Rudi's View | Sep 13 2017
In this week's Weekly Insights (published in two separate parts):
-Not In The Mood
-Conviction Calls: CLSA, Morgans, Wilsons, CS, Ord Minnett, Citi
-Post August Share Price Impact
-CBA And The Premium Gone (Vol 3)
-Rudi On BoardRoomRadio
-Post August Broker Research Nuggets
-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]
Not In The Mood
By Rudi Filapek-Vandyck, Editor FNArena
Earlier in the week, Glenn Miller's In The Mood popped up inside my brain while I was reflecting upon the multiple dynamics exerting their influence on the local share market. Unfortunately, if I now somehow planted this classical tune full of brass exuberance in your head, you will have to undo it, because, if anything, this market is not in the mood.
Not in the mood at all.
Whether we focus on the de-rating for Australian banks since May, or on the failure of industrials stocks to outperform or at least solidly meet market expectations during the August reporting season, or on the fact that higher power prices and a much stronger Australian dollar have presented themselves as serious headwinds, the fact remains, outside of the occasional short-duration rally, the Australian share market hasn't shown any direction since May, with a bias to the downside, albeit not in a major fashion. (And we haven't even mentioned North Korea, Trump, US treasuries and/or the USD).
If it wasn't for the dividends, there would have been no gains worth mentioning for local share market investors, at least not at the index level.
Making matters worse, and contrary to prior years, portfolios stacked to the gills with dividend paying financials and industrials have not outperformed, quite the contrary as these were the large cap stocks that most prominently disappointed in August.
The FNArena/Vested Equities All-Weather Model Portfolio continues to chug along in a non-spectacular fashion, slightly better than the ASX200, with the portfolio taking a step back in July, then returning almost 2% in August, adding a mildly positive extension into September.
Overall, the reporting season allowed a number of high quality companies inside the portfolio to showcase their true value and in this we specifically think of Carsales.com ((CAR)), Orora ((ORA)), Altium ((ALU)) and NextDC ((NXT)), but even so, many of the subsequent rallies were soon overpowered by macro-considerations and downswings in general risk appetite.
Sometimes, history tells us, the market just is not in the mood. Instead of trying to move mountains, we sit tight and observe further developments.
Post August Share Price Impact
The impact from companies reporting their financial results extends much longer than the first few days post market update. Deutsche Bank analysts reminded investors about the lasting effect on share prices after having delivered a "beat", a "meet" or a "miss" during reporting season.
In simplistic terms, companies that "beat" expectations in August typically outperform by 2.5% over the first week after the release; and then by an additional 3% over the following six months. These numbers are averages derived from backward-looking data over the past decade.
In contrast, the best a company can hope for in case of a "miss" is for its share price to keep up with the market over the subsequent six months.
Deutsche Bank research also shows that if a company manages to "beat" expectations, but its share price fails to outperform, the next six months are likely to continue that underperformance.
The strategists put forward their own favourites among companies that delivered a "beat" in August: Medibank Private ((MPL)), Oil Search ((OSH)), Santos ((STO)), Star Entertainment ((SGR)), Tatts ((TTS)), Flight Centre ((FLT)), Fortescue Metals ((FMG)), GPT ((GPT)), Orora ((ORA)) and Perpetual ((PPT)).
Paid subscribers have access to FNArena's full assessment of the August Reporting Season, including excel file with all beats, meets and misses, plus stockbroker responses via the following link: https://www.fnarena.com/index.php/2017/09/05/fnarena-reporting-season-monitor-36/