Rudi's View | Sep 12 2018
This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL
In this week's Weekly Insights (published in two parts):
-Momentum Change: Don't Panic
-August Reporting Season: The Final Snippets
-Rudi On TV
-Rudi On Tour
Momentum Change: Don't Panic
By Rudi Filapek-Vandyck, Editor FNArena
This week's Weekly Insights arrives in your inbox later than usual as I have been traveling to Wollongong, south of Sydney, where I present to the local chapter of the Australian Shareholders Association (ASA) on Tuesday morning.
After five months of uninterrupted gains for the Australian share market, momentum has quickly made a U-turn and posted eight consecutive down-days leading into the ever treacherous September-October period.
You want a valid reason as to why? August had hardly finished a not overly exciting reporting season, or strategists at Goldman Sachs, Citi and UBS, among others, came out with quite bearish assessments to their clientele, pointing out valuations are high, underlying momentum is debatable at best and there are plenty of challenges ahead.
Time for a gold old fashioned correction.
On top of this, emerging market equities, as well as in Europe, look sick and have in many cases fallen by -20% or more. Trump is increasingly publicly outed as an erratic demagogue with the brain and temper of an eight year old, kept in check, to a certain degree, by America-loving adults waiting for better times to (ultimately) arrive.
Meanwhile it has dawned upon Wall Street the spat with Mexico, the EU, Canada and, foremost, China, is not some art-of-the-deal grandstanding in order to achieve a better outcome for ordinary Americans.
This is true nationalist policy aimed at making America Great Again, and America only. This is, and always has been, Trump's ultimate goal. What will happen is that Wall Street's view this trade conflict between Trump's USA and the rest of the world is ultimately going to be won by the fittest, the meanest, the largest and the strongest, which is the USA, is going to be put to a reality test.
At no point have I had a sense it's going to be that simple; and I still don't. So get set for a lot more upheaval, erratic moves, and volatility.
While this is a time to reflect upon the risks and the quality in our portfolios, I sincerely hope none of you lost your nerves and have been selling all and sundry. Falling share prices always look scary and depressing when we watch it unfold in the midst of a storm, but my personal rule is that I try to avoid selling when everybody is doing exactly that, unless I am convinced this is only the premature stage of a much bigger correction or bear market.
There is no doubting the mindset of the market is changing, and there are plenty of obvious challenges ahead. It does not mean we are about to repeat 2008 or even 2011. At some point investors will revisit the quality and resilience of All-Weather Performers like CSL ((CSL)), Bapcor ((BAP)), TechnologyOne ((TNE)), and others. I already spotted early signals the Australian share market is trying to find a base after being hit by waves of selling orders throughout the first week of September.
Note also how, despite what many among you might think, not every stock is sold down when the proverbial hits the fan. Sure, CSL copped a mild beating, and so did Altium ((ALU)) and Xero ((XRO)), among many others, but has anyone looked at share prices of Goodman Group ((GMG)) and ResMed ((RMD))?
It's good to have cash at hand though, if only because opportunities will present themselves. But it's not going to be an easy ride. That story came to an abrupt ending nine days ago.
August Reporting Season: The Final Snippets
The past five weeks I have previewed, assessed and analysed mid-year financial results released by corporate Australia. As part of my job as Editor, I also pay attention to what other experts might find and/or conclude (even though I may not necessarily agree with it).
Below are the final snippets from post-August reporting season analyses published by stockbroking analysts over the week past. Hopefully they add further useful insights to my writings from the past five weeks.
One of the sectors that surprised in August were the retailers. Despite the many headwinds, threats and doubts, many retailers posted better-than-expected financial results and were rewarded with rising share prices, note analysts at Citi.
However, under the bonnet not everything is necessarily as positive as one might conclude on the basis of these positive share price responses.
Citi analysts have observed how the cost of doing business (CODB) is rising across the sector, and they expect this to be a multi-year trend as retailers are shifting more volumes online and this new trend has arguably only just started.
The shift goes hand-in-hand with additional investments, hence why CODB is pushing up costs, and offsetting much of the achieved increases in sales. Citi thinks it's best to remain cautious, with the analysts predicting sales momentum looks poised to slow while the risk of discounting is ever present.
For the sector as a whole, the analysts observe Citi has presently more Sell ratings than Buys.The next potential catalyst on the horizon is the trading updates to be communicated at AGMs in October and November.
In a separate report released prior, Citi retail analysts updated their ranking order for smaller cap retailers on the ASX. Most preferred is footwear expert Accent Group ((AX1)), which has now pushed cheap bling expansionista Lovisa ((LOV)) to the number two spot, followed by (in order of preference) Baby Bunting ((BBN)), Super Retail ((SUL)), Specialty Fashion Group ((SFH)), Beacon Lighting ((BLX)), Premier Investments ((PMV)), Nick Scali ((NCK)), Greencross ((GXL)), Michael Hill ((MHJ)) and, lastly, Myer ((MYR)).
It seems that, whenever there is a ranking to be had, and Myer is involved, it is but a certainty who ranks last.
Retail specialists at UBS pretty much hold the same view. They have, on balance, reduced more estimates and talk about "better than feared" financial performances in most cases, while retaining an overall cautious sector approach.
Stand-out opportunities, in UBS's view, are represented by Flight Centre ((FLT)) for which the broker sees ongoing upside risks, and Costa Group ((CGC)) and Metcash ((MTS)) as market momentum for food is on the up. UBS also believes Coca-Cola Amatil ((CCL)) remains a Sell/Short.
An interesting note on the sector was published by Morgan Stanley with the analysts pointing at the ever broadening trend across consumer-oriented companies to include one-off items in their financial results.
This, of course, raises questions about quality of reporting and health of underlying operations, as well as how one-off are such items if they are becoming a frequent feature?
Morgan Stanley covers 16 consumer stocks in Australia, and only two -Woolworths ((WOW)) and JB Hi-Fi ((JBH))- did not include one-off items in August, report the analysts. They'd prefer companies with a cleaner sheet, but also admit investors thus far seem comfortable wth this broadening sector phenomenon.
Collectively, report the analysts, the 16 consumer stocks (effectively 14) reported a total of $2bn in one-off charges, equal to 25% of their combined normalised profits in FY18.
An equally noteworthy observation comes from analysts at Credit Suisse who point to a trend towards increasingly aggressive accounting by retailers as the pressure remains on bricks and mortar stores.
With the use of data and e-commerce on the rise across the sector, CS analysts anticipate software expenditure is likely to be an increasing feature of retailer reporting. The analysts note both Domino's Pizza ((DMP)) and Super Retail ((SUL)) already have tended to capitalise a large amount of software development expenditure relative to profit in recent years
Credit Suisse predicts bricks and mortar will continue to be under pressure, so watch this space.
Market strategists at Morgan Stanley observe how quickly Australian equities have traded in their regional outperformance starting in June for above average losses into September.
Morgan Stanley remains cautious towards banks and housing related exposures, but the analysts also note High PE names have fallen harder leading to relative outperformance for value-oriented strategies during the post-August share market sell-down.
However, the strategists remain of the view that investors hoping for a repeat of the late 2016 portfolio rotation whereby money kept flowing out of healthcare, technology
and other growth stocks in favour of financials and resources shall be truly disappointed.
Such a repeat is simply not on the cards, predict the strategists.
If there is to be any noticeable portfolio rotation, it will have a more defensive character, in the strategists' view. They point at desynchronising global momentum and intensifying emerging markets stress to support their assessment/prediction.
In an earlier report, Morgan Stanley strategists had expressed their view that valuations seemed high in Australia when compared to what companies actually managed to deliver in August. This concern of valuation was by no means limited to healthcare or High PE growth stocks.
Morgan Stanley found little upside left with the ASX200 above 6300 in late August.
Ord Minnett, which is simply copying the views and conclusions communicated by JP Morgan, is worried about a general de-rating for High PE stocks in Australia. This because share prices for stocks like Afterpay Touch ((APT)), Kogan ((KGN)) and WiseTech Global ((WTC)) have kept on rising during reporting season, and this does not appear to be fully supported by the financial results released.
Other stand-out characteristics are believed to be rising costs and increased capital expenditure forecasts. Ord Minnett/JP Morgan remains of the view that earnings estimates remain too high and will have to re-set at some point in the year ahead.
Hasan Tevfik, formerly at Credit Suisse but nowadays strategist at MST Marquee, retains a positive outlook for the local share market. When everything is said and done, Tevfik notes the average EPS growth for the ASX200 is 7.5% for the year ahead, which he sees as "reasonable".
This also implies share market return should be reasonable and positive, is his underlying thesis.
Tevfik has spotted many signals that point towards late cycle development, but this should not necessarily be taken as a bad omen. Late Cycle, says Tevfik, doesn't mean the next bear market or recession is about to announce itself.
This late cycle stage can still last for a couple of years longer. No need to get overly worried just yet.
On his assessment, the stand-out sector in August was mining & steel. It was the only sector that enjoyed net upgrades to earnings forecasts.
Stockbroker Morgans, on the other hand, has a different view. If forecasts for circa 7% growth fail to accelerate, Morgans thinks the share market is likely to feel gravity kicking in.
The stockbroker is in particular worried about High PE growth stocks that seem priced for perfection and thus might not be able to escape profit taking.
Morgans has been encouraged by Australia's blue chip large caps that might not have managed to outperform expectations in August, but their results in a general sense were "robust" and this is seen as a positive.
Another observation worth pointing out is that investors welcomed in-line results from share market laggards & value stocks. Value is not dead after all, concludes the broker, while adding it was a rather unpleasant reporting season for short sellers.
Elsewhere, healthcare specialists at Citi note the August reporting season has largely delivered what had been anticipated with offshore earners significantly outperforming peers with a domestic focus.
Citi analysts remain a big fan of the three sector leaders -CSL, Cochlear ((COH)) and ResMed ((RMD))- and the only thing that keeps the Buy ratings away are elevated share prices. Having said this, the analysts did increase price targets for all three. CSL's target has moved to $238 from $232, Cochlear's lifted to $220 from $198 and ResMed's new target is $15.50, up 50c from the prior one.
The fresh sector update also comes with a few changes in ratings. CSL has been downgraded to Hold from Buy. Ansell ((ANN) has been upgraded to Buy from Hold. Same for Primary Healthcare ((PRY)).
Fisher & Paykel Healthcare ((FPH)) is now the only Sell rated stock in the sector. Sigma Healthcare ((SIG)) continues to be rated Hold, but with the added High Risk. Ramsay Health Care ((RHC)) continues to be rated Buy with a price target of $62.
Healthcare analysts at Credit Suisse have nominated CSL and Mayne Pharma ((MYX)) as their two favourite healthcare stocks post August. Least preferred are Ramsay Health Care, Primary Healthcare, Sonic Healthcare ((SHL)) and Ansell.
Macquarie observes overall operational dynamics for mining engineers and contractors continues to improve, with the added observation that top line growth has announced itself but with pressure on margins, indicating competition is fierce and cost inflation real.
On the basis of historic precedents, Macquarie analysts are still willing to bet on margin increases over the next 2-3 years as overall activity for the sector is expected to improve.
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Friday, 11.15am, Skype-link to discuss broker calls
Rudi On Tour
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3
(This story was written on Monday 10th September 2018. It 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 shall be published 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: email@example.com or via the direct messaging system on the website).
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(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.)
For more info SHARE ANALYSIS: ALU - ALTIUM
For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED
For more info SHARE ANALYSIS: AX1 - ACCENT GROUP LIMITED
For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED
For more info SHARE ANALYSIS: BBN - BABY BUNTING GROUP LIMITED
For more info SHARE ANALYSIS: BLX - BEACON LIGHTING GROUP LIMITED
For more info SHARE ANALYSIS: CCL - COCA-COLA AMATIL LIMITED
For more info SHARE ANALYSIS: CGC - COSTA GROUP HOLDINGS LIMITED
For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED
For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED
For more info SHARE ANALYSIS: DOW - DOWNER EDI LIMITED
For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED
For more info SHARE ANALYSIS: FPH - FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED
For more info SHARE ANALYSIS: GMG - GOODMAN GROUP
For more info SHARE ANALYSIS: ING - INGHAMS GROUP LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: KGN - KOGAN.COM LIMITED
For more info SHARE ANALYSIS: LOV - LOVISA HOLDINGS LIMITED
For more info SHARE ANALYSIS: MHJ - MICHAEL HILL INTERNATIONAL LIMITED
For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED
For more info SHARE ANALYSIS: MTS - METCASH LIMITED
For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED
For more info SHARE ANALYSIS: MYX - MAYNE PHARMA GROUP LIMITED
For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED
For more info SHARE ANALYSIS: RMD - RESMED INC
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SIG - SIGMA HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED
For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED
For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED
For more info SHARE ANALYSIS: WOR - WORLEY LIMITED
For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED
For more info SHARE ANALYSIS: WTC - WISETECH GLOBAL LIMITED
For more info SHARE ANALYSIS: XRO - XERO LIMITED