FYI | Jun 26 2018
Does sensible investing tell you should buy Telstra or not?
Last week I again made the case for the banks and dutifully the market re-loved our financial sector, with the CBA up 9.8% since its recent low of $67.22. This was a classic case of when it can be smart to invest in a quality company that has been caught up in a real beating by the market.
I've often talked about this strategy in this Report and I've had to really assess its reliability following some market mistreatment of my own SWTZ fund.
A subscriber/investor in the fund, Helen, sent me an email complaining about the fund's performance, which is her right to do. In late February 2017, we listed at $2.50, went as high as $2.63 but not long ago plumbed the depths of $2.42!
I knew the reason behind the fund's ordinary showing was the Royal Commission, which has bashed the banks and other financial stocks that you'd have to have in a rock solid-designed dividend growth fund.
And returns were also not helped by the quadruple T's — Telstra, Trump tariffs and Trump tweets.
Telstra is a big chunk of the overall market, and along with the banks, it is a huge dividend payer. But over the past few months, Telstra and the banks combined have been an enormous drag on the S&P/ASX 200 Index. Happily, as someone who created SWTZ to encourage those who were too long Telstra and banks, and who needed diversification with their dividend stocks, we managed to be up close to 5% in the year to March, while the Big 5 stocks — banks plus Telstra — were down double-digit numbers.
True to form, as the banks rebounded, SWTZ climbed to $2.60 on Friday, which at that point means for 16 months we're up about 10% before franking, which is OK considering what the Big 5 have put us through stock price-wise.
SWTZ was never designed to be a shoot-the-lights out product, but a classic core investment that could be added to, say, an ETF for the Index, such as the iShares Core S&P/ASX 200 ETF (IOZ), and then you could shoot for alpha with individual stocks, managed funds and so on.
A useful strategy
My going long beat-up stocks worked well when BHP headed down toward $14 in 2016. At the time I argued in this Report that if the company's share price made $20 within three years, $6 on $20 would be a 30% gain, or 10% per annum. Obviously, with the current share price of $33, the gain has surprised me, but it has been a nice surprise. So could Telstra be another BHP waiting to happen?
I suspect the TLS share price won't go as low as Citi's guess of $2.30 and maybe Goldman Sachs' $3.60 is too optimistic, but the consensus guess at $3.23 implies a 17.7% upside.
I know my colleague Paul Rickard's assessment post-strategy day was negative on the day itself, but he warmed a little to the new Andy Penn story after a day's reflection.
There are also some negatives about what a split of the company would mean, with some telco experts suggesting the infrastructure spin off company might have some challenges.
The AFR looked at this with the headline: Why Telstra's big split should raise red flag for investors.
And this is my point: Telstra is more complicated than BHP. It has so many moving parts and too many unknowns.