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Rudi’s View: Early Days, But Plenty Of Signs

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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 | Aug 12 2021

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

In this week's Weekly Insights:

-Early Days, But Plenty Of Signs
-Not To Be Forgotten: The Bond Market
-Conviction Calls
-FNArena Talks
-All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Early Days, But Plenty Of Signs

The August reporting season in Australia is still very young. The FNArena Corporate Results Monitor only contains 19 updates on Monday, August 9th (see further below), but already the main themes of the season are there for all to see:

-A humongous dividend from Rio Tinto, including a bonus payout
-A special dividend from Suncorp (plus share buyback)
-The promise of a share buyback from News Corp
-Asset sales are in full swing, as is M&A
-Industrial bricks and mortar assets continue enjoying revaluations
-Just under half (9 out of 19) of companies performed better-than-expected
-Covid-losers are achieving the strongest bounce-backs (unsurprisingly), but covid-winners are not by default turning into losers
-Those who miss market expectations (only a few to date) are likely to do so because of higher costs
-Covid and lockdowns continue having an impact, as expected
-Overall, companies remain reluctant to provide quantitative guidance
-Analysts remain conservative in their forecast upgrades given lockdowns and other uncertainties

Take a short stroll through the aforementioned Corporate Results Monitor and all of these themes will be found. It's early days still, but it is well possible the rest of August will simply provide investors with more of the same.

FNArena's Corporate Results Monitor will now be updated daily:

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

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When it comes to share price action, however, August might be a lot trickier to navigate than usual. Witness: shares in Rio Tinto ((RIO)) are down more than -4% since the announcement of that Grand Dividend; REA Group ((REA)) lost -8% in a heartbeat and ResMed ((RMD)) shares too opened some -3% lower on Friday but have subsequently recovered to a small gain.

And macro factors haven't genuinely commanded a primary role over that brief period.

The share price weakness in Rio Tinto shares is closely correlated with movements and market sentiment concerning the price of iron ore. One would assume most investors are well aware virtually nobody, including the producers themselves, believes this year's elevated prices are sustainable. Hence, those market beating dividends might well include some compensation in the form of share price erosion.

The investment case for Friday's three reporting companies looks equally tricky as all of News Corp ((NWS)), REA Group and ResMed were trading at or near an all-time record high, similar to Rio Tinto. Does it matter? Well, News Corp shares, despite the promise of share buybacks coming under consideration and potentially a better year ahead, has equally seen selling pressure emerge after the market update.

Clearly, there are limits to investor optimism, at least in the short term. Note also: News Corp shares remain well below most broker price targets, so there's no natural safety in a share price that isn't maxed out when the financial result doesn't fully satisfy.

The difficult task ahead for investors is to assess the real importance of these short term moves in share prices, and whether they tell us anything about the way forward. Within this context it is good to keep in mind that companies that manage to beat expectations, and force analysts to lift forecasts and valuations, usually see their share price outperform for up to four months after the market update.

The future profile for those that miss is a lot less straightforward, history suggests, and punishments can be immediately, savagely, or through persistent underperformance over a prolonged period of time.

The best way to handle the information that is updated during results season is thus by forming a view about the longer-term future of the company behind the share price. And here, dare I say it, the fundamentals for ResMed and REA Group continue to look a lot more solid than for most other companies that have reported thus far.

It is no coincidence, both are proud members of my selection of All-Weather Performers on the ASX, and they have been since the inception of my research.

The Strong Are Getting Stronger

Whenever investors ask me: what makes a true All-Weather Stock? My knee-jerk response is usually: a company that consistently invests in its business.

The longer I observe the share market and its multitude in business models, the more I come to this very simple conclusion: from the moment a business starts cutting corners and stops investing in itself, it is gambling on the possibility that nothing unforeseen happens to its customers, its markets, its products and its competitive strengths.

This does not mean nothing untoward can happen. What it does mean is that if something negative occurs, this type of business can handle it, or it knows how to respond relatively quickly. In most other cases, the damage might well be terminal.

