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Rudi’s View: Banks, Bapcor, And Woolworths

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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 | Jun 21 2019

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

-A Confirmation From Aussie Banks
-What's There To Worry?
-Conviction Calls
-Morphic Explains Shorts For CCL, Woolies

-Rudi On Tour
-Rudi Talks

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

By Rudi Filapek-Vandyck, Editor FNArena

Conviction Calls

Differences in views and opinions are what maketh the share market, or so the adage goes and post UK/Brexit-inspired profit warning this has also become apparent in views about Link Administration ((LNK)).

Whereas the Morningstar Model Income Equity Portfolio has now used some of its excess cash to add shares in Link Administration on the expectation that risks and bad news have been priced in and there should be improvement on the horizon, portfolio managers at stockbroker Morgans beg to differ; they sold out of the stock because risks are considered too high, and the outlook may just disappoint a while longer.

In Australia, Morningstar suggests industry super funds gaining market share will play to Link's benefit, but Morgans sees earnings pressure continuing because of regulatory changes to super.

Morgans' Growth Model Portfolio did top up its holding in OZ Minerals ((OZL)) seeing the sizable share price fall since early April as a buying opportunity. Over at Wilsons Advisory and Stockbroking, yet another profit warning from The Star Entertainment Group ((SGR)) proved one too many.

Wilsons Australian Equities (Income) fund has sold out of Star Entertainment, ignoring the apparent value on offer post share price shellacking, instead focusing on "increased uncertainty around the earnings base of the business".

At the same time, holdings in ANZ Bank ((ANZ)) and CommBank ((CBA)) have been increased to push the portfolio's exposure to Australian banks to Marketweight, while keeping the financials sector as a whole on Overweight.

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Returning to Morningstar, its Best Stock Ideas recently added Bapcor ((BAP)) and removed oOh!media ((OML)).

The other eight stocks remaining in the selective list are Domino's Pizza ((DMP)), Iluka Resources ((ILU)), Link Administration (see also above), Nufarm ((NUF)), Pact Group Holdings ((PGH)), Telstra ((TLS)), Westpac ((WBC)), and Woodside Petroleum ((WPL)).

The FNArena Vested Equities All-Weather Model Portfolio owns shares in both Link Administration and Bapcor.

Morphic Explains Shorts For CCL, Woolies

It's a burgeoning industry, still, albeit incredibly fast growing and with increasing impact. Already there is a plethora in approaches, strategies and styles available for investors who like to see their money invested in non-traditional manner.

One of the better known domestic managers using responsible investment filters before selecting and researching stocks is Morphic Asset Management, soon to be acquired by Ellerston Capital. Morphic also provided the rough overview in styles below.

What makes Morphic unique in its style of responsible investing is that it can not own any companies that fail at the first hurdle of stringent ESG filters applied, but it can go short such companies. The fund managers explained during the recent investor tour their reasons for being short Woolworths ((WOW)) and Coca-Cola Amatil ((CCL)).

When funds managers like Morphic go short on a stock they are trying to benefit from a weaker share price at some point into the future.

While taking a short position on an ASX-listed stocks is not at every investor's disposal (I have never gone short on any stock myself), I suspect either or both stocks might be included in many portfolios, which is why investors may want to take notice.

Supermarket owner and liquor distributor Woolworths fails the ESG filter dismally at Morphic. Not only is Woolworths one of the largest owners of pokies in Australia, through its partial ownership of pubs and clubs, but the group is also one of the largest sellers of alcohol in the country given it owns and operates BWS and Dan Murphy's.

Morphic's negative view is above all inspired by a business model that is increasingly under pressure, while the stock's valuation is approaching the heady highs from pre-GFC days.

More German supermarkets entering the Australian landscape in 2020 cannot be a good thing for sales and margins, so goes the thinking, while changing shopping patterns are keeping the pressure on Big W and, increasingly, the liquor chains.

Woolworths' growth next year is predominantly based upon an improving picture at Big W, but Morphic clearly doesn't think of it as longer term sustainable.

Bottom line: Woolworths' EPS is today roughly equal to where it was ten years ago, but its valuation is again riding a peak in investor sentiment. Morphic thinks the future most likely involves a weaker share price, and is therefore positioned short.

Shares in Woolworths entered calendar 2019 around $29 and surged to near $35 in May, after which they settled around $32.

The negative view on Coca-Cola Amatil is even more intriguing, with Morphic identifying ESG negatives in fizzy drinks, alcohol, plastic waste and sugar.

Valuation is again considered too rich in light of the ongoing operational challenges and the long term decline for key products in key markets for the company.

Most importantly, the managers at Morphic are suspicious of the company's real growth rates in key countries New Zealand and Indonesia. They believe the company has failed to address their concerns when questions had been asked about a change in geographic reporting.

Coca-Cola Amatil now reports on the basis that New Zealand and Fiji combined are one region, while Indonesia and Papua New Guinea are also grouped together into one reporting region. It is Morphic's suspicion this is because Fiji and PNG are fast growing still, while New Zealand and Indonesia are likely not, or possibly not much growing at all.

Here the suspicion is that the chosen regional groups are designed to mask the lack of underlying growth in two key regions for the company.

As far as Morphic is concerned, this should ring alarm bells across the wider investment community (which it clearly is not to date judging from the share price), hence why the managers are positioned short Coca-Cola Amatil.

Investors should note Morphic has been short Coca-Cola Amatil shares in the past, and with rather mixed results.

Coca-Cola Amatil shares have rallied strongly in 2019 after bottoming around $8 in the first quarter, surpassing $10 in June.

Rudi Talks

Audio interview on Wednesday about what is happening in the share market:

https://www.youtube.com/watch?v=p1jk7peGbns&feature=youtu.be

On Monday I participated in Episode 5 of Switzer TV (I appear 8 minutes in for about 10 minutes):

https://www.youtube.com/watch?v=4VHWkPpSlc0

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 17-18th June 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. This is Part two).

(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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