Tag Archives: All-Weather Stock

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

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Rudi’s View: 29Metals, Calix, Chalice Mining, Incitec Pivot, Telstra & Qantas

rudi-views
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 13 2022

In today's update:

-Conviction Calls
-All-Weather Performers
-All-Weather Model Portfolio
-AIA Conference In March

By Rudi Filapek-Vandyck, Editor FNArena

Happy New Year, and welcome back!

Rudi's View stories won't genuinely return until after Australia Day when the time has arrived to prepare for the February reporting season, but since various lists of top picks and conviction calls have been updated already, I convinced myself to compile the update below.

Enjoy.

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The January update of Morningstar's Best Stock Ideas on the ASX saw three stocks being removed with share prices of both AUB Group ((AUB)) and Viva Energy Group ((VEA)) having appreciated too much to still warrant their nomination, while the days of Link Administration ((LNK)) as an independent listed entity seem numbered following Dye and Durham's formal offer for the whole of the company.

Since no new additions were included, the list of Best Stock Ideas is now left with 13 names, in alphabetical order:

-a2 Milk ((A2M))
-AGL Energy ((AGL))
-Aurizon Holdings ((AZJ))
-Brambles ((BXB))
-Cimic Group ((CIM))
-G8 Education ((GEM))
-InvoCare ((IVC))
-Lendlease ((LLC))
-Magellan Financial Group ((MFG))
-Southern Cross Media Group ((SXL))
-Westpac ((WBC))
-Whitehaven Coal ((WHC))
-Woodside Petroleum ((WPL))

Analysts at Morningstar cover in excess of 200 companies listed in Australia and/or New Zealand and inclusion in the Best Ideas is always inspired by a (too) cheap valuation, which sometimes translates into an extended membership which might seem endless for investors who do not have the patience.



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Over at Canaccord Genuity, which in Australia has a specific focus on micro-cap and small-cap companies, analysts have selected 26 Top Picks that combined make up this stockbroker's Top Australian Stock Picks for the calendar year ahead.


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Rudi’s View: The Secret Ingredient

rudi-views
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 | Nov 25 2021

In this week's Weekly Insights:

-The Secret Ingredient
-Conviction Calls
-Research To Download
-All-Weather Model Portfolio


By Rudi Filapek-Vandyck, Editor FNArena

The Secret Ingredient

Imagine two similar companies, competing in the same sector. One is hellbent on doing the right thing, the other cares a lot less about the long-term picture and instead is obsessed with its share price in the short term.

To many an investor, the difference between these two investment options is rarely obvious and mostly simply a matter of personal preference. One year one is in fashion and performs better, the next year the competitor catches up and proves the doubters wrong.

This is where the art of investing shares shows one crucial similarity with the appreciation of visual art: stand too close and you might see a lot of details, but you'll never enjoy the full beauty of the artist's creation.

Let's assume our two companies are equally profitable, which could be something like 25c out of every dollar in sales. The first company decides to invest for longer term benefit, while the second is happy to pay most of it out to happy shareholders.

Usually what happens in the share market is the second company is instantly rewarded while the first one sees its share price being punished for not spending its cash profits on pampering the shareholders. At least, that's what first optics show us, with share prices heading south every time management at a listed company announces increased investment.

It's a tough gig, being at the helm of a publicly listed company, but investors should not assume the share market prevents boards and managers from making long-term decisions; it's just that tough questions will be asked, in particular for unlikely or unproven strategies.

If the first of our companies decides to spend 5c out of the 25c in cash profits each year on future benefits, this is only a headwind in the short term. Once investors get comfortable with the extra spending and the returns that are achieved, and can be expected, today's initial scepticism will turn into tomorrow's reward.

Sure, profits for company number one might start to accelerate faster, though this is not always immediately obvious, certainly not when both companies operate in a booming environment. But everyone can figure out that applying the same valuation multiple for both companies doesn't seem 'fair' or even logical.

For starters: company one could easily report the same profit as company two, it's just that it chooses not to for an identifiable purpose: achieving higher rewards for longer for today's shareholders. Investors in the share market can be emotional, single-eyed and short-term obsessed, but they are not completely without a brain.

Give them enough evidence that those investments bring tangible rewards, and they will sit up and pay attention.

Under favourable circumstances, it is possible there is no genuine difference in profitability between our two competitors, but as investors we do understand that company number one could stop its investment if it wanted, and this would instantly increase its profits and thus the short-term valuation of the business. Thus it makes little sense to value company number one less than its competitor.

One way to close the gap between these two is by applying a slightly higher multiple to the 20c in profits at company one vis-a-vis the 25c reported by number two. After all, company one is not simply throwing those 5c out of the window and the board could stop spending that cash any time.

What we are witnessing here is the birth of a valuation premium.

Any investor unaware of the specifics would look at the face value valuation for both companies and conclude: one is on par with the other but reports less profits and pays a smaller dividend. This makes no sense! The common mistake being made is to declare company one is "expensive".

Logic tells us, it might take a while, but the relative gap in operational performances between our two competitors will widen over time, further enlarging the gap in valuations. Of even more importance is that when the tough times arrive for the industry, and they will, investors will learn one extra invaluable lesson: company one is much better protected than competitor number two.

As with a property that has received no maintenance, when proper headwinds arrive investors might discover there are a lot more leaks in the roof that cause a lot more damage, while the building on the other side is standing firm and tall. There is value in the knowledge the next storm won't simply blow off the roof or decimate the front of the house, though we don't know exactly how much that value is.

The share market does have a collective memory. It builds as booms follow downturns; peaks follow troughs; cycles wind-up and wind-down.



In credit markets, it is but basic practice to reward the most solid and reliable borrower with a loan at lesser cost. In the share market investors have equally come to appreciate the worth of reliability and steadiness, albeit with a less defined, less identifiable benefit, but it is there in the share price valuations for companies that have gained investors' trust and confidence.

It is usually granted to sector leaders with pricing power who have the ability to defend their territory. It may not always be visible or obvious, but continuous investments made can act as a genuine moat around the business, which further adds to investors' confidence and trust.

Understanding the above is appreciating that successful investing is so much more than simply jumping on bombed-out, 'cheap' looking stocks. It also explains why many of the outperformers over the past decade(s) never once landed on the radar of bargain-obsessed, value-seeking investors, but their outperformance stands undisputed.


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SMSFundamentals: The Basics Of Portfolio Construction

SMSFundamentals is an ongoing feature series dedicated to providing SMSF trustees with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals section on the website.

The story below was originally published as part of Weekly Insights on 21st October 2021. It is hereby re-published to highlight its importance through inclusion to the SMSFundamentals section.

The Basics Of Portfolio Construction

By Rudi Filapek-Vandyck, Editor FNArena

On my observation, the investment services industry is focused too much on providing the next hot tip and individual stock recommendation. Granted, there is obvious, natural demand for such 'information', but it is also my observation many an investment portfolio suffers from a lack of structure and/or a well-thought out strategy.

Hence, this week I am sharing my own thoughts and experiences with structuring and running an investment portfolio. May it help and assist those investors currently in the dark when it comes to defining a strategy and structuring their own longer-term oriented equities portfolio.

First up, I can report from personal experience, from the moment you are running a structured portfolio, you no longer are an investor in stocks. Just like a coach of a sporting team, you stop concentrating on each of your players individually. Instead, you start realising, and appreciating, the effort made as a team, though you never want to lose sight of the individual components, of course.

Putting a team together, which in this case equals a basket of stocks, starts with the realisation not all players on the field can be hot blooded race horses. The sun doesn't shine every day, all day and we must accommodate for four seasons that cannot be perfectly anticipated each and every time.

Hence we need some race horses, but equally a selection of sturdy, reliable muscle-machines that can pull a load when the weather is cold and the ground is wet and muddy. Apart from the occasional exception, a well-diversified selection means the portfolio never sees all stocks rallying or all falling on a given day, in particular not with share market momentum as polarised as it is this year.

As an added benefit: come the next period of share market weakness, we might feel less inclined to sell everything and hide under the bed.

All-Weather Portfolio

Focus and momentum for the share market changes regularly, and often occurs completely unexpectedly. Instead of constantly shedding and selecting new stocks in order to minimise our losses and avoid missing the boat, once we have that structured portfolio in place, we find ourselves in the role of the master coach overseeing the team, making smaller changes here, and a minor recalibration over there, in response to a changing outlook.

Before we find ourselves in such a position, we need a basic road map as to how we get there and where to get started. In my case, I started with my own research into All-Weather Performers; reliable, proven business models with a track record of performance, not hindered by economic cycles to generate shareholder wealth.

How many stocks should I choose?

Over the past years, I have come to the conclusion that 6% as a full weighting for any given stock is an excellent target. It implies when the portfolio is fully invested the basket contains between 16 and 20 stocks, on average. That's a reasonable number that can still be overseen and managed, assuming they're not all high risk fly-by-nighters that need to be watched constantly.

As part of portfolio management, decisions can be made to allocate half-weightings, or reduced weightings, and in some cases of high conviction an overweighted position, but I would refrain from allowing any position to become too small or too large. As far as the first option goes: it's okay to have a punt every now and then, but if it's not worth owning at a sizeable allocation, is it even worth the energy and attention, let alone the risk?

There is no universal golden rule about what maximum size should be allowed, but I'd be hesitant to allow any given allocation to grow beyond 9% of the total. The reason is simple: risk. Take profits if you must. Consider it part of portfolio management.

On the other hand: don't feel like you need to top up on allocations that haven't worked out and shrink in portfolio importance. Better to always ask that question: where is my money in the best of hands? As impregnated as we all are by this idea that 'cheaper' stocks perform better than those that have already outperformed, the most often made error is selling the winners too early and putting more money into the laggards and losers.

I can guarantee you all this will be the first of lessons that will be learned, time and again, through running an investment portfolio.

As per the lists on the website currently, my research has identified 21 All-Weather Stocks, of which some are still "potential" and others are carrying a question mark. Should we simply buy all of them?

That wouldn't be much of a diversified structuring, would it? All-Weather stocks are spread out over multiple segments and sectors, but most share the same basic characteristics, including above-average Price-Earnings (PE) multiples, which means they potentially can land in or out of favour all at the same time.

Equally important, most investors want income from their portfolio and All-Weathers, if only because of their valuation, are not ideal for short-term income purposes.

It is for this reason that I decided back in late 2014, when we launched the All-Weather Model Portfolio, that a selection of income providing equities would be the second pillar of the overall portfolio strategy. A third pillar consists of emerging new business models and technology disruptors by applying a quality assessment to the many newcomers on the ASX over the semi-decade past.

In practice this means I am combining the likes of Amcor ((AMC)), CSL ((CSL)), REA Group ((REA)), TechnologyOne ((TNE)) and Wesfarmers ((WES)) with higher dividend yielders Aventus Group ((AVN)), Super Retail ((SUL)) and Telstra ((TLS)), and with the younger businesses of NextDC ((NXT)), Pro Medicus ((PRO)) and Xero ((XRO)).

View From The Portfolio Control Room

For the sake of creating a starting point, let's assume we allocate 33% to each of the three pillars. Next things to do: team play, fine tuning and overall macro strategy. Do we lean more towards risk aversion? Can we be more aggressive with our risk-taking? Do individual valuations require profit-taking and trimming of positions? Is there an opportunity out there we'd like to include? Should the portfolio increase its cash allocation given market jitters?

All these questions, and many others, will pop up along the way but from now onwards you can address them through allocating more here and less over there. It goes without saying, to make such decisions requires we know the basics about the companies we own, and we can make a reasonable judgment about what is happening in markets. Neither fear nor hope has ever proved to be a successful strategy in the long run.

One extra benefit is we learn a lot about the companies we own. Always best to know what we own, and why. My own experience also tells me we must never consider our stock choices and portfolio allocations as set in stone. Ignore individual losses and gains. Always keep an eye on the future. Make decisions that seem right. And make those decisions for the team.

Not selling because you're sitting on an individual loss while all the evidence is telling you you should, is not smart team play.

But equally: accept your execution won't be perfect, and luck has its own role to play.

What About Income?

Equally important is that most of the companies in the All-Weather Model Portfolio pay a dividend, but that should never be the sole reason to include a stock. Taking a team approach, we should combine the 5% offered by Aventus with the sub-1% offered by CSL as well as the zero pay-out from Xero.

The average yield for the total basket is what counts. Forward looking estimates only. The All-Weather Model Portfolio on average yields between 2.5%-3%, which may not seem a lot given the banks are back yielding 4% and more, as is the ASX200 index, but that extra -1% missing in yield has been compensated through relative outperformance.

The portfolio can always sell a few extra shares if/when we need that extra bit of income.

You'd have noticed I don't try to have all main sectors of the market represented, which is equally a valid portfolio strategy. Neither do I use rather traditional definitions such as 'defensives' or 'blue chips', which I personally find outdated. AGL Energy ((AGL)) officially belongs to the defensives on the ASX. Have a look at that share price since 2017 and try not to shudder.

Size does matter, however, and smaller cap stocks come, on average, with higher risk and more volatility than larger caps. So this should be one extra consideration for the average, risk-conscious investor.

The Portfolio also has that added goal to prove to investors All-Weather Stocks are worth focusing on and investing in, so the selection of stocks tends not to include the banks when looking for dividends while cyclicals, being the anti-thesis of the All-Weathers, are simply not an option.

You Have Options

In the current context of potential concerns about sticky inflation and rising bond yields, a decision can be made to include a selection of banks, other financials and cyclicals (miners, energy producers, contractors and engineers, etc) and this would simply fit in with the portfolio strategy as described above: adjust relative allocation according to comfort/discomfort with the inflation outlook (to the best of your abilities).

In similar vein, with investor focus currently on re-opening beneficiaries, this too can be integrated in our portfolio and strategy. One warning though: make sure your portfolio doesn't get hooked into one (too) dominant theme as that makes all of the above redundant. Running a diversified portfolio is by definition an admission that we cannot accurately forecast and anticipate all events and momentum changes every single time. So, yes, we are at times giving up on more potential upside, while looking for compensation in different circumstances.

Besides, a number of companies currently in the All-Weather Model Portfolio stands to benefit enormously from re-opening borders and economies, even though they might not yet be seen as key beneficiaries by the majority of investors who prefer to crowd together in airlines, airports and leisure companies.

Sometimes the allocation to new trends and focuses occurs without actually having to make a change in the portfolio!

I know some among you like to take a punt, and many do it more than regularly. You can always put a decent portfolio together and include a special reservation for your more risky, short-term, adrenaline-filled adventures.

And if you're into ETFs instead of individual shares, or a combination of the two, that can be accommodated too.

If all of the above is genuinely new, I highly recommend adopting and applying the basic principles. It'll change your life as an investor, not to mention the additional skills and insights that come with it.

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For more info about the FNArena/Vested Equities All-Weather Model Portfolio send an email to info@fnarena.com

Recent monthly portfolio reviews in 2021:

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

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Rudi’s View: Adairs, Gentrack, ReadyTech, Macquarie, Qantas And Nufarm

In this week's Weekly Insights:

-The Basics Of Portfolio Construction
-Jumpin' Jack Flash Lives In The Seventies
-Conviction Calls
-All-Weather Model Portfolio September Review
-Research To Download


By Rudi Filapek-Vandyck, Editor FNArena

The Basics Of Portfolio Construction

On my observation, the investment services industry is focused too much on providing the next hot tip and individual stock recommendation. Granted, there is obvious, natural demand for such 'information', but it is also my observation many an investment portfolio suffers from a lack of structure and/or a well-thought out strategy.

Hence, this week I am sharing my own thoughts and experiences with structuring and running an investment portfolio. May it help and assist those investors currently in the dark when it comes to defining a strategy and structuring their own longer-term oriented equities portfolio.

First up, I can report from personal experience, from the moment you are running a structured portfolio, you no longer are an investor in stocks. Just like a coach of a sporting team, you stop concentrating on each of your players individually. Instead, you start realising, and appreciating, the effort made as a team, though you never want to lose sight of the individual components, of course.

Putting a team together, which in this case equals a basket of stocks, starts with the realisation not all players on the field can be hot blooded race horses. The sun doesn't shine every day, all day and we must accommodate for four seasons that cannot be perfectly anticipated each and every time.

Hence we need some race horses, but equally a selection of sturdy, reliable muscle-machines that can pull a load when the weather is cold and the ground is wet and muddy. Apart from the occasional exception, a well-diversified selection means the portfolio never sees all stocks rallying or all falling on a given day, in particular not with share market momentum as polarised as it is this year.

As an added benefit: come the next period of share market weakness, we might feel less inclined to sell everything and hide under the bed.



All-Weather Portfolio

Focus and momentum for the share market changes regularly, and often occurs completely unexpectedly. Instead of constantly shedding and selecting new stocks in order to minimise our losses and avoid missing the boat, once we have that structured portfolio in place, we find ourselves in the role of the master coach overseeing the team, making smaller changes here, and a minor recalibration over there, in response to a changing outlook.

Before we find ourselves in such a position, we need a basic road map as to how we get there and where to get started. In my case, I started with my own research into All-Weather Performers; reliable, proven business models with a track record of performance, not hindered by economic cycles to generate shareholder wealth.

How many stocks should I choose?

Over the past years, I have come to the conclusion that 6% as a full weighting for any given stock is an excellent target. It implies when the portfolio is fully invested the basket contains between 16 and 20 stocks, on average. That's a reasonable number that can still be overseen and managed, assuming they're not all high risk fly-by-nighters that need to be watched constantly.

As part of portfolio management, decisions can be made to allocate half-weightings, or reduced weightings, and in some cases of high conviction an overweighted position, but I would refrain from allowing any position to become too small or too large. As far as the first option goes: it's okay to have a punt every now and then, but if it's not worth owning at a sizeable allocation, is it even worth the energy and attention, let alone the risk?

There is no universal golden rule about what maximum size should be allowed, but I'd be hesitant to allow any given allocation to grow beyond 9% of the total. The reason is simple: risk. Take profits if you must. Consider it part of portfolio management.

On the other hand: don't feel like you need to top up on allocations that haven't worked out and shrink in portfolio importance. Better to always ask that question: where is my money in the best of hands? As impregnated as we all are by this idea that 'cheaper' stocks perform better than those that have already outperformed, the most often made error is selling the winners too early and putting more money into the laggards and losers.

I can guarantee you all this will be the first of lessons that will be learned, time and again, through running an investment portfolio.

As per the lists on the website currently, my research has identified 21 All-Weather Stocks, of which some are still "potential" and others are carrying a question mark. Should we simply buy all of them?

That wouldn't be much of a diversified structuring, would it? All-Weather stocks are spread out over multiple segments and sectors, but most share the same basic characteristics, including above-average Price-Earnings (PE) multiples, which means they potentially can land in or out of favour all at the same time.

Equally important, most investors want income from their portfolio and All-Weathers, if only because of their valuation, are not ideal for short-term income purposes.

It is for this reason that I decided back in late 2014, when we launched the All-Weather Model Portfolio, that a selection of income providing equities would be the second pillar of the overall portfolio strategy. A third pillar consists of emerging new business models and technology disruptors by applying a quality assessment to the many newcomers on the ASX over the semi-decade past.

In practice this means I am combining the likes of Amcor ((AMC)), CSL ((CSL)), REA Group ((REA)), TechnologyOne ((TNE)) and Wesfarmers ((WES)) with higher dividend yielders Aventus Group ((AVN)), Super Retail ((SUL)) and Telstra ((TLS)), and with the younger businesses of NextDC ((NXT)), Pro Medicus ((PRO)) and Xero ((XRO)).

View From The Portfolio Control Room

For the sake of creating a starting point, let's assume we allocate 33% to each of the three pillars. Next things to do: team play, fine tuning and overall macro strategy. Do we lean more towards risk aversion? Can we be more aggressive with our risk-taking? Do individual valuations require profit-taking and trimming of positions? Is there an opportunity out there we'd like to include? Should the portfolio increase its cash allocation given market jitters?

All these questions, and many others, will pop up along the way but from now onwards you can address them through allocating more here and less over there. It goes without saying, to make such decisions requires we know the basics about the companies we own, and we can make a reasonable judgment about what is happening in markets. Neither fear nor hope has ever proved to be a successful strategy in the long run.

One extra benefit is we learn a lot about the companies we own. Always best to know what we own, and why. My own experience also tells me we must never consider our stock choices and portfolio allocations as set in stone. Ignore individual losses and gains. Always keep an eye on the future. Make decisions that seem right. And make those decisions for the team.

Not selling because you're sitting on an individual loss while all the evidence is telling you you should, is not smart team play.

But equally: accept your execution won't be perfect, and luck has its own role to play.

What About Income?

Equally important is that most of the companies in the All-Weather Model Portfolio pay a dividend, but that should never be the sole reason to include a stock. Taking a team approach, we should combine the 5% offered by Aventus with the sub-1% offered by CSL as well as the zero pay-out from Xero.

The average yield for the total basket is what counts. Forward looking estimates only. The All-Weather Model Portfolio on average yields between 2.5%-3%, which may not seem a lot given the banks are back yielding 4% and more, as is the ASX200 index, but that extra -1% missing in yield has been compensated through relative outperformance.

The portfolio can always sell a few extra shares if/when we need that extra bit of income.

You'd have noticed I don't try to have all main sectors of the market represented, which is equally a valid portfolio strategy. Neither do I use rather traditional definitions such as 'defensives' or 'blue chips', which I personally find outdated. AGL Energy ((AGL)) officially belongs to the defensives on the ASX. Have a look at that share price since 2017 and try not to shudder.

Size does matter, however, and smaller cap stocks come, on average, with higher risk and more volatility than larger caps. So this should be one extra consideration for the average, risk-conscious investor.

The Portfolio also has that added goal to prove to investors All-Weather Stocks are worth focusing on and investing in, so the selection of stocks tends not to include the banks when looking for dividends while cyclicals, being the anti-thesis of the All-Weathers, are simply not an option.

You Have Options

In the current context of potential concerns about sticky inflation and rising bond yields, a decision can be made to include a selection of banks, other financials and cyclicals (miners, energy producers, contractors and engineers, etc) and this would simply fit in with the portfolio strategy as described above: adjust relative allocation according to comfort/discomfort with the inflation outlook (to the best of your abilities).

In similar vein, with investor focus currently on re-opening beneficiaries, this too can be integrated in our portfolio and strategy. One warning though: make sure your portfolio doesn't get hooked into one (too) dominant theme as that makes all of the above redundant. Running a diversified portfolio is by definition an admission that we cannot accurately forecast and anticipate all events and momentum changes every single time. So, yes, we are at times giving up on more potential upside, while looking for compensation in different circumstances.

Besides, a number of companies currently in the All-Weather Model Portfolio stands to benefit enormously from re-opening borders and economies, even though they might not yet be seen as key beneficiaries by the majority of investors who prefer to crowd together in airlines, airports and leisure companies.

Sometimes the allocation to new trends and focuses occurs without actually having to make a change in the portfolio!

I know some among you like to take a punt, and many do it more than regularly. You can always put a decent portfolio together and include a special reservation for your more risky, short-term, adrenaline-filled adventures.

And if you're into ETFs instead of individual shares, or a combination of the two, that can be accommodated too.

If all of the above is genuinely new, I highly recommend adopting and applying the basic principles. It'll change your life as an investor, not to mention the additional skills and insights that come with it.

Jumpin' Jack Flash Lives In The Seventies

Apparently we now are all googling 'stagflation' in response to higher-for-longer inflation numbers and question marks about global economic momentum leading into year-end.

Rule number one in finance is while everyone uses the same key words, the meaning behind those terms is far from universal, even under the best of circumstances.

And stagflation is one such prime example. Higher inflation and slowing growth are two characteristics of what constitutes 'stagflation', but it sure ain't the stagflation that dominated the 1970s, which is the logical point of reference for everyone googling today.

As per always: details matter and one would have to have an extremely subdued view on the outlook for the global economy to anticipate a rerun of the 1970s which, among many other factors, included mass unemployment and negative economic growth combined with enormous volatility on share markets, ultimately culminating into that (in)famous magazine cover by BusinessWeek: The Death Of Equities.

Ironically, that cover was published on August 13 of 1979 - 40 years ago, plus two months.

This time around economies are less carbon-fuel intensive, countries are opening up, businesses are online and services oriented and inflation is sticking around because of bottlenecks and disruption. Global gas not oil is leading the charge, but the damage done to household budgets is still real, of course.

Consider that global oil prices are up some 12% this quarter, while the price of natural gas is up 25% in the US and nearly 75% for the euro area. Forget about inflation, the real question mark here is about household budgets and consumer spending.

Thus far, most forecasters are still holding out for relatively firm global growth next year, and a lot of this forecast is based upon pent-up demand being unleashed as cashed-up consumers celebrate their newly discovered freedom as vaccination rates surge and lockdowns end.

I suspect those forecasts will be proven too optimistic. Higher gas prices will have an impact, and so will a certain degree of caution among those all-important consumers. But it will require even higher prices for gas and oil before global spending gets squeezed into the next economic recession, after which we can all unite around that comparison with the 1970s.

But until then... don't get sucked in. Stagflation today is not a repeat of the 1970s. Though, that doesn't by default mean there are no risks for the outlook. Ongoing strength in fossil fuel prices would, at some point, force the recovery to come unstuck. So be careful what to wish for.

The 1970s also were a fast-moving, glorious period for music, but I don't think punk is about to make a come-back either. Johnny Rotten singing No Future seems more than just a tad out of context today.

Conviction Calls

In case anyone missed it, Morgan Stanley on Friday raised its price target for Macquarie Group ((MQG)) to $240 which coincides with the broker's Model Portfolio increasing its exposure. Macquarie has also been added to the broker's Focus List, which only contains nine other inclusions.

Downer EDI ((DOW)) was removed from the Focus List.

Macquarie is the pre-eminent representative of ESG investing and asset allocation on the ASX and this is exactly the why behind Morgan Stanley's increased positive view on the asset manager's growth outlook, and premium valuation.

It goes without saying, Morgan Stanley's rating is Overweight with an In-Line sector view.

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Apart from Macquarie, Morgan Stanley's Focus List comprises of APA Group ((APA)), BlueScope Steel ((BSL)), Computershare ((CPU)), Qantas Airways ((QAN)), QBE Insurance ((QBE)), REA Group ((REA)), Scentre Group ((SCG)), Telstra Corp ((TLS)), and Westpac ((WBC)).

The Focus List is a selection of stocks for which analysts have the highest conviction on a twelve month horizon.

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Analysts Jules Cooper and Josh Goodwill at Shaw and Partners are -in their own words- passionate about software. The broker has allowed them to launch a regular update on the local industry which both hope will bring to life the companies, the people, the products and the investment opportunities the sector offers on the ASX.

As tends to be common practice, Cooper and Goodwill have selected their top three of sector favourites: Whispir ((WSP)), Nitro Software ((NTO)), and Gentrack Group ((GTK)).

Equally noteworthy, there is only one Sell rating among the 13 stocks covered, and two Hold ratings. These are respectively for Iress ((IRE)), PushPay Holdings ((PPH)) and WiseTech Global ((WTC)).

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Analysts at Wilsons published their shopping list for the re-opening of state and national borders in Australia: Accent Group ((AX1)), Adairs ((ADH)), Breville Group ((BRG)), GUD Holdings ((GUD)), Integral Diagnostics ((IDX)), Kathmandu ((KMD)), Monadelphous ((MND)), NextDC ((NXT)), Pexa Group ((PXA)), Qantas Airways ((QAN)), Ramsay Health Care ((RHC)), REA Group ((REA)), Sealink Travel Group ((SLK)), Seven Group Holdings ((SVW)), Silk Laser ((SLA)), Sky City Entertainment ((SKC)), and United Malt Group ((UMG)).

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Pacific Smiles ((PSQ)) has been removed from Wilsons' list of Conviction Calls following an already strong rally in the share price in anticipation of businesses resuming to 'normal' post lockdowns.

Stocks that have retained their inclusion are ARB Corp ((ARB)), Collins Foods ((CKF)), Aroa Biosurgery ((ARX)), ReadyTech ((RDY00, and Plenti ((PLT)).

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Lastly, stockbroker Morgans has identified 23 stocks with material catalysts revealing themselves during AGM season. Notable opportunities are believed to be in Corporate Travel Management ((CTD)), Reliance Worldwide ((RWC)), Tyro Payments ((TYR)), and Lovisa Holdings ((LOV)).

Other stocks mentioned are a2 Milk ((A2M)), ALS Ltd ((ALQ)), Catapult ((CAT)), Credit Corp ((CCP)), Data#3 ((DTL)), GrainCorp ((GNC)), ImpediMed ((IPD)), Incitec Pivot ((IPL)), Karoon Energy ((KAR)), Money Me ((MME)), Micro-X ((MX1)), New Hope Corp ((NHC)), and Nufarm ((NUF)).

All-Weather Model Portfolio September Review

Share market volatility and All-Weather stocks in September, monthly review:

https://www.fnarena.com/downloadfile.php?p=w&n=05085E2D-05E6-F1CC-01A08A892D29F9E9

Research To Download

RaaS on AML3D:

https://www.fnarena.com/downloadfile.php?p=w&n=AC2486DF-EB6D-D76A-571F34A5CF9BCC94

(This story was written on Monday 18th October, 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/

article 3 months old

Rudi’s View: Appreciating The Mighty All-Weathers

In this week's Weekly Insights:

-Appreciating The Mighty All-Weathers
-Conviction Calls
-Research To Download
-FNArena Talks


Appreciating The Mighty All-Weathers

By Rudi Filapek-Vandyck, Editor FNArena

One of the most persistent errors made by investors, on my observation, is a too stringent application of the 'Buy Low, Sell High' principle, usually translated as: only buy stocks that are trading on a below-average valuation and don't hold on to them once the PE ratio is much higher.

It has been one of my long-standing favourite market observations: contrary to popular share market folklore, a stock with an above average valuation does not by definition become a Sell, and neither is the opportunity gone for a great investment return over many years into the future.

Recently I was again reminded by these facts by an excellent piece of research (see further below) involving ResMed's ((RMD)) return over the past ten years. As most of you would be well aware, ResMed has been identified as an All-Weather Stock through my own research and the shares are firmly held by the All-Weather Model Portfolio.

This week ResMed entered the ASX50, but preceding this milestone has been a return of no less than 1262% over the past decade. Even for a long standing close observer like myself, that is quite the eye-catching number. Unfortunately, the All-Weather Portfolio is only in its seventh year running, so not all of these returns have been captured, but then again, I don't see this success story coming to an end anytime soon either.



What mostly happens when such a piece of research has been published, is that your typical value-oriented stock picker or share market analyst tries to relegate the share price achievement to the past. One of the obvious ways to do so is by pointing out that back in 2011, this stock was trading on a PE of around 25x while today the forward looking PE is around 46x. Hence, the underlying suggestion then becomes: Sell, there no longer is further opportunity for PE expansion.

While this PE-expansion assessment might be correct, it is but one factor that has contributed to the extraordinary return since 2011, and it by no means prevents this company from achieving many more rewards for loyal shareholders. I also think investors are missing the bigger picture by only comparing the PEs of today and 2011.

A more correct assessment, I believe, is by comparing ResMed's valuation in 2011 with the broader market, which back then was trading on an average PE of below 15x. In other words: ResMed shares ten years ago were valued at a substantial premium versus most other ASX-listed stocks.

When asked the same question ten years ago, today's value-oriented nay-sayers would not have recommended ResMed shares as an excellent Buy-opportunity. Because at such a market premium, the shares did not look "cheap".

Yet, over the following ten years the return from those seemingly "overpriced" shares has been nothing but phenomenal. I haven't done the numbers, but I don't think any of the "cheaply" priced alternatives back then has managed to generate anything remotely close to the reward that has befallen loyal ResMed shareholders over the period.

As a matter of fact, when I think of those stocks that have equally generated outsized returns over the period, the same basic characteristics apply as ResMed's; think CSL ((CSL)) and Cochlear ((COH)), REA Group ((REA)), Seek ((SEK)) and Carsales ((CAR)), but also ARB Corp ((ARB)), Ansell ((ANN)) and TechnologyOne ((TNE)).

In contrast, last week I was dragged into a discussion on social media about the merits, or otherwise, of the proposed merger between BHP Petroleum and Woodside Petroleum ((WPL)). I think Woodside desperately needs this deal. As I looked up the share price, I noticed it is at the same price level as it was back in 2004 - 17 long years ago.

Throughout most of that period, in particular post-2011, Woodside shares have mostly looked "cheap" and "great value", also offering an outsized dividend yield, but that has not generated much in terms of sustainable returns for shareholders (luckily they do pay a dividend).

Certainly, there have been rallies, and at times Woodside looked in a sweet spot, temporarily, but it'll only take a few more years for its shareholders to look back and conclude history doesn't consist of just one, but of two lost decades. So much for the "cheaper" entry!

I am certain all of us can add many more (apparently) cheaply priced examples: AMP ((AMP)), QBE Insurance ((QBE)), Humm Group ((HUM)), Slater & Gordon ((SGH)), and many, many more. Sure, at some stage they'll have a rally and outperform ResMed and the likes, but great long-term investments they have not been, and why would they be in the future?

The answer does not lay in the low or high PE ratio.

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When investing in the share market, investors have roughly two main types of risk to deal with: the risk of overpaying for exposure -your typical share price risk- and the risk not all is well with the company, or that management cannot fulfill its plans and ambition and falls short of expectations; the operational risk.

The first type of risk is usually settled through generalised numbers -PE, dividend yield, relative discount/premium, etc- while the second type is much more difficult to assess and to establish, which is why most financial commentary and analysis focuses on the first part. Much easier. And it works.

Sort of.

If it really were the superior method to uncover opportunities and avoid value-traps, wouldn't we all have owned ResMed shares over the past decade (as well as the other All-Weathers) instead of getting caught into the next downdraught at Myer ((MYR)), Mesoblast ((MSB)) or The Reject Shop ((TRS))?

I do know it's not quite that simple. Not every market participant has the same horizon or objectives, but the message remains the same: instead of ignoring the second risk and predominantly taking guidance from the first assessment, I am advocating long-term investors should practice the exact opposite: start with the second assessment and relegate the first risk to a secondary consideration, at most.

If we start with the companies -and by extension: the sector- behind the numbers and the share price, we soon discover some invaluable insights, such as:

-Some companies (and sectors) have a multi-year growth path ahead of them that is relatively predictable;
-Some companies (and sectors) can grow virtually independently from the economic cycle;
-True market leaders hold the lead in new products, innovation and developments;
-True market leaders can expand their local dominance well beyond Australia's borders;
-Sustainable success requires constant investing, both in the business as well as into new products, markets, geographies, etc
-Quality corporate culture cannot be measured, but you'll recognise it when you see it;
-Quality companies don't need to be convinced about ESG or better practices (they score highly already);
-Great management has a relatively easy job at hand when at the helm of a quality market leader in a sustainably growing industry

The most important take-away is, however, that once the market sniffs out that a company such as ResMed has all of the above characteristics, plus some, it will price its stock accordingly. So no need to wait until the PE ratio is below 15x or something similar; that simply will never ever happen, unless the company's story starts to unravel.

Judging from the latest indications, including the company's investor day last week, investors are wasting their time if their strategy is to position for the end of the ResMed growth story. If anything, most analysts returned from tghe investor day with the impression the company might yet again surprise on the upside next year, as major competitor Philips is struggling with a product recall.

Underlying, however, the ResMed growth story is much more powerful. It is about management correctly anticipating future trends and direction and thus investing in innovation and product expansions that not only solidify the global leadership, but also set up the company for larger market share, a closer relationship with patients and care providers, and possibly a technological moat around its leadership.

See, the odd thing that happens in our human brain is that from the moment we realise what's going on inside this high quality business, and how truly exciting the future might be, we feel excitement flowing through our veins and the urge to become part of it. If only ResMed shares were not publicly listed; we would stand hours in a queue to invest in it!

The best way to invest in a stock like ResMed is by using market volatility to your own advantage, while taking a multi-year view and realising that a "cheap" valuation is something of a short-term nature. Imagine, you'd be struggling with the same dilemma in 2011. Shall I buy around $6? Or $5.50 maybe? Maybe I get another chance below $5?

Ten years later the shares are changing hands above $40.

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The focus of my own research and analysis is on the ASX and this means I am fishing in a relatively small pond. Australia doesn't have many companies of the quality and caliber of ResMed, which, strictly taken, has become more of a US enterprise with its official headquarters now in San Diego, California but still ASX-listed.

As a direct result of the limited selection in comparable All-Weathers, I tend to be quite sanguine about the valuation and entry-price to obtain exposure to such high-quality performers. One of my favourite quips is: if one pays too much for an All-Weather, one might have to wait six months or so to get in the black, but if we do the same for a low quality cyclical, we might have to wait forever and a day!

Last week, I had the pleasure of attending an online presentation by funds manager Claremont Global and while the team over there doesn't use the same vocabulary, their methodology and approach shouts "All-Weathers" from the left to the right and again from the bottom to the top, and back.

The key difference here is, Claremont has a global focus and thus the team can be more stringent and choosy when it comes to valuations and entry-points, for the simple fact there are so many more options to analyse and to consider. But, underlying, the similarities are striking; no mining, no oil&gas, no banks, no insurers, no heavily government regulated industries; and nothing that cannot be forecast with a fair degree of certainty.

Claremont only owns a maximum of 15 companies at any given time. Its preferred entry point is -20% below intrinsic valuation and the stock is usually sold above 20% over-valuation. The aim is to outperform its international benchmark by 2-4% per annum and Claremont has done exactly that by owning the likes of Nike, Microsoft, Alphabet, Aon, Lowes, Automatic Data Processing, Agilent Technologies, Diageo, Ross Stores and Sherwin-Williams.

Viewed through an Australian lens, one can see the equivalents of Bunnings ((WES)), DuluxGroup (alas, no longer ASX-listed), Steadfast Group ((SDF)), Nanosonics ((NAN)), and others.

In the words of portfolio manager Bob Desmond, all companies that will grow faster than the market average in the years ahead and that allow investors to sleep comfortably during a market downturn. I am less certain whether any of these companies are high on the list of managers and investors who focus solely on 'valuation' and 'cheap' PEs.

I discovered the Claremont website offers some interesting views and topics, not only explaining why certain stocks are held, but also, for example, to answer a question like: why would you sell a great business in order to buy a mediocre alternative?

https://www.claremontglobal.com.au/our-insights

Claremont Global was spun out of Evans & Partners.

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The research mentioned earlier in the opening sentences of my story was by TMS Capital's Ben Clark, which, by the way, showed that ResMed's return over the decade past was eclipsed by competitor Fisher & Paykel Healthcare ((FPH)) having returned no less than 1754% over the period.

Ten years ago, Fisher & Paykel Healthcare shares were trading on a PE below 20x (well above market average). Today, the forward looking multiple on FNArena's consensus forecasts is 50x and 49x for FY22 and FY23 respectively.

https://www.livewiremarkets.com/wires/two-stunning-healthcare-stocks-hint-it-s-not-csl

Conviction Calls

It remains Macquarie's recommendation that investors seek (more) exposure to offshore earners on the ASX, providing superior earnings growth and additional benefit from a weaker Aussie dollar.

Macquarie has applied a three-year out filter and selected the following favourites: Computershare ((CPU)), Link Administration ((LNK)), Boral ((BLD)), James Hardie ((JHX)) and Ramsay Health Care ((RHC)) inside the ASX100. Outside of the Top 100, the broker's Best Buy ideas are News Corp ((NWS)), Nufarm ((NUF)), Codan ((CDA)), EML Payments ((EML)), Bravura Solutions ((BVS)), Janus Henderson ((JHG)), and United Malt Group ((UMG)).

In addition, Macquarie highlights Webjet ((WEB)) and Flight Centre ((FLT)) with both having been negatively impacted by covid (and that's an understatement) and still ranking among the most shorted stocks on the local exchange.

Macquarie has also selected several Sell-ideas: a2 Milk ((A2M)), Xero ((XRO)), Reece ((REH)), Altium ((ALU)), Domino's Pizza ((DMP)), ARB Corp ((ARB)), and Zip Co ((Z1P)).

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Healthcare sector analysts at Citi have updated their preferences post August reporting season; Ansell ((ANN)), Ramsay Health Care, CSL ((CSL)), and Integral Diagnostics ((IDX)).

With exception of Ansell, all companies mentioned should experience an acceleration in growth following negative impact from covid, predict the analysts. Ansell should struggle for growth post covid-boost, and Citi is forecasting a decline in earnings per share, but the share price is nevertheless considered too cheap.

Earlier, peers at Macquarie had expressed their sector preferences for Ramsay Health Care, Cochlear ((COH)), Healius ((HLS)), Virtus Health ((VRT)), and Monash IVF Group ((MVF)).

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Mining sector analysts at Ord Minnett have used their latest number crunching exercise -otherwise known as general update on data, numbers and price forecasts- to nominate South32 ((S32)) as one of their sector favourites, even as the share price has already had a good run. South32 sits high on the preference rankings, alongside BlueScope Steel ((BSL)) and Rio Tinto ((RIO)).

Ord Minnett still retains a positive view on the lithium sector, with Orocobre ((ORE)) its favourite, while among ASX-listed gold producers the preference sits with Northern Star Resources ((NST)), above Newcrest Mining ((NCM)) and Evolution Mining ((EVN)).

Peers at Macquarie very much prefer OZ Minerals ((OZL)), 29Metals ((29M)), Sandfire Resources ((SFR)), and, among explorers, Chalice Mining ((CHN)).

****

In the local retail sector, Jarden continues to prefer global reopening plays Premier Investments ((PMV)), Flight Centre, and City Chic Collective ((CCX)) alongside those companies busy building a longer term moat; Woolworths ((WOW)), Wesfarmers ((WES)), and Temple & Webster ((TPW)).

Jarden is cautious regarding Nick Scali ((NCK)), JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), and Super Retail ((SUL)).

Earlier, in a sector report published immediately post the August results season, Jarden had also expressed its positive view on Lynch Group ((LGL)), Beacon Lighting ((BLX)), and Kathmandu Holdings ((KMD)) among leading market positions with growing audiences.

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Post-August, stockbroker Morgans has expanded its Best Ideas with Universal Store Holdings ((UNI)), Beacon Lighting, Hub24 ((HUB)), MoneyMe ((MME)), PTB Group ((PTB)), and Panoramic Resources ((PAN)).

Morgans' list of Best Ideas now consists of 47 names, including Macquarie Group ((MQG)), BHP Group ((BHP)), ResMed ((RMD)), NextDC ((NXT)), Incitec Pivot ((IPL)), Lovisa Holdings ((LOV)), Karoon Energy ((KAR)), TechnologyOne ((TNE)), Ramelius Resources ((RMS)), and Whitehaven Coal ((WHC)).

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Market strategists at Wilsons have re-weighted their Focus List towards the reopening trade with enlarged exposures to Qantas Airways ((QAN)), Silk Laser Australia ((SLA)), Santos ((STO)) and James Hardie while both Worley ((WOR)) and Transurban ((TCL)) have been removed.

****

Bell Potter's key picks for investing in the domestic technology sector are now, in order of preference: Nitro Software ((NTO)), Infomedia ((IFM)), and Life360 ((360)).

Equally noteworthy: the broker currently has no Sell rating in the sector.

Morgan Stanley analysts have nominated Life360 as one of their key picks out of the August reporting season.

Research To Download

IIR on Assetline First Mortgage Debt Fund No 1:

https://www.fnarena.com/downloadfile.php?p=w&n=72F145F3-0640-3907-10C9988E1F1098C5

IIR on Magellan Future Pay:

https://www.fnarena.com/downloadfile.php?p=w&n=72E57601-0FD3-A04B-BD43DA656858E384

IIR BKI Review:

https://www.fnarena.com/downloadfile.php?p=w&n=72E9CC7D-A541-DE5B-E716C44A077AA7A3

FNArena Talks

Last week, I was interviewed by Peter Switzer on the current cycle and the prospect for 'Value' stocks to regain their mojo:

https://youtu.be/V1nXDOHpdnc?t=90

(This story was written on Monday 13th September, 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/

article 3 months old

Rudi Interviewed: 2021 Dynamics Are Different

FNArena Editor Rudi Filapek-Vandyck was recently interviewed by LiveWire Markets’ James Marlay about what to expect from the August reporting season in Australia.

The video of the interview, including a transcript, was published under the heading ‘Rudi: It’s the healthiest bull market we’ve seen in years’ (link at bottom of this story).

Below is an edited version of that transcript, correcting spoken grammar and misheard expressions for more to-the-point and easier reading.

James Marlay:

Rudi, last time we spoke in February, you said we were entering a new bull market and value is back. Since that time, the All Ords has rallied about 11% which is a good return. My opening question to you is: do you think the bull market is healthy and where will the leadership come from if we're to continue to see a bull market from here?

Rudi Filapek-Vandyck:

As per always, there's a context to things. Conclusion number one is financial markets never ask where you came from. They ask where you're going.

Despite all the bad news that we had last year of the covid pandemic, profit forecasts falling off the cliff, dividends being cut, capital raisings being necessary, et cetera, the truth of the matter is we've had an incredibly quick recovery in economies, we don't have to go too much into detail, but this has fueled an incredibly quick recovery in profits and in dividends for corporate Australia.

It also has created a completely new dynamic for corporate Australia. While we [here at FNArena] look at reporting season and corporate results, it's incredibly visible in how those corporate results compare towards market expectations, and that there's a completely new dynamic in corporate Australia.

Probably the easiest way to illustrate this is: August and late 2019 was probably the worst time for corporate Australia in all the years that I've been in Australia, which is more than two decades.

And according to some analysts that have data that go back to the 1980s, those 2019 data were worse than the 1980s.

That's even before the pandemic appeared. What we saw back then was companies not being able to meet even relatively low expectations. We all forget this, but the banks started cutting their dividends back then, as did energy companies and some other cyclicals.

Then the pandemic came along and, of course, everything falls off a cliff. But that experience now and the subsequent recovery, and the fact that companies have used that experience to strengthen their balance sheet, to streamline the operations, et cetera, has now created a completely different dynamic.

Now what we're seeing is that profit growth is surprising to the upside. You won't see it if you just look at the share price or the index, but forecasts in Australia are now rising for 11 months uninterrupted. That almost never happens.

This has created a completely new dynamic. Dividends in Australia are recovering at a speed which is probably never witnessed, Australia is the number one in the world now in terms of recovery in dividends.

We're seeing all of that with the early indications. The banks have already announced they're going to conduct share buybacks. Those dividends are not quite back to where they were, but they are on their way.

We already had Rio Tinto ((RIO)) paying out probably as much cash as they ever have done in the history of the company, including a bonus dividend, with a promise of more to come in the second half.

I think one of the words we can use here is a Super Cycle in Dividends, which is right here happening in Australia at this point in time.

If you combine all of that, it should be no surprise that people like myself have now been talking about a new bull market that's started. That is if you assume that the old one stopped in late '19 or early '20, otherwise it's just a continuation of, but today’s phase is a much more profitable, much more enjoyable, much stronger upturn to be part of as an investor.

Because the older bull market was pretty much crawling through the mud and you really had to be careful in which stocks you had in your portfolio. That is still the case now, but I'm sure we'll get there with some of your other questions.

James Marlay:

Before we get into the nitty gritty, we will talk about dividends and earnings in a bit more detail. I just want to briefly touch on the backdrop which is the bond market.

When we spoke in February, we were seeing a peak, a rise in bond yields and effectively it's rolled off since then.

I guess I'd be interested in your take on that. Does this mean the value trade that we saw ignited by inflation expectations is now over?

Rudi Filapek-Vandyck:

Again, context, very important, but just before I forget to mention this later in the interview, I do believe that the value trade needs the bond market to ignite it and to support it.

And that gives you already the answer of why the value trade has basically deflated from about late March.

No doubt about it, the bond market has pretty much surprised just about everyone and that includes myself. Did I expect the bond market would go to 2% and just continue going up? No, definitely not.

But I also did not expect it would go back this close to 1% again. We can all have lively discussions about what's happened in the bond market. I actually think there's probably a lot of sense to it.

One of the reasons, I believe, is the relativity between bonds in Europe and bonds elsewhere.

I think this also touches upon a new concept for investors, for most investors are trained to judge and to calculate a valuation for assets on their own, while in the modern-day environment, we have to make assessments on a relative basis.

In the share market, this shows up, for example, between Commonwealth Bank ((CBA)) and the other banks, or between Afterpay ((APT)) and the competition.

In the bond market, the same relative comparison applies. It's about having to make a relative call between low yields in the US, still positive, and low yields in Europe, which are turning even lower.

I think that's one of the reasons why the bond market has gone where it has gone, and it has had a massive impact on equities.

I've never been a believer in that we are entering a new era of the value trade. I do believe we'll go through periods when the value trade is everything that happens in the share market, and then it disappears again.

We've seen so far that every time the value trade becomes popular, it lasts about 4-5 months and then it, sort of, peters out. So far, that's basically the maximum the value trade has been able to achieve.

James Marlay:

Rudi, I'm going to dive into your reporting season themes. You've touched on a couple of them already.

Two of the ones that you've touched on are surging corporate profits and dividends. I'm going to start with one that we haven't touched on so far, which is rising costs, and pressures.

Could you talk me through why that's something that you think is interesting to watch? And maybe call out where you think it is most likely to pop up?

Rudi Filapek-Vandyck:

This bull market is very, very strong. Has been very, very strong, but it doesn't make people comfortable. You see this on many metrics, and in the data that we collect at FNArena.

People always worry that the share market has gone too far. But what we see with the data that we watch -for example the difference between share prices and price targets, the difference between buy, hold, and sell ratings in the market- is this market is very reluctant in pricing in the maximum.

There are a lot of question marks around this market, so we've now had the V-shaped recovery; very strong, but we're very hesitant because we don't know what's coming beyond 2021.

And you see that on many, many levels. One of the reasons, I believe, is because we have transitory inflation. Central bankers talk about it all the time, there's a whole discussion about it in the background happening.

What is transitory inflation? Is that the one that sticks around, or is that the one that goes up once and then stays there? Central bankers say it's the second; it means we're not going to see 2% inflation increases year upon year in the years ahead.

Central bankers see it as transitory, and for that reason bond yields can stay low. They don't have to act and the share market, all else being equal, should do quite well.

However, if you have a rise in prices which are essentially input prices, like commodities and rent and other elements; companies are consumers of those commodities and they are paying rent, et cetera.

One of the reasons I believe why the share market in a broad sense has been very reluctant in continuing to price in and continuing to forecast that those strong recoveries will simply continue, is because the sales level might go up, but corporate margins might come under pressure.

Inflation has to go somewhere.

Traditionally, one of the most profitable investments in the share market is when a company enjoys rising margins - because profit and growth accelerate.

But the opposite happens when margins come under pressure. The obvious questions the share market is asking are directed at industrial companies. The likes of Amcor ((AMC)), Ansell ((ANN)), Orora ((ORA)), you name it, they all have to buy in commodities and then make a product out of it.

But investors should not automatically assume that the producers of commodities are immune. We will see price pressure equally for the likes of Fortescue Metals ((FMG)), BHP Group ((BHP)), Incitec Pivot ((IPL)), Orica ((ORI)), you name it.

Ultimately, it's universal. Where you will see it less happening is in typical IT companies, services companies, software companies. They don't have to buy in oil, for example.

This is one of the question marks that hangs over this reporting season, and investors will be watching this very, very closely. It's not that companies can't buy in product at a higher price; they have to be able to pass it on.

Again, this takes us to quality companies, that are market leaders in their sector, and that have an ability to pass on price increases. If they have none of those three characteristics, they might end up in trouble at some point, and investors will be on the lookout for this.

James Marlay:

You've touched on the strength of earnings. I guess just in terms of the dividends, you've touched on the headline dividend payers, banks, the miners, which are spinning out a lot of cash at the moment.

Are there any areas where you think people might not be fully anticipating the dividends that are about to come out? Are there any under the radar dividend opportunities?

Rudi Filapek-Vandyck:

Most companies are increasing their dividends.

Some companies are selling assets, and have already, sort of, indicated they're going to pass on at least half of it or more to shareholders.

You have to think about the likes of Telstra ((TLS)), Insurance Australia Group ((IAG)), Iress ((IRE)), Commonwealth Bank, BHP too, probably.

We have Ampol ((ALD)), formerly known as Caltex Australia. We even have some REITs that are selling assets. Waypoint REIT ((WPR)), for example.

The term super cycle dividends is not easily applied here, but it will apply. It's almost a once in a lifetime experience that we have in 2021.

Of course, this is not going to be repeating in every subsequent year. But this can potentially still get a repeat in February next year.

This started in February. It's going to continue now in August and there will be a lot of cash coming into investors’ coffers.

James Marlay:

This is your opportunity to draw on the database that FNArena puts together, which tracks the beats and misses of corporate earnings and I know you've just done a bit of an update on those companies that reported between February and where we are now.

I guess the question is: are expectations likely to be exceeded on average this reporting season? What's your assessment of the temperature? Do you think investors are likely to be surprised?

Rudi Filapek-Vandyck:

What we've seen over the past 6-9 months or so is that the numbers are absolutely ‘blown out of the park’-numbers.

We usually don't see in Australia the same numbers as we see in the United States, where business leaders are very well trained to make sure they beat market expectations. This second quarter, for example, the number of companies in the United States that have beat expectations is close to 90%.

We never see those numbers in Australia, absolutely never. I've been doing this for 20 years. Australia is lucky if ‘beats’ reach 40% or so.

What we've seen is that, usually, on average, we have about 33%, 34%, 35%, maybe 37% of companies beating expectations in reporting season.

In the last reporting season, which we just closed off on, the percentage was 55%. Now, that gives you an idea about how much that number is above average.

What can we expect for August? We now are in the 11th month of rising forecasts and the question thus becomes: will we see a reversal from February?

The February reporting season was fantastic, but expectations were much lower. Today expectations are quite high.

We are all expecting a big announcement from BHP. We will not be happy if Telstra doesn't do something special.

One indication that maybe has gone unnoticed this time around is that usually when we have a reporting season, what comes first is the "confession season".

I remember in 2019 and 2018, confession season; that was something you would be a little bit afraid of. You would almost hope you were not in the market the month before reporting season, because share price could tank by -30% or more.

I think the best indication today is: have you noticed any confession season? I haven't. February didn't have one either.

So, I think the fact that the confession season has pretty much gone quiet, maybe that in itself is a very strong indicator of what we should expect from August.

Maybe this August season is too early yet to see a reversal in the strong uptrend. It doesn't mean we can't see it happening in six months' time, but maybe now it's too early yet.

I'm not expecting that we are going to have a results season that generates 55% in beats again. But I'm thinking it might still be higher than average.

The lack of confession season indicates we might still be in for a very positive experience in August, overall.

James Marlay:

Very interesting observation. Now Rudi, this is your time to shine. You are the manager of the All-Weather Portfolio.

You don't need to go through each of them, but I thought I'd ask you to bring along a couple of stocks that you're going to be watching closely in reporting season.

And maybe pick a few that you think could surprise on the upside and a couple that might surprise on the downside.

Rudi Filapek-Vandyck:

On the downside; there’s always the left field one, isn't there?

There's one thing I want to throw in first, to illustrate the magnitude of what's happening this year. If you look at the six months announcement from Rio Tinto, they paid out more in six months than they did last year, and the year before, over 12 months.

Actually, you can combine those two years together and Rio Tinto will still pay out more dividends this year.

The yield on the Rio Tinto dividend is more than 5% over six months. BHP is going to pay out something like three and a half, four percent, over six months. You're going to get that from the banks after 12 months. These companies are paying that out over six months.

This provides us with an idea of the magnitude of what's coming towards Australian investors. Of course, it's not sustainable. One of the reasons why it's happening now is because nobody believes it's sustainable. That's why the share price is where it is.

Coming back to the reporting season itself, as people would know, I'm not the kind of guy who looks for beaten down stocks that are forgotten by everyone and that I can buy and hold for six months in the hope that someone else comes along and gives me a big price for it.

I happen to concentrate on what I believe are high quality companies. There are some fast growers in there. I recently noticed quite a number of the stocks I own are near or at an all-time high, which shows you they've obviously done well.

Those companies in particular have my attention. The likes of a ResMed ((RMD)) and REA Group ((REA)), because I need to remain confident those companies can continue performing.

There is also Pro Medicus ((PME)), which I still believe is one of the prime growth stories on the Australian Stock Exchange. I recently sold it because the share price was very close to $60 and I thought you probably can't justify that. That's just too high.

With pain in my heart, I sold my shares. I remain on the lookout for a company like Pro Medicus, and if I would have one wish for this year, I would say, well, hopefully Pro Medicus comes out and people get a big scare and they sell off the share price, and then I can become a shareholder again.

There are companies at the smaller end that have my attention that could potentially become something like a Pro Medicus in the years to come. One of those, I believe, is Audinate Group ((AD8)).

I also owned that one. I've done really, really well out of it. But out of portfolio management, I no longer own that stock, but I will still be watching it.

Audinate Group is a stock that could potentially do very, very well in years to come, but it is a small-cap stock, it's not profitable yet, and bond yields will have a big impact, if bond yields move higher at some stage.

This is probably equally important. We spoke earlier about bonds. What we saw in November last year was a very strong switch between value and growth, and growth stocks were sold off quite heavily while value was bought heavily.

I think for the second half, the chances are we might witness a similar repeat of that experience, for the simple reason that the whole value trade has deflated so much, and bond yields are so important for that trade.

Investors should be mindful of the fact that it's not all about corporate results and dividends. Post August, the bond market can have a big say again, and then stocks like a Pro Medicus, or an Audinate, or an REA, who've all benefited from bond yields going the opposite direction, they might get punished very harshly if the bond market decides to push up yields again. There are quite a few people that expect this to happen.

Paying attention to companies in reporting season; it's not just about the individual cases. You have to do it from a portfolio perspective. And in 2021, there's no better advice than to have a diversified portfolio so that if bond yields move, it doesn’t mean your whole portfolio gets squashed, because you're on the wrong side of the trade.

Other than that, I actually own only few stocks that are a bit of a market laggard.

If I had to nominate two of them, I would nominate Amcor and I would nominate NextDC ((NXT)).

I think it's up to NextDC again to prove the doubters wrong, and there are a lot of doubters out there.

Amcor, it's a bit of a strange animal. It gets thrown in with the growth companies when bond yields move and that's a bit strange, of course.

I remain a big Amcor fan. I believe it's defensive growth at very high quality and dependability and predictability is something you do want to have in your portfolio. Especially when the tough times arrive, plus it's a nice dividend. No franking, though.

James Marlay:

Final point, Rudi. I did happen to go and have a look at the CSL ((CSL)) share price before our call, because I know it's a bellwether stock and something that you've followed for a long time.

It quietly crept its way from the $250 level up towards $300. Give us a quick view on CSL.

Rudi Filapek-Vandyck:

Well, luckily you mention CSL, I didn't want to because people think I always talk about CSL.

Essentially, the share price is moving sideways. It's at $293 or $292, or whatever. It has been above $300.

CSL is one of Australia’s high-quality companies, but its business has been impacted by covid, and by bad policies in the US.

That is still the case and the market will want to see some indications: when is that going to be resolved?

I see CSL as in a sideways pattern, but I still own it. It's still one of my largest holdings and I'm not too unhappy about things.

The share price would have been clobbered if something similar would have happened to one of the lesser quality companies. I think sometimes people just have to be patient and I think in this case, one shouldn't expect miracles.

It's very telling as well, that when analysts have to nominate their potential risks and surprises for the upcoming season, that CSL is mentioned on both sides.

A few other companies are like that. Lendlease is. I think Lendlease is no longer quality, by the way. Seek ((SEK)) is mentioned in the same manner.

We'll have to see what reporting season brings, but it's funny that people will mention those companies with conviction, like, "Oh, they're going to disappoint" and other people go, "No, no, I can see potential for an upside surprise" and that's interesting.

In general terms, when people nominate potential disappointers for the reporting season, they usually are proven wrong because companies that do have to announce bad news, they often can mix it with positive news.

Like, "We throw in an extra dividend" or, "We're going to restructure. We're going to lay off people."

In the past, we had perennial disappointers. QBE Insurance ((QBE)), for example, and Telstra which always disappointed.

I actually think both now are probably going to surprise to the upside, and that too gives us an indication that the dynamics in Australia really are different from the past.

****

To view the video on LiveWire Markets:

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

To view the video on YouTube:

https://youtu.be/wwuh8YvfVks

(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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FNArena is proud about its track record and past achievements: Ten Years On

article 3 months old

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

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/

article 3 months old

Rudi’s View: Investing In Quality & Growth; A Journey

This story contained a mathematical error when mailed out to subscribers late on Monday. That error has been corrected in the version below.

In this week's Weekly Insights:

-Investing In Quality & Growth; A Journey
-Conviction Calls
-All-Weathers, EML Payments, Macquarie, And Risk


Investing In Quality & Growth; A Journey

By Rudi Filapek-Vandyck, Editor FNArena

Investing in Growth companies is something entirely different from trying to find true value among bombed out cyclicals, disrupted business models and misjudged disappointments.

Which is why my investment rule number one says: never ask your typical value investor for an opinion on a Growth stock.

You know the answers already. It's either too expensive. Or it won't last. Or the world has gone super-duper crazy.

But Growth stocks offer a lot more than the next investment fad or mini-market bubble. As one astute fund manager stated recently: find the right one, and you can keep them in your portfolio for the next decade, possibly longer. Along the way, fortunes are being made and lives are changing - literally.

New Zealand-based a2 Milk ((A2M)) achieved a secondary listing on the ASX in March 2015 at a price of 56c. Mid-last year the shares peaked near $20 for a return ex-dividends of no less than circa 3470%. What this means is that $10,000 spent on the first day of trading would have appreciated to $347,000 in a little over five years.

What this also means is that investors could have bought those shares in any meaningful pull back and still have made a huge return on investment. One that literally could prove life-changing.

But those earlier mentioned value investors are correct too. It couldn't last and it didn't. a2 Milk shares are today languishing around $5.50 which translates into a depreciation of approximately -72%. In less than one year. That's one big ouch!

And a2 Milk is far from the only one. Shares in artificial intelligence company Appen ((APX)) peaked below $45 in August last year. They are now changing hands at around $13.50, having recently rallied off a bottom not far above $10.

Credit-but-no-credit provider Afterpay ((APT)) still had the wind firmly in the sails in February with the shares surging well above $150. They are now struggling to hold above $90.



Not All Tech

Observation number one is that the concept of achieving a prolonged period of strong growth is by no means reserved for technology companies only.

Apart from a2 Milk, which is a marketer of dairy products by anyone's definition, the past decades have shown extended periods of uninterrupted Growth can be achieved by a wide variety of sectors and business models; from medical devices to poker machines and online gaming, to online classifieds and paper and packaging products and services, to car accessories, small electrical appliances and cheap pizzas.

And that's simply limiting my selection of successful Growth stories to the ASX where, arguably, the likes of NextDC ((NXT)), Pro Medicus ((PME)) and Xero ((XRO)) are still in a relatively early stage of what could prove to be another decade of strong growth ahead.

But how do we separate the wheat from the chaff -distinguish between truly sustainable Growth companies and temporary pretenders- and, equally important, how can we know when the tide is shifting as has happened in the case of a2 Milk, and Appen, and Kogan ((KGN)), and Blackmores ((BKL)), and Redbubble ((RBL)), and so many others?

It is here that investing in Growth companies reveals itself as being more art than science. Shares in accountancy software provider Xero have sold off twice already in 2021. First they sank from near $160 to $105 and upon releasing FY21 financials in May the share price pulled back from circa $140 to near $111.

I did not sell my shares, having reduced my exposure a little in February, but I did aggressively increase portfolio exposure during the second pullback. I never climbed on board the register of Afterpay, but if I had I most definitely would not have had the same confidence as with Xero.

One problem with emerging success stories is they sometimes capture the imagination of the crowds, and while everyone is getting excited and boasting about their exposure, the public adulation always makes me wary there's too much money flowing in that is too flighty for its own good. Someone shouts Boo! and risks setting off a stampede towards the exit.

Which is why I much more prefer achievers a la ARB Corp ((ARB)), or Breville Group ((BRG)), or Ansell ((ANN)). I hardly ever receive an enquiry about these companies, but have you checked their performances yet?

This is not to deny that Growth stocks in general can be a lot more volatile than the average stock listed on the ASX. Take the aforementioned a2 Milk for example. Whereas the share price had risen by some 3470% over as little as 5-plus years, from 2018 onwards there have been a number of serious pullbacks (-20%, -30%, -40%) that would have made many a shareholder uncomfortable on each occasion.

But also: none of these pullbacks marked the end of the uptrend that remained in place until the middle of last year. If we look back at recent history, we'll find this is quite a common feature for Growth stocks, including for ARB Corp, Breville Group and Ansell.

Such pullbacks are not necessarily always related to a company's performance. Sometimes the market simply gets in a mood to sell everything that trades on above average multiples.

See the first two months of calendar 2021, for instance, or the third quarter of 2018, or the second half of 2016.

While these significant draw-downs always attract a lot of attention from media and market commentators, with the usual explanation given that the shares were simply too expensive, it's good to realise that investors suffering heavy losses is not the sole prerogative of Growth companies.

AMP. QBE Insurance. Telstra. Unibail-Rodamco-Westfield. Not to mention your typical cyclicals such as Woodside Petroleum; they have all caused shareholders serious grief and disappointment, often with losses that are far greater and with very slim prospects of getting back to old share price levels anytime soon, if ever again.

My Personal Lessons

Us humans are not naturally well-equipped to excel in the share market. Whereas your typical value investment style often requires patience, and a lot more than many have available, investing in Growth companies scares people because of the big accidents and the huge draw downs that do occur.

The extra mental barrier comes from the general misconception that Price-Earnings (PE) multiples define whether a given stock is "cheap" (thus: opportunity) or "expensive" (thus: a disaster waiting to happen).

Simply analysing CSL ((CSL)) over the past (nearly) three decades would deliver sufficient counter-evidence of this Grand Misunderstanding, but emotions get in the way, or otherwise our personal biases, the lack of understanding, insufficient in-the-market experience, the fear of suffering losses, or the inability to look beyond the here and now.

It's never a pleasant experience to see the price of your shares falling, let alone dropping like a rock. Unless you are confident and ready to pounce with a big bag of money on the sideline, but I find such ideal scenario is rather seldom a reality.

I don't consider myself your typical Growth stocks investor either. Rather, I aim to seek out those businesses that have that something special; something that makes it worthwhile to stay on board when volatility hits the share price. I don't always get it right, and I definitely don't always respond appropriately or on time.

The portfolio I manage sold out of Appen ((APX)) above $20, which is more than -50% below last year's peak, but also more than 100% above the recent low. I was lucky I sold out of Treasury Wine Estates ((TWE)) before the Chinese import duties hit the share price. I made good money out of Nanosonics ((NAN)) which the All-Weather Portfolio currently does not own. I never anticipated that CSL shares would fall as low as $245 during the post-November pullback.

On average, I find confidence in my understanding and my insights about the companies I select, and this includes their potential weaknesses as much as their competitive prowess, their business moat, the structure of the sector and the embedded corporate quality within.

Every day I learn and I read. Newspapers. Broker research. Company statements. Corporate presentations. Strategy reports. General news. Look as much for negatives as you do for positives.

The most important lesson I can pass on is to not treat investing as a game of being perfect. This is as much about learning, including from mistakes, and finding what suits you best. In the end, if something doesn't suit you, it can never grow into a comfortable fit.

To those with diversified, long-term portfolios, or the desire to build such a portfolio, I can wholeheartedly recommend thou should not dismiss the benefits and beauty of being part of some of Australia's high-quality, pre-eminent success stories. Them being out of favour is usually not a long-winded trend, as also once again proven by the fact CSL shares are grinding their way back towards $290.

See also Conviction Calls further below.

Paying subscribers can stay on top of my research into All-Weather Performers via a dedicated section on the website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Here's the April update on the All-Weather Model Portfolio: https://www.fnarena.com/downloadfile.php?p=w&n=51C9C4D8-CC0D-24EC-9FE75F69E9D98B9F

Conviction Calls

Mid-year is approaching and JP Morgan is reviewing its assumptions and outlook for sectors listed on the ASX. Its healthcare update, released on Monday morning, nominates ResMed ((RMD)) as Top Pick and Nanosonics ((NAN)) as least preferred.

ResMed is chosen because of share price weakness post quarterly results release, with the new product launch of AirSense11 later in the year providing the logical next positive catalyst for the share price.

Nanosonics has fallen out of favour because it is increasingly becoming clear to JP Morgan that hospitals worldwide are cutting their spending. This shrinking of budgets, the broker worries, might slow growth for Nanosonics, even if its main device is relatively low cost.

Ongoing uncertainty about the company's new device, details unknown at this stage with potential for further delays, only adds to the broker's concerns.

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Market strategists at Macquarie warn investors should be cognisant of the fact global cyclical momentum is in the process of peaking, which loosely translates as the easy gains have been made from this recovery. From here onwards, returns might still be positive, but they will be smaller and possibly harder to achieve.

Which is why Macquarie is starting to advocate investors should return to local healthcare and staples retailing. Slowing momentum usually goes hand-in-hand with reduced risk appetite, meaning a shift towards defensives. Macquarie in particular likes CSL ((CSL)), Cochlear ((COH)), Ramsay Health Care ((RHC)), and Woolworths ((WOW)).

Strategists at Wilsons are equally in favour of adding more defensive names to investment portfolios, while pointing out the Australian share market has been rallying higher for 13 months in a row without a sizeable pullback or correction.

Wilsons likes Amcor ((AMC)), Coles ((COL)) CSL, Northern Star Resources ((NST)), Medibank Private ((MPL)), Ramsay Health Care, and Telstra ((TLS)).

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All-Weathers, EML Payments, Macquarie, And Risk

As communicated a few weeks ago, I am reviewing and revisiting the lists of companies that are mentioned across the various categories that are on display via the All-Weather Stocks section on the FNArena website.

For those who are reading this through the free email that goes out on Thursday; sorry, but this section is for paying subscribers only.

Historically, most of my amendments tend to focus on sub-categories such as Emerging New Business Models and Dividend Champions, which act as a complimentary add-on to the original concept of finding true All-Weather Performers such as TechnologyOne, REA Group, CSL, et cetera.

The fact that my specific choices regarding All-Weather Performers have remained largely unchanged over the past decade or so in essence solidifies the core-concept of my research. All-Weather Performers are rare, which is what makes them so valuable for long-term oriented investment strategies.

One of the changes I did make this month is adding EML Payments ((EML)) to the selection of New Business Models. This company has been one of the prime achievers among local fintech companies with many institutions and professional investors singing its praise, which is usually what happens when the share price keeps rallying towards new record highs, of course.

I was very well aware the recent change in overall strategy, whereby EML Payments is effectively moving into online banking, brings about added risks, but I also realised this could potentially be that success story that keeps on giving for many years into the future.

Almost immediately after I added EML Payments on the website, news broke the Irish central bank had communicated some reservations about the company's subsidiary in the country. The ultimate irony after I waited this long to include the stock. Just goes to show there is always a level of risk that simply cannot be forecast or anticipated.

It goes without saying, I have removed EML Payments from my selected list. Not necessarily because I no longer believe in this company's ability to shape a profitable future, but this is simply not the kind of uncertainty that belongs in my curated selections.

On a slightly related topic; investors are being treated with some of the finest investigative journalism through the Sydney Morning Herald and the Australian Financial Review this month.

The subject of investigation is the flopped IPO that has been Nuix ((NXL)) and the insights provided are best summarised with the scathing assessment of one of the sources quoted:

A pig was put on a dress and then sold to investors as being a princess.

Another insider quoted makes the bold prediction that Nuix will turn into the next AMP.

Macquarie Group ((MQG)) still owns 30% of Nuix's equity and will be held responsible for this debacle, one way or another. Which is doubly annoying because Macquarie has been a proud member of my small selection of Prime Growth Stories on the ASX.

Last year I was annoyed with myself for having sold out of the stock when economies locked up and borders and travel closed down as the share price recovered quicker than anyone can say Shemara Wikramanayake.

This time around, however, if Macquarie were still held in the All-Weather Portfolio, I might actually have decided to wave goodbye.

The stock has not been removed from my list, but I have serious reservations. Consider this the equivalent of a first strike against management and the corporate culture at the Silver Doughnut.

(This story was written on Monday 24th May, 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 $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/

article 3 months old

Rudi’s View: CSL, The Answers

In Weekly Insights this week:

-CSL, The Answers
-Research To Download

CSL, The Answers

By Rudi Filapek-Vandyck, Editor FNArena

Since listing in June 1994, the performance of CSL ((CSL)) has been nothing but spectacular, with the stock ultimately growing into the ASX200's largest constituent, beating the far more familiar household names of CommBank and BHP Billiton.

It took the better part of the past 2.5 decades, but Australian investors eventually warmed to Australia's largest and most successful biotech company, even though it never offered a genuine "yield" to get excited about and the valuation never looked "cheap".

But CSL performed when others couldn't, and it kept on simply doing that, until the global pandemic and calendar year 2020 arrived.

Just when it seemed nothing could ever possibly go wrong for Australia's number one business success story, it somehow did.

While the Australian share market has enjoyed one of the strongest bull markets in living memory, the CSL share price has sagged, clocking up its worst relative performance since the IPO 26 years ago.

Below is an attempt to explain the "why" behind this remarkable turn of events. More than a simple company-specific expose, it might as well be treated as an informative and educational vivisection of the share market in general, and the past twelve months specifically.

Answer #1: No More Buyers Left

Can an investment ever become too popular?

In overseas markets, particularly in the US, teams of quant analysts are regularly sifting through fund manager statements, drawing up rankings for popular ownerships in an attempt to determine which stocks are over-loved and which ones are temporarily under-owned. Such insights might prove pivotal when exploring the next trading opportunity.

The situation of CSL in Australia is somewhat different.

For most of its ASX-listed existence, the stock did not feature prominently on many active funds managers' radar. Too expensive, would be the standard response for a long while, in particular during the years of Commodities Super Cycle and strong outperformance from the Big Four major banks.

And frankly, CSL as the topic of conversation among retail investors was simply non-existent. No yield. A high valuation. A complex science and investment-based business model. Predominantly active in overseas markets.

Who in their right mind would possibly invest in it?

Meanwhile, CSL shares kept on rising through the local rankings. Member of the ASX200. Then followed the ASX100, the ASX50, the ASX20, the Top10, the Top5.

Nothing grabs the attention of investors as much as a steady and persistent outperformance, and the fact CSL grew ever more important for the local index meant the business and its share price were consistently outperforming the broader market, in particular near the top where it counts.

On my observation, things started to change in 2016, maybe 2017. Public conversation shifted from "expensive" to "you pay up for quality" and more and more investors, both professional and retail, joined the fan club.

What helped growing enthusiasm was that CSL shares kept on keeping on. First past $100, then $200, and even $300 was not a bridge too far.

By late 2019, a local survey among investors put CSL up as a must-own stock for the second year in a row. In hindsight, it was then I started to feel a little less comfortable. But, of course, as soon as markets entered 2020 and the global pandemic hit, no such doubts seemed valid with the CSL share price, true to its form and reputation, surging as high as $339.14.

What happens when everyone is on board with a guaranteed good thing? It means there are no logical buyers left when money starts shifting elsewhere. So, when parts of the investment community started to concentrate on greener pastures elsewhere, there was no money on the sideline waiting for the opportunity to get in.

In fact, that money on the sideline last year was very much looking elsewhere because the opportunities to be had were of the once-in-a-lifetime kind, leaving early safe havens and outperformers like CSL hanging high and dry.

To answer today's first question: there most definitely is a danger with having convinced the last of the sceptics, as share prices need a marginal buyer to provide natural support.

That marginal buyer was not around, or had other interests, when the CSL share price pulled back from its all-time high last year.



Answer #2: It's All Relative

Most share market analysis focuses on company specific features (bottom up) or starts with a macro view (top down), but both omit the fact that relativity is equally important in the share market, in particular during times of extraordinary circumstances and a heavily polarised asset spectrum.

Why would an investor buy into 4% yield when 5% is still on offer? Why buy into a stagnant business when plenty of growth is around? Why hold on to a falling share price when so many others are trending upwards?

The rise of CSL's popularity stems to a large degree from the fact most old economy stalwarts on the ASX were starting to be challenged in their growth path, and many local management teams (and boards) did not have a ready-to-be-executed answer or response.

Yes, the past five years have thrown up multiple tech success stories including Afterpay, Altium and Xero (sorry, New Zealand), as well as a2 Milk (sorry again), Lovisa Holdings, and Netwealth but at the top, where most institutions allocate their funds, the Australian landscape gradually turned grey and bleak.

From banks to insurers, to property developers and shopping mall owners, not to mention energy companies, utilities and miners; all revealed their weaknesses when confronted with a low growth, highly disruptive environment and only a few large cap companies in Australia managed to offer sustainable, consistent and reliable growth. CSL was one of those few.

As happens elsewhere: what becomes rare but remains in demand will receive a big reward. Hence the shift in market attitude: CSL is not expensive, it's of rare quality, and that deserves a premium.

Of course, the Big Reward came about one year ago when most stocks in the market got smashed amidst panic, forced selling and the threat of a global pandemic.

While low quality cyclicals, small caps and cash gobbling business models de-rated by -50% and more, shares like CSL found new friends who pushed up the share price onto a new all-time high.

But now that dynamic has changed and those prior castaways are offering potential growth of 50% and more, plus in some instances the return of shareholder dividends.

By now the over-ruling question has become: why holding on to a company that only offers little growth, with no yield, while I can get both in spades elsewhere? Many investors don't spend five seconds thinking about it.

Answer #3: A Parasol Or An Umbrella?

The importance of relative comparisons is firmly backed up by history. In simple terms: when it rains everybody starts looking for an umbrella, but as soon as the sun shines the race is on to secure an umbrella on the beach.

CSL is a big, sturdy, dependable umbrella that keeps us dry during times of heavy weather, but it's not a parasol.

Twelve years ago, when four years of synchronised global economic growth came to naught and disintegrated into the Global Financial Crisis, CSL shares went into the quagmire priced in the mid-$30s. It came out the other end at around the same level.

It was a truly astonishing result considering the broad market sank more than half in value, with banks and resources stocks faring a lot worse.

However, 3.5 years later CSL shares were still battling to stay above $30. Nobody wants a high-quality umbrella when the mindset is: let's go to the beach!

Answer #4: Aussie, Aussie, Aussie!

Sometimes the odds are stacked in your favour, and multiple narratives merge into one giant support for the share price, and sometimes the exact opposite happens.

Once central bankers had found a way to pull the world out of the fraudulent mess created by the US financial industry, global optimism was awakened and this pulled the Australian dollar to parity and beyond against the greenback. AUD/USD at 1.13. Remember those days?

Those were also the days that local exporters and profits derived in foreign currencies had a giant mountain to climb. No surprise, the local healthcare sector remained out of favour while the Aussie dollar enjoyed its moment in the sun. Once AUD/USD had peaked in 2012, the CSL share price started moving upwards.

Today's situation is not as extreme, but important nevertheless. AUD has quickly risen from below 0.60 to near 0.80. The move since the start of 2021 has been from circa 0.70 to, say, 0.77. That's a 10% increase. In three months.

At its lowest point two weeks ago, the CSL share price was down in excess of -13% when measured from the start of the calendar year.

Every analyst who has investigated historical correlations will confirm during times like these, CSL shares and the Aussie are very much intertwined with each other, as direct opposites.

Answer #5: My Name Is Bond, Not 007

Never witnessed anything like it before. Ever. Such was the mood of veteran asset managers and professional investors in late 2019.

Share markets, including here in Australia, had become gripped by extreme polarisation whereby winners kept on winning and laggards never seemed to attract anything but temporary attention from investors.

The result was a valuation gap most had never witnessed in their active careers. Then came the dividend cuts in Australia, followed by the global pandemic, and that relative valuation gap between winners and laggards blew out further to an extent that could not possibly be sustained.

The elastic band between Growth and Value has narrowed considerably, as should be expected, but what really got the momentum switch into acceleration was the advent of ready-to-use vaccines plus rising yields on government bonds the world around.

Before long, the global narrative morphed into "inflation is coming". Investors buy protection through energy, financials and cheaply valued cyclicals.

They reduce exposure to technology and highly priced quality and growth stocks. Again, CSL finds itself on the wrong side of market momentum.

Answer #6: Covid Is Kryptonite

Very few contest the fact CSL is one of the most successful and best managed companies on the local bourse, but just like Superman is weakened by Kryptonite, the covid-19 virus spreading throughout the USA still is preventing donors from visiting plasma collection centres and this is weighing down the global plasma industry, of which CSL remains the most efficient operator.

Because there is a lead time of approximately nine months, today's below-trend industry collection data will weigh upon growth numbers in FY22. While nobody expects the current situation to remain in place forever, the market is waiting for concrete evidence the industry is picking up.

CSL has the advantage of operating the world's second largest virus vaccine business, which is booming and thus offering a natural offset, but investors understandably want to see improvement in the largest and core part of the business.

Pre-covid, CSL was operating the largest and most efficient global network of collection centres while also investing most in additional capacity, grabbing the lion share of annual industry growth, but these advantages don't count for much when supply remains under pressure.

And so we wait. For the Biden administration to successfully roll out vaccines. For life without lockdowns. For industry collection data to signal the worst is in the past, and growth in plasma collection is returning.

Answer #7: Fear Is Stronger Than Fact

Does anyone remember when Amazon was coming to Australian shores? And how did that work out for local retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), or for a direct local competitor such as Kogan.com ((KGN))?

The most insightful answer probably comes from Booktopia ((BKG)) which listed late last year but would never have been able to IPO in the year leading up to Amazon's arrival. Yet, here we are, with Booktopia reporting record growth and with both company management and analysts forecasting ongoing strong growth numbers for the years ahead.

Admittedly, the Booktopia share price hasn't exactly performed strongly post the initial fresh listing excitement, but there are many factors in play, and it remains early days yet to make any sort of firm judgment.

Meanwhile, JB Hi-Fi shares recently set a fresh all-time record high, while Kogan shares did so last year, and Harvey Norman -believe it or not- is finally closing in on the all-time high reached in 2007 (pre-GFC).

A similar fear has gripped parts of the investment community regarding a potential new class of drugs that might impact on sales of immunoglobulin (Ig), which is the bread and butter for the likes of Grifols in Spain, Takeda in Japan, Octapharma in Switzerland, and CSL in Australia.

Without getting lost in healthcare techno-lingo, US-based biotech argenx is currently trialling a FcRn drug for Chronic Inflammatory Demyelinating Polyneuropathy (CIDP), and showing great promise. CIDP is a rare condition with only 40,000 patients being treated annually, but it does account for circa US$3bn of the US$12.8bn of global annual Ig sales. In other words: a highly successful argenx market entrance can potentially put a big dent in the plasma industry's annual sales.

This is probably where the comparison with Amazon meets the reality of every day life inside hospitals and the healthcare industry in general. For starters, argenx is currently the front runner for this new industry but, assuming everything works out well from here onwards, a genuine competitive threat might not be seen until a number of years from today.

A recent industry study by Credit Suisse gives a successful argenx FcRn product launch a 70% chance by 2025 with an estimated peak potential of US$1.2bn in annual sales years later. This remains less than half of the current US$3bn in annual Ig sales that would be affected.

Not surprisingly, Credit Suisse analysts believe market fears about this new upcoming threat look "too pessimistic". On Credit Suisse's assessment there is no shortage in demand, hence Ig lost to FcRn will simply find a customer elsewhere.

Others have expressed similar views and forecasts, while not necessarily having conducted a similar survey of US neurologists to produce an in-depth industry report in the same fashion as Credit Suisse did. Grifols' share price since January 1st looks quite similar as CSL's.

argenx is not the sole competitor aiming to make an impact, not by the slightest. Takeda, and others, have been cranking up competition in so-called Specialty Products; high margin, strongly growing market segments. Local analysts, in response, have been scaling back their growth projections for CSL in coming years.

The bottom line remains the same, however, and this is that CSL will very much continue growing its business, profits and dividends in the years ahead, occasionally impacted or interrupted by external factors such as currencies, government policies and competition.

Which is why I believe last week's upgrade to Outperform with a twelve months price target of $315 might prove quite the pivotal event for shareholders and investors in the company.

Following their recent industry study, Credit Suisse analysts have positioned their CSL EPS forecast for FY22 -11% below market consensus, but still decided to upgrade the stock.

The difference, say the analysts, between a base case scenario for Ig sales and the bear case scenario is between 10% growth per annum and 7% growth per annum between 2025-2030.

Credit Suisse's updated projections imply CSL will report negative EPS growth in FY22, followed up by a strong, double-digit rebound in FY23. History suggests such an outcome looks but plausible. But as today's expose shows, it ain't the only factor impacting on the share price, not by a long stretch.

Research To Download

Recent research reports by Research as a Service (RaaS) that can be downloaded:

-Stealth Global Holdings ((SGI)):

https://www.fnarena.com/downloadfile.php?p=w&n=D6311338-B76B-59BC-36F8578D08B8D850

-Rent.com.au ((RNT)):

https://www.fnarena.com/downloadfile.php?p=w&n=D6493443-E334-736F-3D4B77ADAA0C0CA2

-Amaero International ((3DA)):

https://www.fnarena.com/downloadfile.php?p=w&n=D65174F7-D468-1E25-5592798BB643BC3E

(This story was written on Monday 29th March, 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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