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Rudi’s View: February Feeding Market Optimism

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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 | Feb 11 2021

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

Weekly Insights this week will be published in two parts because FNArena is organising a webinar on Monday evening (see further below).

In this Part One:

-February Is Feeding Market Optimism
-Conviction Calls
-FNArena Webinar (tonight)

By Rudi Filapek-Vandyck, Editor FNArena

February Is Feeding Market Optimism

As the February reporting season in Australia is slowly warming up, investors are anticipating stronger-than-expected profit results, leading to increased market forecasts, opening the gates to higher valuations and less downside risk.

At face value, they do have a few strong indicators on their side, including:

-quarterly corporate results in the US where circa 80% of all companies reporting to date have managed to beat market forecasts;
-historic precedents, including 2009, showing analysts are too conservative when the big economic turnaround arrives;
-Australian corporate results post-August last year (Sep-Dec) saw 49% beating expectations versus a long-term average of circa 33% (*)

Other factors to consider include ongoing policy support from major central banks and governments, including a fresh stimulus package from the Biden administration in the US; further progress in rolling out vaccinations; and robust consumer spending as many households are left with spare cash and limited avenues for spending.

These are all positives and probably explain why equity markets have seldom paused to take a breather over the past four months. Earnings forecasts are on the rise and companies are expected to not only justify those increases, but add more reasons for further upward adjustments.

REA Shows The Way

The case for ongoing optimism was once again highlighted by local leading property portal REA Group ((REA)) on Friday. While the company's financial result has triggered further upgrades to analysts' forecasts, and to valuations and price targets, everyone can see from Stock Analysis the share price had already well and truly anticipated this would be the case.

This, however, has not stopped REA shares to continue rising post Friday's release. Today, as I am writing these sentences, the shares are up a further 3.5% highlighting the one question that has at least part of the investment community nervous: are markets not expressing too much optimism and at what point will the music stop playing?

For the time being, such secondary considerations are being dismissed and it is very likely that ongoing positive corporate results and updates will continue to feed in ongoing market optimism.

As the FNArena Corporate Results Monitor shows, of the 15 local companies that have reported in February thus far, only two have missed expectations and 10 did better for a 66.7% "beat" thus far. It's not quite the 80% achieved in the US, but then nobody outside the US knows how to work financial markets as well as do American CEOs.

The bottom line here is that market optimism feeds off positive input, and investors are currently presented with a large and varied smorgasbord of positive inputs.

Market Momentum Remains Divided

One important lesson to be learned from the REA example is that investors better not stare themselves blind on valuations, price targets and forecasts pre-results as the current trend suggests most will reset at a higher level post release.

To what extent, of course, remains an open question and ultimately dependent on what exactly is being reported and subsequently adopted by analysts to spice up their expectations.

Then, of course, there is always the question: what will the market do with the freshly updated insights?

Credit Corp ((CCP)) shares pretty much had the same experience as REA Group, as did Nick Scali ((NCK)) and Pinnacle Investment Management ((PNI)), but producer of nickel, copper, zinc and precious metals, IGO ((IGO)) did not despite also delivering a robust earnings "beat", while shares in ResMed ((RMD)) are equally struggling despite its quarterly triggering further increases to this year's consensus forecast.

Probably the best example in this regard was provided by global leading packaging company Amcor ((AMC)) as management lifted FY21 guidance for the second time together with releasing a better-than-forecast financial performance.

After an initial positive response, the share price was clobbered on day two but did manage to resume its uptrend since. The shares are still trading more than -12% below updated consensus price target of $16.99 while promising a dividend yield in excess of 4%.

The problem a stock like Amcor is facing is that investor optimism is feeding into more risk taking and this means smaller caps and mining stocks are seen as a lot more interesting. Amcor is also a rather defensive business, which is another no go, unless markets go through conniptions or the economic recovery story is in doubt.

And while management at the company would not necessarily agree, Amcor is also seen as a covid-beneficiary by investors, and this year's trend is all about buying covid-victims who stand to benefit from vaccines, recovering activity and borders re-opening.

None of this means Amcor shareholders will not be rewarded for the excellent performance delivered by management last week; what it does show is that companies like Amcor will need to work harder for a possible lesser reward, or at least less quick, than for others that are currently at the centre of market momentum.

As per always, corporate reporting season is believed to be all about corporate results, but it seldom is only about corporate results.

Dividends Are Back!

Apart from strong results and forward guidance from companies operating under robust operational momentum, such as mining companies, banks, building materials, financial services and platforms and discretionary retailers, the big positive surprise everybody is preparing for concerns dividends.

Australian investors traditionally enjoy the world's most consistent and attractive cash dividends, but the past two years have brought about the rather unusual phenomenon of subsequent declining payouts, in particular from trusted income providers the Big Four Banks.

Insurance companies, energy producers, regional lenders and infrastructure owners have equally severely disappointed those shareholders looking out for their semi-annual or quarterly cash payouts.

