Rudi’s View: Credit Corp, Nearmap, And The Banks

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 | Apr 27 2018

In this week's Weekly Insights (this is Part Two):

-Outlook 2018: A Complex Equities De-Rating
-Slowing Growth, Rising Yields, High PEs
-Conviction Calls
-Australian Banks: Cheap, But Value?

-Rudi Talks
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appeared in part one on the website on Wednesday]

By Rudi Filapek-Vandyck, Editor

In Part One, this week published on the website on Thursday due to public holiday on Wednesday, I pointed out the global economy is losing momentum and investors are increasingly paying attention.

Also add rising bond yields, ongoing positive momentum for corporate earnings and numerous macro uncertainties and what looks like a year of de-rating for global equities has, only four months into the process, turned into an increasingly complex development.

The first segment below, "Slowing Growth, Rising Yields, High PEs" should be read in conjunction with "Outlook 2018: A Complex Equities De-Rating" which is the core segment of the first part of Weekly Insights for the week starting on Monday, 23rd April 2018..

Slowing Growth, Rising Yields, High PEs

Slowing growth will separate the true achievers from the pretenders, but more attention goes out to rising bond yields - they weigh upon share price valuations, in particular for stocks trading on high Price-Earnings (PE) multiples, or so goes the general narrative. Not so, of course, because not every stock on a high PE multiple is equal.

Cue the latest research into this matter presented by the equity strategy team at Credit Suisse. In line with my own research, Credit Suisse strategists have made a distinction between the right kind of high PE/long duration stocks versus the wrong kind. As one can gather from the chart below, the difference between the two groups has led to very different experiences over the past two years.

As Credit Suisse explains, those High PE stocks that still outperformed in the local share market even with bond yields rising were not particularly leveraged, and they continued to enjoy EPS increases with both rising margins and revenues contributing. These companies, including a2 Milk ((A2M)), Aristocrat Leisure ((ALL)), Cochlear ((COH)) and Orora ((ORA)), also invested twice as much as their peers in the "wrong kind" group, while return on equity (ROE) was also higher.

In contrast, the wrong kind of high PE/long duration stock would have come with higher financial leverage, higher dividend payout ratios, weaker revenue growth and margin contraction. Think Bega Cheese ((BGA)), Domino's Pizza ((DMP)), Healthscope ((HSO)), Qube Holdings ((QUB)), Trade Me ((TME)), TPG Telecom ((TPM)), and numerous others.

So which High PE stocks are still looking good in the face of higher bond yields?

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