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Rudi’s View: All-Weather Stocks, Some Answers

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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 | Jan 20 2022

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

By Rudi Filapek-Vandyck, Editor FNArena

FNArena regularly receives questions about my research into All-Weather Performers. Below is an attempt to answer recent questions in bulk.

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My idea about researching All-Weather Stocks has always been to provide a general framework of solid, high-quality, dependable performers that will generate plenty of benefits over a long period of time.

How investors deal with this information, and how they choose to benefit from it and incorporate this information into their own portfolio and strategy is completely up to them.

My research started more than 12 years ago and over that period the stocks identified have shown their true value as excellent long-term performers.

Simply look at price charts for, say, ARB Corp ((ARB)), REA Group ((REA)) and Cochlear ((COH)) over that period.

Because true All-Weathers are hard to find, and they are rather rare, I have also compiled a few additional lists with quality growth stocks, mostly carried by megatrends, plus the best of the crop among dividend payers.

I often receive questions about when will I be making changes to my lists and selections, but you'll be surprised to hear the number of changes made over that period has remained quite small.

Sure, some of the growth companies once selected ultimately ran out of steam. Appen ((APX)) springs to mind, as does Treasury Wine Estates ((TWE)), as well as a2 Milk ((A2M)).

And as far as true All-Weather Stocks are concerned, I recently removed Ramsay Health Care ((RHC)) from my list, arguably a little too late, but most of my selections have remained largely intact.

Since late 2014, FNArena in cooperation with Vested Equities, also offers investors the opportunity to invest in a managed account (SMA) specifically based upon my research.

In practice this means the All-Weather Model Portfolio selects and owns stocks from the lists I share with subscribers here at FNArena.

This always leads to two types of questions: at what price exactly did the All-Weather Portfolio purchase those shares and what is the current portfolio weight?

Personally, I think such questions are misdirected. Firstly, the All-Weather Portfolio has a very specific mandate (my research and no commodities), plus there is no such thing as one strategy approach that suits everyone under all circumstances.

The more important message, I hope, is there are high-quality, mega-performers out there, listed on the ASX, and they are worthy of investors’ attention with a focus on rewards over the longer-term.

The latter is important as the past two or three decades have shown that while companies such as CSL ((CSL)) and TechnologyOne ((TNE)) are capable of delivering high rewards for loyal shareholders over many years, they do not necessarily (out)perform every single day, week, month, quarter, or even every year.

But one weak(er) period does not change the broad picture and as long as I remain confident the underlying trend remains ‘up’ for multiple years into the future, the stocks I have identified shall remain on my lists.

Another regularly recurring question is: at what price should one buy shares in, say, CSL, or REA Group, or TechnologyOne?

My response always points out that such high-quality performers are never truly “cheaply” priced. It goes with the territory, so to speak.

Forget about trying to buy any of such shares at low single digit PEs or even near the market average valuation; it’s simply not going to happen.

As a matter of fact, if ever any of those stocks gets de-rated to the level of your ordinary run-of-the-mill, ASX-listed, low quality wannabe, it’ll be time to consider whether that specific long-term growth story has finally come to an end.

General Electric, IBM, Kodak and Xerox were amongst the champions of the twenty first century and investors enjoyed incredible returns on their investment in these companies over a long time, but today these companies feature no more.

Hence, it’s good to keep in mind that even exceptional companies don’t have eternal success written in their corporate DNA.

In the same breath, it is equally good to keep in mind that while these companies remain successful, the underlying trend in shareholder rewards and in their share prices remains from the bottom on the left to the right hand top on price charts.

While it is easy to pick a level whereby a stock like CSL or REA Group genuinely looks “cheap”, chances are the market never allows those shares to fall that deeply, so there really is not much value to be derived from setting “cheap” price levels (as I usually point out when your typical value investor shares his or her opinion).

I’ve had discussions about CSL looking extremely over-valued at $120, and REA Group couldn’t possibly be bought at $65, while surely the ceiling was in for TechnologyOne at $9, but today each of those share prices are trading at much higher prices.

As I pointed out to one inquisitive subscriber recently, does it really matter whether one bought CSL shares at $130, or at $180, or at $230? Today the share price is much higher, and it has been at a much higher level still.

Admittedly, if one bought at $330 or at $300 the general feeling would be different because today’s shares are trading at a lower price, thus short-term considerations cannot be dismissed completely.

If I look back at my own experiences since late 2014, it actually happens regularly that stocks added to the All-Weather Portfolio weaken to a lower price level initially, and it may take some time, depending on the overall context, but eventually they all came good.

I am not adding this experience to suggest entry levels do not matter, but for all the wrong or the right reasons, I tend to feel more comfortable trusting these companies/shares will deliver, even when my entry point proves not 100% ideal in the short term.

The question when to add one of these long-term over-deliverers is never an easy one, but most investors, myself included, tend to start thinking about buying during times when share prices are weakening.

There is always a degree of personal preference involved too. For example: ever since I started communicating my research, I have held a personal preference for REA Group and Carsales ((CAR)) over Seek, but that was not necessarily the correct bias from a total investment return perspective.

These are some of the key reasons as to why my research is presented as a general framework only, and not in the form of fluid Buy-Hold-Sell recommendations.

I am, of course, delighted when subscribers pick the bottom in, say, Carsales and witness their shares appreciate over the subsequent days, but I feel many times over more vindicated when they tell me they bought the stock at a price half or a quarter below the current share price.

So how do I decide whether and when to buy shares in an All-Weather Stock?

Unsurprisingly, I try to gauge whether the near-term outlook can still be relied upon. And whenever doubt hits market sentiment, I genuinely hope the market exaggerates to the downside, as it often (though not always) does.

And I unapologetically use the same input, data and information from the FNArena website that is available to paying subscribers.

I find the more one knows about a given company and its sector, the easier it is to use the views and assessments made and published by stockbroking analysts.

My rule of thumb is to buy when shares are at least -10% below consensus target, but there are plenty of exceptions to that rule because circumstances and general context are not always identical or even comparable.

Also, I tend to not treat consensus targets as a static, set-in-stone benchmark. Some stocks always trade at a premium. Some analysts are always positive while others keep lagging for a long time.

Pay attention for long enough, and these observations turn into important inputs.

Equally important is to know when to sell, and no matter how high quality our portfolio is, there is always room for disappointment, and for change.

There are stocks, I fully admit, I simply never want to completely sell out of. At most, the Portfolio might sell a portion if there's enough confidence of a big correction coming up.

This is also because my personal experiences have taught me it can be incredibly challenging to get back on board, in particular when the market’s out to prove one's personal fear/conviction was misguided.

The Portfolio sold Macquarie Group ((MQG)) shares near the height of covid carnage fears in 2020, and never managed to get back on board during the subsequent recovery rallies.

You are damn right I feel sad about it.

But when things change, investors should not hesitate to wave goodbye if the indication is strong enough that the good times are well and truly in the past.

During the early days of the All-Weather Portfolio I had mistakenly assumed Slater & Gordon ((SGH)) was primed for longer-lasting greatness, but the initial strong performance for the shares quickly turned into a loss of -15% (from memory, it might have been closer to -20%).

I felt the acquisition in the UK was misguided and all shares were sold at a loss. Given Slater & Gordon shares would ultimately deflate by some -96%, that lesson will probably last a lifetime.

In the same vein, iSentia ((ISD)), Appen, Treasury Wine Estates, a2 Milk… they are no longer in the Portfolio or on my lists, and they might never again come under reconsideration.

History thus far suggests true All-Weather Performers deserve to be treated differently, even when momentum is temporarily not on their side – as long as we have a long-term horizon.

Which is why the Portfolio owns most of the stocks on my lists, and changes include selling half or part of the shares owned under more difficult conditions.

I am sharing my ideas and portfolio insights to help investors understand the broader philosophy and risk-mitigating approach behind my research and the All-Weather Portfolio in extension of that research.

Ultimately, the decision whether parts or all of my research should be paid attention to, and to what extent, rests with every investor individually.

I simply hope that my personal experiences, combined with market insights and my research, assists with making better and more profitable investment decisions.

Because, ultimately, that’s what all of the above is about. It’s not about providing Buy and Sell tips, it’s about creating and sharing quality knowledge as the basis for better investment returns.

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See also the following video from late last year:

https://www.fnarena.com/index.php/fnarena-talks/2021/11/25/all-weather-stocks-an-introduction/

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Paid subscribers have 24/7 access to my lists, while I write regular portfolio reviews, and include updates and insights in Rudi's View stories that are sent out as Weekly Insights emails before they are published on the website.

Recent Portfolio reviews:

November: https://www.fnarena.com/downloadfile.php?p=w&n=5A1F8C7A-D49A-C5ED-550285FB8C63EBD9

October: https://www.fnarena.com/downloadfile.php?p=w&n=4BA408AC-AF35-78F5-F42D94A2CF808BF1

September: https://www.fnarena.com/downloadfile.php?p=w&n=B6798F75-0375-ACE0-CAB39BEDF04567BE

August: https://www.fnarena.com/downloadfile.php?p=w&n=B674AF06-E339-5816-5FD0DA4AE7D29F80

June/July: https://www.fnarena.com/downloadfile.php?p=w&n=B66CC435-9758-005C-77B2719A92612A9B

May: https://www.fnarena.com/downloadfile.php?p=w&n=B66804C2-BB83-93BF-AEFB5A28EC0E4A5A

April: https://www.fnarena.com/downloadfile.php?p=w&n=B664E73A-FBB4-1456-8EF79590D64EBF29

March: https://www.fnarena.com/downloadfile.php?p=w&n=B66218E0-DB14-B8D4-360E91AE22EA01AC

February: https://www.fnarena.com/downloadfile.php?p=w&n=B65DC629-929F-1743-8FF1EEFE600DF5A8

(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.)  

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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CHARTS

A2M APX ARB CAR COH CSL ISD MQG REA RHC SGH TNE TWE

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

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: COH - COCHLEAR LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: ISD - ISENTIA GROUP LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP 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: SGH - SLATER & GORDON LIMITED

For more info SHARE ANALYSIS: TNE - TECHNOLOGY ONE LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED