Rudi's View | Mar 08 2019
In this week's Weekly Insights (this is Part Two):
-Reporting Season: Reality Versus Sentiment
-Aussie Banks & Market Sentiment
-Have Your Say
-No Weekly Insights Next Week
-Rudi On TV
-Rudi On Tour
[Non-highlighted parts appeared in Part One on Thursday]
By Rudi Filapek-Vandyck, Editor FNArena
Ruralco is now in take-over mode as the board has agreed with the $4.40 per share cash offering from Canada's Nutrien, while Nanosonics is facing temporary interruption from the change in relationship with GE come July, while last month's interim report by GWA has raised more questions, making Wilsons a little more cautious.
Stocks that remain on the Conviction List are Arq Group ((ARQ)), Bravura Solutions ((BVS)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Noni B ((NBL)), Ausdrill ((ASL)), Mastermyne ((MYE)), and NRW Holdings ((NWH)).
Over at stockbroker Morgans, market strategists didn't think the reporting season was good enough to warrant the strong performance for share market indices. They are worried for a repeat of the August reporting season experience last year when, once fundamentals had been fully digested by investors, share price weakness starting kicking in once the season had concluded.
But Morgans wouldn't be a hard core stockbroker if at the same time it hadn't spotted a number of opportunities regardless.
New opportunities to emerge from reporting season, report the strategists, include offshore growth exponents, steady cashflow growers, companies enjoying industry tailwinds, those past their cycle lows and cheap stocks being overlooked by investors, for whatever reason.
The first group includes stocks such as Treasury Wine Estates ((TWE)), Corporate Travel ((CTD)), Lovisa Holdings ((LOV)) and Iress Market Technology ((IRE)), for the second group investors are advised to consider Wesfarmers ((WES)), Origin Energy ((ORG)) and Aventus Group ((AVN)), while candidates put forward for group number three include Oil Search ((OSH)), PWR Holdings ((PWH)), Data#3 ((DTL)) and Redhill Education ((RDH)).
Companies now well and truly past their cycle lows are, in Morgans' view, Telstra ((TLS)), QBE Insurance ((QBE)) and AP Eagers ((APE)) while the final selection generates names including CML Group ((CGR)), Bingo Industries ((BIN)), Noni B ((NBL)), Whitehaven Coal ((WHC)), and Orocobre ((ORE)).
Small cap specialists at Ord Minnett have updated their Key Picks in this segment post reporting and on top of the table sits Webjet ((WEB)) as the broker's Top Pick, while Tassal Group ((TGR)) remains the broker's Bottom Pick.
Analysts at Credit Suisse have updated their ranking order for stocks grouped together under the label of diversified financials. The updated ranking has Link Administration ((LNK)) as most preferred, followed by Magellan Financial Group ((MFG)), Computershare ((CPU)), Hub24 ((HUB)), Netwealth Group ((NWL)), IOOF Holdings ((IFL)), Perpetual ((PPT)), Challenger ((CGF)), Pendal Group ((PDL)), Platinum Asset Management ((PTM)), Janus Henderson ((JHG)), and the ASX ((ASX)) last.
Sector analysts at Morgan Stanley have analysed casino operators on both sides of the Tasman Sea, and the result is their conviction has grown that Star Entertainment ((SGR)) should be most preferred by investors seeking exposure to the sector, with Crown Resorts ((CWN)) second, and SkyCity Entertainment (SKC.NZ) third.
Aussie Banks & Market Sentiment
Readers who have been reading Weekly Insights for many years, and I know this covers the overwhelming majority of the database, might still remember how I used to closely watch share prices for the Big Four Majors in Australia in order to gauge market sentiment, and establish whether it had gone too far into the euphoria zone.
Once upon a time all it took was watching the gap close between share prices and consensus price targets, and start reducing risk when premia started appearing. But then the banks encountered their own idiosyncratic reversal of fortune and as with every other market indicator (Baltic dry index, copper, etc), this is when the indicator surpassed its use by date.
Banks have staged a noticeable come-back following the release of the Hayne report in Australia. Share prices have a more distinct solidity attached these days. Is it time to revisit the old indicator?
We won't know for certain until at some point further into the future, but if share prices for major banks in Australia can (again) be used as a gauge for excessive investor exuberance, then this market still has further upside to explore.
Allow me to explain.
On Tuesday, when I write this Weekly Insights, CommBank ((CBA)) shares are trading 4.6% above consensus target, which doesn't mean CBA shares are more "expensive" than its peers; it's simply a sign CommBank is still widely regarded as the prime banking stock in Australia, and the shares trade at a sector premium in response.
For those subscribers who use The Icarus Signal on the FNArena website. Always keep this in mind. When looking at the raw data, the right context is equally important. On my observation, with exception of relatively brief interruptions in time, CommBank shares always trade at a noticeable premium to local peers, and they perform best when times get tough, as well as over time.
This is counterintuitive for investors who are being told "valuation" is the secret to long term investment performance. It's not. Context is. Because context explains why the most "expensive" stock in the banking sector is also the best performer (I have extensive data and research to back up CommBank's superior performance over two decades, and more; no need to argue the point).
Returning to my share market indicator, CommBank is but one member of the Big Four and sector laggard (because it is widely seen as the prime candidate to cut its dividend payout at some stage) is National Australia Bank ((NAB)), whose shares are trading -8.4% below consensus target.
With one being the leader on a sector premium and the other the sector laggard trading at a discount to peers, maybe a better gauge for investor sentiment is to take guidance from the two Major Banks in the middle.
On the assumption the local banking indicator is back alive and well, I'd draw from this the conclusion this market is starting to "feel" expensive, but there can still be another leg higher until the level of oxygen in the air becomes a genuine problem.
The beauty about this is that if we add, say, another 3% upside to the ASX200 (which is what ANZ and Westpac are suggesting) this will take the index back to the highs from 2018, with the index peaking on August 30th last year at 3373.50 (intraday) and 3351.80 (day's close).
And this, I know from years of observing and analysing the local share market, this is how good indicators interact under the best of circumstances. History also shows there is no certainty in these calculations and suggestions, but I wouldn't be surprised if somehow this market finds enough optimism and oomph to try to reach for last year's high.
After that, I also would not be surprised if by then we all decided it's getting a bit crazy. Results season wasn't that good, and it doesn't look like it's getting better quickly.
Have Your Say
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No Weekly Insights Next Week
Due to commitment for an on-stage presentation on Tuesday next week, I won't be writing a Weekly Insights. Everything should be fine again from the following week onwards.
Rudi On Tour In 2019
-ASA Inner West chapter, Concord, Sydney, March 12
-ASA Sydney Investor Hour, March 21
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1
(This story was written on Tuesday 5th March 2019. Part One was published on the Tuesday in the form of an email to paying subscribers at FNArena, and again on Thursday as a story on the website. Part Two will be published as a story on the website on Friday).
(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.
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