, a preview on the August reporting season, can be accessed here:
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 mostly written on Monday 7th August, 2017. This is the second part of Weekly Insights, of which the first part was sent to paying subscribers in the form of an email on Monday).
(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
(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.)
P.S. – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
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