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Rudi’s View: Afterpay Touch, Nearmap, And a2 Milk

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 | Jul 12 2019

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

This Too Shall Pass
-The Other Story About Small Caps
-Afraid About Growth: Nearmap
-Who Invests In Negative Yielding Bonds?
-Conviction Calls
-Rudi In The Australian
-Rudi On Tour

The Other Story About Small Caps

By Rudi Filapek-Vandyck, Editor FNArena

This truly deserves a dedicated story, based upon more detailed in-depth research, but for now I have to restrict myself to merely pointing out one of my pet observations from the past 17 years: small cap investments can generate large, above average returns, but on average, small caps do not outperform in Australia, despite the fact this is convincingly the case in overseas markets like the USA.

On my non-researched hunches, factors in play locally are smaller average company size (what is mid-cap in Australia is merely small cap in the USA), more mining companies and explorers, different dynamics as Australia is a much smaller economy, and, equally important, a much smaller share market with limited liquidity, in particular during times of economic stress. I have a suspicion the big overweight in local indices towards large banks and resources also plays a role.

Whatever the case, investors shouldn't automatically assume there are no outsized gains to be achieved from large cap names in Australia, with the smaller end of the share market the automatic magnet for investors looking for large upside on offer. The statistics, however, tell a different story.

Below is a recent chart I picked up from Colonial First State. I'd wager the big gap in performance between the Top100 in Australia and the tiddly piddly small cap stocks grouped together in the Small Ordinaries has as much to do with CSL, Brambles, REA Group, the banks, iron ore and Telstra as it has to do with the unusually strong performance for Goodman Group and Transurban and the likes, plus the fact that the investment sweet spot in Australia is situated in between positions 51 and 100 of the ASX200.

For those not familiar with the composition and rankings of the ASX200, the aforementioned sweet spot includes names such as Xero, Fisher & Paykel Healthcare, Magellan Financial, WiseTech Global, ResMed, Afterpay Touch, IDP Education, and many other fast growing upcomers. These have been the little engine that could for the Australian share market for a long time now.

In the USA, each of these names would be part of the small caps index. In Australia, all are part of the ASX100, which is outside the typical hunting ground for small cap funds managers.

The second chart, from Ord Minnett, provides more detail into how small caps in Australia performed throughout fiscal 2019.

Afraid About Growth: Nearmap

Australian investors are not used to dealing with structural growth companies. Hence why the likes of CSL and REA Group do not feature prominently in most investment portfolios (while they most definitely should).

To make matters worse, the general idea that buying cheap looking stocks -otherwise referred to as "value investing"- is the only viable methodology for long term investors, instills the fear of God into many an investor when confronted with rapidly growing success stories including a2 Milk, Pro Medicus, and Afterpay Touch.

Assisted by hopelessly misguided narratives such as "stocks cannot continue to trade above a Price Earnings Ratio (PE) of 15x", the usual response is to criticise from the sidelines and await for the share price to tumble. I have had quite the exchanges via Twitter over the years past!

And, of course, while it is correct to point out the disasters that awaited shareholders in, say, BWX and Speedcast International, it is equally correct to point out that large gains have been made by staying on the shareholders register of the stocks I mentioned earlier, plus many more!

It goes without saying, ever since my own research into All-Weather Performers and in particular since the publication of my book "Change. Investing in a Low Growth World" (2015), I have been genuinely surprised by how deeply engrained the belief about buying cheap looking stocks is as the only sensible investment strategy, despite the accumulating evidence that most cheaply priced stocks are not participating in the bull market for very good reasons.

Yes, I know, the generalisation is over the top as some cheap looking stocks successfully turn around and become highly profitable investments for multiple years after. But here's a personal observation I believe can withstand the test of closer scrutiny: I am convinced more money gets lost every year in the Australian share market through investors trying to pick bottoms, turnarounds and cheap looking stocks in general, than on the other side of the ledger where growth stories occasionally experience a hiccup.

The decade-long outperformance of Growth over Value (in the US. In Australia the story is only six-seven years old) is not pure coincidence, and neither do I believe it is simply cyclical as some experts have been arguing. I believe it is as much the result of a thoroughly changing world as is president Trump inside the White House.

And, yes, I agree it is most likely that Growth stocks will ultimately end up being priced too expensively, potentially into stratospheric valuations, but good luck with trying to time that story. Meanwhile, many among today's laggards will simply remain that, laggards. They'll never catch up, and if occasionally they do, it is highly unlikely to last.

Which takes me to a recent conversation I had after my presentation to members and guests of the Australian Investors Association (AIA) in Adelaide. As has become pretty standard, my presentations contain lots of charts and statements like you just have been reading in prior paragraphs.

With part of the crowd gathering around me, firing away questions about how much growth can this or that company possibly still have up its sleeve and why another company cannot get its share price moving away from the bottom, one statement was thrown at me about Nearmap ((NEA)) by someone who said he had a long career inside the industry.

Here is where things get genuinely interesting. Why do you think the share price is in a bubble, I responded, other than that the share price has doubled this year, which is no evidence at all, believe it or not?

The answer came swiftly: the company is trying to replicate its success in the USA, but over there it has to deal with much larger and better equipped competitors. It's only a matter of time before investors in Australia come to realise this!

My response: the fault in your thinking is that Nearmap needs to take the whole of the American market. It doesn't. Do you know what A2 Milk's market share in China is? It's less than 3%. Have you looked at what achieving 3% in China has done to the A2 Milk share price?

Currently analysts are excited about A2 Milk's growth prospects in North America. A recent report by UBS projected A2 Milk's US market share to grow to 2% in the years to come. That's even less than the 3% in China. Watch what happens if Nearmap successfully builds out a network of loyal customers in America. You won't recognise the share price, irrespective of the gains already booked this year.

And this, as they say, is the crux of investing in small cap growth stories. They start from nothing, so everything looks promising and exciting in the early stages, but success does not come only by wrapping up the whole wide world and growing into the next Facebook or Alphabet or Amazon. Accountancy software provider Xero will never be the sole standard for its industry in every single country. It cannot even achieve that status here in Australia. The same principle applies to Altium, and to Nanosonics, and to Appen, and to WiseTech Global, and a number of others.

The Australian share market has become the home ground for some extremely exciting growth stories, with lots of potential left for the next decade, but the main danger is many an investor will not benefit because he/she is afraid of PEs above 15x, the absence of a high yield, or this idea that Australian companies simply can never achieve success for long when venturing overseas.

The latter might be true upon reflection about how Foster's had to withdraw from China, how QBE Insurance lost billions overseas, while nobody has forgotten about National Australia Bank, or Telstra, or Wesfarmers.

The other side of this story is that high quality, well managed companies starting life in Australia have been extremely successful overseas for many decades. From News Corp, to Computershare, to Westfield, ResMed, Cochlear, and the two resources giants, BHP Group and Rio Tinto.

Carried by the increasing digitisation of the global economy, local growth stories such as Nanosonics, Appen and WiseTech Global are ready to potentially add the next chapter. And yes, Nearmap is part of the burgeoning new generation of Australian businesses as well.

Is ultimate success guaranteed? Of course not! But neither is failure. And that is the long and the short of this story.

Earlier in the year I launched the CSL Challenge (click here) -most likely the most successful growth story in the Australian share market of our generation. Apart from finally pulling investors on board of this tremendous success story, I remain of the view that observing, studying and learning from CSL will prove an invaluable asset for most investors.

If anything, it'll help understand what makes an exceptional company, with the ability to apply such insights when selecting emerging growth stories, plus it also cures the fear of owning shares trading on a PE higher than 15x. Honestly, I cannot even remember the last time CSL traded on a PE of 15X or lower.

As anyone can see from the historic price chart for the CSL share price, that hasn't stopped this large cap champion from pampering loyal shareholders with plenty of above average returns over a very long horizon. It is never too late to join the CSL Challenge, or to start researching local growth stories.

It is my intention to update the various lists that make up the All-Weather Performers section on the website, as well as write up the next update for the CSL Challenge. Thus far this year time has run ahead of my intentions, and with the August reporting season looming, as well as the annual conference of the Australian Investors Association, both updates are most likely to occur in September.

The next update will see Nearmap included in the selection of Emerging New Business Models. The stock has recently been added to the All-Weather Model Portfolio.

To read up on and join the CSL Challenge:

Conviction Calls

Ord Minnett has removed Afterpay Touch ((APT)) from its Best Stock Ideas. The reason? An increase in competitive threat now that Visa has announced its intention to also move into the buy-now, pay-later arena. The analysts note Afterpay Touch had become a Conviction Buy in January 2018 and generated a return of no less than 217% over the period.

Ord Minnett's list of conviction calls consists of four sub categories. Below are the remaining names for each of the four sub-divisions:

Core Blue Chip:
-ANZ Bank ((ANZ))
-APA Group ((APA))
-CSL ((CSL))
-GPT Group ((GPT))
-Oil Search ((OSH))
-Rio Tinto ((RIO))
-Sonic Healthcare ((SHL))

-AusNet ((AST))
-Charter Hall Long WALE REIT ((CLW))
-Event Hospitality and Entertainment ((EVT))
-National Australia Bank ((NAB))
-Perpetual ((PPT))

-Ansell ((ANN))
-Aristocrat Leisure ((ALL))
-Boral ((BLD))
-Charter Hall ((CHC))
-QBE Insurance ((QBE))
-ResMed ((RMD))
-WorleyParsons ((WOR))

Small Caps
-Alliance Aviation Services ((AQZ))
-Austal ((ASB))
-Clover ((CLV))
-Hub24 ((HUB))
-Integral Diagnostics ((IDX))
-Pacific Current Group ((PAC))
-Service Stream ((SSM))
-Viva Energy REIT ((VVR))

Also, the Equity Strategy Portfolio at Macquarie has traded in Treasury Wine Estates ((TWE)) for A2 Milk ((A2M)) while also preferring defensive exposures that are not so much reliant upon bond yields continuing to move lower.

Macquarie thinks typical bond proxies have done more than their dough in recent months and likely to underperform from here onwards.


Portfolio managers at Baillieu have been making a number of adjustments post mid-year re-assessments. This has led to buying more shares in Milton Corp ((MLT)) and selling out of Monadelphous ((MND)) and Vocus Group ((VOC)), while reducing exposure to Macquarie Group ((MQG)).

Their peers at stockbroker Morgans have been topping up on Oil Search ((OSH)) and on Telstra ((TLS)), while reducing exposure to Aristocrat Leisure ((ALL)) and People Infrastructure ((PPE)).

Rudi In The Australian

My recent story on Australian gold producers got picked up by The Australian newspaper to lead the Wealth section on July 2nd.

Unfortunately, the times when I was able to include a direct link to my story are well and truly past – News Ltd likes to keep its content behind a stringent pay wall.

For those who missed the story, there is always the opportunity to still read the story via the FNArena website:

Rudi Talks

Audio interview on Wednesday about how much central bankers are invested in today's financial markets, and how far exactly is this going to take them:

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 8th & 9th July 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. Part two follows 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.

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: or via the direct messaging system on the website).



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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
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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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