FYI | May 30 2018
By Peter Switzer, Switzer Super Report
Telstra and the banks are a buy if you are a long-term investor
Let’s imagine you don’t hold any Telstra shares and you are wondering if they are a buy right now. Or else, let’s assume you hold shares and have seen the share price spike and fall and you are wondering if it’s time to dollar cost average to drop your overall average holding price of the stock.
It’s a legitimate question with today’s opening price at $2.87 after a seeing $2.72 on May 22. Are the smarties starting to say “that’s a big enough correction”? Is the appeal of the dividend getting too much for yield-chasers, even if Telstra has to cut dividends again more than expected in a couple of years’ time, and Bill Shorten bans tax refunds for most SMSF retirees?
The same kind of questions are being asked in relation to the Big Four banks with the standout question being: “Is the Royal Commission fall-out for the banks’ share prices done and dusted?” Clearly, some smart players are nibbling right now, knowing that there could be further surprise bad news but just how bad will it be?
Has the market already overreacted and will the eventual, actual restrictions on banks post-Commission, a stronger economy, rising interest rates and time mean that the Big Four are a buying opportunity, for the long-term investor?
This raises the really important question about the advantages of being a long-term investor and buying quality companies at good prices, when the market, driven by short-term players, has overreacted.
We saw this with Blackmores when it dropped from $217 in December 2015 to $89 in August 2017. On my TV program, I suggested that at $98 it looked like a buy given that it had traded at $217 in the past. Of course, past prices are never a guide, but what had this premier vitamins company really done to see its share price slashed by more than halve?
The same applied to BHP at $14 and many more. The long-term investor has the advantage that he or she does not have to impress anyone but themselves with their returns and they don’t have to be assessed quarterly or yearly.
The same goes for CBA when I see it at $69 after being a $95 stock in March 2015 when economic growth was 2.7%, as it is now, I have to ask is it a 30% lesser company?
Brand damage has been terrible, but I wonder how many people have left their CBA home loans, credit cards, etc.? A few years back the NAB tried a big promotion of breaking up with the banks and few people shifted!
Right now, the consensus of analysts on FN Arena have CBA at $75.37, which is an 8% rise if they’re right. This bank reminds me of a champion racehorse, whose been out of form as of late, but who you suspect is close to finding his old form.
If I was a short-term player I’d be waiting for some signs that the Royal Commission revelations are pretty well over, but as a long-term player I can take more risk as I have more time to get upside.
Back to Telstra and it has copped a perfect storm of challenges from better competitors in Optus and Vodafone, which have been hopeless in the past. The NBN’s revenue end-play and TPG’s mobile assault with crazy low prices, all means there are a lot of rivals eating its lunch as it navigates the headwinds out there.
And it’s not helped that Telstra’s skipper, Andy Penn, does not look like a great company navigator. One day the penny will drop for Andy or he will be dropped by the board and Telstra will know it is big enough to blow away its rivals!
Maybe it has to get out of its “we pay a big dividend” mentality and leverage the best data base in Australia of potential customers and maybe it could use its huge revenue to become a serious hi-tech player.
I’ve always pondered why Next DC became such a huge cloud player when that should have been Telstra’s domain.
My colleague Paul Rickard is still a bit cautious. This is what the brokers are thinking:
With a three-year view do I think Telstra can be a $3.50 stocks again, particularly when the consensus of brokers think $3.39 in the not too distant future is on the cards.
If I make 65 cents on a $2.85 outlay, that’s a 22% gain and even if it takes three years, then that is around a 7% capital gain a year.
And with a dividend of about 7.7% before franking credits, that could be a 17% gain per year, so not too bad a bet.
Macquarie’s latest 12-month price target for TLS is $3.20 and that’s despite their team saying: “Neutral retained with revised price target of $3.20/sh. Competitive pressures across all key segments persist and pose a headwind to underlying earnings over the medium term.”
Buying quality companies and holding them has been the strategy of the Jensen Quality Fund in the USA, which has a great track record. It’s average five-year return is 13.9% and here how its fund is put together:
- 27 stocks versus an average of 98 for rival, similar funds
- “The main screen that the managers use when beginning their analysis and decision process is to include only companies that have achieved returns on equity of at least 15% for 10 straight years.” (Marketwatch.com.)
- Average return on equity over a long time is a crucial factor in stock selection.
For long-term investors, this should be a foundation strategy for your core holdings. Just occasionally you should shoot for some speculative gains and when it is a former quality company going through a rough patch with questionable leadership, they can be a reasonable bet.
Recall Qantas was a near $1 stock in January 2014 and then Alan Joyce got to work and look at it now — $6.30. I’d rather buy a quality company like the flying kangaroo at $1 than at $6.30.
Buy quality and wait is not a bad strategy for those who have time on their side.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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