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Rudi’s Views: Pre-August Observations

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 | Jul 21 2022

In this week's Weekly Insights:

-Pre-August Observations
-Reporting Season: Early Signals
-ASX/S&P Index Rebalance Predictions
-Conviction Calls
-All-Weather Model Portfolio
-FNArena Talks


By Rudi Filapek-Vandyck, Editor FNArena

Pre-August Observations

To borrow a famous quote from Winston Churchill and make it my own:

You can depend upon the share market to do the right thing. But only after it has exhausted every other possibility.

And so it is with great delight that I have been witnessing the return of buyers to share prices in some of the highest quality and resilient business models listed on the ASX. Think CSL ((CSL)), Cochlear ((COH)) and ResMed ((RMD)), but also Amcor ((AMC)), TechnologyOne ((TNE)) and Woolworths ((WOW)).

Both analysts and investors might at times find it difficult to warm towards these High Quality stalwarts, usually because the valuation never looks as attractive as for lower quality, smaller cap and cyclical companies, but it is my observation when times really get tough and uncertainty dominates the broader picture, these are the Go-To companies that will stabilise and rise first amidst turbulent and volatile times.

Always difficult to pinpoint exactly when that moment arrives, but in 2022 it seems to have arrived in early June, just before share prices for the likes of BHP Group ((BHP)), Woodside Energy ((WDS)) and Fortescue Metals ((FMG)) started to break down. Take a look at share price graphs for the likes of CSL, Cochlear, Woolworths and TechnologyOne and admire how strong the rebound is that has occurred over the past six weeks.

I think we can now conclude the market is comfortable with valuations for these High Quality companies following this year's general de-rating as bond yields had to reset from exceptionally depressed yields. At the same time, with the risk of an economic recession looming, or at the very least a significant slowdown, the apparent rebound is equally the market's call on (much lower) earnings risk.

In simple terms: amidst a multitude of risks surrounding the upcoming August reporting season, as well as the eight months ahead of next year's February season, where do we all think the greatest risks lay for downgraded earnings and reduced dividends?

I think the market is showing us where the risks are the lowest.

****

Traditionally, a recovery in share prices of CSL & Co marks Phase One in the equities market recovery, so which sectors might be up next?

With a rare exception of, maybe, coal prices, I continue to see large question marks obfuscating the outlook for iron ore, base metals, oil & gas, precious metals, EV battery materials, steel and most other cyclicals. Serious questions remain about what exactly is happening inside the Chinese construction industry; what will happen in Europe during the upcoming winter; or the duration of the strength and direction of the US dollar.

These unanswered enigmas all represent additional risks on top of the one key question in mid-2022: how recession-proof exactly are those businesses?

Note: even if there won't be a recession anytime soon, it is most likely that question will still be asked by nervous investors.

My focus thus naturally shifts towards technology and smaller cap growth companies, as well as to the local REITs. All three market segments have been trading under serious duress this year, as first excessive exuberance needed to be priced-out and then the natural de-rating kicked in from higher bond yields.

There is one caveat that needs to be highlighted: that optimism that has been creeping into share markets these past weeks is based upon a general belief that inflation will peak soon, as well as that bond yields will mostly trade sideways from here onwards, i.e. the peak in 10-year bond yields is well and truly past us; at least for the time being.

These are all-important requirements for those three sectors to experience a sustainable recovery from beaten-down share prices. Plus, of course, the next question that will be asked is: how recession-proof exactly are those businesses?

If ever anyone has the feeling that investing during a raging bull market is so much easier, well, that feeling is probably 100% correct.

One problem with local technology and smaller cap growth companies is most have a rather limited track record and, with exception of the exceptionally brief recession of 2020, there's no reference or framework for how these business models operate when confronted with economic stress tests.

Which is probably why, being a cautious investor, approaching the upcoming reporting season with a great deal of caution seems but the logical thing to do. And that's assuming August does not come too early in today's cycle, leaving key questions for the next eight months.

Either way, I am of the belief that, here too, the market is providing investors with valuable clues as to the various risk profiles of companies that are either technology or promising high growth small cap opportunities.

I am generalising now, but there should be very little surprise as to why shares in TechnologyOne have not nearly fallen as much as, say, Kogan ((KGN)), Nuix ((NXL)), Redbubble ((RBL)) or Zip Co ((ZIP)), and they have been quicker in staging a noticeable recovery.

Mr Market can be a highly unreliable weather vane, and the next tantrum might be but another economic update away, but my experience is that when it comes to separating the wheat from the chaff, i.e. identifying which companies are High Quality and which ones are certainly not, Mr Market's communication is often loud and clear, and correct.

Note, for example, how both Objective Corp ((OCL)) and WiseTech Global ((WTC)) issued a positive market update in July. Yes, of course, one can potentially make a higher return out of a share price that has fallen a lot further, but what is the real trade-off when adjusted for the risks involved, as well as when taking a longer-term view?

Lower quality fly-by-nighters tend not to perform well over a longer period of time. This is the confusing message the share market throws at bargain hunters: it does not account for the risks involved.

Having said all of that, certainly following the firm bounce in share prices since early June, there should now equally be a degree of caution when buying into the local High Quality names. If they're in the portfolio already, congratulate yourself. Your decision from the past has once again been vindicated.

But as also indicated by current valuations and price targets for those stocks, buying now runs the risk of low returns in the immediate, and there always remains the risk for disappointment in August, for higher bond yields, or for inflation to stick around for longer.

This is the share market, remember? Other opportunities will present themselves.



Some of the most obvious opportunities, it would seem, are among local REITs. Just about every sector analyst has conducted a general review of the sector over the past two months, and not one has drawn a different conclusion to most ASX-listed REITs seeming undervalued.

The one requirement for this sector to genuinely and sustainably close the gap between share prices and intrinsic valuations is for investors to become comfortable with the outlook for bond yields (thus: inflation and central bank policies), about which we can all make various forecasts, but this can take a while, still.

Since most REITs are, operationally, in good health, which also applies to balance sheets, investors can opt for the waiting game, while confidently cashing in relatively high distributions to shareholders.

Exactly how to play this sector is very much dependent on personal views and preferences. Sector heavyweight Goodman Group ((GMG)) is usually singled out as a lower-risk exposure, but it also pays out a rather low yield in distributions. See the earlier remarks about quality and risks, which also applies to REITs.


