Rudi's View | Feb 13 2020
Dear time-poor reader: a line up of stockbrokers' favourites ahead of February reports, amidst scepticism and warnings
In this week's Weekly Insights:
-February Reports: Equity Favourites And Warnings
-Four Tips For Reporting Season
-The Green Revolution Is Awakening
-Get More Out Of Your Subscription
February Reports: Equity Favourites And Warnings
By Rudi Filapek-Vandyck, Editor FNArena
Paying attention to stockbroking analysts announcing their Conviction Buys and Sells can be highly beneficial to one's investment portfolio, as no doubt experienced by many an FNArena subscriber.
Over the past two years in particular, I have methodically kept track of Conviction Calls in the market, and those have included ResMed, Magellan Financial Group, IDP Education, Cochlear, Goodman Group, Appen, EML Payments and various other high flyers.
Every now and then these Conviction Calls generate an absolute blooper; the stinker that leaves a bad taste that simply won't go away. Boral and Challenger Financial come to mind, as well as EclipX Group and G8 Education.
In January we had the profit warning from Treasury Wine Estates ((TWE)) which, on one hand, vindicated the persistent Sell rating maintained by analysts at Citi, irrespective of their peers releasing more bullish assessments.
On the other hand, the Buy ratings that stood out prominently in December and early January subsequently led to four downgrades to Neutral while for Citi it was time to upgrade to Neutral, as the share price tanked.
One team of analysts that hasn't budget post profit warning and quite the significant de-rating for the stock is the team at CLSA.
The analysts were left licking their wounds, but subsequently stated they had been negative on the US market anyway. It's the company's growth prospect in China that keeps optimism alive, and CLSA's rating on Buy.
Analysts Richard Barwick and Deija Li cannot believe how "cheap" the share price looks today (it has been falling on most days since the day of warning).
But even they have to acknowledge, Treasury Wine has now de facto become a long-term story. Short term, there are a number of investors out there who lost a lot of money, and they'd be vying for blood & revenge. Don't be surprised if Treasury Wine remains in the naughty corner for quite a while.
In the meantime, there are no guarantees the bad news flow won't continue for longer.
And the previous week's https://www.fnarena.com/index.php/2020/01/16/rudis-view-xero-treasury-wines-and-appen/
On my own observations, and I have some incomplete data to support this statement, most declared Conviction Calls perform better than the market average, which is why I thought it apposite to share the various favourites and Hot Stocks that have been picked ahead of the February reporting season.
The obvious comment to make is that sudden warnings, like the one issued by Treasury Wine, if such event were to occur, can change a stock's trajectory dramatically. The same goes for share price movement and the profit report release itself this month.
Diversified financials are expected to release weak results this month, potentially with the exception of Magellan Financial. Analysts at Credit Suisse see potential for negative surprises and have lined up Challenger Financial ((CGF)), Netwealth ((NWL)), Perpetual ((PPT)), Hub24 ((HUB)), and Link Administration ((LNK)) as stocks carrying additional negative potential.
Noteworthy: outside of Magellan, no other stock in this sector is seen as a potential upside surprise.
Credit Suisse finds more hope could be emerging from the insurance sector where even AMP ((AMP)) is seen as a stock that might have upside on a not-as-bad-as-feared results release, accompanied by some clarification from management around customer remediation.
QBE Insurance ((QBE)), AUB Group ((AUB)) and Steadfast Group ((SDF)) are equally believed to carry upside surprise potential. The odds seem less favourable for the likes of Suncorp ((SUN)), Insurance Australia Group ((IAG)), Medibank Private ((MPL)) and nib Holdings ((NHF)), at least if Credit Suisse's pre-release assessments prove accurate.
Stockbroker Morgans is concerned elevated share prices might not necessarily be followed up with robust looking earnings results this month.
On its assessment, the best looking tactical buys this season -stocks whose share price looks poised to react positively to the release of results- include BHP Group ((BHP)), Rio Tinto ((RIO)), Telstra ((TLS)), Aurizon Holdings ((AZJ)), and Baby Bunting ((BBN)).
Other candidates for earnings upside risk are Australian Finance Group ((AFG)), Infigen Energy ((IFN)), and Adairs ((ADH)) while yet others seem poised for a better-than-priced-in outlook guidance, including Afterpay ((APT)), Generation Development ((GDG)), IDP Education ((IEL)), Mainstream Group ((MAI)), Pro Medicus ((PME)), and Megaport ((MP1)).
Analysts at Wilsons updated their Conviction Insights, revealing two new additions and two removals. Nuchev ((NUC)) and Telix Pharmaceuticals ((TLX)) are now in, while National Veterinary Care ((NVL)) and Ridley Corp ((RIC)) are out.
Other stocks on the list are Bravura Solutions ((BVS)), EML Payments ((EML)), ReadyTech ((RDY)), Whispir ((WSP)), ARB Corp ((ARB)), ImpediMed ((IPD)), Countplus ((CUP)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Mosaic Brands ((MOZ)), Mastermyne ((MYE)), Perenti Global ((PRN)), and Whitehaven Coal ((WHC)).
Market strategists at Morgan Stanley are equally worried about the ever widening gap between share price valuations and reported earnings in Australia.
It is their view that overall conditions for corporate Australia are not that flash, highlighting the need for more broader stimulus. But will the RBA and the Australian government hear the message?
Changes made to Morgan Stanley's Model Portfolio include removing Insurance Australia Group ((IAG)), Coles Group ((COL)), South32 ((S32)), Viva Energy Group ((VEA)), and Charter Hall ((CHC)) while instead buying shares in Janus Henderson ((JHG)), Sandfire Resources ((SFR)), Karoon Energy ((KAR)), and Wesfarmers.
Also, the Model Portfolio has again moved underweight the banks, while opting for more concentrated sector allocations, to reduce overall risk.
Strategists at Macquarie suggest investors should not be deterred from growth-leveraged companies with the coronavirus temporarily putting a dent into the global recovery story, but it's only a delay, in their view. The Chinese economy will be supported by further stimulus, while the US economy is anticipated to continue its recovery.
Post coronavirus, Macquarie sees bond yields ticking higher, which will reduce the attractiveness of defensives and yield proxies in the share market.
To gain from the immediate coronavirus impact, Macquarie suggests investors should buy into falling share prices of a2 Milk ((A2M)), BHP Group, and Fortescue Metals ((FMG)). All three are rated Outperform and included in the broker's Model Portfolio.
Macquarie's view is certainly not widely dismissed elsewhere, but investors might also pay attention to the latest research effort put in by analysts at Citi. On their account, short-term headwinds are building in China, and they have not as yet been priced into global commodity markets.
Citi sees iron trade trading down to US$70/tonne, copper to US$5300/tonne, palladium to US$2100/oz and Brent crude oil to US$47/bbl in the near term.
Citi's analysis has revealed the seven worst impacted provinces from the coronavirus in China account for 35%-40% of Chinese GDP, automotive output, property new starts, and in excess of 70% of air conditioner output.
The same regions only contribute 7%-26% of Chinese metals production, with exceptions of copper smelting at 45% and lead at 70%.
The Large Cap Portfolio at Shaw and Partners managed to keep pace with the fast running Australian share market in 2019, but since the coronavirus caught the world's attention, the headwinds have been quite tangible.
In response, the portfolio has moved Overweight local banks while abandoning REITs that are not covered by analysts in-house.
Shaw and Partners too believes any impact from the virus will prove temporary.
Potentially the most cautious ahead of the bulk of corporate results is Baillieu chief investment officer Malcolm Wood, who clearly believes the RBA et al are way too optimistic and the situation on the ground for the bulk of Australian companies looks a lot less promising.
The Baillieu strategist thinks market consensus is too optimistic. Top line growth will remain sluggish this season, Wood predicts, with companies about to reveal a lack of pricing power. Most companies have been enjoying some easing of raw material cost pressures, but forward guidances are likely to remain cautious, on his assessment.
What this translates to is an over-priced share market that thus becomes extremely vulnerable to any piece of negative news. Contrary to general optimism elsewhere, Wood sees earnings estimates trending lower throughout February, with companies in particular in consumer, financial, utilities and domestic facing industrials and healthcare sectors believed to be vulnerable.
To support his scepticism, Wood has kept track of local profit warnings since October last year. His line up contains 65 "significant profit warnings" offset by 16 upgrades. While the profit warnings have been broad based, positive warnings have come from global leaders and high-growth emerging companies.
In what may surprise investors, the Materials sector has issued most of the negative warnings with Incitec Pivot, Syrah Resources, Nufarm, Boral, Perenti Global and peers pulling back market expectations on the back of disappointing operational performances.
Industrials, Consumer Discretionary and Financials are the next three market segments co-responsible for the bulk of negative warnings, led by the likes of Cleanaway Waste Management, MaxiTrans and Prospa Group, Jumbo Interactive, G8 Education and Kogan, and FlexiGroup, IOOF Holdings and Medibank Private.
