Finding Opportunities In A Heavily Polarised Market

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 | Jun 20 2018

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

-Finding Opportunities In A Heavily Polarised Market
-Growth Or Weakness?

-Conviction Calls
-Morgan Stanley's US Cycle Indicator
-Rudi On TV
-Rudi On Tour

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

Finding Opportunities In A Heavily Polarised Market

By Rudi Filapek-Vandyck, Editor FNArena

Strategists at UBS have been struggling for a while with the share market's extreme focus on growth stories, combined with a near equally as extreme aversion for uncertainty and damaged business models.

But can one continue to pour additional funds in stocks like Cochlear, WiseTech Global and Altium while continuing to avoid AMP, CommBank, and Aveo Group?

Strategist David Cassidy and associate analyst Jim Xu have tried to find a third alternative: "Growth At A Reasonable Price", otherwise known as GARP. The two have limited their scope to the ASX100 ex-mining & metals and ex-REITs.

After applying multiple filters, including relative Price-Earnings (PE) ratios versus a company's ten year history, they've come to the conclusion that today's best GARP stocks are Atlas Arteria (formerly known as Macquarie Atlas) ((ALX)), Janus Henderson ((JHX)), and Origin Energy ((ORG)).

Equally important is that their data analysis suggests certain stocks may not necessarily be as "cheap" as forward indicators suggest, such as QBE Insurance ((QBE)) and Star Entertainment ((SGR)), while a number of stocks have been identified that are still trading below historic PE multiples, including Magellan Financial Group ((MFG)), Boral ((BLD)), AGL Energy ((AGL)), Brambles ((BXB)), IOOF Holdings ((IFL)), and James Hardie ((JHX)).

Note the strategists: QBE Insurance looks very attractive on the basis of EPS growth projections, however the company has a consistent track record in recent years of disappointing the market, including the last twelve months. They also believe Macquarie Group ((MQG)) still looks attractive relative to growth potential, but there are equally risks for the outlook such as share market turmoil, sharply higher bond yields and a drop off in M&A.


Stockbroker Morgans is a lot more explicit in its struggles to find opportunities in today's share market. Morgans sees a local share market that is trading on elevated valuations while lacking earnings momentum. The stockbroker only sees 3% more upside potential for the remainder of calendar 2018 (target 6200).

With a market that is lacking conviction, also because sentiment has been curbed due to rising bond prices and geopolitical risks, Morgans has gone searching for mispriced opportunities because there are always stocks whose share prices have rallied too far, and others that have been ignored for too long.

Morgans sees "tactical opportunities" in QBE Insurance, CML Group ((CGR)) and Catapult Group ((CAT)). Stocks that have been oversold include Ramsay Health Care ((RHC)), Link Administration ((LNK)), Star Entertainment, and LiveHire ((LVH)).

The stockbroker also suggests investors should consider accumulating shares on more weakness in AMP ((AMP)), Pendal Group ((PDL)) -that's the former BT Investment- Magellan Financial, and in IPH ltd ((IPH)).

Also, June usually throws up some opportunities among oversold names as EOFY approaches and portfolios are rebalanced, reports the broker.

The three "tactical buys" are explained as follows:

-QBE represents a trading opportunity leading into the upcoming financial results, scheduled for 16th August. Assuming management finally manages to deliver a positive surprise, Morgans sees potential for a more sustainable re-rating that can last a number of months.

-CML Group remains one of Morgans' High Conviction Stocks and there remains potential for positive outperformance in the years ahead. Morgans sees a conservative, well-managed industrial stock that is likely cum upgrades.

-The market has already priced in heavy losses incurred by Catapult Group, but Morgans thinks positive newsflow and new contract wins leading into the upcoming financial result (scheduled for 23rd August) warrant a tactical buy proposition.


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