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Rudi’s View: Peter’s Portfolio Reviewed

Peter's Portfolio Reviewed

By Rudi Filapek-Vandyck, Editor FNArena

Occasionally I am being asked to cast my eye over someone's investment portfolio and give my honest opinion.

Time and other constraints (no financial advice!) often prevent me from responding in-depth. This week I have decided to dig deeper and provide more colour in response to the latest request, and share my insights with a broader audience.

The portfolio in question contains the following stocks:

-a2 Milk ((A2M)),
-Audinate Group ((AD8))
-Amcor ((AMC))
-Ansell ((ANN))
-Bapcor ((BAP))
-Bigtincan Holdings ((BTH))
-Breville Group ((BRG))
-Catapult Group International ((CAT))
-Cochlear ((COH))
-CSL ((CSL))
-Goodman Group ((GMG))
-Kogan ((KGN))
-Megaport ((MP1))
-NextDC ((NXT))
-Pro Medicus ((PME))
-TechnologyOne ((TNE))
-Wesfarmers ((WES))
-Woolworths ((WOW)).

The General Framework

First up, when it comes to portfolio construction, I am a firm believer in creating a general framework with one eye on the immediate circumstances and one eye on the long-term. There's only so much we can confidently predict and/or anticipate, which is why a truly diversified selection of companies will prove its true value over time.

Having said so, investors should never be afraid to make changes. Things change. The world has been changing quite profoundly post-GFC. The past few years have seen multiple shocks to the global system that all had major impacts on trends and general market dynamics.

Don't believe for a second that this time is never different from the past. It has been different on every single occasion!

Whereas covid has had a significant impact on the world, and on markets, since 2020, investors must now consider whether the Russian invasion into Ukraine and the subsequent response from the Biden administration and its Western allies might not have an even greater impact in the months and years ahead.

Things to consider in the short to medium term:

-Is inflation near its peak and about to trend downwards? Hopefully the answer is 'yes', but we cannot be 100% certain.

-Will central bankers have to choose between taming inflation or keeping economic momentum in the positive? The Federal Reserve is behind the curve and needs to step on the accelerator. Historically, this is when bad things happen. Who knows how strong exactly the US economy remains in the face of aggressive tightening?

-Will there be a recession? The pressure is on for Emerging Economies, also not helped by a weakening Chinese economy and sanctions on Russia. But the most obvious pick for the next recession is Europe where economies broadly haven't grown post-GFC (and often for much longer), and household budgets already were under pressure from stagnant wages when confronted with rising food and commodity prices. Now a genuine energy crisis is piling on further pressure.

-Is Australia still the Lucky Country? In light of serious challenges for Europe, China and other parts of the world, and unanswered question marks about the trajectory in the US, it looks like Australia might yet again stand out in a positive light.

Inflation over here is still quite contained, the RBA is not in a hurry, the local housing market might be deflating, but that doesn't automatically translate into 'disaster', and the world is short crucial basic ingredients Terra Australis has in abundance; iron ore, copper, coal, nickel, uranium, the list goes on.

-Quo vadis the Aussie dollar? One additional complication is that when Australia truly stands out on the global scene, the Aussie dollar might grab the limelight and become a lot stronger.

Apart from one-eyed market sentiment which pushes investors into chasing the momentum of the day, the AUD is one key reason as to why a buoyant super-duper, never-ending party for commodities can easily become a big negative for most companies listed on the ASX. If the pressure doesn't show up in thinner margins, the currency might wreak havoc through the translation of foreign sales.

-The megatrends from yesteryear haven't gone missing, of course. It's just that, for the time being, general attention is focused elsewhere.

-What's the market impact from tightening liquidity? Having injected unprecedented, previously unimaginable liquidity into the global financial system, central bankers are now increasingly looking into how they can reduce it. This is in particular the case at the Federal Reserve.

We don't know exactly how this increased liquidity has impacted on assets and on markets, but if it has been a positive in the past, what then will be the consequences of reducing it? My suspicion is that the impact will be felt first through the more speculative segments, including crypto currencies & NFTs, and microcap stocks, but admittedly, I am simply sticking one wet finger into the air. We shall have to wait and see.

The above list is incomplete, and not without contradictions, but such is life as an investor. Equity markets don't seem too worried just yet about the risks that lay ahead, but as we all know, that can change pretty quickly (see the first weeks of the calendar year, for example).



The Individual Stocks

With all of the above in mind, now let's have a look at the individual portfolio constituents.

-The a2 Milk Company

Since co-listing on the ASX in 2015, a2 Milk has literally changed people's lives. That's but the logical result when a share price appreciates from an initial 56c to a peak of nearly $20 by mid-2020 when covid had investors running for apparent safe-havens. The demise in the share price since has been nothing but brutal. In 2022, a2 Milk shares are oscillating around the $5 mark, and there doesn't appear to be much life left (at the moment) in the former market darling.

Obviously, too many investors are in the same position in that they refused to acknowledge the general context has changed for a2 Milk. Many have now been left to ponder why they didn't sell when the share price was at a much higher price level.

Always easier to draw conclusions in hindsight, but the -75% fall in the share price has laid bare two major barriers most investors need to overcome (and many never do): to acknowledge when a good news story changes into failure and disappointment, and knowing when to sell.

I think we all want to prevent ending up in a situation where the losses are so large, it literally causes a headache simply thinking about it. It can be done. Draw a line in the sand beforehand, be it at -15%, or -20%, or -30%; it doesn't matter where precisely, but set your ultimate limit for instant capital loss, and stick by it.

I often recall my personal experience with Slater & Gordon ((SGH)) whose shares I sold at a loss, but at least I did not stick around to see the share price ultimately sink by -96%!

Having said so, what should one do when still holding a2 Milk shares today?

Risk hasn't evaporated, and things can still deteriorate further. But there is equally upside potential from a management team that is all too aware that shareholders are, and have been, suffering. Maybe they'll sell some assets? Maybe a larger international competitor might have a go at buying the lot? Maybe things can finally improve operationally?

Whatever the decision at this point, it has to be made with patience in mind, and with the understanding that more bad news can still be next. Then there's that other major error too many investors make: anchoring their view on the share price from the past. a2 Milk is not going back to its glory days anytime soon, if ever. That pretty much is a guarantee I am willing to provide (do the maths!).

What not to do? Anchor your mind on $10, or $15, or $20 or wherever the share price has been. Start from a clean slate. Today's journey starts at $5.

Alternatively, and I can confirm this from personal experiences, don't underestimate the relief that kicks in once you got rid of that blatant failure in your portfolio. It's almost like you teared down walls, opened up all the windows and gave your mind the opportunity to broaden its scope again, free from long-lasting, debilitating shackles.

Taking a much broader vision, as an investor, we simply have to be mindful of the fact that most companies cannot continue performing over a long period of time. There's literally no value in getting stuck in the past; mentally, financially, or otherwise.

-Audinate Group

Audinate Group is one highly promising local technology developer whose growth outlook has been seriously impacted by two major events since its IPO in late 2016. First came covid, closing down all stadiums and outdoor venues. Next came a global shortage in semi-conductors ("chips").

For a company that is potentially developing the next global standard for wireless -"point-to-point"- audio-visual equipment and network-infrastructure, both major events have created major bumps in the road. No wonder, the share price has now given up all gains that were made since 2020.

Come to think of it, that is not too bad a result, in the bigger scheme of things. Other technology companies that are equally not profitable have seen their shares fall by -75% over the past six months or so. For Audinate shares the losses are, thus far, less than -40%. Ok, that is still a big loss, but it does signal investors still believe in the growth story and in the company's potential.

The main problem investors, and management at the company, are facing is that nobody knows when exactly that global shortage will be resolved. Here too, it turns out, the war in Ukraine has had an unforeseen negative impact. Judging from ResMed's recent indications, it appears chip shortages are still getting worse in the short term. This is a problem that is completely outside the control of the companies concerned.

Patience seems like the best remedy here. Or to summarise Audinate's predicament in a buddhist manner: shit happens, what do you do?

-Amcor

Packaging giant Amcor is one of the truly international operators on the ASX though, ironically, since the spin-off of Orora ((ORA)) in December 2013, it no longer has any operations in Australia or New Zealand. Amcor's second-life glory days started with the acquisition of Alcan Packaging from a debt-ridden Rio Tinto during the tumultuous GFC-period.

Amcor has a stated target of providing shareholders with a 10% annual return, which is not always possible, of course, but a steadily growing dividend (yield above 4%) is a great place to start from. On outdated sector-qualifications, Amcor is part of the Materials sector, side by side with BHP Group et al, but take it from me, Amcor is a solid, international, defensive growth company whose accumen has usually been underestimated.

There is a lot more technology and innovation going on in the global packaging industry than most of us appreciate. Amcor works with/for the largest consumer-oriented multinationals of our time. From drink bottles to pre-packaged food and medicines; it all requires a flimsy wrap, or more.

Amcor is part of my selection of All-Weather Performers on the ASX. I consider it typically a stock to own for the long time, Warren Buffet-style. Yes, the industry is not without its challenges (no industry is). Yes, given its international character there is always a problem somewhere, if not in Venezuela, then in Russia or the Ukraine. Yes, it nowadays reports in USD, which makes it vulnerable to AUD-appreciation. No, there is no franking on the dividend. And its contracts typically allow for cost inflation pass-through with a delay.

But every time the world turns cautious and seeks protection, investors know where and how to find Amcor. Should prove resilient during times of economic distress.

-Ansell

Ansell is what is left on the ASX from the old Pacific Dunlop conglomerate. The company has gone through significant changes since it changed name in 2002. Traditionally, Ansell is put in the same basket as CSL, ResMed et al, but only half (roughly) of its latex-related products are sold into the healthcare sector; the other half consists of selling gloves and other protective gear to manufacturers, professional cleaners, builders, chemical companies, and even the mining and oil & gas industries.

Ansell shares many similar characteristics with Amcor; lots of products and customers spread out over many geographies, stable margins, an under-appreciated innovation drive, a long history of delivering shareholder value, etc... Though the key difference between the two is equally important: Ansell is much smaller than Amcor (US$2bn in annual sales and $3.3bn in market cap versus US$12bn and $23bn respectively) plus it has exposure to direct-to-households channels, which makes it more vulnerable to competition from cheap alternatives.

The latter also means Ansell is less protected against rising input prices. Occasionally, these greater vulnerabilities show up, and 2021/22 is one prime example of this. In 2020, Ansell was revered as a prime beneficiary of the global pandemic. Today, the shares represent "deep value", which is quite the extraordinary turnaround in market perception and treatment.

Six months may seem like a long time on the share market, it's next to nothing when running a business and trying to solve problems. Ansell has disappointed in two results seasons in a row. Can management start anew in August? No guarantees are available, but what we do know is this company has an excellent longer-term track record and today's share price valuation looks severely undercooked.

All that is required, possibly, is some good news and an indication of a successful turnaround.

-Bapcor

Autoparts distributor Bapcor listed as Burson Group on the ASX in 2014. Thanks to my research into All-Weather Performers, I was able to relatively quickly identify this business as being extremely resilient, which it has proven to be. The FNArena/Vested Equities All-Weather Model Portfolio seldom welcomes a recent IPO, instead preferring to wait 3-4 years in order to gauge a new business's true colours, but an exception was made for Burson/Bapcor.

Throughout numerous market tribulations, this has proved a great decision with the share price reaching an all-time high last year above $8, roughly 2.5x times up from the early days on the ASX. But Bapcor is no longer included in the Model Portfolio.

Over the years that Bapcor was in the Portfolio, it had become obvious the company's long-term risk profile is changing, because of the accelerating advent of electric vehicles. But when the news broke of a serious rift between the CEO and the company's board, leading to the abrupt retirement of CEO/MD Darryl Abotomey, the company's short-term profile suddenly became a lot riskier too.

This is why Bapcor shares are no longer in the All-Weather Model Portfolio.

-Bigtincan Holdings

IT services provider Bigtincan Holdings has been a victim of a change in general market sentiment with its share price halving (-50%) in less than seven months. Admittedly, soon after listing on the ASX in 2016 it had quickly become one of the beneficiaries during a time when everything 'software' and 'technology' looked sexy and extremely attractive to investors riding positive market momentum for tomorrow's new economy representatives.

At face value, Bigtincan has a few obvious disadvantages inside the new market context of 2022 triggered by rapidly rising global bond yields: it is not profitable, and profitability looks a few years out at best, its market cap is only $450m with annual sales but a tiny $44m, while negative cash flow only further reduces the investment appeal.

Outside of the occasional rally, which is part and parcel of being publicly listed, it may well take a long time before this company lands back on the radar of the broader investment community (if at all). The days when carrying a 'technology' tag was sufficient to see share prices flying higher are well and truly behind us. Instead, investors are now demanding positive cash generation as a minimum requirement, and Bigtincan does not meet the benchmark.