Not to forget: the owners of shopping malls.

All are expecting to start paying a (higher) dividend again this year, and in the case of iron ore producers and major banks, expectations are building for a lot more than simply the return of juicy yield.

On current forecasts, ANZ Bank ((ANZ)), for example, will pay out 111.4c in total dividends for the year ending in September, which equals a yield of circa 4.4%. But the dividend is expected to grow to 128.9c next year, and that takes the implied yield beyond 5%, or what shareholders used to enjoy before the sector hit a snag or two.

For good measure: ANZ Bank paid out 160c in FY19, so there still remains a large gap to close with the prior trend, but expectations are building current estimates, even though on the rise, might prove too conservative and some of the banks might even have the luxury to pay out a special dividend or announce a share buyback.

For a sector that genuinely looked down and out one year ago, 2021 is likely to witness a remarkable come-back on the back of a much quicker recovery from the pandemic fall-out, plus banks stand to benefit directly from a steepening yield curve in bond markets.

The latter is one key reason as to why prior champion stocks including CSL ((CSL)), Xero ((XRO)) and Carsales ((CAR)) have found the going a lot tougher since October last year.

CommBank ((CBA)) is scheduled to report on February 10th. Market consensus is aiming at $1.44 in final dividend, but the market response is equally dependent on what Australia's premium lender has to say about costs.

Iron ore producers know what it is like to operate inside the land of milk and honey. On my observation, most analysts are now reverting to yet another chapter of stronger-for-longer.

The Chinese would love to stick up their finger to Australia, as they have done through coal, wine, lobsters and other imports from the land Down Under, but they cannot unless they risk crippling their own economic recovery.

Part Two shall dig deeper into expectations for specific sectors and market segments, including analysts' most favourite candidates for upward and downward surprises this month. See the FNArena website on Friday.

(*) Paying subscribers can access the archive of past Corporate Results Monitors via a dedicated section on the website:

https://www.fnarena.com/index.php/reporting_season/

The Monitor for February is now being updated daily.

Conviction Calls

Stockpickers at Wilsons have updated their list of Conviction Buys which has led to the inclusion of non-bank lender Plenti Group ((PLT)).

Others who remain on the list are ARB Corp ((ARB)), Collins Foods ((CKF)), Integral Diagnostics ((IDX)), Telix Pharmaceuticals ((TLX)), ResMed ((RMD)), Whispir ((WSP)), Appen ((APX)), and ReadyTech ((RDY)).

FNArena Webinar

FNArena is organising an online webinar with myself providing an introduction to the website and service provided, followed by a general update on financial markets in early 2021.

There is an opportunity to ask questions beforehand (see below).

To participate in this webinar, use the link provided below and follow the steps to install and sign in to Zoom.

Date of this webinar: Monday, 8th February 2021, 7.30pm (Canberra, Melbourne, Sydney time).

Duration: about 1 hour, of which:

-First part (30 minutes) consists of a general overview to the FNArena website and the service provided, helping subscribers to maximise their usage and benefits;

-Second part (30 minutes) provides an assessment of what is happening in financial markets, why, and a deeper look into the February reporting season

Registration beforehand is required (simply follow the steps as Zoom will take care of it). This webinar will be recorded and made available via the website shortly after the event.

If you have questions or topics you would like to see covered, use the messaging system on the website or send an email to info@fnarena.com

Details about this event:

Topic: FNArena – webinar

Time: Feb 8, 2021 07:30 PM (Canberra, Melbourne, Sydney time)

One hour incl Q&A. The first half will be dedicated to the FNArena website. How to best use the service and find what you are looking for, etc. The second half will zoom in on the state of financial markets, trends & strategies and the February reporting season.

Join Zoom Meeting
https://zoom.us/j/94038372572?pwd=c3FFTlZ2VUNnQTFMeS94SGtydUhRQT09

Meeting ID: 940 3837 2572
Passcode: 584321

Looking forward to welcoming you all in what will no doubt be an enjoyable and informative meeting. Let the questions roll in!

(This story was written on Monday 8th February, 2021. 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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– 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)
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CHARTS

AMC ANZ APX ARB CAR CBA CCP CKF CSL IDX IGO NCK PLT PNI RDY REA RMD TLX WSP XRO

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

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

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CCP - CREDIT CORP GROUP LIMITED

For more info SHARE ANALYSIS: CKF - COLLINS FOODS LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: IDX - INTEGRAL DIAGNOSTICS LIMITED

For more info SHARE ANALYSIS: IGO - IGO LIMITED

For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED

For more info SHARE ANALYSIS: PLT - PLENTI GROUP LIMITED

For more info SHARE ANALYSIS: RDY - READYTECH HOLDINGS LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: TLX - TELIX PHARMACEUTICALS LIMITED

For more info SHARE ANALYSIS: WSP - WHISPIR LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED