Rudi's View | Nov 29 2017
In this week's Weekly Insights (published in two separate parts):
-This Is It Folks!
-Make Risk Your Friend: Don't Ignore The Future
-Old Media Versus New
-No Bear In Sight
-Conviction Calls: Ord Minnett, GS, Macquarie, UBS, CLSA and Morgans
-Rudi On BoardRoom.Media
-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]
This Is It Folks!
This is the final Weekly Insights of 2017.
It has been an extremely intense twelve months, including the launch of our new website and the publication of my second book, to name but two of the milestones achieved.
I shall be dedicating my attention to a number of initiatives and developments in the background. Life at FNArena never really involves standing still.
There will still be the occasional Sky Business TV appearance, but gradually less and less, and in about three weeks time I'll make myself available for a 7pm online seminar with FP Markets; more info to follow.
At some stage, I won't get up early in the morning and sleep for sixteen hours without interruption, or something along those lines. I might have to look up first the true meaning of "pause", "break" and "holidays".
I hope you all enjoyed my research, analysis and writings this year. I certainly have drawn lots of energy from your comments, responses, ideas and feedback.
FNArena continues to serve your best interests for four more weeks and I shall remain part of it.
Thank you all for playing an active part in this extremely exciting and wonderfully rewarding endeavour; it's been more than fifteen years and I sincerely hope the benefits and appreciation remain mutual.
Time to start loosening up on my daily routine, and, eventually, to start recharging the human battery.
Who knows what might happen in 2018?
Make Risk Your Friend: Don't Ignore The Future
By Rudi Filapek-Vandyck, Editor FNArena
As the local share market remains poised to clock off on 2017 with double-digit percentage gains (all-in) for the second calendar year in a row, maybe it's time for investors to zoom in on what has been happening underneath the surface of this unexpectedly robust bull market?
No doubt, this year's shareholders in a2 Milk, Mineral Resources, WiseTech Global, et al cannot help but showcase a big smile connecting ear to ear, but most Australians also have a large exposure to banks, Telstra, Wesfarmers and other large cap companies and those have largely been laggards since the beginning of the year.
As a matter of fact, most large cap stocks in Australia have found it hard to keep up with the broader market since the share market recovery started in Q1 2016. The same can be said about the past five years. Note: on a five year flash back, only two of the major banks have managed to outperform the ASX200. That number reduces to zero since the start of the year.
In similar vein, while every market commentator has by now caught up on the fact that small and mid-cap stocks are very much sought after in this rally, investors should note that on a five year comparison the ASX200 and ASX300 have pretty much performed equally, but the ASX50 has slightly underperformed, while the ASX20 has been left behind at a significant distance.
Since mid-2012, most indices in Australia have generated circa 7% ex-dividends per annum. For the ASX20 that number drops to a mere 5% per annum.
Is this simply a timing issue regarding major large cap index constituents such as BHP, Rio Tinto, Santos and Woodside Petroleum? Or is it related to the threat of a Royal Commission into the banking sector? The CBA scandal? Is it the feared impact of Amazon on retailers Wesfarmers, Woolworths, and their landlords, maybe?
On my assessment, what we are witnessing here is the gradual but undeniable impact from technological disruption, regulatory scrutiny and increased competition; factors that within the Australian context were always going to impact hardest on sectors that not so long ago were dominated by well-entrenched duopolies that are by now forced to defend their turf, and to rethink their strategy.
Witness recent restructuring announcements made by Telstra, National Australia Bank, Santos, Origin Energy and AMP.
But, of course, none of the problems these companies are facing today started earlier in the year. In each case there is but a valid argument to be made the operational environment started to get tougher back in 2012. It takes a while before management teams acknowledge the new environment is here to stay.
Then they still have to formulate a response.
It would be premature to now take the view these companies will remain operating under a huge cloud permanently, but at the same time, keeping the fingers crossed that tomorrow everything shall be alright seems rather optimistic. Such challenges and processes take time and they seldom go hand in hand with excellent shareholder return in the meantime.
Which is why I am advocating investors adopt a risk-updated, three layered view of the local share market:
Group one: companies that are under threat and need to review their modus operandi and their strategy to stay relevant in the future;
Group two: companies that are not impacted by changing dynamics and might possibly even be beneficiaries;
Group three: upcoming companies that are inflicting the disruption to existing market positions and business models.
It goes without saying each of these three groups represents a different risk profile. In a generalised sense, companies in group one should de-rate until more clarity is forthcoming about how each company is dealing with the threats and challenges coming towards it. Companies in group two should trade at a premium. They represent the least risk from a sustainable operational point of view.
Companies in group three offer lots of potential and excitement, but many are early stage development still and thus highly vulnerable themselves to sudden changes, incumbent responses and unforeseen pitfalls. Note that in some cases young companies that IPO-ed at the ASX only a few years ago have already been disrupted before they managed to fulfill the promises upon which they became a listed public entity. iSentia comes to mind, as well as Freelancer.
Most importantly, just like the Internet was real in the 1990s, but very few of the original Internet champions are still around twenty years later, it is not because innovation and disruption are tangible and real today that all emerging innovators and disruptors will by default prove successful. Surely the dismal experience with OnePage serves as a stern warning about the risks involved in group three.
For companies in group one, it's probably best investors resist looking over their shoulder into the past when trying to assess what the future might bring. On my observation, the past five years have impacted through two very different scenarios for companies and/or sectors affected.
Under a best case scenario, share prices carve out an extended sideways channel of multi-year duration on price charts. Probably the best example of this is being provided by Wesfarmers whose share price has traded between mid-$30s and mid-$40s since late 2012. It doesn't take much imagination to see a similar trend on price charts for Australian banks, with the exception of Macquarie Group ((MQG)).
Things look a lot worse in case of scenario number two whereby share prices end up being encapsulated inside a long term down trend. Take a look at a multi-year price chart of Coca-Cola Amatil and you shall have no problem understanding what I am talking about. FlexiGroup is another example.
The experience from mining and energy stocks between 2012 and early 2016 shows buying cheap stocks doesn't work when there's a persistent down trend. At least companies such as BHP, Fortescue Metals and Whitehaven Coal have since been rescued by a significant recovery in commodity prices. But what about Billabong? Myer? Fairfax Media?
Investors trying to scoop up cheap looking stocks better make sure they are not committing themselves to value traps dressed up like a long term opportunity. Telstra comes to mind too.
As far as group three is concerned, here there are always plenty of promising, exciting stories, but many prove ephemeral as business models are immature and unproven and the future remains as unpredictable as ever. Yet, the years past have also proven Australia remains an outstanding breeding ground for high quality, fast growing, sustainable new technology companies. Names like Wisetech Global ((WTC)), Altium ((ALU)) and Appen ((APX)) are increasingly attracting widespread praise, and investor attention.
There is every reason to assume these companies will be around for a long while, and growing strongly for many more years. This is how micro cap stocks become small cap stocks, then mid-cap. This process is arguably well-advanced for the companies mentioned.
Admittedly, strongly rising share prices have excited ever more traders and investors and valuations seem a lot less attractive than they were only a short while ago, but an experienced investor knows the importance of patience and of being ready when opportunity knocks. I suggest keep a list, do your research, add regular updates and market observations.
But don't shy away as these companies represent Australia's, and the world's, future.
Other names that come to mind at significantly lower valuations include Integrated Research ((IRI)), Nanosonics ((NAN)), Class ((CL1)) and, of course, one of my personal long-standing favourites, TechnologyOne ((TNE)).
My positive views regarding TechnologyOne should be common knowledge by now. There are not many companies on the ASX that can boast double-digit growth in earnings per share in each of the years that make up the past decade, with notable exception of the financial year just passed when growth didn't exceed 9%. That was a bad year in TechnologyOne parlance (!).
And boy did investors take notice. TechnologyOne shares have thus far lagged the broader market in 2017. The shares go ex-div on November 28th and any weakness post this event will be used to add more shares to the All-Weather Model Portfolio where TechnologyOne shares are no less than a core holding.
Somewhat to my surprise, analyst Gareth James at Morningstar is of a similar mindset. Morningstar has a stringent valuation based rating methodology and at around $5.22 the shares are on the cusp of being upgraded to Accumulate from Hold, this despite the fact the PE multiple sits around 29.6x on FY18 estimates.
Apart from the company's 99% customer retention rate, and a conservative and lazy balance sheet (no debt), Morningstar suggests investors should zoom in on the projected 15% EPS CAGR for the decade ahead. That's even better than the 11% average that has been achieved over the decade past.
Or simply put TNE in the search engine on the FNArena website.
In terms of the three baskets of stocks mentioned, the FNArena/Vested Equities All-Weather Model Portfolio remains very much focused on opportunities inside groups two and three. Despite having no exposure to mining and energy, and neither to any of the Big Four banks, year-to-date performance is better than the main index and we remain en route to achieving our longer-term performance goal after three years of operating the portfolio, including the significant set-back endured in the closing months of 2016.
No doubt, it'll come as a surprise to many, the portfolio's performance does not include any trading strategies or lucky windfalls, but is largely the result of owning high quality, sustainable, cycle agnostic, robust, multi-year growth stories; and of sticking by them whenever a manic and flighty share market goes temporarily off course.
Within this context, we remain confident in future growth potential for core holdings including CSL, Carsales ((CAR)), REA Group ((REA)), Link Administration ((LNK)), Ramsay Health Care ((RHC)), and others, including many of the future champions mentioned.
In most cases, short-term minded investors are probably underestimating the potential return the Model Portfolio is likely to achieve from these holdings in the years ahead.
Old Media Versus New
What is the name of the new political leader in Zimbabwe?
Having twice spent a couple of weeks in the country over the past decade, I have been glancing with lots of interest over images published by global media in recent weeks. On multiple occasions my eyes recognised a building, street or neighbourhood where I walked past years ago.
My attention was piqued when reading a story in the Sydney Morning Herald on page 9, 23rd November. Emmerson Mnangwagwa, it says under a militant photo, clinched fist in the air, and that's exactly the name with which the accompanying story takes off. But then, in the next paragraph, the name changes to Mnangagwa, with a w less, only to change back to Mnangwagwa (with extra w) two paragraphs further, and then to become Mnangwaga (still less one w but in a different spot).
Mind you, I am still inside the first column of a half page story that comes with two large images plus an extensive time line of events starting in 1963 covering the right hand side from top to bottom. At the very bottom of the final column it states Telegraph, London; AP. It is then I realise this is not just the result of Fairfax Media slashing personnel and outsourcing tasks to New Zealand; this is old media showing up what it means operating under constant financial pressure and within a gradual, long term down trend.
Anyone interested in knowing the exact spelling of the new guy in Harare can simply ask Google, and get it right instantly. That was different when I grew up in the seventies and eighties.
All this also shows tobacco firms obtained an invaluable victory by delaying their US court forced advertisements in American media since the initial judgment was made in 1999. Since it's paid for advertising, we probably don't have to fear there will be a c missing in tobacco (or something similar), but as to exactly how many US citizens are going to read those mea culpa advertisements?
Rudi On BoardRoom.Media
Audio interview from Tuesday last 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: 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
-Wednesday, Switzer TV, between 7-8pm
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
– I will be sharing my views and market observations via online seminar organised in cooperation with FP Markets on December 12th, 7pm. More info to follow.
(This story was written on Monday 27th November, 2017. This first part was published on the day in the form of an email to paying subscribers at FNArena, and will be again on the following Wednesday as a story on the website. Part two shall be published 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: 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): http://www.fnarena.com/index2.cfm?type=dsp_signup