Rudi's View | May 09 2018
In this week's Weekly Insights (published in two separate parts):
-Quality Is Not In A Bubble
-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]
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).
Stockbroker Morgans updated its selection of High Conviction Stocks last week and I hope it's not just my imagination but the selection seems to contain fewer names after each update. This shouldn't surprise, as local equities have been on a tear over the past weeks and anybody's conviction shrinks in the face of robust share price rallies.
Morgans' present selection consists of five ASX100 members plus two smaller cap names; Cleanaway Waste Management ((CWY)), Suncorp ((SUN)), BHP ((BHP)), Link Administration ((LNK)), and Westpac ((WBC)), plus CML Group ((CGR)) and PWR Holdings ((PWR)).
Interestingly, Morgans also calculated High PE stocks have outperformed the broader index by 13% per annum since April 2013. Note: that is five times 13%, on average, not 13% over the period. Strategists Andrew Tang and Tom Sartor acknowledge the years ahead might not be as accommodative for high growth stocks with interest rates on the rise, but they are quick to add "most of the outperformance and higher valuations of Growth vs Value can be explained by higher margins, earnings and ROE" [Return on Equity].
In other words: see Macquarie above. Morgans' strategists do highlight that, while backing genuine Growth companies still makes sense, it is nevertheless a time to be more selective now.
Strategists at Credit Suisse also updated their Top Picks in Australia, which saw the inclusion of Domain Holdings Australia ((DHG)), James Hardie ((JHX)), Suncorp ((SUN)) and Wesfarmers ((WES)), alongside the removal of Southern Cross Media ((SXL)) and of IDP Education ((IEL)).
Other names on the short list are: AGL Energy ((AGL)), Coca-Cola Amatil ((CCL)), CSL, Caltex Australia ((CTX)), IOOF Holdings ((IFL)), National Australia Bank ((NAB)), Qantas ((QAN)), and Speedcast International ((SDA)) – these are all positive positions ("long"). The sole name with a negative stance ("short") on the list is WiseTech Global ((WTC)).
Judging by WiseTech's share price performance over the week past, however, and with analysts at Citi upgrading to Buy and lifting their price target to $14.12, I think the odds have turned in favour of Credit Suisse eating humble pie at some stage. Credit Suisse analysts certainly won't be the only ones; Bell Potter analyst Chris Savage stuck with his Sell rating for WiseTech Global on May 2nd, refusing to lift his twelve month price target above $9.25. At least it's not the $7.10 suggested by Credit Suisse.
Analysts at Morgan Stanley have been making the extra effort in recent weeks, trying to convince their clientele data centres operator NextDC ((NXT)) is entering a new phase in its development, and there should be a whole lot more value for shareholders as the outside world comes to grips with how strong demand really is for data storage.
And as management at the company based in Sydney's Macquarie Park grabs the bull by the horns via more capacity, paid for by the recent cap raising, on top of the already expanding suite of world class assets.
No coincidence thus, Morgan Stanley has the highest price target in the FNArena universe when it comes to NextDC – at $9.20 that target suggests both investors and analysts elsewhere are still too cautious, with the share price still more than -27% below the targeted level.
Another remarkable new development was the announcement by UBS that a new analyst is now in charge of covering accountancy software provider Xero ((XRO)). The new guy definitely broke loose from the old shackles. The price target moved from a miserable NZ$26.50, well below the share price, to A$42.50 which was at that time (May 2) well above the share price.
As you probably guessed, the Xero share price has been closing the gap steadily ever since. Equally important, in my view, and in line with my comments about Macquarie, CSL, and the likes earlier, the new guy in charge at UBS does not believe Xero's share price crossing the $100 mark in less than five years from now is such an outrageous proposition.
In fact, he thinks this is do-able, not even accounting for everything in good news that can potentially pop up between now and then. The sentence that says it all from the May 2 UBS report:
"Xero is towards the end of a transition from a loss-making start-up to a self-funding business with a proven business model and significant structural growth opportunities".
By 2022, UBS projects, Xero shareholders should expect their first dividend payout (27c). The change in currency for UBS's price target is due to the fact Xero is abandoning its NZ-listing in favour of entering key share market indices in Australia.
Small cap specialists at Ord Minnett equally reviewed their Top and Bottom Picks in Australia. The new Top Pick is Webjet ((WEB)), of which the in-house analyst (no copying JP Morgan on this stock) has been a long term fan. Webjet has been in and out of investors favour over the year past because of numerous accountancy adjustments, which can be quite unsettling at times.
Ord Minnett, however, remains comfortable the company continues to grow "multiple times faster than the underlying markets in which it operates". Added scale in the B2B hotel segment should drive further earnings and margin growth.
