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Rudi’s View: Macquarie, Aristocrat Leisure And Emeco

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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 | Oct 18 2018

In this week's Weekly Insights (this is Part Two):

Out With The Garbage
Change: Rudi On TV
-Zimbabwe on Top Of The World
-Conviction Calls
-UBS On Inflation

-Rudi Talks
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Zimbabwe On Top Of The World

Some things a sane mind simply cannot make up, no matter what the context.

With equity markets globally in turmoil, and the Australian share market giving up all the gains that had been booked over the first nine months of calendar 2009, the stock exchange in Harare, Zimbabwe was celebrating an all-time record high.

Make no mistake, the ruling elite is still enriching itself while ruining further what once was a thriving exporter in the south of Africa.

Hyperinflation is no more, but economic decay remains and nobody believes the official inflation estimate currently printing 4.8%.

Businesses are being affected by acute shortages in foreign currency. Investors are treating equities as a preservation of wealth. In local currency, the Zimbabwean Stock Exchange has appreciated some 18% this year, which makes it one of the best performers in the world.

Conviction Calls

First up, a warning from me, again, to all investors out there: do not get sucked into this whole theme of "value" is now going to outperform "growth" by buying into (or holding onto) the wrong stocks.

On Monday, I referred to Domain Holdings ((DHG)) and Fairfax Media ((FXJ)) issuing a profit warning. On Wednesday, as I am writing Part Two of this week's Weekly Insights, shares in The Reject Shop ((TRS)) are down by -34% after yet another profit warning from an under pressure business model that has a long legacy for surprising into the negative.

These examples should remove two misconceptions that have long survived inside the financial industry: the first is that a lower share price takes care of all the risks, which clearly is not the case (not even after this month's heavy sell-off) and the second one is that High PE stocks represent higher risk because, you know, watch what'll happen when they disappoint.

The irony here is, of course, that if you pick the high quality companies among the High PEs you'll seldom encounter a nasty surprise such as delivered by Domain and The Reject Shop. Whereas The Reject Shop shares had fallen from $8 to $6 already, and then further to $4.50 as the share market met broad based selling.

By that stage the shares were trading on PE ratios well below market average and an implied dividend yield well above the banks and the market average. And as we know now, the shares still had another -34% downside in them on the back of today's profit warning.

Fact remains, most stocks in the "value" basket are carrying a lot of operational risks and uncertainties, as old economy stalwarts are struggling to cope with a changing market place, increased competition, technological advances and government policies (or the lack thereof).

Many of the quality growth companies had become too popular and the current share market correction is taking care of this. However, it remains yet to be seen if and for how long these quality companies, providing robust growth outlooks, will remain out of favour.

In the meantime: don't get stuck with value traps such as The Reject Shop which, coincidentally, would also have been a yield trap for those investors desperately seeking income and lured in by what must have looked like a very attractive yield.

(See also Part One published on the website on Wednesday)

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Shares in Aristocrat Leisure ((ALL)) have put in a solid rally this week and that should not surprise. Amidst ongoing positive feedback via industry reports, sector data, conferences and stockbroking research, the shares kept sliding from a high around $33 in July to near $28 on Monday.

Enough reasons for experts to step into the limelight and declare the shares are nothing but a buying opportunity. Cue Mathan Somasundaram, market portfolio strategist at Blue Ocean Equities, alongside analysts at Deutsche Bank, UBS, Wilsons, Baillieu Holst and CLSA (I might have forgotten a few) who all declared Aristocrat shares are a screaming buy at these beaten down levels.

Baillieu Holst upgraded to Buy on Tuesday, declaring the -17% fall from the record closing high of $32.98 "has come to be a rare opportunity in recent years to buy the stock on material weakness". Baillieu Holst upped the new price target to $33.15 from $31 previously. Among the positives cited in support of the move was favourable feedback from last week's global gaming expo in the USA; G2E.

One day earlier, in the midst of the severe sell-down of Australian equities, Wilsons declared it is time to step up and declare Aristocrat shares an unmitigated buying opportunity. Wilsons has a fair value assessment around $33. It's price target sits at $32.95. Over at CLSA the analysts have a price target of $41.26.

I do know Aristocrat Leisure, due to its link with pokie machines in Australia, is not everybody's taste. Just saying…

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CLSA (senior) banking analyst Brian Johnson has been a long time groupie of the Millionaires Factory nowadays operating as Macquarie Group ((MQG)) and amidst October turmoil he has shown no intention to change his view. Quite to the opposite, when selling orders started hitting Australia, and Macquarie Group shares too started sliding ever further away from the $130 all-time high, Johnson issued a special missive to the database of clients: buy the dips.

Admittedly, said Johnson, this is a high beta stock, and one cannot but point out Macquarie is, essentially, "an asset recycler leveraged to rising asset values in an environment where bond rates are also rising". But this is no time to bail, declared he.

Amongst the numerous reasons pointed out, Johnson points out conservative accounting virtually guarantees tailwinds to persist for a long while yet. Unless impairments would rise, market consensus forecasts are most likely to be proven too low yet again for the years ahead.

The company is also a beneficiary of market volatility, a weaker AUD and US tax cuts. Plus it carries surplus Common Equity Tier 1 (CET1) capital in combination with regulatory approval for a $1bn buyback, while generating $750m in suplus CET1 each year.

Bell Potter banking analysts TS Lim and Tim Piper, on Monday, equally used a general preview to the upcoming banks reporting season to reiterate their sector preference remains with Macquarie Group. This despite Bell Potter rating three of the Big Four as Buy (Westpac ((WBC)) being the exception) while also viewing Suncorp ((SUN)) shares worthy of the highest rating possible.

Bell Potter has a $132.50 price target for Macquarie Group, declaring "the recent share price decline provides a great opportunity to invest in this “Cash and Growth” story".

In case you wondered, and I have no doubt many among you do, here's Bell Potter's view on the Big Four: "ANZ ((ANZ)) and NAB ((NAB)) appear to be most resilient to medium term Royal Commission headwinds while CBA ((CBA)) has, in our view, reached an inflexion point that now justifies an upgrade to a trading Buy".

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One of the yield/value traps that had many an investor bamboozled in 2018, G8 Education ((GEM)), has proven quite resistant this month. I guess there's only so far a share price can fall and Australia's number one owner/operator of childcare centres is still paying dividends, despite persistent industry headwinds.

Those dividends were cut in FY17, and the same scenario applies to FY18 (financial year to December). Most analysts covering the stock are projecting dividend increases again from next year onwards. We'll see. In the meantime, analysts at Wilsons are not budging from their view the shares are not worth more than $2.03 (around where the shares are trading) and their message to long suffering shareholders is as clear as pie: you will have to be patient.

Inside the FNArena universe of stockbrokers covering this stock, Wilsons sits near the bottom in terms of valuation, rating G8 Education no more than a firm Hold. If you have access to Stock Analysis on the FNArena website, you'll find the likes of Morgans, UBS and Ord Minnett are still willing to stick with a more positive view.

But hey, take it from me, there's nothing as easy as adopting a positive view after the share price has been walloped. Investors do it every day in the share market. It didn't work so well with Slater & Gordon ((SGH)), iSentia ((ISD)) or The Reject Shop, just to name a few.

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One sector that has quite a number of analysts excited are the contractors and equipment providers to miners and energy producers. Overall activity is forecast to pick up for the coming 2-3 years or so, though this hasn't helped RCR Tomlinson ((RCR)) of late. And who could forget Forge Group?

Nevertheless, Goldman Sachs this week initiated coverage on Emeco Holdings ((EHL)) with a Buy rating and a price target of 47c, suggesting significant upside given the share price on Wednesday is trading around 38c, no doubt already on the up because of Goldman's positive expectation.

Emeco, which is Australia's largest mining equipment rental firm, is making a come-back after having been in the dog house from 2014 until mid-2017. If Goldman Sachs' projections prove correct, CAGR for the next three years is 27%. Further adding to the analysts' confidence is the forecast Emeco will announce the return of a dividend for shareholders in the second half of FY20.

****

Investors should note analysts have equally stepped up support for shares in Link Administration ((LNK)) this week past, but we already published a story about this on Wednesday:

https://www.fnarena.com/index.php/2018/10/17/treasure-chest-investors-missing-link/

For full disclosure: All three of Aristocrat Leisure, Macquarie Group and Link Administration are proudly held in the FNArena/Vested Equities All-Weather Model Portfolio (see also further below).

Investors can read more about the Portfolio here:

https://www.fnarena.com/index.php/2018/10/04/rudis-view-all-weather-model-portfolio/

UBS On Inflation

Prepare for an inflation shock by month's end.

No, not what you are thinking right now. Economists at UBS have conducted a deep dive into what is occurring underneath underlying consumer prices inflation in Australia and their conclusion is the quarterly update locally, scheduled for October 31, is most likely to surprise to the downside.

Mind you, quarterly CPI readings have mostly underwhelmed over the past two years, so we shouldn't be shocked by this. But there is a higher oil price, and a weaker Aussie, plus a number of economists continues to hammer home that wages inflation, it is coming.

If UBS's calculations will be vindicated by month's end, the third quarter is about to generate one of the lowest inflation readings on record. Yes, you read that correctly. One of the lowest, ever.

UBS thinks a reweighting of the CPI basket, plus price deflation for child care, education and autos will more than just compensate for dearer fuel and tobacco tax hikes. On UBS's current estimate, Q3 underlying CPI will print 0.3% (versus 0.4% the previous quarter) to pull down the year-on-year number to 1.7%.

Combine this forecast with a bearish view on the housing market and it is no surprise UBS thinks there will be no action from the RBA until 2020.

Rudi Talks

Audio interview from last week in which I advocate investors raise more cash and keep a list of stocks they do not own, but would like to:

http://boardroom.media/broadcast/?eid=5bbd2c4b7410a23524811618

Rudi On Tour

-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 15th October 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 was written on Wednesday and 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: info@fnarena.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.) 

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ALL ANZ CBA DHG EHL FXJ GEM ISD LNK MQG NAB RCR SGH SUN TRS WBC