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Rudi’s View: Quality & Growth, Confidence & Execution

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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 | Oct 22 2020

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

In this week’s Weekly Analysis:

-Quality & Growth: Confidence & Execution
-Value Versus Growth The Chart That Confirms
-That Dreadful ASX Website (Continued)
-Rudi Talks
-Conviction Calls

Quality & Growth: Confidence & Execution

By Rudi Filapek-Vandyck, Editor

On Wednesday last week, one local newsletter published a list of thirteen stocks that had all closed at a new all-time high on that day.

It didn’t take long for me to realise five of the companies mentioned are included in the FNArena/Vested Equities All-Weather Model Portfolio.

One scroll through the full list of companies owned in the Portfolio instantaneously revealed the large majority of stocks in the Portfolio are either in the vicinity of their all-time high, or they peaked earlier in 2020 and have retreated somewhat since.

Most importantly, only a minority has been added during the course of 2020, indicating most stocks in the Portfolio have been trending upwards for a long while pre-covid, plus, of course, the pandemic hasn’t destroyed their business model or corporate greatness.

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The philosophy behind the All-Weather Model Portfolio was born out of the GFC in 2008 when the likes of CSL ((CSL)) showed not every stock is equal when it comes to hunkering down for the bad times.

My research and experience since have proven stocks are almost never equal. Add to this the macro-observation that cycles are much shorter these days, and inflation subdued (at best), while disruption is all-around, targeting low-quality, low-growth laggards and the ideal starting point has been created to look for structural growth and high quality with a moat.

Despite the general view such companies represent higher risk, because of trading on higher valuations, the past five years in Australia have proved otherwise.

A share price that temporarily rises too high is easily fixed with ongoing strong growth, while a cheap looking valuation burdened by profit warnings, dividend cuts and other forms of disappointment literally translates into “lower for longer”.

However, the (many) critics of this year’s swift share market recovery do have a point when they argue not every fast-grower in 2020 is automatically a long-term shareholder champion.

As a matter of fact, if we stay true to statistics and observations from the past, we have to conclude most winners today are likely not of exceptional quality or destined for eternal greatness; they just happen to be in the right sector under the right circumstances at the right time.

And so it is much easier to look back and conclude if only I’d participated in the CSL float back in 1994, and held onto my shares since, instead of trying to figure out which of today’s freshly emerging rapid-growers will remain successful beyond the coming weeks/months/years/decades.

I regard a successful track record an important piece of the puzzle. So does the market. CSL shares would never have consistently enjoyed today’s valuation premium in the nineties or the noughties. Back then, it still had to prove itself and ultimate success was far from guaranteed.

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This is not to say that companies such as Fineos Corp ((FCL)), Readytech Holdings ((RDY)), Whispir ((WSP)), Pro Medicus ((PME)) and Audinate ((AD8)) cannot develop into long-term wealth creators; they all look interesting and successful (thus far), but we cannot possibly know what the future will bring.

So how do we know which ones to choose for the longer-term investment horizon? The honest answer is: we don’t.

All the answers we are looking for will be provided through management’s execution, either positive or negative, which will dominate the direction of share prices and determine whether market sentiment will improve, stick around or deteriorate.

This is not something we can find on a company’s balance sheet or in the next set of stockbroker forecasts. Execution is all about providing evidence and building confidence.

It’s easily forgotten today, but once upon a time CSL was operating in a market burdened by too much supply, while both Cochlear ((COH)) and ResMed ((RMD)) have had their product recalls, and subsequent share price shellacking.

A company of exceptional quality is not immune to day-to-day vagaries and challenges out there in the real world, but none of the headwinds and set-backs destroys them. In most cases, they arise in better shape and with renewed positive momentum.

This is why those share prices today are not far off from all-time record high price levels, and why I remain confident those record highs from the year past will, at some point, be replaced by new record highs.

Just like this has turned out this year’s scenario for stocks including Carsales ((CAR)), NextDC ((NXT)), REA Group ((REA)), Xero ((XRO)) and Bapcor ((BAP)); all mentioned in last week’s newsletter list, and all held in the All-Weather Model Portfolio.

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Most newsletters and investors are obsessed with valuation -cheap or expensive- but I’d argue the performance of the All-Weather Model Portfolio strongly suggests a strategy built on identifying quality businesses that reliably deliver combined with emerging new businesses on a sustainable, structural growth path has numerous benefits.

A few obvious observations to make:

-the number of negative profit warnings and/or dividend cuts suffered inside the Portfolio since inception nearly six years ago has been very low;

-bad news and misfortune don’t stick around for too long (good things happen to great companies);

-periods of doubt and temporary stasis for the companies owned are usually followed by positive surprise(s);

-share prices in the Portfolio do not always hold up during the toughest of times, but they surely bounce and recover first;

-most retreats in share prices have been nothing but a temporary pause in a long-term uptrend.

All in all, I find, if I can remain confident the underlying trajectory for most companies owned remains up, I don’t have to worry as much about what is likely to happen to the share price in the short term.

One look at the long-term price graph of AMP, for example, immediately reveals how important the timing of entry and exit points is. Look at the same graph for Xero and timing almost looks irrelevant.

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The most important feature about investing in the share market remains, without the slightest doubt, the ability to respond to changes in general context and circumstances.

We can all admire the tenacity of the early shareholders in CSL, but what about the many more who are still holding AMP shares today -two decades after they peaked- or shares in Telstra -more than two decades after they peaked?

Identifying great companies brings many virtues, but some greats do lose their mojo eventually. GE and Boeing spring to mind internationally. Locally, companies including Monadelphous, InvoCare and the banks could literally do no wrong for a long while, but their fortunes eventually changed, and quite in a dramatic manner.

Agility and flexibility remain every investor’s best friend.

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Apart from combining quality and structural growth companies, the All-Weather Model Portfolio has always leaned on a third pillar; that of reliable and sustainable dividend growers.

But when the pandemic hit earlier in the year, that part needed to be re-assessed and replaced with a different set of trustworthy, dependable sources of income.

The only dividend stock we kept, and which still is held in the Portfolio, is Waypoint REIT ((WPR)) for a reliable 5.6% yield this year (on current share price of $2.68) and 5.9% next year, on market consensus projections.

Waypoint shares have since been joined by Aventus Group ((AVN)) and two of the other three names mentioned on my list of Australian dividend champions (see website, section All-Weather Stocks).

When it comes to this particular segment of the Portfolio, my view is certainty, low risk and reliability should be the highest priorities.

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The FNArena/Vested Equities All-Weather Model Portfolio continues to significantly outperform the broader market in Australia, despite repeated attempts by market participants to rotate into cyclicals and value laggards.

Portfolio performance for three months up to October 18th is a positive 4.76%, of which 0.55% was derived through dividends, versus the ASX200 Accumulation index posting a slightly negative performance of -0.44% over the same period.

The All-Weather Portfolio is migrating away from the Praemium platform, towards, we believe, much better service and lower costs. This will be a win-win-win for everyone involved.

More news about this in a few weeks from today.

Paying subscribers have 24/7 access to my research and commentary on All-Weather stocks and the Model Portfolio via a dedicated section on the website.

Value Versus Growth The Chart That Confirms

One chart a thousand words?

I sat in long and boring presentations, have read a copious number of research reports and witnessed how teams of value investors presented their findings in an attempt to prove there was no fundamental justification as to why popular tech stocks are trading on elevated multiples, while their beloved value’ companies where largely being ignored.

If ever investors wondered how biased the human mind can be, and how this is reflected in research and analysis done, there are quite a number of such regrettable examples around.

At times, it’s not about what I can see that you cannot. It can also be a case of I can only see what I want (and I’ll make damn certain I will find plenty of reasons to support it too!)