Which brings me to one theme that was not mentioned in the list above: recessions and pandemics cause the strong to become stronger. There is, of course, a strong correlation between being a market leader that does all the right things, like investing substantially in the business, and witnessing one's prospects improve on the back of global misery.

The share market may not necessarily always like it, not in the immediate term, but eventually the benefits reaped from those investments will translate into healthy and sustainable rewards for shareholders.

The best example that comes to mind in this regard is that of Seek ((SEK)), whose market leadership for job advertisements in Australia has come under threat from multiple corners on multiple occasions over the past decade, and every time management at the helm responded with: we need to crank up the level of investment.

On each occasion the share price has come under pressure in the immediate aftermath of yet another "disappointing" market update, but look where it ultimately has taken the share price.

Seek shares set an all-time high in July; they are a little lower now. The former is what counts in a long-term oriented portfolio; the latter is only important in the here and now.

Seek, too, has been on my list of All-Weather Performers since inception.

Other companies that come to mind include Aristocrat Leisure ((ALL)), Breville Group ((BRG)), Cochlear ((COH)), CommBank ((CBA)), IDP Education ((IEL)), and Woolworths ((WOW)), though there is a valid argument to be made I should mention all companies listed as All-Weather, potential All-Weather and All-Weather with question marks in the dedicated section on the website.

Not all report in August, and CommBank is not on my lists, but investors' portfolios would be well-served through exposure to any of these high quality businesses that know the secret sauce for staying on top of the corporate ladder.

Short Term Versus Long Term

Of course, we still want management to harbour a positive culture, to stay aligned with shareholders, to invest in the right places and at a favourable return, and we prefer markets that are non-cyclical with a less volatile structure, but all these characteristics still need to be complemented with substantial investments that are not one-offs and do not simply patch up various weak spots in the corporate armour.

Where things get a little trickier, once again, is that most companies I selected have been enjoying favourable long term trends, such as an ageing population, comfort food and the eternal popularity of automobiles. Some of these trends are ripe for disruption, some of the trends are arguably already under threat.

Here the most obvious victim is probably Ramsay Health Care ((RHC)). Up until 4-5 years ago, this leading operator of private hospitals provided better growth and better financial metrics than CSL ((CSL)), would you believe it? But dynamics for that industry have changed, and quite profoundly so, and this is why the share price has essentially trended side-ways, after the plunge from $80-plus.

Make no mistake, last year's pandemic and lockdowns have plausibly created a runway for growth that may well last two-three years because of the freeze in low priority surgeries, but there are also higher costs to be dealt with and it remains still to be seen how governments respond to the prospect of ever higher costs for general healthcare services.

Ramsay Health Care is still held in the All-Weather Portfolio, but I have to admit the thought has crossed my mind, on multiple occasions, that its name should probably be removed from my list. For now, the prospects for next year and beyond have kept this stock in the portfolio. Management has a major challenge at hand. I am not sure whether they can pull it off, beyond the immediate horizon.

And herein lays the true challenge for investors: at face value, Ramsay Health Care shares look a lot cheaper than the likes of Seek, ResMed and REA Group on very basic measurements such as the one-year forward looking Price-Earnings ratio, though I wouldn't call Ramsay particularly "cheap".

It is possible this gap in relative valuation helps Ramsay shares perform better if the FY21 financials beat forecasts, but I remain more confident in keeping ResMed and REA Group in portfolio and if/when their share prices weaken significantly, I'll be ready to increase portfolio exposure.

This is, ultimately, how you play the share market to your own advantage. Know what you are interested in, and why. Give confidence to the companies that deserve it. Keep a firm eye on the longer term.

Understand that quantifiable quality is rare and extremely valuable, and that 'valuation' is the one and only consideration for unproven, lower quality and cyclical companies (which is: most of them), but merely a short-term item for those exceptional businesses that are also listed on the ASX.

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More on this year's August Reporting Season:

-August Bonanza, But What's Next?

https://www.fnarena.com/index.php/2021/08/05/rudis-view-august-bonanza-but-whats-next/

-August Results: Anticipation & Trepidation:

https://www.fnarena.com/index.php/2021/07/29/rudis-view-august-results-anticipation-trepidation/

Also: this week's Weekly Insights includes a more detailed update on the All-Weather Model Portfolio, see further below.

Not To Be Forgotten: The Bond Market

Results seasons are supposed to direct investors' attention to what really matters on the share market, and that is how business leaders at the helm of ASX listed companies create durable shareholder benefits and rewards, usually through growing the company's revenues, profits, cash flows and dividends.

But results seasons are seldom only about individual companies. Anno 2021 we can count the global pandemic and bond markets as two potential forces that can have a profound impact, either on individual companies or on markets in general. In particular the bond market can cause some serious tribulations, if/when global bond yields start rising once again.

Nobody really knows what has driven bond yields down since mid-March. All explanations I have come across seem partial influences, at best. What we do know is that bond yields are a lot lower than where they seemed to be trending towards up until March, and this has allowed Quality and Growth and Defensive stocks to once again show their most favourable colours.

Investors should, however, not underestimate the potential impact from bond market yields rising, as we all witnessed during the opening weeks of this calendar year. We don't know when or why exactly, but it seems but a fair assumption this will happen again, possibly before year-end.

What this means is that diversification in portfolios remains of paramount importance. Don't stare yourself blind on the strength of profits and dividends and capital returns this season; equally consider what a quick run up in bond yields might do to the share price.

This might be an opportune time to secure profits on the winning side and start looking at adding some laggards that might come to life on the back of bonds selling off (yields rising).

Whatever the strategy: don't make it a one-way bet on the direction of bond yields.

Also, keep in mind: companies that are capable of achieving sustainable strong growth will come out positively on the other end of bond market headwinds, though probably not immediately.

Conviction Calls

Last week's surprise takeover agreement between US fintech Square and local BNPL market leader Afterpay ((APT)) has triggered a genuine "Who Could Be Next?" research drive inside the local stockbroker community.

Whereas Morgan Stanley doesn't think investors should get too excited post-Afterpay, RBC Capital has weighed in with a three-tiered assessment, dividing potential ASX-listed technology targets over three baskets: Highly attractive targets, medium attractive names, and lowly attractive peers.

In the highly attractive basket we find: NextDC ((NXT)), Infomedia ((IFM)), Pushpay Holdings ((PPH)), Altium ((ALU)), and Hansen Technologies ((HSN)). The latter already is providing due diligence to a potential suitor.

Medium attractive targets include: Appen ((APX)), EML Payments ((EML)), Megaport ((MP1)), Macquarie Telecom ((MAQ)), and Fineos Corp ((FCL)).

Not so attractive, apparently, are: Xero ((XRO)), Pro Medicus ((PME)), Nearmap ((NEA)), and Elmo Software ((ELO)). Not all for the same reasons though. The first two are trading on elevated valuations, which acts as a natural deterrent, while for the latter two the future looks a lot less predictable with RBC Capital anticipating ongoing negative cash flows.

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Not a big fan of picking high dividend yielders whose shares look attractive because of operational headwinds and serious question marks that depress the share price, but it is one of the selections that always has investors' interest in Australia.

Morningstar has come up with the following "10 Franked Income Ideas for Australian Investors". Stocks selected are:

-Aurizon Holdings ((AZJ))
-Perpetual ((PPT))
-Link Administration ((LNK))
-GWA Group ((GWA))
-Westpac Banking ((WBC))
-APA Group ((APA))
-Telstra ((TLS))
-Magellan Financial Group ((MFG))
-Dexus ((DXS))
-Medibank Private ((MPL))

Morningstar seems confident there are no dividend traps included in that list.

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Morningstar also updated its selection of Best Stock Ideas, involving a switch out of Spark Infrastructure ((SKI)) and into Aurizon Holdings.

The 15 Best Stock Ideas are:

-a2 Milk ((A2M))
-AGL Energy ((AGL))
-Aurizon Holdings
-Brambles ((BXB))
-Challenger ((CGF))
-Cimic Group ((CIM))
-G8 Education ((GEM))
-InvoCare ((IVC))
-Lendlease Group ((LLC))
-Link Administration ((LLC))
-Southern Cross Media ((SXL))
-TPG Telecom ((TPG))
-Viva Energy Group ((VEA))
-Whitehaven Coal ((WHC))
-Woodside Petroleum ((WPL))

FNArena Talks – Pre-August Interview

Last week I gave an interview to Livewire Markets, which can be accessed:

-Through LiveWire Markets:

https://www.livewiremarkets.com/wires/rudi-it-s-the-healthiest-bull-market-we-ve-seen-in-years

-Via YouTube: https://youtu.be/wwuh8YvfVks

All-Weather Model Portfolio

June-July update for the one and only Portfolio based on my research into All-Weather Stocks on the ASX:

https://www.fnarena.com/downloadfile.php?p=w&n=8E207C19-082F-ADA0-E271FB7C116BFAB0

(This story was written on Monday 9th August, 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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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 $450 (incl GST) for twelve months or $250 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

A2M AGL ALL ALU APA APT APX AZJ BRG BXB CBA CGF CIM COH CSL DXS ELO EML FCL GEM GWA HSN IEL IFM IVC LLC LNK MAQ MFG MP1 MPL NEA NWS NXT PME PPH PPT REA RHC RIO RMD SEK SKI SXL TLS TPG VEA WBC WHC WOW XRO

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: ALU - ALTIUM

For more info SHARE ANALYSIS: APA - APA GROUP

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED

For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED

For more info SHARE ANALYSIS: BXB - BRAMBLES LIMITED

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

For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED

For more info SHARE ANALYSIS: CIM - CIMIC GROUP LIMITED

For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: DXS - DEXUS

For more info SHARE ANALYSIS: ELO - ELMO SOFTWARE LIMITED

For more info SHARE ANALYSIS: EML - EML PAYMENTS LIMITED

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

For more info SHARE ANALYSIS: GEM - G8 EDUCATION LIMITED

For more info SHARE ANALYSIS: GWA - GWA GROUP LIMITED

For more info SHARE ANALYSIS: HSN - HANSEN TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: IEL - IDP EDUCATION LIMITED

For more info SHARE ANALYSIS: IFM - INFOMEDIA LIMITED

For more info SHARE ANALYSIS: IVC - INVOCARE LIMITED

For more info SHARE ANALYSIS: LLC - LENDLEASE GROUP

For more info SHARE ANALYSIS: LNK - LINK ADMINISTRATION HOLDINGS LIMITED

For more info SHARE ANALYSIS: MAQ - MACQUARIE TELECOM GROUP LIMITED

For more info SHARE ANALYSIS: MFG - MAGELLAN FINANCIAL GROUP LIMITED

For more info SHARE ANALYSIS: MP1 - MEGAPORT LIMITED

For more info SHARE ANALYSIS: MPL - MEDIBANK PRIVATE LIMITED

For more info SHARE ANALYSIS: NEA - NEARMAP LIMITED

For more info SHARE ANALYSIS: NWS - NEWS CORPORATION

For more info SHARE ANALYSIS: NXT - NEXTDC LIMITED

For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED

For more info SHARE ANALYSIS: PPH - PUSHPAY HOLDINGS LIMITED

For more info SHARE ANALYSIS: PPT - PERPETUAL LIMITED

For more info SHARE ANALYSIS: REA - REA GROUP LIMITED

For more info SHARE ANALYSIS: RHC - RAMSAY HEALTH CARE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RMD - RESMED INC

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SKI - SPARK INFRASTRUCTURE GROUP

For more info SHARE ANALYSIS: SXL - SOUTHERN CROSS MEDIA GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED

For more info SHARE ANALYSIS: TPG - TPG TELECOM LIMITED

For more info SHARE ANALYSIS: VEA - VIVA ENERGY GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WHC - WHITEHAVEN COAL LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED