Rudi's View | Sep 07 2017
In this week's Weekly Insights (published in two separate parts):
-August Reporting Season: Costs & Capex, Mining & Dividends
-Conviction Calls: Citi, CLSA and Goldman Sachs
-Rudi In The Australian
-CBA And The Premium Gone (Volume 2)
-Buy Signal For Equities
-Rudi On BoardRoomRadio (Updated)
-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]
Conviction Calls: Citi, CLSA and Goldman Sachs
By Rudi Filapek-Vandyck, Editor FNArena
Regular readers of my market analyses already know that data centre operator NextDC ((NXT)) has been on my radar for quite a while. The stock was included in the FNArena/Vested Equities All-Weather Model Portfolio (see also further below) in 2015 and has delivered a noticeably positive contribution to date. I have no doubt this trajectory will continue for a lot longer.
For good measure: NextDC is not an All-Weather stock in itself; it is part of the multi-year, structural growth stories that I managed to identify and that are also part of the Model Portfolio, as are Aristocrat Leisure ((ALL)), Altium ((ALU)) and a handful of others.
Analysts at Citi responded to last week's FY17 release by not only reiterating their Buy rating for the stock, but equally so their Conviction behind the Buy rating. Citi's target price jumped by 16% to $6.03 (the shares are trading at around $4.50 as I write this sentence).
Analysts at CLSA have lined up their Top Picks post August reporting season. These are, not necessarily in order of favouritism:
-Treasury Wine Estates ((TWE)); while short term the valuation doesn't look particularly cheap, CLSA analysts maintain here is a material margin and volume story underway which will surprise on the upside into 2019 and beyond
-BlueScope Steel ((BSL)); global sector dynamics remain highly favourable so the sell-off post disappointing guidance looks overdone
-Alumina Ltd ((AWC)); CLSA sees strong fundamentals with risk biased towards more upside potential on rising aluminium prices (thanks to China) and increased bauxite production
-Scentre Group ((SCG)); owner of the best quality assets with the highest specialty sales productivity of $11,250/sqm in Australia, say the analysts, and this will make it more resilient to structural and cyclical headwinds relative to peers
-a2 Milk ((A2M)); this company's growth trajectory is not finished by a long stretch, with CSLA stating the PE multiple still appears too low given the scalability of the business and the significant growth ahead
Different analysts, a different view. Those at Goldman Sachs respectfully disagree with CLSA on BlueScope Steel. They too had been taken by surprise, not sure about how to reconcile the somewhat subdued guidance with the highly accommodative industry dynamics worldwide.
But Goldman Sachs decided to downgrade to Hold, which also led to the removal of BlueScope Steel from the stockbroker's Australia-New Zealand Conviction Buy List. Remaining on the list post August reporting season are:
-Newcrest Mining ((NCM))
-Sims Metal Management ((SGM))
-Sky City Entertainment ((SKC))
-Oil Search ((OSH))
-ANZ Bank ((ANZ))
-Lend Lease ((LLC))
-Lifestyle Communities ((LIC))
-Property Link Group ((PLG))
-Sydney Airport ((SYD))
CBA And The Premium Gone (Volume 2)
It seems like such a long time ago, but when I arrived in Australia, back in the year 2000, National Australia Bank ((NAB)) was the premium banking stock in Australia.
Things changed dramatically from the moment a scandal erupted from inside the FX trading desk. That was back in early 2004. NAB shares have never been able to regain that premium sector position since. Instead, a bad news cycle opened up and NAB shareholders who stayed loyal, preferring NAB over the other three, have significantly underperformed since.
A similar sector leadership switch has been observed between Coles and Woolworths ((WOW)) in the supermarket industry, with first momentum departing Coles and pushing Woolworths shares into the stratosphere, then momentum switching again from the moment Wesfarmers ((WES)) absorbed Coles.
The reason why I reflect back on these major pivotal events is because ever since National Australia Bank shed its sector leadership, investors happily embraced CommBank ((CBA)) as the logical primus inter pares. And that has translated into much better rewards for shareholders in comparison to Westpac ((WBC)), ANZ Bank ((ANZ)), and NAB.
But now sector dynamics are shifting again and it's probably not 100% coincidence this is happening as the sector leader from yesteryear, CommBank, is battling one scandal after another. The latest one is the heaviest by far, and most definitely of long lasting consequences.
Sector dynamics have shifted. Former laggards ANZ Bank and National Australia Bank are the new leaders. Investors in the sector should pay attention, or it'll cost them. Just like holding on to NAB preference between 2004 and last year has done loyal shareholders no favour.
Analysts at Morgan Stanley weighed in on this public discussion on Monday. On their observation, CommBank's sector premium has never been as thin as today since 2010. The average valuation premium over the past two decades, report the analysts, in favour of CBA shares has been 11%.
Over that period, CBA shares have only traded as a discount to the sector in four relatively short periods: 1996-1997, 2001, 2004 and 2009.
Reasons to justify the sector premium in all other periods include:
-higher return profile
-stronger EPS growth
-funding advantage due to its leading retail franchise
-lower risk profile
-a clear strategy and superior execution
-a tighter share register
Irrespective of any operational impact from the AUSTRAC fall-out, Morgan Stanley agrees with those experts who believe most of the above advantages are narrowing and CBA's EPS growth profile is very much falling in line with the other three for the years ahead. This means the PE premium no longer seems warranted.
On Morgan Stanley's calculation, CBA shares have enjoyed a PE premium vis-a-vis the other three major banks of no less than 17% since 2011. The AUSTRAC revelations and subsequent share price fall have narrowed the valuation gap to circa 5% on the analysts' calculations.
Another reason as to why CBA's premium blew out so much in recent years is because conditions for retail banking were much more favourable than for business banking. But this is now changing, while specific problems at NAB and ANZ have been addressed, says Morgan Stanley.
Cutting a long story short: Morgan Stanley suggests the current de-rating process for CBA may well take the share price down to $70.80; all else left equal. It's own price target for the stocks is $72. It's rating remains Underweight. Industry view In-Line.
Buy Signal For Equities
Medium term technical momentum indicators for global equities are once again suggesting the time to Buy is now, reports Longview Economics, suggesting the temporary slump that saw Australian shares go nowhere amidst a lot of volatility, while US equities merely tracked sideways with hardly any volatility, should make way for a renewed uptrend, soon
Always tricky to make that type of forecasts when the unpredictable September month has only just begun. But who cares when underlying momentum starts pointing north, right?
Equally interesting is that share market strategists at Citi believe global dynamics are changing and they look a lot like the late 1990s. In practical terms this means expensive growth stocks will get a lot more expensive, say the analysts, while rising credit spreads and higher dispersion coincided with an acceleration in momentum trades. These are conditions in which active stock pickers can thrive, but contrarian value investors might be left behind, warns Citi.
First implication, if Citi's assessment is correct, is we may have seen peak performance from passive investment strategies.
Equally important, I assume, is the fact that Citi's Bear Market Checklist still only shows 2.5 red lights out of 18 indicators. So equities should be safe, with Citi strategists continuing to encourage all to buy more in dips.
Rudi On BoardRoomRadio (Updated)
Not to be confused with last week's audio interview, here's a new one from 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
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 4th September, 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
(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.)
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