The new Bottom Pick (negative view) is salmon producer Tassal Group ((TGR)) with the extra observation JP Morgan is one of very few who genuinely keeps a close eye on international and domestic dynamics affecting salmon producers in Australia. Ord Minnett white labels JP Morgan research while both IOOF Holdings, majority shareholder in Ord Minnett, and JP Morgan are reportedly in negotiations for the sale of JP Morgan equity in Ord Minnett.
Warmer waters and cost of production increases will be the main catalysts that will cause Tassal to disappoint investors, predict the analysts.
Finally, here is something that is worth contemplating, and for multiple reasons. Analysts at Credit Suisse have been a long time supporter of iSelect ((ISU)), no doubt thanks to the fact Credit Suisse was joint lead-manager of the float back in June 2013. On Monday they finally threw in the towel, having rated the stock Outperform alongside a price target of $1.95 when yet another profit warning was released to the stock exchange.
The new rating is Neutral and the new target price is $0.58. If this seems like overly harsh treatment, consider the share price was last trading at 53c. Yes, I know, it was above $2 in mid last year, but that's how it goes with "cheap" looking stocks that simply cannot get the sustainable turnaround happening.
Monday's research update by the clearly unsettled duo of Paul Buys and Andrew Dodds stands out because it questions whether iSelect can have a future going forward. Both analysts question whether sustainable profits are actually possible with what seems to be a less than dependable business model?
It is here and now that we are all being reminded that at the time of the IPO, iSelect's largest shareholder pre-float, Spectrum Equity Investors, sold the bulk of its equity holding without any forewarning or obvious justification within weeks after the bourse listing. That certainly didn't look "supportive" at the time, and iSelect never really recovered from the bad start as a publicly listed internet portal.
In hindsight, Spectrum Equity Investors selling so soon after the successful listing should have been enough of a warning that iSelect is not a steady and reliable fee generator in the way management kept selling the corporate story to investors and stockbroking analysts. In the lead up to the IPO, I had the pleasure to talk about iSelect with an experienced source from within the industry. His view was short, but clear: don't go near it.
Apart from all this, this company in particular has given investors plenty of reasons to be disappointed since listing. Those who are still on board, holding out for that elusive miracle, or simply because the stock looks "cheap", should blame themselves for not paying attention.
One of the conclusions I have drawn from the years past, is too often investors, and their advisors, pay too much attention to "price" and "valuation" ("it looks cheap"), and not enough to "quality" of management and the business model.
This is one of the fundamental reasons as to why All-Weather Stocks such as CSL, Cochlear ((COH)), REA Group, et cetera are trading on much higher Price-Earnings (PE) multiples than the broader market. These companies are still exposed to the global economy out there, but there is a very slim chance they will ever do an iSelect, no matter what the circumstances.
Last week I was again reminded about this as Ainsworth Game Technology ((AGI)) issued yet another serious profit warning, and as management at Gateway Lifestyle Group ((GTY)) yet again disappointed by admitting the company won't achieve guidance for the year. These stocks might look "cheap", but that in itself won't prevent them from missing expectations, or disappointing otherwise.
The notion there's a price for everything, and share prices for perennial disappointers are likely to fall too deeply, only has value for a certain type of investor, with a specific strategy. Hint: it does not include Buy and Hold for the long term.
Alert subscribers would have picked up a large number of the stocks mentioned above are also included on the dedicated All-Weather Stocks section of the FNArena website. This section contains my research into this specific theme, as well as regular updates for all companies included. This section is exclusive for paying subscribers at FNArena (6 and 12 months).
Middle Class Poverty? Blame The Banks
An interesting angle regarding consumers and the outlook for consumer budgets in Australia was put forward by Dick Bryan, emeritus professor of political economy at the University of Sydney, on the Opinion page of the Sydney Morning Herald, 27th April 2018.
On Bryan's assessment, Australian society is now encountering a fully new concept: middle class poverty. And he finds Australian banks are to blame for it.
The general idea, and I am now translating a few dozen paragraphs into one sentence, is that banks have systematically allowed Australian households to over-borrow for property post GFC and today these households are living hand-to-mouth in order to continue paying off the burdensome mortgage, while costs are rising and property prices are falling.
Share prices in discretionary retailers are rallying on the prospect of a reversal in consumer spending on the back of tax cuts offered by an anxious Turnbull government in Canberra. If Bryan's assessment is even remotely correct, how long do you think any stimulus period might last?
RBA rate hikes anyone?
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
-Friday, 11am, Skype-link to discuss broker calls
Rudi On Tour
-Presentations to ASA members and guests Gold Coast and Brisbane (2x), on 12 & 13 June
-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
(This story was written in two parts on Monday 7th May and on Wednesday 9th May respectively. The first part was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part two will be published on the website 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).
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