-Breville Group

Multinational manufacturer and marketer of home appliances Breville Group has been one of the more silent performers on the ASX post-GFC with its share price appreciating more than seven fold over the past fourteen years. Once the company's growth profile got more broadly recognised in about 2018, the share price appreciation accelerated noticeably.

Take a look into the future that is coming towards us and what we see is direct communication between ourselves, our home appliances and the outside world. What if our fridge would signal the local supermarket when the household is running out of milk, which then promptly is delivered to our front door? No more sudden visits at the eleventh hour to save our Sunday morning cuppa experience!

Breville Group is very much part of that future, though it's early days as yet. Positioned as a mid-market player in between cheap-and-nasty and pricey luxurious, Breville is still expanding its international network, which still leaves a lot of growth up for grabs for many more years to come.

The key offsets to that ongoing growth potential are international competitors, such as De'Longhi and Philips, and, naturally, consumer sentiment and household spending. One of the key risks today is Europe facing an economic recession, which seems but a plausible outcome within the current context. But even in better placed economies, such as the US and Australia, consumer spending might well shift away from goods to services, post-lockdowns, which can easily impact on the short-to-medium term pace of growth.

Analysts covering the company believe Breville Group can withstand the negatives from reduced consumer spending through successfully extending its products reach into new geographical markets. This might well prove the case, but the share market in 2022 is not one that takes a positive view first and then waits to see whether that decision is correct.

Breville's share price has thus fallen from $33 in August last year to circa $25 this month. A relatively high PE ratio, typical for a successful growth story as has been Breville's, has not helped either.

Viewed from a broader angle, it can be argued Breville Group trades like your typical consumer-oriented stock, a la JB Hi-Fi and Super Retail, and history for all those stocks shows occasional volatility can be high, as has been proven yet again by Breville since August last year.

It is difficult to see how this success story would be finished right here, right now. It most likely has a lot further to go, but question marks about inventory, supply chains and consumer spending are likely to keep the buyers at bay for the time being.

-Catapult Group International

Catapult Group International offers market-leading technology for a targeted audience; professional athletes. The company initially generated a lot of media attention, and investor enthusiasm, after listing on the ASX in late 2014, but that all changed from mid-2016 onwards when the shares peaked at $4 - a level not witnessed since.

Similar to earlier mentioned Audinate Group, covid has seriously impacted on Catapult's growth plans, and similar as with Bigtincan Holdings, Catapult is not yet profitable, though it has started to report positive operational cash flow. Another positive is that subscription and recurring revenues now represent 86% of annual revenues.

As a non-profitable, technology-driven, small-cap, promising growth company, Catapult shares have nearly halved in a matter of weeks since January, and that was off a level that was pretty much half the peak share price back in 2016. Investors who like to adhere to the narrative that small cap companies by default generate higher returns than large cap companies, pay attention.

Given the trend in revenues and positive cash flow, one would have to assume investors will be looking to get back on board, on the condition that management continues to execute well. Offsetting this optimism is the observation this still is a company with a market cap of $300m only, and not included in the ASX200 or ASX300.

Catapult shares are currently part of the All Ordinaries, as well as the All-Technologies index.

-Cochlear

The aforementioned Ansell is not the only remnant of the once glorious Pacific Dunlop on the ASX today. Cochlear too was once part of the same conglomerate. It was spun-off as a separate entity in the early 1990s.

Cochlear is part of the trio that made the healthcare sector the best performing sector on the ASX over the past two decades. Unlike CSL and ResMed though, there are more questions creeping in about Cochlear's true underlying pace of growth.

Those questions will remain unanswered for now, because covid and lockdowns have had a significant negative impact on Cochlear's business. Today's investment proposition is thus very much linked to the re-opening theme, as it is for Ramsay Health Care and a number of other healthcare companies, even though the sector label 'healthcare' and a high PE ratio are not the characteristics most momentum-following market participants will be looking for.

As a global market leader, Cochlear equally suffers when the AUD is in fashion, even though the company still reports in local currency. Most of its revenues are nevertheless derived internationally.

The interim report release in February has injected renewed confidence into analysts' and investors' mindset to anticipate ongoing improvement for Cochlear's business as societies adjust and adopt a post-pandemic 'normal'. It's probably a fair statement to make that, for the next 2-3 years, Cochlear is but an obvious re-opening beneficiary.

-CSL

CSL remains one of the highest quality, high achievers on the ASX but even the most glamorous success story needs to take a break every so now and then. It happens to the very best and in CSL's case, covid has disrupted US plasma collection, and thus kept the share price under a cloud over the past two years.

Similar to a number of other ASX-listed healthcare companies, CSL is now part of the so-called re-opening trade. With plasma collection data indicating volumes are recovering from virus-interruption, common sense suggests CSL's operations are now in full recovery mode, and that share price, AUD permitting, should respond accordingly.

But what is more interesting, in my personal assessment, is the recent acquisition of Vifor takes Australia's number one biotech into new product territories, outside of its two core competencies of plasma and vaccines. One of the speculations doing the rounds is that CSL might be anticipating future disruptions to its two key businesses (there are new technologies popping up every year) and that Vifor is now adding extra growth optionalities in case such disruption might occur.

CSL has been part of my All-Weather Performers from day one and the Vifor acquisition, when placed in the above framework, once again bears all the hallmarks of a great business led by quality management. I'd simply add: investors take note. CSL's track record suggests Vifor's contribution will likely surprise to the upside in the coming years.

-Goodman Group

I have watched the transformation of Goodman Group, nowadays included in the ASX Top20, from a debt-overloaded property developer that almost went bankrupt during the GFC into a successful fund manager and one of the world's prominent designers & developers of modern warehouses.

Those two key characteristics have turned the company into a mega-trends beneficiary, and the subsequent re-rating of the company's share market valuation means Goodman Group shares are no longer attractive for your traditional yield-seekers. Goodman Group is priced as a growth company these days, which makes it vulnerable to rising bond yields, as it traditionally always has been.

Common sense says the present double-digit percentage pace in annual growth, reliable and dependable as it has been, will reduce to the high single digits that used to be more common over many years prior, but who's to say this will be a problem? For as long as mega-trends continue, and Goodman management keeps its eye on the ball and its finger on the industry's pulse, it's hard to see the underlying uptrend not be extended, beyond the occasional hiccup, with the latter probably related to surging bond yields.

-Kogan

It's hard not to mention the importance of 'governance' and the treatment of ordinary shareholders when writing about online shopping platform Kogan. On the one hand, we have a great coming-of-age story led by a young entrepreneur who, at the age of 23, started this business in his parents' Melbourne garage in 2006.

On the flipside we have a business that has received fines for misleading its customers while management has been accused of releasing press releases to prop up the share price so that directors, including founder Ruslan Kogan himself, can offload equity at a more favourable price (only to be rewarded with additional free stock options).

Of course, when the times are good and get-me-in-too momentum is strong and positive, many an investor doesn't care about such dark spots. There's money to be made! And Kogan shares, just like so many other online retailers, found themselves in an operational sweetspot when covid necessitated lockdowns in 2020, but that narrative has turned sour by now.

Kogan shares peaked in 2020 near $25; they are trading above $5 in 2022. Bloated inventories and ongoing margin pressure have quickly pulled investor enthusiasm back to earth. Contrary to, for example, CSL or Goodman Group, I have yet to spot any signals of a quality, long-term achiever. Can leopards truly change their spots?

When it comes to applying ESG filters, I find most attention tends to go to the E (environment) and the S (social) but I recommend investors not to lose sight of the G (governance).

-Megaport

The world is generating more and more data; it's one of today's undisputed mega-trends. Megaport is the intermediary that connects businesses to data centres via its propietary network-as-a-service (NaaS) offering. The company was founded by Bevan Slattery, local royalty when it comes to investments in telecom and technology following success stories including Pipe Networks, NextDC, Cloudscene and Superloop.

One would be inclined to think the combination of all of the above would guarantee success for Megaport and for its loyal shareholders, which still includes Slattery, but investor appetite has made a big switch in 2022 as rising bond yields and high inflation now require businesses to be profitable, or at least cash flow positive.

Megaport is still in the investment phase and thus neither profitable or generating excess cash out of its day-to-day operations. For the time being, this is a big no-no (double negative). Thus the share price is trading well below broker targets, and well below the levels witnessed last year.

Given the ongoing need for significant investments, as Megaport builds and extends its international platform, and the current mood in financial markets, with a preference for commodities and cyclicals, it remains anyone's guess as to when exactly a company such as Megaport can come back into investor favour.

The safest prediction, no doubt, is that patience will re required.

-NextDC

NextDC is also part of the ever-more-data mega-trend, being the largest local owner and operator of 'neutral' data centres. Apart from Bevan Slattery, NextDC shares with Megaport the fact it is not yet profitable as investments need to be made first in building those data centres, after which clients and sales can follow. NextDC has expanded its plans and footprint multiple times over the years past.

It's a mega-trend, remember? Demand simply keeps running ahead of capacity and availability.

Strictly taken, and I keep repeating this, NextDC might be included in the local All-Technologies index, but it is essentially an infrastructure play, similar to Transurban and Atlas Arteria today - or the NBN if it ever lists on the ASX. In many years from today, NextDC shares will be priced off the forward yield on offer, though, admittedly, this still is a long while off.

The key difference between NextDC and the likes of Megaport is it generates plenty of cash off existing contracts, and there remains plenty of capacity, including data centres under development, to keep this growth story going. The main threat for operators such as NextDC comes in the form of pricing pressure through competition, but with demand growing as strongly as it has, this does not look like an imminent threat.

NextDC shares are equally trading well below consensus target and the near-$14 peak from mid-last year. A stabilisation in bond yields, along with investors becoming more comfortable with the outlook for inflation, might be required before the share price can resume its prior uptrend. The exact timing of this remains anyone's guess.

-Pro Medicus

Pro Medicus offers all the ingredients of a long-term, international success story a la ResMed, Cochlear and Fisher & Paykel Healthcare. It is the global market leader, with the most advanced technology, in a young and unfolding new development inside the global healthcare sector.

Equally important; its contracts are with quality operators, for multiple years and provide excellent visibility. Last week, Pro Medicus announced an 8-year, $32m per annum deal with Inova Health in Northern Virginia, USA. The company has also announced a share buyback over the coming twelve months.

Of all the analysts who cover this company, not one doubts the quality or the growth prospects for Pro Medicus, which cast a dark shadow over most ASX-listed peers on a longer-term horizon. There is, however, a 'but'... and that is the share price valuation.

Even after pulling back from $66-plus, the Pro Medicus share price valuation remains rich on traditional metrics with a price-earnings ratio of 90x-plus. But then again, high quality technology with such a long runway for growth, underpinned by great visibility and recurring income should probably not be measured against the same benchmarks as, say, Healius or Virtus Health.

It is anyone's guess as to when exactly the pre-2022 uptrend can sustainably resume for Pro Medicus shares, but an already high valuation will certainly keep a lid on any rallies while the market's focus is on bond yields, central banks tightening and, potentially, an economic recession.

The best remedy, from Pro Medicus shareholders' point of view, is for the company to continue announcing fresh contracts.

-TechnologyOne

Having survived the Nasdaq meltdown of March 2000, TechnologyOne has grown into one of the most consistent performers on the ASX. Average annual growth in earnings per share post-2004 is in the vicinity of 15%, which is impressive on its own account, and it comes with a high degree of forward visibility too.

Local and federal governments, healthcare providers, universities, and financial institutions; they all rely on the company's tools and services for business analytics, supply chain management, student management, support and training, and other business tasks. With client churn of less than 1%, it appears this is but one of the key ingredients underpinning the unusual solidity on display over such an extended period.

Ongoing strong growth for the years ahead seems all but secured as those sticky customers are being transferred into the cloud (SaaS), away from desk-operated software packages, which also translates into higher margins.

Similar to everything tech-related, TechOne shares have fallen from $13-plus to briefly below $10, but this is all about changing market dynamics and investor preferences. Eventually, the solidity and visibility, combined with margin expansion and steadily increasing dividends, will catch the market's attention again, as it always has.

I personally think of TechnologyOne as one of the most under-rated quality growth stocks on the ASX. This is probably related to the fact that, after all that growth that has accumulated since 2004, the company's market capitalisation is still only $3.5bn. Many high-flyers in the sector have seen their market cap shoot-up to much higher numbers, and then subsequently crash down to a smaller size.

There is a lot of comfort in the profile that TechnologyOne offers, as also on display on a long-term share price chart.

-Wesfarmers

The Wesfarmers conglomerate combines fertilisers with lithium, natural gas, industrial chemicals, and safety workwear but its main growth drivers have been consumer-oriented businesses through Coles (now mostly divested), Bunnings, Kmart, Target, Catch and the recently acquired Australian Pharmaceutical Industries.

If we forget about the shameful failure in the UK, Wesfarmers' track record for allocating capital and accumulating shareholder value throughout the cycles can only be praised, but it has been heavily supported by housing market strength in Australia, which may no longer provide the same support for Bunnings in the year(s) ahead.

Maybe this is where the API acquisition steps into the limelight?

The current market has a dislike for higher PE valuations, plus investors have become concerned about what a slowing housing market and consumer spending under pressure might look like. Such concern is now also reflected in a Wesfarmers share price trading well below the $66 peak from August last year.

Rising costs and supply chain hurdles add to the challenges for Wesfarmers management this year. If history can be relied upon, however, it would not seem wise to bet against management rising above those challenges. Maybe all shall be revealed in August?

-Woolworths

Management at Woolworths runs one of the most valuable franchises in the country. Woolworths is Australia's best-run supermarket operator, and this commands a premium valuation. Unfortunately, hubris hit the boardroom in 2014 and this resulted in a brief but painful experience for shareholders during which the share price almost halved over the following two years. That misguided hardware JV with Lowes has been dismantled, and now Endeavour Group ((EDV)) is trading on its own strength too.

Woolworths still owns discount department store Big W, but the key attraction now comes from the solidity and predictability of supermarket sales. Every well-diversified portfolio needs a backbone of lower-risk, dependable and reliable, defensive growth and Woolworths offers just that.

Which is also why Woolworths, as well as Wesfarmers, is included in my selection of All-Weather Performers on the ASX. These stocks do not necessarily perform every day or under all circumstances, but they tend to come out well given enough time. There's a long track record to support that statement.

Longer-term price charts tend to move from the bottom on the left to the top corner on the right.

Conclusion

In summary: A portfolio without banks and commodity producers was always primed for a tough time in 2022 as sharply higher bond yields and more hawkish central bankers have swiftly shifted market momentum out of technology, quality and defensives - stocks that were on the winning side previously.

While true quality companies will not remain out of favour forever, and there should always be room for truly defensive businesses in every long-term portfolio, the same cannot be said about the speculative exposures that have revealed their inner-vulnerability when the market tide turned.

In some cases the market preference has, temporarily, changed. In some case there has been a shift in risk profile, at least for the months ahead.

One of the most difficult decisions to make, for most investors, is to sell when the share price is at a much lower level than the original purchase price. I'd still be inclined to make changes, instead of hoping for miracles to happen. Successful investing includes learning from mistakes, and trying not to repeat them, rather than staying the course, no matter what.

The outlook for equities in the months ahead looks more uncertain than is currently suggested by daily price action, so I'd definitely not be afraid to carry a healthy dose of cash, which can also be put to work when market volatility offers up opportunities.

One alternative course of action could be in adding some exposure to (producers of) commodities. Even if this proves the wrong action at the wrong time later on, the rest of the portfolio should then start to shine, so one is effectively hedging against extended disappointment.

I hope all the above helps with making the necessary decisions.

(This story was written on Monday 11th April, 2022. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).


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article 3 months old

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

article 3 months old

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

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.

In alphabetical order:

-Alcidion Group ((ALC))
-Allkem Ltd ((AKE))
-Aroa Biosurgery ((ARX))
-Bellevue Gold ((BGL))
-BWX Ltd ((BWX))
-Calix ((CXL))
-Carnarvon Petroleum ((CVN))
-City Chic Collective ((CCX))
-DDH1 Ltd ((DDH))
-DGL Group ((DHL))
-Dropsuite ((DSE))
-Euro Manganese ((EMN))
-HT&E ((HT1))
-ImpediMed ((IPD))
-Macquarie Telecom ((MAQ))
-Marley Spoon ((MMM))
-Mighty Craft ((MCL))
-OFX Group ((OFX))
-Paladin Energy ((PDN))
-Praemium ((PPS))
-Predictive Discovery ((PDI))
-Secos Group ((SES))
-Superloop ((SLC))
-Top Shelf International ((TSI))
-Toys "R" Us ANZ ((TOY))
-Trajan Group ((TRJ))

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Mining analysts at Macquarie recently expressed their preference for OZ Minerals ((OZL)) and 29Metals ((29M)) for copper exposure, and Mincor Resources ((MCR)) and Panoramic Resources ((PAN)) for exposure to nickel, with Chalice Mining ((CHN)) as the top favourite among local exploration companies.

Among large cap local gold producers, Macquarie's preference remains with Northern Star ((NST)) and Newcrest Mining ((NCM)).

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JP Morgan's target for the ASX200 is 7800 by year-end. Its projection for the S&P500 is slightly better, with the US index expected to rise to 5050 this year, but the MSCI EM (Emerging Markets) might rise by 23% this year if JP Morgan's projections prove correct.

In Australia, JP Morgan's Model Portfolio retains a clear bias towards 'Value'. Largest holdings, relative to index importance, are National Australia Bank ((NAB)), Star Entertainment ((SGR)), Beach Energy ((BPT)), Qantas Airways ((QAN)), Fortescue Metals ((FMG)), and Scentre Group ((SCG)).

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Morgan Stanley's Model Portfolio for Australia shed a few exposures over the holiday period, with Insurance Australia Group ((IAG)) and Downer EDI ((DOW)) no longer represented. In their place came Incitec Pivot ((IPL)), Orica ((ORI)) and Tyro Payments ((TYR)).

Other inclusions are:

-ANZ Bank ((ANZ))
-CommBank ((CBA))
-National Australia Bank
-Westpac
-Computershare ((CPU))
-Macquarie Group ((MQG))
-QBE Insurance ((QBE))
-Goodman Group ((GMG))
-Mirvac Group ((MGR))
-Scentre Group
-Domino's Pizza ((DMP))
-IDP Education ((IEL))
-Wesfarmers ((WES))
-James Hardie ((JHX))
-REA Group ((REA))
-ALS Ltd ((ALQ))
-Qantas Airways
-CSL ((CSL))
-ResMed ((RMD))
-Sonic Healthcare ((SHL))
-APA Group ((APA))
-Telstra ((TLS))
-BHP ((BHP))
-29Metals ((29M))
-Alumina Ltd ((AWC))
-BlueScope Steel ((BSL))
-Rio Tinto ((RIO))
-OZ Minerals
-Newcrest Mining
-Ampol ((ALD))
-Oil Search ((OSH))
-Karoon Energy ((KAR))
-Santos ((STO))
-Worley ((WOR))

Morgan Stanley's Model Portfolio holds 3.90% in cash.

