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Rudi’s View: Preparing For August

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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 | Mar 24 2022

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

In this week's Weekly Insights:

-Preparing For August
-Conviction Calls
-Research To Download
-No Weekly Insights Next Week

By Rudi Filapek-Vandyck, Editor FNArena

Preparing For August

"Earnings growth expectations have been reduced dramatically since the start of the year. Higher commodity prices will lead to weaker consumer demand and lower economic growth.

As a result, we believe the global earnings growth for stocks in 2022 will be less than five percent, or approximately half of the current market expectation. With increasing geopolitical tensions and recession risk the market will struggle in returning positive returns to investors."
 
[Lewis Grant, Senior Portfolio Manager – Global Equities, at Federated Hermes]

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Markets have bounced from oversold levels, but the quote above captures the challenge that lays ahead, irrespective of what happens in Moscow or at the US Federal Reserve: earnings estimates are most likely facing a downgrade cycle in the months ahead.

For investors, the challenge is thus to avoid owning those companies that might be forced to issue a profit warning or, in the absence of a public admission beforehand, miss market forecasts in August.

Valuations in general have shrunk since the start of the calendar year, but share prices usually don't respond well when anticipated sales or profits don't materialise.

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One prime example from the February reporting season was provided by gloves and protective gear manufacturer Ansell ((ANN)).

Prior to the start of 2022, Ansell shares had already deflated as the market became aware of more challenging conditions for the company, and so the share price declined from $43 to $31 which might have suggested at the time the forthcoming disappointment had already been priced in.

But when management issued a profit warning in January, it was worse than anticipated, and the share price took another dive to $25. Sometimes even a 'cheap' looking share price is still not enough to accommodate for the disappointment that lays ahead.

There is, however, another side to this story. Since that follow-up punishment in the share price, Ansell shares have range-traded around the $25 price level. This during a time when large parts of the share market were caught into wild swings in either direction.

As such, Ansell is showing investors one way to protect their capital in 2022: through buying a quality performer that is temporarily facing tougher conditions, with its share price beaten down to a level that, simply put, offers 'deep value' for those who can look beyond the immediate outlook.

Ansell is not a fly-by-night, not a business idea that yet needs to find enough customers to turn EBITDA-profitable, and neither has the company a chequered history that combines lucky streaks with painful failures and broken promises.

Over the decade past, Ansell shares (more than) tripled in value up until that $43 peak from last year, which is not something many ASX-listed peers can boast about.

I personally believe the company shares key common features with the much larger Amcor ((AMC)) but with a market capitalisation of circa $3bn only, and fierce competition from Malaysia, Ansell is more susceptible to the occasional stumble every now and then, and its history shows exactly that.

A company such as Ansell will get through the current period in a better shape, with reinvigorated growth prospects. The market knows this all too well.

But few are willing to stick their neck out as yet, because -who knows?- there might just be another piece of negative news waiting to be announced.

In the meantime, Ansell shares have become a waiting game. Waiting for the next catalyst to move away from a deeply discounted share price.

Another example is Iress ((IRE)), a company whose share price has looked 'unexciting' for the past five years or so, but in recent weeks the buyers have returned. Again, at $10, there's but a fair argument to be made Iress shares looked 'cheap', also with the implied forward looking dividend yield rising to around 4.7%.

The shares have risen by some 18% since the release of interim financials in February -a little over one month ago- which means the implied yield is now closer to 4%, but there remains the prospect of extra-capital management on top of the current share buyback.

Like so many other companies on the ASX, Iress is looking to sell non-core assets and shareholders will see at least part of the proceeds coming their way.

Both Ansell and Iress are but two examples of how investors have directed their attention to the lowly valued parts of the share market at a time when fears about inflation, rising bond yields and central bank tightening are putting a lot of pressure on share prices that trade on higher multiples, regardless of their operational health or outlook.

As per usual, cheap looking share prices are not a guaranteed success formula. The general climate has changed, insofar that small and micro cap growth companies will need to achieve positive cash flows if they ever want to make a sustainable come-back, not just growth at the top line with lots of attractive sounding promises.

And for many, of course, a 'cheap' looking share price simply means it's not worth our attention. Unless the strategy consists of trading the short-term ups and downs in market sentiment.

What the example of Iress possibly also shows is that seeking out companies that pay out extra dividends, or buy back more of their own shares, could provide that extra layer of downside protection during a time when global concerns are building about what general trends might look like later this year, and into 2023.

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Another strategy to minimise risk this year is by seeking out beneficiaries from re-opening countries and economies.

Ever since the global pandemic revealed itself, and countries shut borders and limited general mobility, whole sectors have been placed on life support.

Returning back to something resembling 'normal' has been rather slow, with numerous stops and starts, for the likes of Flight Centre ((FLT)), Vicinity Centres ((VCX)), Transurban ((TCL)), Alliance Aviation Services ((AQZ)), Event Hospitality & Entertainment ((EVT)), Experience Co ((EXP)), and many more.

