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Tale Of Two Consumer Stocks

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jan 31 2018

In this week's Weekly Insights (first edition of the new year):

-Welcome To 2018
-Tale Of Two Consumer Stocks
-Conviction Calls: JPMorgan/Ord Minnett, CS and Morgans
-AFIC Provides The Answer

By Rudi Filapek-Vandyck, Editor FNArena

Welcome To 2018

Welcome to 2018. Welcome to the first Weekly Insights of the new calendar year. We have not remained completely idle over the annual holiday season, instead making changes and improvements on the technical side which, all else remaining equal, should now result in faster access to the FNArena website and its numerous tools and applications.

In addition, we produced and published our first Special Report for the year: "Stories From 2017 To Re-Read In 2018" – for those who'd like to catch up on valuable stories they might have missed last year (it's ok, we're all busy).

Paid subscribers not yet familiar with the Special Reports section; head to the drop down menu on the website starting with Analysis & Data and check out the many goodies on offer.

Plus we've now added a Guide To The Website (see the black horizontal bar across the website) which hopefully will make it easier to navigate and to find more useful tips, tools and applications.

Lastly, FNArena has developed a brand new Australian Reporting Season Monitor, soon to become a permanent feature on our website. This will become everybody's one-stop destination for everything related to corporate results locally. Stay tuned as we are preparing for official take-off… not long now!

Tale Of Two Consumer Stocks

One section that has also been updated is the dedicated All-Weather Stocks page on the website (sorry, paying subscribers only). One regular complaint from last year was subscribers found it impractical to stay on top of my research through regular notes and observations provided by Weekly Insights updates.

This then led to questions such as why is this or that stock not in your table? The list of All-Weather Performers has been updated, and will continuously be reviewed and updated as time goes by. In line with my share market research, and with the strategy employed in the FNArena/Vested Equities Al-Weather Model Portfolio, we have now added two extra sections: Emerging New Business Models and Prime Growth Stories.

A number of FNArena subscribers has grabbed the opportunity provided by the December-January festive season to congratulate myself and FNArena for providing this unique piece of research into Australian equities. If you are a paying subscriber, and you have as yet not paid any/much attention, then maybe today is as good a time as any?

The All-Weather Performers section at present showcases 40 different stocks, accompanied by plenty of writings and updates since 2013. Note there are Special Reports on the theme that can be accessed and downloaded as well. Feel free to ask more questions when necessary.

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One of the stocks included is Bapcor ((BAP)), a regularly recurring name in my All-Weather Performers research. I have stated many times in the past, and haven't changed my view to date, this company is blessed with one of the most resilient operations on the Australian Stock Exchange (hence its inclusion in my selection of All-Weather Performers).

One glance over the share price performance since listing in 2014 suffices to understand this company has the support of many happy shareholders. Yet, 2017 was pretty disappointing in terms of actual rewards for loyal shareholders. Nothing to do with management or the company itself, however.

How many AGMs did you visit last year where management and the board comfortably predicted 30% growth for the year ahead?

So what was holding back the performance last year? Amazon, of course, or more to the point: the fear of destruction from online competition through Amazon. There was also a protracted acquisition process in New Zealand, which added several businesses that had to be put up for sale (as they don't fit in with the rest of the operations). Then there's all the talk about self-driving vehicles and electric cars.

For those who are as yet not familiar with Bapcor; this is the number one provider of automotive aftermarket parts and services on both sides of the Tasman. The mechanic who repairs your car at the garage probably orders his spare parts from Bapcor. The business is predominantly wholesale, with a smaller retail facing segment through chains including Autobarn, Autopro and Opposite Lock.

In case you are more familiar with Super Retail ((SUL)), this is the main competitor for their Supercheap Auto operations. I would not be surprised if, post a disappointing 2017, Bapcor is ready to re-establish itself as the reliable wealth creator it has been since IPO. Analysts have done their best to highlight the company's virtues and strong growth outlook over the months past.

The latest to update are analysts at Macquarie. Their report is littered with predictions of "further margin upside", alongside characterics of "defensive growth profile" and "superior growth outlook". This is why Macquarie's price target sits at $6.60, well above the current share price. Macquarie is not the high marker for Bapcor price targets. See Stock Analysis on the website.

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One consumer facing stock that is attracting a lot more attention these days is Retail Food Group ((RFG)), once upon a time highly successful with its various food related franchises, but things have changed for the worse, and rapidly too. Investigative journalism at Fairfax media has been followed up with quite severe profit warnings, and the share price has responded in accordance.

Of course, the share market has a habit of selling down out-of-favour stocks too far and thus Retail Food Group will be on many a value seeker's radar by now. Yet, I am giving it away straight up, I have no appetite for the stock. I see a company in serious trouble, and suspect there could be a lot more bad news lurking around the corner.

One of the few that still actively covers the stock, Wilsons, seems to agree. In its latest update on the company, Wilsons points out there is not much room for further downgrades as the company is already trading near its debt covenants; yet another hit to the bottom line will most likely trigger a heavily dilutive equity raising. I'd say: buyer beware.

Wilsons also points out weakness in franchise transactions is currently prevalent and there is no visibility about where profits are heading in the short to medium term; nor when profits might stop falling. Just to be safe, Wilsons forecasts now assume negative growth for the three years ahead. No surprise thus, the rating remains on Sell, with the share price target falling to $1.64.

Conviction Calls: JPMorgan/Ord Minnett, CS and Morgans

One day during the holiday break I ran into a stockbroker who lives down my street. After the polite greetings, he was unable tot stop bragging about the ten bagger he had managed to snatch up in the local share market last year. I won't bore you with the details, but this micro-cap stock multiplied by five in less than two months. No double guessing: here stood a stockbroker beaming from ear to ear.

Upon witnessing my rather lukewarm enthusiasm for his newfound gold mine, he asked which is your stock tip for the year? I gave it a few seconds and then said CSL ((CSL)).

CSL?

I cannot possibly describe the look on his face. Think something along the lines of: my mother is an alien from Mars, but pssst, don't tell anyone my family secret.

The irony here is his micro-cap has since deflated by double digit percentage, while CSL's share price has steadily lifted from near $140 to near $150 on rising expectations from an early and severe flu season in the USA. No, CSL is not going to appreciate by a factor five anytime soon, but the risk profile involved is a lot closer to what I am looking for in the share market.

Behind the surprise also hides the widespread misconception that just because CSL is a large cap healthcare stock, whose performance in years past has been nothing short of excellent, investors now better look elsewhere for additional investment return.

I note numerous price targets set by analysts remain well above today's share price (see Stock Analysis); and yes, Morgan Stanley disagrees. But when share market strategists at JP Morgan earlier this month summarised their views and outlook for the year ahead through a small selection of most favoured stocks, they also included CSL, alongside Huon Aquaculture ((HUO)), WorleyParsons ((WOR)) AGL Energy ((AGL)), Amcor ((AMC)), and Scentre Group ((SCG)).

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Stockbroker Morgans' current selection of High Conviction Calls comprises of Westpac ((WBC)), ResMed ((RMD)), Oil Search ((OSH)), Link Administration ((LNK)), Aventus Retail Property Fund ((AVT)), PWR Holdings ((PWH)), Senex Energy ((SXY)) and Motorcycle Holdings ((MTO)).

Morgans' Model Portfolios have been adding Corporate Travel ((CTD)) in recent weeks, plus more of Aristocrat Leiure ((ALL)).

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Credit Suisse's local selection of Top Picks currently consists of 15 names, of which two carry a negative view ("short"). Those two are IDP Education ((IEL)) and TPG Telecom (TPM)).

The 13 most preferred ASX exposures are: AGL Energy, Coca-Cola Amatil ((CCL)), CSL, Caltex ((CTX)), Graincorp ((GNC)), Insurance Australia Group ((IAG)), IOOF ((IFL)), iSelect ((ISU)), National Australia Bank ((NAB)), Nine Entertainment ((NEC)), Qantas ((QAN)), Speedcast International ((SDA)) and Southern Cross Media ((SXL)).

AFIC Provides The Answer

Australian Foundation Investment Company, shortcut AFIC, is the largest listed investment company on the ASX. It is also one of the oldest given a track record in excess of 80 years. AFIC specialises in achieving superior investment returns, including dividends, through investments in large cap Australian equities. Think the banks, and BHP and Rio Tinto, Woodside Petroleum, Wesfarmers, Woolworths, Telstra, CSL, plus AGL Energy and Origin Energy.

All the household names that are equally well-represented in most SMSF portfolios.

Which is why AFIC's latest market update should have every investor's attention. Total investment return has lagged the ASX200 accumulation index, not only for calendar 2017, but also over three and five years. Last year, total return didn't quite make it to double digit percentage, but at 9.9% it failed to keep up with the 11.8% total return for the ASX200 accumulation index (including dividends, but not accounted for franking benefits).

Over a five years horizon, the 8.8% in total return achieved by AFIC remains painfully below the 10.2% attached to the broader index. As many small and midcap stocks have shown significant outperformance in years past, one can adopt the argument that AFIC was always going to struggle to keep up.

The latter argument seems to be supported by the fact that AFIC's investment vehicle in small and midcap stocks, Mirrabooka Investments, is able to show better results up until the past five years. For 2017, Mirrabooka's gross return including dividends reinvested stands at 14.3%. Over the past five years, it has averaged 15.1% per annum.

Amidst widespread optimism about global synchronised growth and tax cuts in the USA, investment specialists at AFIC have indicated their focus will be on increasing exposure to emerging and disruptive technologies, without taking on excessive risk. I think the latter is the real message investors should take on board. But then again, I have been playing the same tune since 2015.

The FNArena/Vested Equities All-Weather Model Portfolio achieved 13.8% in calendar 2017. More about this in next week's edition.

(This story was written on Monday 29th January, 2018. It was published on the day in the form of an email to paying subscribers at FNArena.

(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: info@fnarena.com or via the direct messaging system on the website).

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AGL ALL AMC BAP CCL CSL CTD CTX GNC HUO IAG IEL IFL ISU LNK MTO NAB NEC OSH PWH QAN RFG RMD SCG SDA SUL SXL SXY WBC WOR