Rudi's View | Aug 30 2017
In this week's Weekly Insights (published in two separate parts this week):
-CBA And The Premium Gone
-September S&P Index Rebalancing
-Rudi On BoardRoomRadio
-Investing: The USD Did It!
-Energy Sector – August Report Card
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour
[Note the non-highlighted items appear in part two on the website on Thursday]
CBA And The Premium Gone
By Rudi Filapek-Vandyck, Editor FNArena
Banking sector analysts have been talking about CommBank ((CBA)) losing its premium over the other major banks in Australia for at least two years now, but it appears the latest scandal outed by Austrac has rapidly pulled CBA shares ex-premium. This week the shares are revisiting the mid-$70s having touched $88 in May and $84 earlier in the month.
This still is without federal Labor getting its much feared/maligned Royal Commission through parliament, which we all know is the goal whenever PM Turnbull and Co lose one more seat.
I didn't think I would write this sentence anytime soon, but CommBank is now the cheapest of the Big Four in Australia; offering a higher dividend yield than ANZ Bank ((ANZ)), a larger discount to consensus price target than both ANZ Bank and National Australia Bank ((NAB)), plus the highest Price-Earnings (PE) multiple of all four.
I wouldn't necessarily roll out that sentence about how quickly the mighty have fallen, but I could.
Another observation to point out is that present relative ranking for the sector is completely the reverse of post-2009 practice; ANZ Bank and National are now arguably the premium stocks in the sector, with CommBank and Westpac the laggards. Oh how times have changed, they certainly have.
Consider the following key metrics, grabbed from Stock Analysis on the FNArena website:
-CommBank – discount to consensus target: -5.2% – implied div yield: 5.7% – PE multiple 13.3x
-Westpac – discount to consensus target: -7.2% – implied div yield: 6.0% – PE multiple 12.9x
-National Australia Bank – discount to consensus target: -3.5% – implied div yield: 6.4% – PE multiple 12.4x
-ANZ Bank – discount to consensus target: -4.8% – implied div yield: 5.6% – PE multiple 12.5x
Rumours around the traps have it that internally, CommBank is preparing for a potential mega-fine on the back of, what was it again?, 53000+ breaches under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and 2.5 years of failures to report suspicious transactions.
This story is far from over, particularly with APRA now planning to look into the bank's governance.
September S&P Index Rebalancing
Coming Friday, 1st September, Standard & Poor's will announce various changes to key share market indices in Australia. Usually, these changes are met with a yawn around the traps, but this time might be different with some of the speculated changes potentially of high impact for stocks including a2 Milk ((A2M)), Charter Hall ((CHC)), nib Holdings ((NHF)) and WH Soul Pattinson & Co ((SOL)).
Announced changes on September 1 will only come into effect on September 15, leaving fund managers and other index followers with plenty of time to adjust and reshuffle.
Also, for the first time in a long while, analysts are predicting changes might affect future composition of blue chip/large cap indices including ASX20, ASX50, ASX100, ASX200 and ASX300, as well as the Small Ordinaries index (the latter is non-S&P dependent).
Analysts at Wilsons predict AMP ((AMP)) might lose its membership to the ASX20 with Amcor ((AMC)) the likely replacement. The same could happen to Incitec Pivot ((IPL)) in the ASX50 with Cochlear ((COH)) the likely replacement. Both changes are deemed low probability for September, but possible. In particular the second option is seen as potentially imminent. If not in September, then December maybe?
For the ASX100, Wilsons predicts Primary Healthcare ((PRY)) might lose its spot in favour of a2 Milk ((A2M)). For the latter, it is also anticipated a2 Milk will lose its membership of the Small Ordinaries, irrespective of ASX100 inclusion. Historically such transitions tend to trigger a temporary set back for the share price because small cap fund managers are forced to sell while savvy large cap fundies might choose to await better entry points.
Other potential changes that might have a potentially significant impact on respective share prices is the potential for iSentia ((ISD)) and Sky Network Television ((SKT)) to be kicked out of the ASX200, with nib Holdings and WH Soul Pattinson & Co likely to be included.
Changes to the ASX300 can have a similar impact as new inclusions automatically land on the radar of institutional fund managers. Wilsons thinks the following stocks are under threat of losing their index membership: Doray Minerals ((DRM)), The Reject Shop ((TRS)), MG Unit Trust ((MGC)), CSG Ltd ((CSV)), Sino Gas & Energy ((SEH)), Alacer Gold ((AQG)) and Quintis ((QIN)).
No coincidence, many of those mentioned have experienced a tough existence for quite a while, with their share prices on a downward slope well before 2017 announced itself.
Potential inclusions to the ASX300, on Wilsons' assessment, are: AfterpayTouch ((APT)), Bingo Industries ((BIN)), Nick Scali ((NCK)), Clean TeQ Holdings ((CLQ)), Cooper Energy ((COE)), Xero ((XRO)), Appen ((APX)), Hub24 ((HUB)), Melbourne IT ((MLB)), Pacific Current Group ((PAC)) and possibly also Imdex ((IMD)) and Integrated Research ((IRI)).
Given all of the above, Wilsons suspects there is potential for a positive trading opportunity in Xero, nib Holdings, WH Soul Pattinson, AfterpayTouch, Hub24 and Melbourne IT. If history is our guide, a2 Milk's share price is likely to come under pressure, if the above prediction proves correct.
Also note that if the merger between Tabcorp ((TAH)) and Tatts ((TTS)) goes ahead later this year, this automatically creates an ASX100 position that needs to be filled. Wilsons suggests that if a2 Milk enters the index in September, the next choice might be Charter Hall.
Analysts at Macquarie have a different take on things. They see no forthcoming changes to ASX20 or ASX50 and for the ASX100 they agree Primary Healthcare is most likely to be kicked out, but the most likely candidate for inclusion in their view is Charter Hall, not a2 Milk.
Macquarie analysts do agree both nib Holdings and WH Soul Pattinson & Co are likely to become ASX200 inclusions, though Ingham's ((ING)) is also seen as a (small) possibility. Apart from iSentia and Sky Network Television, Virtus Health ((VRT)) could also lose its ASX200 inclusion, say the analysts.
The ASX300 has four spots to fill and Bingo Industries, Nick Scali, AfterpayTouch and Xero are seen as the strongest candidates. Cooper Energy, Clean Tech Holdings and Appen are seen replacing Doray Minerals, The Reject Shop and MG Unit Trust. CSG Ltd and Alacer Gold are also considered under threat of losing their inclusion, but only if QV Equities ((QVE)) and/or Melbourne IT qualify by the cut off date, say the analysts.
Analysts at Morgan Stanley point out Ingham's and WiseTech Global ((WTC)) might qualify for ASX200 inclusion at the next general review. Both will see more shares becoming available post FY17 results and thus increase their float-adjusted market cap, which is likely to satisfy S&P requirements.
Contrary to Wilsons and Macquarie, Morgan Stanley does not see many, if any, changes being announced to ASX20, ASX50, ASX100 or even the ASX200. Instead, Morgan Stanley suspects there could be a large list of changes to the ASX300 (up to 25 potential inclusions and exclusions on the analysts' assessment).
Most likely candidates to be included in September are Bingo Industries, AfterpayTouch, Xero, Nick Scali and Cooper Energy.
In case S&P decision makers are extra-motivated to make changes to the ASX100, Morgan Stanley predicts most likely to be facing exclusion are (in order of appearance) Primary Healthcare, Flight Centre ((FLT)) and TPG Telecom ((TPM)) with Charter Hall, a2 Milk and Metcash ((MTS)) most likely replacements.
Low probability exclusions for the ASX200 are, on Morgan Stanley's assessment, iSentia, Sky Network Television, Virtus Health and Japara Healthcare ((JHC)). Candidates to move in, in case of vacant spots, are considered to be Ingham's, Charter Hall Long WALE REIT ((CLW)), Mesoblast ((MSB)) and IDP Education ((IEL)).
Stay tuned for the S&P index rebalancing announcement on September 1.
Rudi On BoardRoomRadio
Audio interview from last week Tuesday:
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: firstname.lastname@example.org
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
-Wednesday, hosting of Your Money, Your Call 8-9pm
-Thursday, Skype-link around 1.30pm
-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 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 28th 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 on Thursday).
(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: email@example.com 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