Even the healthcare sector delivered its fair share. Outside the international market leaders (of course), but through Monash IVF, Mayne Pharma, Estia Health, Healius, Regis Healthcare, and Australian Pharmaceutical.
The sixteen companies having issued "significant upgrades" over the period are Bapcor ((BAP)), oOh!media ((OML)), a2 Milk, ResMed ((RMD)), Sigma Healthcare ((SIG)), James Hardie ((JHX)), Amcor, Genworth Mortgage Insurance Australia ((GMA)), Macquarie Group, Emeco Holdings ((EHL)), John Lyng Group ((JLG)), Afterpay, Bingo Industries ((BIN)), Appen ((APX)), Fortescue Metals, and Charter Hall.
FNArena monitors corporate results the whole year around. Currently we are keeping track of February results releases. Paying subscribers to the service also have access to detailed reports for past seasons going back to August 2013. Make sure you check it out regularly:
Before we move on to more things financial…
Our democracies are in danger. I know this sounds extremely hyperbolic, but it is not.
Since the middle of the twentieth century we have all become accustomed to the fact societies and political systems have become more open, accessible and accountable. In particular in the West, and in particular after the iron curtain collapsed in the late eighties.
Today we take too many things for granted. We assume bad history won't repeat. And just like the proverbial frog in gradually heating up water, we don't notice or even understand how the parliamentary system, the role of government, and its institutions are being undermined and eroded away. Read The Fifth Risk by Michael Lewis. Read Fascism, A Warning by Madeleine Albright.
There are, of course, many more authors, books and publications that can be read, but the message remains the same: undemocratic forces are on the rise, and they have the momentum on their side. Increasing limitations placed on free and independent media, of which FNArena is a proud member, is but one factor that is easy to identify.
Awareness is the first step to defending our democracies, who have never been flawless, but nevertheless far superior to any of the alternatives history shows us.
Four Tips For Reporting Season
Continuing from our reporting season cooperation in recent years, FNArena is sharing insights from this year's February with readers and subscribers at Livewire Markets.
This year the cooperation includes an interview with yours truly, having been titled "Rudi's four tips for reporting season success".
A written summary of the interview can be accessed here, alongside the video:
The video is also accessible via YouTube:
The Green Revolution Is Awakening
Observers of the US stock markets would have picked up shares in companies that fit the narrative of green energy and sustainability are in high demand, with share prices in numerous cases in parabolic uptrends since late last year.
In Australia, investor attention is equally awakening, but applying the theme to the local share market is a lot more challenging. Analysts at Canaccord Genuity recently pointed their clientele towards five small cap stories that fit the mould.
A brief introduction to each nominee:
–Calix has developed patented kiln technology, addressing global challenges such as carbon emissions, water treatment, infrastructure, food protection and energy.
–Carbonxt produces non-brominated, Activated Carbons (AC), which remove toxic pollutants from industrial flue gas and wastewater streams.
–SciDev focuses on the separation of solids from liquids in mining, water and wastewater, oil and gas, and food manufacturing, reducing water wastage and so helping reduce clients' environmental footprint.
–Vmoto is an electric vehicle manufacturer specialised in electric-powered two-wheeled vehicles.
–Secos is a developer-manufacturer of patented biodegradable resins and packaging products.
As per always: none of these are guaranteed success stories and the small size of each company carries additional risks for early-stage investors.
Get More Out Of Your Subscription
In a country where stormy weather -be it too hot, or too clouded, or too wet- can have a significant impact on internet speed, if not the entire connection, it is no surprise some of FNArena's readers and subscribers occasionally experience delayed delivery of our emails.
Alas, we have no control over email deliveries by Bigpond and the likes, and it only happens on rare occasions we cannot send out our daily emails well before the market opens at 10am. But paid subscribers don't have to wait until the email arrives to access and enjoy our content and service.
In case of delay, simply go straight to the website FNArena.com, logon and look for Australian Broker Call Report, The Overnight Report, or whatever you'd like to read. We aim to have the Overnight Report up on the website not long after (or before) 9am and the first edition of the Australian Broker Call Report is usually up by 9.20am (on many occasions sooner).
The only email that works slightly different is Weekly Insights. This email is usually mailed out to paying subscribers on Monday, but its content is only published on the website on the following Thursday morning.
Do make sure you also check the junk mail folder in case an email goes missing. Yet another misdemeanor we don't control.
(This story was written on Monday 10th February 2020. 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).
(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: firstname.lastname@example.org or via the direct messaging system on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– 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.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.
Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup