Conviction Calls, And Middle Class Poverty

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 | May 09 2018

In this week's Weekly Insights (published in two separate parts):

-Quality Is Not In A Bubble
-Conviction Calls
-Middle Class Poverty? Blame The Banks

-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appear in part two on the website on Thursday]

Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Contrary to usual practice, the main story of this week's Weekly Insights has been relegated to Part Two, which shall be published on the website on Thursday morning (Make sure you don't miss it).

On Monday, CLSA banking analyst Brian Johnson experienced the sweet taste of having stuck one's neck out for a particular investment opportunity, and then witnessing how the Conviction Call, amidst many critics and doubters, turns into a gift that simply keeps on giving.

Johnson is a long time groupie of the Millionaires Factory at Macquarie Group ((MQG)). When the share price approached the $100 level the first time around, pre-GFC, Johnson was employed by JP Morgan at the time and remained steadfast in his conviction the price should be well above that level. Alas, that call got buried inside the turmoil that followed globally and which left Macquarie soul-searching for a new business model.

Fast forward to 2018 and this time around the share price merely sighed when the $100 price tag came into focus, and then simply rallied past it. Friday's results release revealed the usual scenario of investors and (some) analysts getting a little bit antsy as the share price kept on trending upwards, but once the numbers were out, everybody once again was left in awe.

In simplistic terms, FNArena's consensus price target (which does not include CLSA) further increased to $104.50 from $101.20 prior to the release. But, of course, the share price is already beyond that... Maybe investors can take guidance from the three brokers that have a price target still a few percentages above the current share price?

CLSA analyst Brian Johnson has now raised his price target to $130 from $117.

Or maybe the real message here is that when it comes to high quality performers, which Macquarie undoubtedly is, investors shouldn't fret so much about short term, minor issues like "how much has the share price gone up?" and "what exactly is the PE, and how high the sector premium?"

If the past four to five years have provided one clear message it is that quality trumps price and value, and investors who do not understand the message are missing out badly. What goes for Macquarie obviously also applies to high quality, high PE stocks like CSL ((CSL)), REA Group ((REA)), and others.

To date I have been reluctant to add Macquarie to my selective list of All-Weather Performers in the Australian share market. I still haven't. But for those who have access to the section dedicated to my research on the website (that would be: only paying subscribers), you'll find Macquarie under the heading of Prime Growth Stories, alongside the likes of a2 Milk ((A2M)) and Aristocrat Leisure ((ALL)).


Elsewhere, Citi analysts provided the fuel for shares in shoe-retailer Accent Group ((AX1)), formerly known as RCG Corp, to recoup some of recent losses by bumping up their valuation/price target for the small retailer by 22% to $1.40. Investors might be familiar with this company through well-known brands including The Athlete's Foot, Timberland, Vans, Skechers, and Saucony.

After sinking as low as 67c in May last year, shares in the retailer have gone on an extended run (pun intended) and are now approaching $1.30, also helped by the talk about tax cuts in the upcoming federal budget. Looking at the sector from a top down angle, however, I remain of the view discretionary retailers are a minefield for investors, and will be for years to follow.

For every single Champion stock that comes out the other end a winner, there will probably be four or five disaster stories that have only started to crumble just yet. Not the kind of risk I like to include in my strategy or portfolio.

Accent Group remains Citi's top choice among small cap retailers in Australia (and has been for a while).


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