I did spot a few fund managers who have recalibrated their strategy for this year around this theme.

The underlying reasoning is those companies have been through such a rough time that any improvement from here onwards is a positive development. Even if that improvement fails to live up to expectations, the market most likely will still focus on the prolonged return to normal, hence in the absence of another true calamity, the downside risks should remain contained.

A special mention needs to be made of healthcare companies including Ramsay Health Care ((RHC)), CSL ((CSL)), Integral Diagnostics ((IDX)), and yes, even Sonic Healthcare ((SHL)) after the recent de-rating, which equally stand to benefit from the global return to 'normal', even though they might not necessarily be seen as such (obvious) beneficiaries right now.

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A trickier challenge is to pick up equities that have been sold off on the back of rising bond yields, and out of fear for much higher bond yields yet to come, while operational conditions suggest these companies are now undervalued.

The obvious comment to make here is that investors might have to become more comfortable with the outlook for inflation and bonds before these securities can see buying interest return in a sustainable manner, but most pay dividends, which makes it less challenging to wait around for better momentum to return, one assumes.

The obvious sector to consider is Property & REITs and, lending my ear to the specialised research teams across the stockbroking industry, it appears investors have plenty of angles to choose from:

-funds managers
-daily needs retail
-storage
-land lease

plus we can throw in more of the re-opening beneficiaries theme through, for example, owners of shopping malls.

Candidates to consider are Goodman Group ((GMG)), Charter Hall ((CHC)) and HomeCo ((HMC)) as reputable (and successful) funds managers, HomeCo Daily Needs REIT ((HDN)) and Shopping Centres Australasia ((SCP)) for the second category, while Abacus Property ((ABP)) -post yet another capital raising- seems to be every man's favourite in the storage sector, while Ingenia Communities ((INA)) and Lifestyle Communities ((LIC)) remain the two pre-eminent representatives for the land lease-theme.

Stock Analysis on the FNArena website shows most of these share prices are trading well below valuations and price targets put forward by the analysts covering the sector. This will not prevent share prices from possibly falling lower, but if operational conditions do not deteriorate, this gap will eventually narrow (if not close) to the upside.

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Equally valid: there's still plenty of inspiration that can be drawn from the recent reporting season in February when solid results from companies including Seek ((SEK)), Lovisa Holdings ((LOV)), Hub24 ((HUB)), Aussie Broadband ((ABB)), Cleanaway Waste Management ((CWY)), and Steadfast Group ((SDF)) generated near-universal praise.

As per always, the trick remains the same: "as long as operational conditions do not deteriorate".

An excellent starting point for further research and assessments could be my own comprehensive review of the February season, which was published on Monday:
https://www.fnarena.com/index.php/2022/03/21/rudis-comprehensive-february-2022-review/

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Bottom-line: beyond the daily updates on the war in Ukraine, investors globally are increasingly worried about the impact of higher prices for energy and industrial and agricultural commodities on corporate margins and household budgets.

The August reporting season is still more than four months away, but investors should probably start their preparation today.

As far as Australia's two main index components are concerned, the operational outlook for the banks does not look especially attractive, but those dividends look secure and RBA rate hikes later in the year might help improve things for the sector.

A fresh update on the banks by (ex-UBS) analysts at Barrenjoey estimates two out of every three new mortgage loans in Australia are now written via mortgage brokers.

This, predict the analysts, will act as yet another earnings headwind for the sector in the next three years, with Westpac ((WBC)) to experience the heaviest impact of the Big Four.

Analyst profit forecasts for the ASX200 in FY23 are quite low, for an average of single digit growth only, though this can easily change via miners and energy producers as commodities are arguably enjoying prolonged boom times on the back of the war in Ukraine and Western sanctions against Russia.

But what are excellent top line conditions for producers of commodities is increasingly a negative for the rest of society. It remains important to keep this in mind.

"US corporates now face decelerating sales growth coupled with higher costs. As such, our leading earnings model is pointing to a deceleration in EPS growth toward zero over the coming months, and higher-frequency data on earnings revision breadth are trending lower – driven by cyclicals and economically sensitive sectors – a set-up that looks increasingly 'late' cycle."

[Michael J Wilson, US equity strategist, Morgan Stanley]

Both Ansell and Iress are held in the FNArena/Vested Equities All-Weather Model Portfolio.

Conviction Calls

Analysts at Wilsons have stuck their neck out and declared all of Aristocrat Leisure ((ALL)), James Hardie ((JHX)) and Seek ((SEK)) have been treated unfairly by macro-inspired selling in the opening weeks of 2022, making all three share prices undervalued.

Wilsons believes a general non-appetite for 'Growth' is responsible for these three structural, quality growers falling out of favour.

The 'problem', so to speak, is, however, that all three still enjoy long-term structural growth, and this implies share prices today are looking too cheaply priced when assessed against the background of many more years of solid growth on the horizon.

The analysts do concede it might still a take a while before such share prices can regain widespread investor favour, maybe until the market is comfortable with inflation and the pace of US rate rises? Wilsons suggests this might not happen until mid-year.

In the meantime, the analysts' current forecasts imply all three will grow at much faster pace than the market average over the next three years, at least.

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Analysts at Morgan Stanley, on the other hand, have equally been inspired to conduct another review for their favourites coming out of the February reporting season.

The result: Morgan Stanley looks even more convinced those companies will prove excellent investments throughout the volatility and the many uncertainties that beset share markets in 2022.

Favourites that have remained favourites include ARB Corp ((ARB)), Breville Group ((BRG)), City Chic Collective ((CCX)), Jumbo Interactive ((JIN)), IDP Education ((IEL)), and SG Fleet ((SGF)).

The broker has equally repeated its mantra that good times continue to lay ahead for Goodman Group.

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Morgan Stanley's Model Portfolio for Australia seems to have waved goodbye to both Tyro Payments ((TYR)) and Karoon Energy ((KAR)) while additional weight was given to Carsales ((CAR)) and Woolworths ((WOW)).

The broker's Australia Macro+ Focus List currently comprises of the following ten inclusions: ANZ Bank ((ANZ)), Santos ((STO)), Computershare ((CPU)), Goodman Group, Macquarie Group ((MQG)), Orica ((ORI)), Qantas Airways, QBE Insurance ((QBE)), REA Group ((REA)), and Telstra ((TLS)).

Research To Download

Independent Investment Research (IIR) on Pimco Global Income Opportunities Trust ((PMX)):

https://www.fnarena.com/downloadfile.php?p=w&n=ABDE7EEC-AC2B-88F4-869A64CEAD5D5BC2

No Weekly Insights Next Week

I will be attending the Australian Investors Association's (AIA) national conference at the Gold Coast next week, unable to write.

Weekly Insights shall resume from the following week, in early April.

(This story was written on Monday 21st March, 2022. 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

ABB ABP ALL AMC ANN ANZ AQZ ARB BRG CAR CCX CHC CPU CSL CWY EVT EXP FLT GMG HDN HMC HUB IDX IEL INA IRE JHX JIN KAR LIC LOV MQG ORI QBE REA RHC SCP SDF SEK SGF SHL STO TCL TLS TYR VCX WBC WOW

For more info SHARE ANALYSIS: ABB - AUSSIE BROADBAND LIMITED

For more info SHARE ANALYSIS: ABP - ABACUS PROPERTY GROUP

For more info SHARE ANALYSIS: ALL - ARISTOCRAT LEISURE LIMITED

For more info SHARE ANALYSIS: AMC - AMCOR PLC

For more info SHARE ANALYSIS: ANN - ANSELL LIMITED

For more info SHARE ANALYSIS: AQZ - ALLIANCE AVIATION SERVICES LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED

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

For more info SHARE ANALYSIS: CCX - CITY CHIC COLLECTIVE LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: CPU - COMPUTERSHARE LIMITED

For more info SHARE ANALYSIS: CSL - CSL LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: EVT - EVENT HOSPITALITY & ENTERTAINMENT LIMITED

For more info SHARE ANALYSIS: EXP - EXPERIENCE CO LIMITED

For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: HDN - HOMECO DAILY NEEDS REIT

For more info SHARE ANALYSIS: HMC - HOME CONSORTIUM LIMITED

For more info SHARE ANALYSIS: HUB - HUB24 LIMITED

For more info SHARE ANALYSIS: IDX - INTEGRAL DIAGNOSTICS LIMITED

For more info SHARE ANALYSIS: IEL - IDP EDUCATION LIMITED

For more info SHARE ANALYSIS: INA - INGENIA COMMUNITIES GROUP

For more info SHARE ANALYSIS: IRE - IRESS LIMITED

For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC

For more info SHARE ANALYSIS: JIN - JUMBO INTERACTIVE LIMITED

For more info SHARE ANALYSIS: KAR - KAROON ENERGY LIMITED

For more info SHARE ANALYSIS: LIC - LIFESTYLE COMMUNITIES LIMITED

For more info SHARE ANALYSIS: LOV - LOVISA HOLDINGS LIMITED

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: ORI - ORICA LIMITED

For more info SHARE ANALYSIS: QBE - QBE INSURANCE 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: SDF - STEADFAST GROUP LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: SGF - SG FLEET GROUP LIMITED

For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED

For more info SHARE ANALYSIS: TLS - TELSTRA CORPORATION LIMITED

For more info SHARE ANALYSIS: TYR - TYRO PAYMENTS LIMITED

For more info SHARE ANALYSIS: VCX - VICINITY CENTRES

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED