Rudi's View | Nov 23 2017
In this week's Weekly Insights (this is part two):
–Equities Bull Market: It's Raining Warnings
-Commodities And A Greener China
-Conviction Calls: Goldman Sachs, Ord Minnett, Bell Potter, CLSA, And Morgans
-Predicting December Index Changes
-Matt Barrie's Manifesto
-IPOs In September Quarter
-Rudi On BoardRoom.Media (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: Goldman Sachs, Ord Minnett, Bell Potter, CLSA, And Morgans
By Rudi Filapek-Vandyck, Editor FNArena
Investors(still) looking to jump on board the reversal in fortune for contractors and services providers to mining and oil and gas companies should opt for Seven Group Holdings ((SVW)) and ignore Monadelphous ((MND)), according to the latest sector update by analysts at Goldman Sachs.
The analysts can still see upside for Seven West shares, though less so with each added day of positive share price performance of course, but their price target of $11 sits -35% below Monadelphous' share price on Friday, suggesting a whole lot needs to move into the right direction before those shares can grow into the current share price.
Not going to happen, declare the analysts. They only see muted energy spending growth in the years ahead. All other stocks in the sector are currently rated Neutral, including WorleyParsons ((WOR)), whose rating has been upgraded on the updated outlook for spending by oil and gas producers across the globe.
The updated price target for WorleyParsons, at $13.70, still sits below the share price, but nowhere nearly as far away as is the case for Monadelphous. The obvious caveat here is that were oil and gas companies to accelerate their spending plans, for whatever reason, present assumptions and forecasts will prove too conservative.
Goldman Sachs' price target for Seven Group has lifted to $13.55.
International salmon prices are under pressure. It looks pretty serious too, with on some estimates a decline in excess of -20% since a price peak in May. Analysts at JP Morgan, whose research is copied and published under the Ord Minnett brand for retail investors in Australia, report the main culprit is probably increased supply from Chile.
Making matters worse for the sector, JP Morgan analysts don't think Chilean supply is about to back down either. Luckily, for Australian producers, the local market remains undersupplied and protected from international intruders. Imports of fresh head on gutted, or HOG salmons is legally not allowed and exports for both Tassal Group ((TGR)) and Huon Aquaculture ((HUO)) only account for 20% of annual revenues.
Sure, frozen and smoked products can be affected from international price pressure, over time, but JP Morgan sees any impact merely coming from investors sentiment in the short term, which would create buying opportunities. Ord Minnett rates both stocks a Buy with share prices more than -20% below price targets (see Stock Analysis on the website).
Bell Potter analyst Chris Savage has seen no other option than finally introducing two Sell ratings for tech stocks Altium ((ALU)) and Wisetech Global ((WTC)). It had been a while since the stockbroker's universe of some twelve tech names under coverage contained any Sell ratings.
Bell Potter made the effort to highlight it still thinks both companies are world class, and their growth outlook has not deteriorated, it's just that share prices are seen as "excessively priced" post recent extended rallies.
In the meantime, Adacel Technologies ((ADA)) issued a profit warning and that would have hurt as it is the number one top pick for the sector at Bell Potter. The share price has taken a bath since, as one would have expected. Bell Potter's Savage is not worried, however, suggesting this might be a case of bad timing. Target price has fallen to $3 from $3.50 prior and Buy rating retained.
Three other favourites in the sector are TechnologyOne ((TNE)), issuer of a mild profit warning earlier and for which conviction has risen that double digit percentage growth should resume in FY18, Senetas ((SEN)) and Empired ((EPD)). Cybersecurity firm Senetas should also have a strong year ahead with management suggesting as much as the AGM, while Empired issued a disappointing trading update last month.
Bell Potter's price target for Senetas has now risen to 14c from 12c prior.
DuluxGroup ((DLX)) issued a strong FY17 report last week. About this all analysts covering the stock remain in unison. Virtually none can reconcile the present share price. Which is why CLSA's latest update attracted my attention.
The difference, it seems, is that CLSA analyst Andrew Johnston is willing to take a positive view on management's intention to grow Selleys products in markets such as the US, Asia and Europe. Most people would know Dulux from its market leading paint products in Australia, but Alesco's garage doors are now performing better and so are Selleys' lubricants, adhesives, sealants, gap fillers and other home decorating products.
Applying a higher multiple to Selleys' sales and growth leads CLSA to a revised price target of $9.45, still well above the current share price. No wonder, CLSA is one of the few with a Buy rating for the shares.
Stockbroker Morgans' recent update on Model Portfolios warns investors focused on income generating share market strategies should by now review whatever their holdings are. After a long period of outperformance for yield stocks on the back of falling bond yields, threats are now on the rise, says the stockbroker.
Morgans' Income Model Portfolio has been lifting exposure to Telstra ((TLS)), while reducing its ownership of Wesfarmers ((WES)) and Challenger ((CGF)). In addition, Morgans declared it intends to take up any entitlement should Transurban ((TCL)) undertake a capital raising following its WestConnex bid. Suncorp ((SUN)) and Australian Finance Group ((AFG)) were also discussed as possible inclusions for the portfolio.
The stockbroker's Balanced Model Portfolio has trimmed exposure to ALS ltd ((ALQ)), sold out of Beacon Lighting ((BLX)), because of high valuation, and added more shares in Telstra ((TLS)) and Ramsay Health Care ((RHC)). The latter is described as a core portfolio holding, which it is also in the FNArena/Vested All-Weather Model Portfolio (see further below).
Added on Tuesday: Analysts at Citi have added Trade Me ((TME)) to Citi's Focus List Australia/New Zealand, essentially a selection of the greatest buy ideas these analysts can come up with.
Trade Me was chosen because its share price had been in free fall since peaking at $5.20 in late July. Citi thinks this occurred because of investor fears about competition from Facebook and Amazon.
Weekly Insights has been reporting on Conviction Calls since early February this year with only a rare exception this year. Paid subscribers can access the archive via Rudi's Views on the FNArena website.
Predicting December Index Changes
It seems like they only just announced their last changes to share market indices in Australia, but Standard & Poor's will be announcing their newest inclusions and exclusions on Friday, December 8th. All changes announced will become effective by close of business on December 15th.
Analysts at Morgan Stanley predict Afterpay Touch ((APT)) and Wisetech Global ((WTC)) shall replace FlexiGroup ((FXL)) and Japara Healthcare ((JHC)) in the ASX200 while Regis Health Care ((REG)) could be next if S&P decides to make a third amendment.
A much higher probability is given to a2 Milk ((A2M)) replacing Vocus Communications ((VOC)) in the ASX100. This could mark an important milestone as it turns small cap funds into forced sellers while others already own the stocks, or can wait for a more opportune price point.
Macquarie certainly agrees with the potential for a2 Milk to be included in the ASX100. If it doesn't happen on the back of the Tabcorp ((TAH))/Tatts ((TTS)) merger, it is likely S&P will give Vocus the boot, suggests Macquarie. The analysts also highlight Fairfax Media ((FXJ)) which seems safe for now but mainly because of the late spin-off of Domain ((DHG)).
Domain was initially included in the ASX100, but it has now been added to the Small Ordinaries instead. Its inclusion in the ASX200 is not seen as under threat.
As far as new inclusions to the ASX200 are concerned, Macquarie sees Lynas Corp ((LYC)), Wisetech Global, Pilbara Minerals ((PLS)) and Smartgroup Corp ((SIQ)) as possibilities. The first two more than the next two. Potential names to lose their spot are FlexiGroup (likely) and Japara Healthcare (likely), as well as Regis Healthcare, Asaleo Care ((AHY)) and Myer ((MYR)).
New Zealand based but soon solely Australia-listed Xero ((XRO)) won't be joining any local indices anytime soon, but Morgan Stanley suggests that's only a matter of time. Also, if a2 Milk does move up into the ASX100, Mineral Resources ((MIN)) will become the largest constituent of the Small Ordinaries.
Past data analysis by Morgan Stanley suggests new ASX200 inclusions outperform by some 7.5% over the twenty days prior to S&P's announcement, and also leading up to the implementation. Exclusions tend to underperform, but quickly recover post the 20 days period.
Rudi On BoardRoom.Media (Updated)
Audio interview from Tuesday this week:
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
-Thursday, Noon-2pm, Trading Day Live
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be sharing my views and market observations to a select group of investors in Paddington (Sydney) this week. Alas, all tickets have sold out. Those who missed out shall have to wait until the next opportunity, which will probably be next year.
(This story was written on Monday 20th November, 2017. The first part was published on the day in the form of an email to paying subscribers at FNArena, and again on the following Wednesday as a story on the website. This is part two).
(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.)
P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.
P.S. II – 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.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.