Rudi's View | Aug 09 2019
Dear time-poor reader: Part Two offers Conviction Calls, and an update on the CSL Challenge.
In this week's Weekly Insights (published in two parts):
-August Preview: Lower Rates & Lower Growth
-CSL Challenge: A (Not So) Brief Update
-Rudi On Tour
CSL Challenge: A (Not So) Brief Update
By Rudi Filapek-Vandyck, Editor FNArena
Something has gone amiss with my messaging to investors, maybe?
At the recent National Conference organised by the Australian Investors Association (AIA), I showed a price chart during my presentation of a sustainable and structural growth story and asked: anyone a guess which stock this is? The answer came straight from the room: CSL! (In multiple voices).
Yet, it couldn't be CSL as the top of the chart didn't reach beyond $100 and everybody who has been paying attention should know by now CSL ((CSL)) shares surged a second time through $100 in late December 2016 and subsequently never looked back. The share price recently reached a new all-time high of $232.03, more on that further below.
Just as a side-remark: today, I tried to look up recent share price levels for CSL and both Yahoo Finance and the ASX website are ostentatiously displaying incorrect data. What is happening here? FNArena provides access to correct share price data, of course, but for more detail we can all still visit Google Finance.
Upon arrival in Australia, back in late August 2000, I never imagined myself becoming the go-to expert for CSL background and insights nineteen years on. My research into investing in the local share market has led to the concept and identification of All-Weather Performers, and CSL is only one of them.
From memory, my presentations in recent years have specifically highlighted DuluxGroup, Carsales, Bapcor, TechnologyOne and NextDC, alongside others, and occasionally the price chart shown was picturing CSL. The biggest compliment I have received is from investors thanking me for directing their attention, and courage to buy, towards stocks they otherwise would never have considered.
The right answer at the conference was REA Group; yet another one of my all-time favourites, and for good reason. REA Group shares recently surged above $100, equally an all-time high. This means that those who bought at or pre-IPO at $1 a share, and stayed on board since, have enjoyed a 100-bagger, including funds manager Hyperion.
CSL shares, corrected for shares split, IPO-ed at $0.77. Plus there was another shares split pre-GFC. CSL shares have thus performed even better than REA Group's 100-bagger since listing. Needless to say, it is difficult to find a single shareholder today who is unhappy with how management, the company and the share price have performed over the past 2.5 decades (CSL started life in 1991, and listed in 1994).
On my observation -at the conference and elsewhere- investors do not necessarily grasp the importance of what I just pointed out. The fact that CSL shares, 25 years after listing, have surged to a new all-time high means that everybody who bought the shares, at any given point in time, has made a profit.
Everybody. No matter when the shares were bought.
Think about this for a while and one instantly starts to realise how truly amazing the CSL experience has been for shareholders who stayed the course. REA Group's performance has been equally impressive, but it has only been listed since December 2008. Still very impressive though.
A few stats to highlight the strength and importance of these performances:
-Resources stocks in Australia are still some -33% below their peak in May 2008
-Bank shares are still some -28% below their peak in May 2015
Consider, for example, that BHP Group shares peaked at $50 in late 2007 and again at $49 the following year. CommBank shares reached $96 in 2015.
Hint: local indices recently finally managed to surpass the all-time record (ex-divs) set in late 2007 and while resources and banks were instrumental in getting there over the past seven months, we would still not be nowhere near current level if it wasn't for the steady and continuous, uninterrupted contributions from All-Weather, sustainable, structural growth companies such as CSL, REA Group, and numerous others I have been highlighting through my research in years past.
Yet, when one looks back from the chair I am sitting on, it is difficult to not also remember the abuse, the disbelief, the rejections that have occurred throughout the period. It was only a few months ago I had to stand my ground amidst a wave of criticism and personal attacks. Surely I had lost my sanity? Didn't I know that no single stock trading on a PE multiple above 15x had ever proved to be a genuine, profitable long term investment? CSL is going to crash, and take me and my reputation down with it!
As you all would have guessed, those same voices have gone missing by now. Understanding CSL is effectively understanding how little investors know and understand about the share market. Which is why I launched the CSL Challenge earlier this year (see further below).
To my surprise, a recent analysis by the Australian Financial Review (The stocks doing the heavy lifting, 3-4 August 2019) once again put CSL at the top of the performance table for having contributed the most index points in 2019. My own analysis conducted earlier had the iron ore miners on top, but those share prices deflated quickly while CSL's surged onwards and upwards. Just goes to show how much of these performance tables are determined by timing and time-period.
Time to apologise. Earlier this year I asked long term shareholders to send in their personal experiences to share with other investors but I haven't yet found the time to fully execute that plan. It will happen though. I am aiming for September, after the August reporting season.
CSL is scheduled to release FY19 financials on August 14 and analysts are expecting yet another strong performance, also carried by quite the savage flu season in 2019. No doubt, this was one of the reasons as to why the share price recently surged to a new all-time high.
To fully understand why CSL shares are where they are, and how much of a stand-out the company's performance has been, consider that a recent analysis by UBS puts the average EPS growth for Australian companies since 2007 at 0.1% per annum. This is not a typo. The Australian share market has effectively lived through an earnings recession over the past twelve years. Judging by forecasts for the upcoming August reporting season, this is not about to change.
One disconcerting observation, however, is that the share price has retreated quite quickly throughout the market turmoil that pulled the local share market in a fierce downdraft this week. It used to be the case that CSL shares held up reasonably well when others were staring into the abyss. Maybe too many momentum and trend followers are on board these days? Maybe this is the price we all have to pay for CSL being such a stand-out?
Maybe, just maybe, in an era of passive investing, this is the toll to pay when CSL is now one of the Top Four in Australia?
Some analysts have been suggesting CSL might disappoint this season as the strong performance over FY19 might be followed up by a more moderate guidance for FY20. I have no extra insights into whether this might happen or not, but history tells me, as with the experiences of REA Group shares I highlighted at the recent conference, that if for some reason CSL's share price comes under pressure upon the release of FY19 financials, this would only be a genuine concern under extremely rare circumstances.
This is what JP Morgan published on Thursday morning: "With a tight market for immunoglobulins, continued solid growth in specialty sales and an expected recovery in albumin and coagulant revenues we are confident CSL will deliver a decent sales result. This should ensure a profit number at or above the top end of the FY19 guidance range as gross margins lift. However, we expect FY20 guidance to come in below our forecasts as management maintains its conservative approach."
It is far more likely that share price weakness in CSL is simply an opportunity to buy (more) shares. See also ResMed shares in late January and where they are trading at today.
In case you read this and you still haven't joined the CSL Challenge, do know you can join at any time, from any place of your own choosing.
Here's more info about it: https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/
Also, paid subscribers have access to my eBooks and other writings about CSL and All-Weather Performers, see the dedicated section on the FNArena website. The slides of my presentations are available through the Special Reports section. The slides I used at the recent AIA National Conference are now included.
P.S. And don't you worry, this success story is nowhere near its end.
Market strategists at Morgan Stanley have been taken by surprise by how strongly the domestic equity market has performed over the past seven months. They had warned their customers about generally weaker profits for Australian corporates, which has proved to be a prescient warning, but the share market decided to ignore the earnings and concentrate on falling bond yields and more central bank stimulus instead.
Morgan Stanley had a target for the ASX200 of no more than 6000, which does look a little bit silly in the current context. That target has now been lifted to 6400. In case of a very bullish outcome, the strategists are willing to accept 7000 for the major index which still only leaves a little bit of room for further expansion.
Their current warning is that, in the absence of a solid pick-up in corporate profits (not expected this month), share prices might have to fall to match the rather sober outlook for corporate Australia.
From this starting point, Morgan Stanley strategists have been making a number of changes in terms of Model Portfolio positioning. Cash levels have increased to 5% on the back of selling shares in BlueScope Steel ((BSL)) and Iluka Resources ((ILU)). The idea here is to reduce the portfolio weighting towards resources.
The Model Portfolio has now gone significantly overweight National Australia Bank ((NAB)) in order to neutralise the previous underweight positioning in banks. Inside healthcare the relative overweight has switched to Sonic Healthcare ((SHL)) from Cochlear ((COH)) while among defensives the portfolio is now more underweight Telstra ((TLS)).
In the energy sector Oil Search ((OSH)) has been added to sustain a sector overweight position.
Retail specialists at UBS are of the view that forthcoming tax cuts from the Morrison government will only have a small impact on consumer spending with retail sales in FY20 expected to -maybe, potentially- increase by an additional 1% (annualised) on the back of these cuts being delivered.
They are equally of the view this prospect has already been priced in for most retailers listed on the ASX. And then, of course, we have the August reporting season yet to be fully unleashed upon us.
UBS's key consumer sector picks ahead of corporate results are Flight Centre ((FLT)), Treasury Wine Estates ((TWE)), Viva Energy ((VEA)), a2 Milk ((A2M)) and Bapcor ((BAP)). The analysts also like the prospect of Myer ((MYR)) shares.
The combination of geopolitical risks increasing and the Aussie dollar being clobbered has proved to be highly beneficial for Australian gold producers. Most share prices have surged, a lot, but stockbroker Morgans still sees selected value in the sector.
Morgans recently elevated gold to its most favoured commodity and junior and emerging gold producers are seen as the best hunting ground for investors still looking to add exposure through the local share market. Morgans in particular likes Ramelius Resources ((RMS)).
Market strategists at stockbroker Morgans, still worried about High PE stocks not having any room to disappoint in August, have decided to take profits in Kina Securities ((KSL)) -which led to the removal of this stock from their list of High Conviction Stocks. In its place the strategists have added Volpara Health Technologies ((VHT)).
Other stocks that have retained their inclusion are Sonic Healthcare, OZ Minerals ((OZL)), ResMed ((RMD)), Westpac ((WBC)) and Oil Search ((OSH)) inside the ASX100 and Australian Finance Group ((AFG)) and Senex Energy ((SXY)) outside the Top100.
Morningstar has a predominantly valuation driven methodology to decide on inclusions and exclusions and I personally have been a long term critic of their methodology to determine protective moats for companies. While once upon a time setting rules for corporate moats was cutting edge analysis, today I think Morningstar's methodology is no longer quite in sync with modern economies and shifting market dynamics.
Anyway, Ardent Leisure has been added on the potential for a successful turnaround, while for Computershare share price weakness seems to have been the key ingredient. Westpac's removal follows a strong sector re-rating.
CLSA has put Ed Henning in charge of researching Australian banks and the direct result has been a removal of the firm's Underweight recommendation for the sector. Instead, CLSA has now adopted the view that, on a relative basis, Australian banks don't look too expensive at all, certainly not when taking into account that interest rates can, and probably will, move lower from here still.
The Underweight recommendation has thus been replaced with a Neutral stance with analyst Henning adopting the view that all of the negatives are by now well known and understood, and in the share prices. One offsetting positive is that today's dividend yields across the sector will prove sustainable.
Elsewhere at the CLSA office, analysts Richard Barwick and Mark Wade have continued repeating and reiterating their Conviction Buy rating for Treasury Wine Estates with an unchanged price target of $23. As reported earlier, both CLSA analysts see the upcoming FY19 results release and the subsequent investor day in September as two catalysts that seem poised to get the share price a lot closer to their target (Trump & Xi permitting).
Meanwhile, no changes have occurred to the list of Conviction Buys at Wilsons. The most recent addition thus remains Countplus ((CUP)) which had been added in early July.
Other inclusions are Bravura Solutions ((BVS)), EML Payments ((EML)), ReadyTech ((RDY)), Whispir ((WSP)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), National Veterinary Care ((NVL)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Noni B ((NBL)), Ausdrill ((ASL)), Mastermyne ((MYE)), and Whitehaven Coal ((WHC)).
Just like most other human portfolio managers and stock pickers in Australia, Wilsons' Conviction Insights Portfolio has found it rather challenging to keep pace with share market indices in Australia (unless we go back to last year, or to inception in early 2017).
Market strategists at JP Morgan have stuck with their target for the ASX200 of 6300, meaning they are now positioned below Morgan Stanley, usually the low marker in Australia.
JP Morgan has singled out a number of key stocks that are rated Underweight and considered to have downside potential of -20% or more from share prices in late July/early August.
Lastly, but certainly not least, bank analysts at Bell Potter have used this week's sell down in Aussie shares as yet another opportunity to reiterate their positive view on Macquarie Group ((MQG)) shares.
In Bell Potter's view, any weakness in the stock will be temporary at worst and it provides investors with the opportunity to simply buy more. The price target currently sits at $140, accompanied by a Buy rating.
(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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