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Morgan Stanley's Focus List for Australia contains 10 members, in alphabetical order:

-APA Group
-BlueScope Steel
-Computershare
-Goodman Group
-Macquarie Group
-Orica
-Qantas Airways
-QBE Insurance
-REA Group
-Telstra

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Finally, but certainly not least, analysts at Bell Potter also selected their favourite sector exposures for calendar year 2022:

-Among banks: ANZ Bank and National Australia Bank
-Listed Investment Companies: Qualitas Real Estate Income Fund ((QRI)), Future Generation Global Investment Co ((FGG)), and WAM Alternative Assets ((WMA))
-Agriculture & FMCG: Bega Cheese ((BGA)), a2 Milk, and Synlait Milk ((SM1))
-Technology: Infomedia ((IFM)), TechnologyOne ((TNE)), and Life360 ((360))
-Accent Group ((AX1)), City Chic Collective, and Propel Funeral Partners ((PFP))
-Industrials: DDH1, Calix, Emeco Holdings ((EHL))
-Industrials (continued): Money3 ((MNY)), BWX Ltd, and ikeGPS ((IKE))
-Industrials (continued): Cluey ((CLU)), Coventry Group ((CYG)), and DGL Group
-Healthcare: Kazia Therapeutics ((KZA)), Telix Pharmaceuticals ((TLX)), and Doctor Care Anywhere ((DOC))
-Resources and Precious Metals: Nickel Mines ((NIC)), Regis Resources ((RRL)), and Chalice Mining
-Energy: Cooper Energy ((COE)), and Boss Energy ((BOE))
-Strategic Minerals: Liontown Resources ((LTR)), Lake Resources ((LKE)), and Alpha HPA ((A4N))

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All-Weather Performers

My response to questions about whether I decided to make any changes to my list of All-Weather stocks and other selections I share with FNArena subscribers:

Bapcor ((BAP)) and Ramsay Health Care ((RHC)) have now been removed from my lists. I have also moved Seek ((SEK)) from the All-Weathers-with-question-marks to simplify the All-Weathers (no more fundamental questions).

I have decided not to add any more promising upcoming new and exciting business models, as 2022 looks far more challenging than the past five years or so. But other than those changes, I have left my lists untouched.

Always remember: true gold standard businesses like CSL, ResMed ((RMD)), Wesfarmers, etc don't lose their core mettle simply because the share market has a few conniptions.

Paid subscribers have access to a dedicated section on the website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

All-Weather Model Portfolio

Since late 2014, the FNArena/Vested Equities All-Weather Model Portfolio has been based upon my research into All-Weather stocks on the ASX.

Monthly Portfolio reviews published in 2021:

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

AIA Conference In March

The Australian Investors Association (AIA) has been organising an annual national conference since the early 1990s, uninterrupted, until covid hit in 2021. There was no event last year due to lockdowns, lack of vaccinations and travel restrictions.

This year's event will have everyone double vaccinated and masked up, but at least this time around investors can listen to what the likes of yours truly have to say about investing in Australian shares and related subjects.

Tickets are still available: https://www.investors.asn.au/events/natioanl/date/177/2022-03-27/2022-03-30

March 27-30, on the Gold Coast, in Queensland.

(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

article 3 months old

Rudi’s View: The Secret Ingredient

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.

The above also explains why some companies deserve to be labelled 'High Quality' and others never will, as well as the differences in valuation and share price performances beyond the 'right here, right now'.

Compare Sonic Healthcare ((SHL)) and Healius ((HLS)) and you'd be forgiven to think 'valuation' no longer matters in this market (it still does, rest assured, it's just not as simple as solely applying a multiple on next year's estimated profit). The same can be said about Aristocrat Leisure ((ALL)) versus Ainsworth Game Technology ((AGI)), REA Group ((REA)) versus Domain Australia Holdings ((DHG)), Woolworths ((WOW)) versus Coles Group ((COL)), Hub24 ((HUB)) versus Praemium ((PPS)), Computershare ((CPU)) versus Link Administration ((LNK)), and so forth.

But as with the sector premium granted to CommBank ((CBA)), investors should equally never assume things can never change, or market leaders can never lose their status. In the case of Ramsay Health Care ((RHC)), for example, a generally challenging environment for the private hospitals sector internationally has placed a firm ceiling above the share price since 2016. And who can forget the time when hubris took hold of the board and management at Woolworths with its share price tanking between 2014-2016?

In 2021 it is the status of CommBank versus other banks in Australia that has come under investor scrutiny. Similar to all cited examples, CommBank shares started building a relative valuation premium since the second half of the 1990s, only a handful years after its IPO in 1991. The shares have very rarely not traded on a sector premium since.

The explanation as to why is multi-fold (as is often the case with other examples too). One measurable metric is CommBank's return on equity (RoE) has consistently beaten all others in the sector over the past thirty years. As Australia's dominant retail bank, CommBank has steadfastily enjoyed the largest group of loyal shareholders, which has helped with protecting and maintaining its premium status.

A consistent stream of investments made, while others were um-ing and ah-ing, means CommBank is miles ahead of ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)), and even further ahead of the regionals, when it comes to technology. This might also explain why CommBank has built a track record of the most consistent operational performance for the sector in Australia.

As with other examples, CommBank shares are seldom hailed as an investment opportunity, and banking sector analysts always have a preference for other banks, with CommBank usually placed on number 3 or last in the Big Four picking order. But as with other examples, CommBank shares have significantly outperformed all peers on mid- and longer-term horizons.

On calculations made by analysts at Wilsons recently, total performance of CommBank shares since its IPO thirty years ago is almost twice as high as that of ANZ Bank, the second best performer over that period. Investors might want to take a deep breath and read that last sentence again.

Never the cheapest, steadfastly the superior performer. If only Warren Buffett had been investing in Australian shares, investors and market commentators might be less obsessed with 'cheap' valuations, and with a better understanding of what makes a sustainable, superior, longer-term investment.

Among banks in Australia, CommBank is the only one whose shares have risen above the peak from May-2015 as well as pre-GFC. Berkshire Hathaway would be owning a large chunk of CBA shares today, and of CSL ((CSL)) and a number of the other examples mentioned.

But more than anyone else, Warren Buffett also understands that hubris can just as easily creep into a share price, which is why loyal shareholders could be in for a prolonged re-adjustment, which is another way of stating: don't expect too much for the months ahead.

CommBank is likely to retain its status as Australia's premier bank, but that valuation gap between it and other banks might have blown out too far in recent years. Or as some sector analysts put it post the recent disappointing quarterly market update: it's a bank, not a technology growth stock. And also: it's the superior among peers, but still a bank.

If we take a leaf from history, CommBank shares on average enjoyed a valuation premium of circa 20% versus other banks. Post Royal Commission, that premium had quickly ballooned to 50%-70%, depending on what metric is used. It is this large premium upon the usual premium that has analysts almost in perfect synchronicity expecting relative underperformance for the sector leader in the year ahead.

And it's not as if the sector in general is experiencing boom times.

Of course, those doubting whether CommBank deserves to trade on a higher valuation than the rest of the sector will most likely be proven wrong, as its technological leadership places CBA in a much better position to fend off aggressive fintechs and other changes impacting on the industry over the decade ahead.

In the short term, however, that premium upon the premium remains a problem now that operationally, CommBank has proven just as vulnerable as the lesser gods on the ASX.

As with all other examples, the secret ingredient is what you don't see when you simply look at the share price, the balance sheet or the financial numbers. Only this time, it is working as a negative.

****

Next week will be my final Weekly Insights for 2021.

Recent editions of Weekly Insights

Ansell, Mach7, Nitro Software, ResMed And Santos:

https://www.fnarena.com/index.php/2021/11/18/rudis-view-ansell-mach7-nitro-software-resmed-and-santos/

Three Risks Into Year-End:

https://www.fnarena.com/index.php/2021/11/11/rudis-view-three-risks-into-year-end/

Bonds Versus Earnings:

https://www.fnarena.com/index.php/2021/11/04/rudis-view-bonds-versus-earnings/

Australia's Share Market Sweet Spot:

https://www.fnarena.com/index.php/2021/10/28/rudis-view-australias-share-market-sweet-spot/

Conviction Calls

The duo of software sector enthusiasts at Shaw and Partners has stuck with their three sector favourites, in order of preference: Mach7 Technologies ((M7T)), Whispir ((WSP)), and Gentrack Group ((GTK)).

****

Guardians of Model Portfolios at stockbroker Morgans didn't think too long before signing up for the opportunity to own extra shares in Aristocrat Leisure ((ALL)) and Macquarie Group ((MQG)) recently (2x capital raisings), but they also made the difficult decision to sell all shares in Magellan Financial Group ((MFG)) for the Growth Model Portfolio.

The latter decision was, on their own admission, "a very difficult call" that has resulted in the Portfolio realising a "chunky loss".

****

Market strategists at Canaccord Genuity released their most preferred sector allocations -Best Investment Ideas- which saw Newcrest Mining ((NCM)) being added as a large cap and BlueScope Steel ((BSL)) as a mid-cap idea. Following the merger between the two, Saracen Minerals has been replaced with Northern Star ((NST)).

The full list of Best Investment Ideas, as per below, contains a few odd choices (in my humble view) and I can only think of "too cheap" as a justification for their selection. (Apart from the fact that Amcor doesn't belong under building materials).

Best Investment Ideas by Canaccord Genuity

CYCLICALS

Resources
-BHP Group ((BHP))
-Newcrest Mining
-OZ Minerals ((OZL))
-Iluka Resources ((ILU))
-IGO ((IGO))
-Northern Star
-Gold Road Resources ((GOR))
-Orocobre ((ORE))
-Perseus Mining ((PRU))

Oil&Gas
-Woodside Petroleum ((WPL))
-Origin Energy ((ORG))
-Santos ((STO))
-Carnarvon Petroleum ((CVN))

Banks
-National Australia Bank ((NAB))
-Westpac ((WBC))

Mining Services
-MacMahon Holdings ((MAH))
-Perenti Global ((PRN))

Building Materials
-Amcor ((AMC))
-Reliance Worldwide ((RWC))
-BlueScope Steel
-Calix ((CXL))

Financials
-Macquarie Group
-Insurance Australia Group ((IAG))

Consumer Discretionary
-Dusk Group ((DSK))
-Marley Spoon ((MMM))

SENSITIVES

Industrials
-Brambles ((BXB))
-Aurizon Holdings ((AZJ))
-Cleanaway Waste Management ((CWY))
-Downer EDI ((DOW))
-Electric Optic Systems Holdings ((EOS))
-Fleetwood ((FWD))

Info Tech
-REA Group ((REA))
-Elmo Software ((ELO))
-Whispir

Utilities
-Spark Infrastructure ((SKI))

Infrastructure
-Transurban ((TCL))
-Atlas Arteria ((ALX))

Communication Services
-HT&E ((HT1))

DEFENSIVES

Healthcare
-CSL ((CSL))

Wagering & Gaming
-Aristocrat Leisure
-Tabcorp Holdings ((TAH))

Consumer Staples
-Treasury Wine Estates ((TWE))
-Ricegrowers (SGLLV))

LISTED PROPERTY
-Stockland ((SGP))
-Scentre Group ((SCG))
-Lendlease ((LLC))
-Abacus Property Group ((ABP))

Research To Download

Independent Investment Research (IIR) reports on:

-Clime Capital ((CAM)):

https://www.fnarena.com/downloadfile.php?p=w&n=B27297EB-9DC9-B9F6-E07B75AEA3322184

-Initiation on Loomis Sayles Global Equity Fund ((LSGE)):

https://www.fnarena.com/downloadfile.php?p=w&n=B27DBC6A-0C73-D1C7-6CA1C3453C1FC60F

-Antipodes Global Investment Company ((APL)):

https://www.fnarena.com/downloadfile.php?p=w&n=B28448C8-B597-344F-3F45B008A1853B80

All-Weather Model Portfolio

Since late 2014, the FNArena/Vested Equities All-Weather Model Portfolio has been based upon my research into All-Weather stocks on the ASX.

Monthly Portfolio reviews published in 2021:

-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

(This story was written on Monday 22nd November, 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).


****

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

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.

****

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

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

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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.
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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)).

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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.

****

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)).

****

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).


****

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.

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

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/

****

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

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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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