And then comes along the chart that explains it all. Thanks to Forager’s Steve Johnson who kindly submitted the Goldman Sachs chart below to his Twitter followers on Monday.

The interesting factor on display is the fact Goldman Sachs has not taken into account forward looking estimates, but concentrated on actual achieved growth numbers instead.

I think the evidence speaks for itself: no growth for most parts of global companies, except when they are part of the fast-growing technology disrupters and hearts-and-minds conquerors.

It is exactly that gap that has been reflected in price action over the past five years, in Australia, and longer than that in the USA.

I have no doubt the value-biased investors who have been trying to disprove the thesis that has been dominating equity markets will accuse their peers at Goldman Sachs of somehow massaging the data to serve their personal views and conviction.

Having done a lot of research and analysis myself to find Goldman Sachs’s observation is most accurate, one only has to question: who’s fooling who?

That Dreadful ASX Website (Continued)

A lot of anger and disappointment has been spewed over social media, and elsewhere, following the launch of the new ASX ((ASX)) website.

Apart from the fact that change always unsettles and we humans like to stick with old habits and tricks, a lot of the bad feelings towards the ASX are expected to subside as investors find their way around the updated website.

On Monday, for example, the ASX reinstated company announcements going back as far as 1998, which has been a major achievement by activist investors who had been jumping high and low since the ASX -apparently- had initially decided it’s better to stick to younger-dated announcements only.

Given the ASX has been preparing six long years for the newly launched website, and given the new website seems extremely keen to promote the ASX’s role as seller of data and market insights, surely, I am not the only one around who is suspicious about the true strategy/motives behind many missing parts and a seemingly user-unfriendly design of the new website?

The fact the ASX has decided to make the new website advertisement free equally suggests the top has decided there is more money to be made from selling data and announcements than accommodating hordes of free-loading retail investors.

But hey, in a time of free-roaming conspiracy theories, I am simply doing my bit on this occasion.

Rudi Talks

Among the popular podcasters in Australia when it comes to investing and finance is the duo of Bryce and Alex at Equity Mates who have a knack of getting lots of experts in front of their microphone.

Last week it was my turn to see my hour-long conversation with the two going live on social media and on the Equity Mates website.

Check it out here: https://equitymates.com/podcast/rudi-filapek-vandyck/

Conviction Calls

Portfolio managers at stockbroker Morgans have used Macquarie Group ((MQG)) as the funding source to expand their exposure to Australian banks post the Australian government’s budget announcements and a more benign environment for bad debts than initially assumed.

In addition, share market laggard Aurizon Holdings ((AZJ)) has seen its weight increasing in the stockbroker’s Balanced Model Portfolio as at the end of September.

Morgans’ Growth Model Portfolio is participating in the retail entitlement offer at Corporate Travel Management ((CTD)).

Coincidentally, Sze Chuah, Senior Investment Analyst at Ord Minnett, is equally of the view share prices for Australian banks have seen the bottom earlier in the year.

(This story was written on Monday 19th October, 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: info@fnarena.com or via the direct messaging system on the website).

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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/index.php/sign-up/

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CHARTS

AD8 ASX AVN AZJ BAP CAR COH CSL CTD FCL MQG NXT PME RDY REA RMD WPR WSP XRO

For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED

For more info SHARE ANALYSIS: ASX - ASX LIMITED

For more info SHARE ANALYSIS: AVN - AVENTUS GROUP

For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED

For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED

For more info SHARE ANALYSIS: CAR - CARSALES.COM LIMITED

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED

For more info SHARE ANALYSIS: FCL - FINEOS CORPORATION HOLDINGS PLC

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED

For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED

For more info SHARE ANALYSIS: RDY - READYTECH HOLDINGS LTD

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: WPR - WAYPOINT REIT

For more info SHARE ANALYSIS: WSP - WHISPIR LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED