Tag Archives: All-Weather Stock

article 3 months old

Rudi’s View: Equities Portfolio For 2021

In this week’s Weekly Insights:

-Equities Portfolio For 2021
-World’s Worst Salesman?
-Rudi Talks
-Research Reports To Download

Equities Portfolio For 2021

By Rudi Filapek-Vandyck, Editor FNArena

Plenty of academic research suggests what matters most for investment strategies in the long run are asset allocation and portfolio composition.

Yet, it’s probably a fair statement to make most commentary and analysis in finance focuses on the direction of markets and individual stocks in the short to medium term.

Which is why my personal interest was piqued when I came across a recent strategy update by Wilsons, including an explanation and insights into the composition of Wilsons’ Australian Equity Focus List, which can serve as a model portfolio for investors looking for guidance for the year ahead, and beyond.

First up, Wilsons’ investment strategy is built around the observation that Quality and Growth, as identified through, respectively, return on capital and growth in earnings per share, outperforms the broader Australian share market over the medium/long-term.

This not only immediately explains my personal affinity, it also informs investors whose strategy is solely and religiously based on seeking out heavily undervalued assets; this is not for you.

Although, it has to be pointed out, nothing is ever as black and white and Wilsons’ approach does include (a few) typical ‘Value’ opportunities.

Structure Through Baskets Of Shares

Constructing an investment portfolio ideally starts with creating lists or groups of stocks that share similar base characteristics, after which decisions about which stocks to include in order to properly structure, weigh and diversify become a lot easier.

Wilsons has dropped the more traditional labels such as Blue Chips, Defensives and Cyclicals and opted for more refined qualifications that, dare I say it, seem better attuned to the general 2020 share market context.

Instead, the five baskets of equities identified are “Defensive Growth”, “Cyclical Value”, “Secular Growth”, “Cyclical Quality Growth” and “Asset Valuation Plays”.

While at first glance, it appears the concepts of “defensive”, “growth” and “value” are all represented, which can easily fool the inexperienced investor into the wrong impression and interpretation, all is not what it looks like on second consideration.

For example, the most important part of “Defensive Growth” is not the ‘defensive’ part. These are Growth stocks a la Amcor ((AMC)), Collins Foods ((CKF)) and Aurizon Holdings ((AZJ)) that are considered less volatile than your typical high tech, high PE multiple peers elsewhere.

Note: Wilsons even considers a gold producer like Northern Star Resources ((NST)) part of this basket.

The underlying bias towards Growth is shown through the addition of two more baskets with growth stocks of different qualifications; Cyclical Quality Growth and Secular Growth.

The Cyclical Quality Growth contains names such as CommBank ((CBA)), James Hardie ((JHX)), Macquarie Group ((MQG)) and Aristocrat Leisure ((ALL)).

With Secular Growth, Wilsons is referring to the likes of Appen ((APX)), a2 Milk ((A2M)), CSL ((CSL)), ResMed ((RMD)), and Goodman Group ((GMG)).

On the other hand, “Cyclical Value” does involve companies whose share price seems “cheaply” priced, but whose fortunes & outlook are likely to improve materially if/when the economic recovery continues next year.

This is where Wilsons' approach shows its sophistication because other major banks outside of CBA are part of this particular basket, alongside oil and gas producers, retailers such as Super Retail Group ((SUL)), and cyclical industrial companies such as Reliance Worldwide ((RWC)) and Seven Group Holdings ((SVW)).

The final basket, Asset Value Plays, is the one that most closely resembles your typical ‘value’ strategy; companies whose assets are worth more than is currently reflected in the share price.

On Wilsons’ own admission, such stocks need a positive catalyst, and it is not always obvious where that catalyst comes from, or when, indicating stocks can remain ‘undervalued’ for a prolonged period of time in the absence of the right catalyst.

I’d imagine some would consider Boral ((BLD)) and Telstra ((TLS)) part of this basket, or even AMP ((AMP)) and IOOF Holdings ((IFL)), and Link Administration ((LNK)) prior to private equity showing interest (a typical external catalyst).

Wilsons likes News Corp ((NWS)) and has it in portfolio alongside Costa Group ((CGC)).

All-Weather Overlap

Readers familiar with my research, which forms the basis of the FNArena/Vested Equities All-Weather Model Portfolio (see further below), would have noticed there is significant overlap, even though my own set of baskets is the result from a different view and starting point.

To recap, my four baskets of stocks are:

-All-Weather Performers
-Emerging New Business Models & Prime Growth Stories
-Dividend Champions
-Cyclicals, Low Quality & Companies Technologically Challenged and/or Disrupted

The overlap pops up naturally with the likes of CSL, ResMed and Amcor part of my first basket, and with Goodman Group, Macquarie, Aristocrat Leisure, Appen and a2 Milk all included in the second.

Wilsons doesn’t do traditional yield stocks, and instead relies on the Defensive Growth basket to secure above average yield/income for the portfolio.

I’m very happy with the performance I derived from Waypoint REIT ((WPR)), while I equally use reliable industrial companies a la Amcor, Orora ((ORA)) and Iress (IRE)) to boost the average yield for the portfolio.

The All-Weather Portfolio avoids basket number four, also to stay true to its name and purpose.

One potential addition I have been thinking about is seeking out the highest quality companies among cyclicals, as these contribute to my overall observation that, in the long run, quality businesses significantly outperform their lower quality peers, on average.

To date, I haven’t added this latter category to the lists I share with paying subscribers via the FNArena website, but if I had, it would have included the likes of CommBank, James Hardie, and JB Hi-Fi ((JBH)).

Let’s Get Crackin’

Once we have an equities portfolio alongside the chosen labels, we can start managing the weights and balances in line with our worries and expectations for the months/year ahead.

For example, Wilsons recently made the decision to reduce the overall defensiveness of its portfolio and to increase exposure to the economic recovery that is considered sustainable and worth believing in.

In direct response to this change in view, the relative portfolio weight was increased for Cyclical Value and for Cyclical Quality Growth and decreased for Defensive Growth and Asset Value Plays.

These adjustments can be made through either selling shares from multiple members in a particular basket, or through the removal of one or two stocks altogether.

In Wilsons case, decisions were made to dump Amcor and Link Administration (post private equity approach), and to add Super Retail and buy some extra shares in CommBank and ANZ Bank.

As at the end of September, Cyclical Quality Growth and Secular Growth are the two largest portfolio components weighing more than 55% combined.

Add 24% of Cyclical Value and it is clear Wilsons’ preference currently lays with the ongoing economic recovery for the year ahead.

Defensive Growth still represents more than 10%, with Asset Value Plays the smallest basket.

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The All-Weather Stocks section on the FNArena website does not contain any suggestions about portfolio weights or preferences; instead it offers six lists from which long-term oriented investors can choose at their own volition.

As said, the FNArena/Vested Equities Model Portfolio is almost exclusively populated with stocks from these six lists. The Portfolio owns most, though not all stocks mentioned on the website. For more info about the performance to date, see below.

World’s Worst Salesman?

I must be the world’s worst salesman. Last week I updated on the performance of the FNArena/Vested Equities All-Weather Model Portfolio and made sure I severely understated the actual performance achievements in the process.

In my defense, we are migrating the Portfolio operation onto a new technology platform, and both Vested Equities’ Stuart McClure and myself still have to get our head around the new environment, as also proven by last week’s update.

To set the record straight: Portfolio performance is running significantly ahead of the market in general.

Over the twelve months to June 30, otherwise known as fiscal 2020 (FY20), the performance was a positive 5% (with the emphasis on positive).

For the six months to June 30, otherwise known as the first half of calendar 2020, the performance was a negative -2.03% - the only negative you will read in this update, and a rather small one (no doubt, everyone agrees with that assessment).

For the first quarter in the new financial year FY21, the three months ending September 30th, the performance stands at 4.91%.

For the month of October, up until Friday, 23rd the performance stands at 5.17%.

Note all numbers quoted are ex-fees and costs, but once the current migration is in place (expected soon) FNArena and Vested Equities believe we are running one of the lowest cost, active equity portfolios in the country.

So watch this space. A lot more positive announcements are waiting to be unleashed.

The Model Portfolio picks stocks from my research into All-Weather Stocks, which is available on the website for paying subscribers (6 & 12 months), and then sits on those stocks for a long time.

That’s pretty much the story behind the Portfolio. We are currently weighing up the short-term risks leading into the US presidential election, but don’t anticipate we’ll be making a lot of changes.

Rudi Talks

For those who missed it, I interviewed the infamous (or should that be illustrious?) Harry Dent last week – the man who’s predicting the mother of all crashes is coming, and soon too.

For those who don’t want to watch and listen for the full hour, I wrote a brief intro with summary:

https://www.fnarena.com/index.php/2020/10/23/rudi-interviews-harry-dent/

Research Reports To Download

A few recent research reports that might come in handy:

RaaS on Pure Profile ((PPS)):

https://www.fnarena.com/downloadfile.php?p=w&n=DEF0B8A1-D46D-9B8A-BA9E5A46C19898EC

RaaS on Shekel Brainweigh ((SBW)):

https://www.fnarena.com/downloadfile.php?p=w&n=DF09560E-CD86-33E1-96238C0631C52BB5

Edison Research on EML Payments ((EML)):

https://www.fnarena.com/downloadfile.php?p=w&n=DF1552B8-C885-FE91-5D2025194BFA932E

(This story was written on Monday 26th October, 2020. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

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

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


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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Rudi’s View: Quality & Growth, Confidence & Execution

In this week's Weekly Analysis:

-Quality & Growth: Confidence & Execution
-Value Versus Growth The Chart That Confirms
-That Dreadful ASX Website (Continued)
-Rudi Talks
-Conviction Calls

Quality & Growth: Confidence & Execution

By Rudi Filapek-Vandyck, Editor

On Wednesday last week, one local newsletter published a list of thirteen stocks that had all closed at a new all-time high on that day.

It didn't take long for me to realise five of the companies mentioned are included in the FNArena/Vested Equities All-Weather Model Portfolio.

One scroll through the full list of companies owned in the Portfolio instantaneously revealed the large majority of stocks in the Portfolio are either in the vicinity of their all-time high, or they peaked earlier in 2020 and have retreated somewhat since.

Most importantly, only a minority has been added during the course of 2020, indicating most stocks in the Portfolio have been trending upwards for a long while pre-covid, plus, of course, the pandemic hasn't destroyed their business model or corporate greatness.

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The philosophy behind the All-Weather Model Portfolio was born out of the GFC in 2008 when the likes of CSL ((CSL)) showed not every stock is equal when it comes to hunkering down for the bad times.

My research and experience since have proven stocks are almost never equal. Add to this the macro-observation that cycles are much shorter these days, and inflation subdued (at best), while disruption is all-around, targeting low-quality, low-growth laggards and the ideal starting point has been created to look for structural growth and high quality with a moat.

Despite the general view such companies represent higher risk, because of trading on higher valuations, the past five years in Australia have proved otherwise.

A share price that temporarily rises too high is easily fixed with ongoing strong growth, while a cheap looking valuation burdened by profit warnings, dividend cuts and other forms of disappointment literally translates into "lower for longer".

However, the (many) critics of this year's swift share market recovery do have a point when they argue not every fast-grower in 2020 is automatically a long-term shareholder champion.

As a matter of fact, if we stay true to statistics and observations from the past, we have to conclude most winners today are likely not of exceptional quality or destined for eternal greatness; they just happen to be in the right sector under the right circumstances at the right time.

And so it is much easier to look back and conclude if only I'd participated in the CSL float back in 1994, and held onto my shares since, instead of trying to figure out which of today's freshly emerging rapid-growers will remain successful beyond the coming weeks/months/years/decades.

I regard a successful track record an important piece of the puzzle. So does the market. CSL shares would never have consistently enjoyed today's valuation premium in the nineties or the noughties. Back then, it still had to prove itself and ultimate success was far from guaranteed.

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This is not to say that companies such as Fineos Corp ((FCL)), Readytech Holdings ((RDY)), Whispir ((WSP)), Pro Medicus ((PME)) and Audinate ((AD8)) cannot develop into long-term wealth creators; they all look interesting and successful (thus far), but we cannot possibly know what the future will bring.

So how do we know which ones to choose for the longer-term investment horizon? The honest answer is: we don't.

All the answers we are looking for will be provided through management's execution, either positive or negative, which will dominate the direction of share prices and determine whether market sentiment will improve, stick around or deteriorate.

This is not something we can find on a company's balance sheet or in the next set of stockbroker forecasts. Execution is all about providing evidence and building confidence.

It's easily forgotten today, but once upon a time CSL was operating in a market burdened by too much supply, while both Cochlear ((COH)) and ResMed ((RMD)) have had their product recalls, and subsequent share price shellacking.

A company of exceptional quality is not immune to day-to-day vagaries and challenges out there in the real world, but none of the headwinds and set-backs destroys them. In most cases, they arise in better shape and with renewed positive momentum.

This is why those share prices today are not far off from all-time record high price levels, and why I remain confident those record highs from the year past will, at some point, be replaced by new record highs.

Just like this has turned out this year's scenario for stocks including Carsales ((CAR)), NextDC ((NXT)), REA Group ((REA)), Xero ((XRO)) and Bapcor ((BAP)); all mentioned in last week's newsletter list, and all held in the All-Weather Model Portfolio.

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Most newsletters and investors are obsessed with valuation -cheap or expensive- but I'd argue the performance of the All-Weather Model Portfolio strongly suggests a strategy built on identifying quality businesses that reliably deliver combined with emerging new businesses on a sustainable, structural growth path has numerous benefits.

A few obvious observations to make:

-the number of negative profit warnings and/or dividend cuts suffered inside the Portfolio since inception nearly six years ago has been very low;

-bad news and misfortune don't stick around for too long (good things happen to great companies);

-periods of doubt and temporary stasis for the companies owned are usually followed by positive surprise(s);

-share prices in the Portfolio do not always hold up during the toughest of times, but they surely bounce and recover first;

-most retreats in share prices have been nothing but a temporary pause in a long-term uptrend.

All in all, I find, if I can remain confident the underlying trajectory for most companies owned remains up, I don't have to worry as much about what is likely to happen to the share price in the short term.

One look at the long-term price graph of AMP, for example, immediately reveals how important the timing of entry and exit points is. Look at the same graph for Xero and timing almost looks irrelevant.

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The most important feature about investing in the share market remains, without the slightest doubt, the ability to respond to changes in general context and circumstances.

We can all admire the tenacity of the early shareholders in CSL, but what about the many more who are still holding AMP shares today -two decades after they peaked- or shares in Telstra -more than two decades after they peaked?

Identifying great companies brings many virtues, but some greats do lose their mojo eventually. GE and Boeing spring to mind internationally. Locally, companies including Monadelphous, InvoCare and the banks could literally do no wrong for a long while, but their fortunes eventually changed, and quite in a dramatic manner.

Agility and flexibility remain every investor's best friend.

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Apart from combining quality and structural growth companies, the All-Weather Model Portfolio has always leaned on a third pillar; that of reliable and sustainable dividend growers.

But when the pandemic hit earlier in the year, that part needed to be re-assessed and replaced with a different set of trustworthy, dependable sources of income.

The only dividend stock we kept, and which still is held in the Portfolio, is Waypoint REIT ((WPR)) for a reliable 5.6% yield this year (on current share price of $2.68) and 5.9% next year, on market consensus projections.

Waypoint shares have since been joined by Aventus Group ((AVN)) and two of the other three names mentioned on my list of Australian dividend champions (see website, section All-Weather Stocks).

When it comes to this particular segment of the Portfolio, my view is certainty, low risk and reliability should be the highest priorities.

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The FNArena/Vested Equities All-Weather Model Portfolio continues to significantly outperform the broader market in Australia, despite repeated attempts by market participants to rotate into cyclicals and value laggards.

Portfolio performance for three months up to October 18th is a positive 4.76%, of which 0.55% was derived through dividends, versus the ASX200 Accumulation index posting a slightly negative performance of -0.44% over the same period.

The All-Weather Portfolio is migrating away from the Praemium platform, towards, we believe, much better service and lower costs. This will be a win-win-win for everyone involved.

More news about this in a few weeks from today.

Paying subscribers have 24/7 access to my research and commentary on All-Weather stocks and the Model Portfolio via a dedicated section on the website.

Value Versus Growth The Chart That Confirms

One chart a thousand words?

I sat in long and boring presentations, have read a copious number of research reports and witnessed how teams of value investors presented their findings in an attempt to prove there was no fundamental justification as to why popular tech stocks are trading on elevated multiples, while their beloved value' companies where largely being ignored.

If ever investors wondered how biased the human mind can be, and how this is reflected in research and analysis done, there are quite a number of such regrettable examples around.

At times, it's not about what I can see that you cannot. It can also be a case of I can only see what I want (and I'll make damn certain I will find plenty of reasons to support it too!)

And then comes along the chart that explains it all. Thanks to Forager's Steve Johnson who kindly submitted the Goldman Sachs chart below to his Twitter followers on Monday.

The interesting factor on display is the fact Goldman Sachs has not taken into account forward looking estimates, but concentrated on actual achieved growth numbers instead.

I think the evidence speaks for itself: no growth for most parts of global companies, except when they are part of the fast-growing technology disrupters and hearts-and-minds conquerors.

It is exactly that gap that has been reflected in price action over the past five years, in Australia, and longer than that in the USA.

I have no doubt the value-biased investors who have been trying to disprove the thesis that has been dominating equity markets will accuse their peers at Goldman Sachs of somehow massaging the data to serve their personal views and conviction.

Having done a lot of research and analysis myself to find Goldman Sachs's observation is most accurate, one only has to question: who's fooling who?

That Dreadful ASX Website (Continued)

A lot of anger and disappointment has been spewed over social media, and elsewhere, following the launch of the new ASX ((ASX)) website.

Apart from the fact that change always unsettles and we humans like to stick with old habits and tricks, a lot of the bad feelings towards the ASX are expected to subside as investors find their way around the updated website.

On Monday, for example, the ASX reinstated company announcements going back as far as 1998, which has been a major achievement by activist investors who had been jumping high and low since the ASX -apparently- had initially decided it's better to stick to younger-dated announcements only.

Given the ASX has been preparing six long years for the newly launched website, and given the new website seems extremely keen to promote the ASX's role as seller of data and market insights, surely, I am not the only one around who is suspicious about the true strategy/motives behind many missing parts and a seemingly user-unfriendly design of the new website?

The fact the ASX has decided to make the new website advertisement free equally suggests the top has decided there is more money to be made from selling data and announcements than accommodating hordes of free-loading retail investors.

But hey, in a time of free-roaming conspiracy theories, I am simply doing my bit on this occasion.

Rudi Talks

Among the popular podcasters in Australia when it comes to investing and finance is the duo of Bryce and Alex at Equity Mates who have a knack of getting lots of experts in front of their microphone.

Last week it was my turn to see my hour-long conversation with the two going live on social media and on the Equity Mates website.

Check it out here: https://equitymates.com/podcast/rudi-filapek-vandyck/

Conviction Calls

Portfolio managers at stockbroker Morgans have used Macquarie Group ((MQG)) as the funding source to expand their exposure to Australian banks post the Australian government's budget announcements and a more benign environment for bad debts than initially assumed.

In addition, share market laggard Aurizon Holdings ((AZJ)) has seen its weight increasing in the stockbroker's Balanced Model Portfolio as at the end of September.

Morgans' Growth Model Portfolio is participating in the retail entitlement offer at Corporate Travel Management ((CTD)).

Coincidentally, Sze Chuah, Senior Investment Analyst at Ord Minnett, is equally of the view share prices for Australian banks have seen the bottom earlier in the year.

(This story was written on Monday 19th October, 2020. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

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

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

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

FNArena Book Review: Good To Great

The story below was initially written and published on Monday 28th September, 2020 under the title "Identifying Greatness" (and sent out on that day as Weekly Insights email). It is hereby re-published to also include it as a book review on the FNArena website.

FNArena Book Review: Good To Great. Why some companies make the leap … and others don’t by Jim Collins, Random House Business Books, 300 pages, ISBN 9780712676090.

By Rudi Filapek-Vandyck

I recently finished reading Good To Great. Why some companies make the leap … and others don’t by US author/researcher Jim Collins.

Admittedly, I haven’t been exactly quick in catching up on the author’s global best-seller research.

This book was originally published in 2001 and has sold more than three million copies since.

As it was, I needed a tip-off from new FNArena team member Mark and a little respite post the August reporting season. Plus the fact that Good To Great is available in bricks and mortar book stores around my neighbourhood.

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Collins’ five-year study in what makes a small group of US companies a better breed than the majority of peers is aimed at helping entrepreneurs and business leaders to see the light. The author has since built a successful advisory & consultancy career.

But there is plenty of knowledge embedded in those 300 pages for everyday investors watching and researching opportunities among listed companies worldwide.

Truth to be told, I think many an investor would do him/herself one gigantic favour in buying this book and absorbing its content, including the finer details.

Collins’ research started in 1996, involved 21 research associates and ultimately took five years, during which 1435 Fortune 500 companies over several decades were analysed, studied, sliced and dissected, interviewed and ultimately mostly rejected. (Note: The Fortune 500 is not static in make-up but is regularly updated).

As such, the study neatly fits in with Arizona State University’s Hendrik Bessembinder’s findings that, when taking a long-term view, most listed companies turn out to be lousy performers and poor creators of lasting shareholder wealth.

Two years ago, Bessembinder found that over the long term, share market gains can be explained through as little as 4% of the best performing stocks in a study that went back in time as far as 1926.

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The latter study certainly raised a few eyebrows, to put it mildly, and I have seen a number of asset managers publishing comparable data-analyses since.

Their numbers might look a little different, but their conclusions are not: when it comes to investing in listed equities, investors better be extremely cautious, as very few companies that are successful today are able to remain successful over the next three, five, seven, ten years, or longer.

Instinctively, this has been my view over the past decade or so. While I never have done the finer data-crunching, there is plenty of evidence around for whoever has an excellent memory to rely upon, or who dares to look back in time through data-details.

BHP Group shares peaked near $50, twice, in late 2007 and in 2011. They have never managed to surpass the $42 level over the period since, spanning thirteen years during which the share price sank as low as $13.

Three of the four major banks are today trading well-off share price levels pre-GFC, and similar observations can be made for the likes of Newcrest Mining (peaked in 2011), Rio Tinto (2008), Scentre Group (2016), Suncorp Group (2007), Telstra (1999), and Woodside Petroleum (2008).

These are all ASX Top20 members in 2020; household names that feature in many investment portfolios and are broadly considered as “must have” backbone portfolio constituents by many, both retail and professional investors.

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Probably the most deceptive document that is happily passed on inside the global finance sector is the long-term price graph from Vanguard showing equity indices tend to move upwards as time goes on.

Look under the bonnet, and that’s not what most individual share prices do. AMP shares were once priced above $20 ($1.35 today). Perpetual shares have halved over the past five years.

These are not idly-piddly, teeny-weenie, micro-cap exploration companies with no revenues and nothing to sell.

Which is why, on my assessment, most investors would do well from taking notes from research published by the likes of Jim Collins and Hendrik Bessembinder, and incorporate their key findings in strategies and portfolio composition.

For example: I am regularly informed by investors “I did relatively well” or “I achieved a satisfactory return” from, say, a stock like QBE Insurance.

Below I have included the price chart for QBE Insurance shares over the past ten years (source: ASX).

Has there been another way of achieving a “good” return from these shares other than buying on persistent weakness and then quickly selling on the upswing, with the key requirement not to stay on board for too long?

(I mean, other than deluding myself into thinking I am doing well when the market in general mirrored the QBE share price in the exact opposite direction.)

It’s not as if the dividend has been growing steadily along the way down either.

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Here’s one thing I learned from many years of observing the Australian share market: “valuation”, be it “under”- or “over”-, is nothing but of short-term importance. Quality, however, is what shines beyond the immediate.

This has always been the case, but even more so during times of low growth, shorter cycles, low inflation and the emergence of new technologies that challenge most mediocre and sub-par performing businesses.

This is why buying “cheaply” and laggard “value” stocks has performed so poorly as an investment strategy over the past seven years.

Sure, they all have their moment under the sun, and sometimes the gap between “winners” and “laggards” is stretched too far, and it needs to narrow, as happened on occasion and surely it will happen again.

But once you manage to identify the truly great companies, you need to worry a lot less about what happens in the short term. Time to roll out that favourite quote from Warren Buffett himself:

“What’s your favourite holding time? Forever!”

What needs to be added is: but only for the truly great companies.

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What makes a great company?

It’s a shame Collins’ Good To Great research is nearly twenty years old. But I am also confident that if it had been updated this year, it would have identified a number of today’s “winners” as meeting the requirements to be labeled a truly great company: Microsoft, Amazon, and Merck come to mind, among others.

The true value of Collins’ research, in my view, is by spelling out the characteristics of the many not so great companies out there: hubris at the top, ill-timed and overly optimistic acquisitions, lack of structural investment, copy-cat strategy decisions, company boards filled with career yes-men, low quality products and services, holding on to yesterday’s glory,..

These are all observations investors can make themselves. No need for an Excel spreadsheet or detailed analysis of the balance sheet. Ever dealt with a Telstra support line? Talk to an IT specialist about the systems that run the banks (you will be shocked).

The inconvenient truth, one that the investment industry is all too willing to swipe under the carpet, is that mediocre companies can only achieve sustainable, great returns for investors when they are carried by extraordinary tailwinds for their industry, or through a monopoly, by law or otherwise.

The past two decades have seen Australian companies losing most cosy market dominating positions, with negative consequences for shareholders. Adaptation and successful transformation are not widely used buzzwords by corporate Australia.

****

My personal point of interest is when Australian companies venture offshore. A truly great company manages to replicate its success elsewhere. Think CSL ((CSL)), of course, but also Amcor ((AMC)), Macquarie Group ((MQG)), Xero ((XRO)), Aristocrat Leisure ((ALL)), Computershare ((CPU)), even Ansell ((ANN)).

These are all truly international operators, genuine leaders in their field.

Now compare their price charts post GFC with those of Telstra, National Australia Bank, InvoCare, ANZ Bank, Cash Converters ((CCV)), et cetera.

It doesn’t feature in any of the analysis or research I have seen elsewhere, including Good To Great, but when Australian companies fail overseas it does ring an alarm bell for me, and mostly it is but a matter of time before the share price starts trending south.

Equally valid: if Good To Great was to be updated today, the research methodology would have to be amended to take into account the many changes impacting on the world, including this year’s pandemic (and related changes).

As is readily acknowledged throughout the study, great companies are not 100% safe from bad luck, negative impacts or unforeseen disasters, but they cope a lot better, and tend to always come out on top stronger.

****

Good things happen to great companies. Mediocre peers need luck, lots of it, as well as lots of help and assistance.

Which takes me to my own research into All-Weather Performers on the Australian stock exchange.

During and post GFC, I didn’t know about Good To Great, and neither did I anticipate how skewed share market returns turn out to be in the long run, as laid bare by Bessembinder, but I instinctively felt investors’ core narrative and approach are flawed.

Not all companies are the same. Not all stocks should be treated in the same manner.

For too long, investors have been singularly focused on buying cheaply priced assets, while ignoring the blatant fact that certain companies are simply made from superior substance.

Admittedly, these are a small, selective group, but they do exist, and most portfolios would benefit greatly from at least having some exposure.

This is not to say that anything is destined to last forever. (Sorry, Warren). Things can and do change over time and companies that once were on their way to greatness, or achieved greatness, have subsequently lost that status, with dire consequences for loyal shareholders. Think GE, or Boeing.

In a similar fashion, the lists of stocks I have selected over the past decade have seen some changes, mostly from companies disappearing because circumstances change, or because my initial assessment wasn’t as robust.

Overall, however, the most common questions I receive is when do I intend to update my lists, or whether I should include this or that stock.

It is but a genuine signal that when it comes to selecting great companies on the stock exchange, stability in quality and performance, as reflected in lists inclusion, remains one of the stand-out characteristics.

Certainly, temporary share price weakness does detract nothing from a great company’s core quality, or from the underlying long-term trend for its share price.

Observing corporate greatness is understanding why it should be included in every long-term oriented portfolio and strategy. So, start observing, and act accordingly.

Paying subscribers at FNArena have 24/7 access to a dedicated segment on All-Weather Performers, including eBooks and eBooklets written and published since 2012.

Good To Great. Why some companies make the leap … and others don’t by Jim Collins, Random House Business Books, 300 pages, ISBN 9780712676090.

article 3 months old

Rudi’s View: Identifying Greatness

Identifying Greatness

By Rudi Filapek-Vandyck, Editor FNArena

I recently finished reading Good To Great. Why some companies make the leap … and others don’t by US author/researcher Jim Collins.

Admittedly, I haven’t been exactly quick in catching up on the author’s global best-seller research.

This book was originally published in 2001 and has sold more than three million copies since.

As it was, I needed a tip-off from new FNArena team member Mark and a little respite post the August reporting season. Plus the fact that Good To Great is available in bricks and mortar book stores around my neighbourhood.

****

Collins’ five-year study in what makes a small group of US companies a better breed than the majority of peers is aimed at helping entrepreneurs and business leaders to see the light. The author has since built a successful advisory & consultancy career.

But there is plenty of knowledge embedded in those 300 pages for everyday investors watching and researching opportunities among listed companies worldwide.

Truth to be told, I think many an investor would do him/herself one gigantic favour in buying this book and absorbing its content, including the finer details.

Collins’ research started in 1996, involved 21 research associates and ultimately took five years, during which 1435 Fortune 500 companies over several decades were analysed, studied, sliced and dissected, interviewed and ultimately mostly rejected. (Note: The Fortune 500 is not static in make-up but is regularly updated).

As such, the study neatly fits in with Arizona State University’s Hendrik Bessembinder’s findings that, when taking a long-term view, most listed companies turn out to be lousy performers and poor creators of lasting shareholder wealth.

Two years ago, Bessembinder found that over the long term, share market gains can be explained through as little as 4% of the best performing stocks in a study that went back in time as far as 1926.

****

The latter study certainly raised a few eyebrows, to put it mildly, and I have seen a number of asset managers publishing comparable data-analyses since.

Their numbers might look a little different, but their conclusions are not: when it comes to investing in listed equities, investors better be extremely cautious, as very few companies that are successful today are able to remain successful over the next three, five, seven, ten years, or longer.

Instinctively, this has been my view over the past decade or so. While I never have done the finer data-crunching, there is plenty of evidence around for whoever has an excellent memory to rely upon, or who dares to look back in time through data-details.

BHP Group shares peaked near $50, twice, in late 2007 and in 2011. They have never managed to surpass the $42 level over the period since, spanning thirteen years during which the share price sank as low as $13.

Three of the four major banks are today trading well-off share price levels pre-GFC, and similar observations can be made for the likes of Newcrest Mining (peaked in 2011), Rio Tinto (2008), Scentre Group (2016), Suncorp Group (2007), Telstra (1999), and Woodside Petroleum (2008).

These are all ASX Top20 members in 2020; household names that feature in many investment portfolios and are broadly considered as “must have” backbone portfolio constituents by many, both retail and professional investors.

****

Probably the most deceptive document that is happily passed on inside the global finance sector is the long-term price graph from Vanguard showing equity indices tend to move upwards as time goes on.

Look under the bonnet, and that’s not what most individual share prices do. AMP shares were once priced above $20 ($1.35 today). Perpetual shares have halved over the past five years.

These are not idly-piddly, teeny-weenie, micro-cap exploration companies with no revenues and nothing to sell.

Which is why, on my assessment, most investors would do well from taking notes from research published by the likes of Jim Collins and Hendrik Bessembinder, and incorporate their key findings in strategies and portfolio composition.

For example: I am regularly informed by investors “I did relatively well” or “I achieved a satisfactory return” from, say, a stock like QBE Insurance.

Below I have included the price chart for QBE Insurance shares over the past ten years (source: ASX).

Has there been another way of achieving a “good” return from these shares other than buying on persistent weakness and then quickly selling on the upswing, with the key requirement not to stay on board for too long?

(I mean, other than deluding myself into thinking I am doing well when the market in general mirrored the QBE share price in the exact opposite direction.)

It’s not as if the dividend has been growing steadily along the way down either.

****

Here’s one thing I learned from many years of observing the Australian share market: “valuation”, be it “under”- or “over”-, is nothing but of short-term importance. Quality, however, is what shines beyond the immediate.

This has always been the case, but even more so during times of low growth, shorter cycles, low inflation and the emergence of new technologies that challenge most mediocre and sub-par performing businesses.

This is why buying “cheaply” and laggard “value” stocks has performed so poorly as an investment strategy over the past seven years.

Sure, they all have their moment under the sun, and sometimes the gap between “winners” and “laggards” is stretched too far, and it needs to narrow, as happened on occasion and surely it will happen again.

But once you manage to identify the truly great companies, you need to worry a lot less about what happens in the short term. Time to roll out that favourite quote from Warren Buffett himself:

“What’s your favourite holding time? Forever!”

What needs to be added is: but only for the truly great companies.

****

What makes a great company?

It’s a shame Collins’ Good To Great research is nearly twenty years old. But I am also confident that if it had been updated this year, it would have identified a number of today’s “winners” as meeting the requirements to be labeled a truly great company: Microsoft, Amazon, and Merck come to mind, among others.

The true value of Collins’ research, in my view, is by spelling out the characteristics of the many not so great companies out there: hubris at the top, ill-timed and overly optimistic acquisitions, lack of structural investment, copy-cat strategy decisions, company boards filled with career yes-men, low quality products and services, holding on to yesterday’s glory,..

These are all observations investors can make themselves. No need for an Excel spreadsheet or detailed analysis of the balance sheet. Ever dealt with a Telstra support line? Talk to an IT specialist about the systems that run the banks (you will be shocked).

The inconvenient truth, one that the investment industry is all too willing to swipe under the carpet, is that mediocre companies can only achieve sustainable, great returns for investors when they are carried by extraordinary tailwinds for their industry, or through a monopoly, by law or otherwise.

The past two decades have seen Australian companies losing most cosy market dominating positions, with negative consequences for shareholders. Adaptation and successful transformation are not widely used buzzwords by corporate Australia.

****

My personal point of interest is when Australian companies venture offshore. A truly great company manages to replicate its success elsewhere. Think CSL ((CSL)), of course, but also Amcor ((AMC)), Macquarie Group ((MQG)), Xero ((XRO)), Aristocrat Leisure ((ALL)), Computershare ((CPU)), even Ansell ((ANN)).

These are all truly international operators, genuine leaders in their field.

Now compare their price charts post GFC with those of Telstra, National Australia Bank, InvoCare, ANZ Bank, Cash Converters ((CCV)), et cetera.

It doesn’t feature in any of the analysis or research I have seen elsewhere, including Good To Great, but when Australian companies fail overseas it does ring an alarm bell for me, and mostly it is but a matter of time before the share price starts trending south.

Equally valid: if Good To Great was to be updated today, the research methodology would have to be amended to take into account the many changes impacting on the world, including this year’s pandemic (and related changes).

As is readily acknowledged throughout the study, great companies are not 100% safe from bad luck, negative impacts or unforeseen disasters, but they cope a lot better, and tend to always come out on top stronger.

****

Good things happen to great companies. Mediocre peers need luck, lots of it, as well as lots of help and assistance.

Which takes me to my own research into All-Weather Performers on the Australian stock exchange.

During and post GFC, I didn’t know about Good To Great, and neither did I anticipate how skewed share market returns turn out to be in the long run, as laid bare by Bessembinder, but I instinctively felt investors’ core narrative and approach are flawed.

Not all companies are the same. Not all stocks should be treated in the same manner.

For too long, investors have been singularly focused on buying cheaply priced assets, while ignoring the blatant fact that certain companies are simply made from superior substance.

Admittedly, these are a small, selective group, but they do exist, and most portfolios would benefit greatly from at least having some exposure.

This is not to say that anything is destined to last forever. (Sorry, Warren). Things can and do change over time and companies that once were on their way to greatness, or achieved greatness, have subsequently lost that status, with dire consequences for loyal shareholders. Think GE, or Boeing.

In a similar fashion, the lists of stocks I have selected over the past decade have seen some changes, mostly from companies disappearing because circumstances change, or because my initial assessment wasn’t as robust.

Overall, however, the most common questions I receive is when do I intend to update my lists, or whether I should include this or that stock.

It is but a genuine signal that when it comes to selecting great companies on the stock exchange, stability in quality and performance, as reflected in lists inclusion, remains one of the stand-out characteristics.

Certainly, temporary share price weakness does detract nothing from a great company’s core quality, or from the underlying long-term trend for its share price.

Observing corporate greatness is understanding why it should be included in every long-term oriented portfolio and strategy. So, start observing, and act accordingly.

Paying subscribers at FNArena have 24/7 access to a dedicated segment on All-Weather Performers, including eBooks and eBooklets written and published since 2012.

Good To Great. Why some companies make the leap … and others don’t by Jim Collins, Random House Business Books, 300 pages, ISBN 9780712676090.

(This story was written on Monday 28th September, 2020. 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 $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Rudi’s View: Gold, Conviction Calls & Early Results

Dear time-constraint investor: uncertainty remains, while gold will surprise the many fans, and conviction calls changes ahead of the August reporting season

In this week's Weekly Insights:

-August 2020: Early Results
-Rudi Talks
-Gold, The Enigma
-Conviction Calls

August 2020: Early Results

By Rudi Filapek-Vandyck, Editor FNArena

The local reporting season in Australia is slowly gathering pace. Let’s remind ourselves how important financial results are for market sentiment and thus for how share prices will be treated for the weeks and months ahead.

Often, how companies are being judged is through the lense of: beat or disappointment? Black or white. Superb or poor.

That judgment is made not on the 30% profit growth, or the decision to pay out a dividend, or the heavy losses incurred during lockdowns or bushfires, but on how the financials compare to what analysts had penciled in their modeling.

The ruling narrative is companies which disappoint might see their share price underperform for up to four months, while those who manage to surprise positively are most likely rewarded with longer-lasting outperformance.

That’s one side of the story.

The other side is that sustainable, structural growers can disappoint with their market update, and all of CSL ((CSL)), Cochlear ((COH)), REA Group ((REA)), TechnologyOne ((TNE)), and others have at varying times done exactly that, with direct consequences for the share price in the immediate aftermath.

But take a longer-term view, and what do we see? Every single one of those sell-offs today looks nothing but a temporary blip in an ongoing, long-term uptrend.

And that, I like to think, is the key message investors should keep in mind when volatility hits this reporting season.

The early stage of the August reporting season saw REA Group showing off its in-built resilience, while ResMed’s result was better-than-expected but downgraded as “low quality” with cautious guidance by management not received well by flighty traders.

Clearly, day-to-day operations for healthcare bellwethers CSL, Cochlear and ResMed have been impacted by the virus and forced lockdowns, but the real question investors should be asking is whether this means these companies are running out of puff and soon will find themselves having turned ex-growth.

You know my opinion on this. All three, as well as REA Group, remain firmly embedded in my selection of All-Weather Stocks on the ASX.

Admittedly, a continuing strengthening of the Aussie dollar, as predicted by some, will complicate the outlook for foreign earners in Australia, but when it comes to forecasting FX, most experts’ track record is not something to boast about.

Shorter term, market forecasts and expectations have seldom been as wide as for FY20, including for healthcare companies with most having withdrawn guidance, leaving analysts and investors to speculate what can and should be expected.

One positive stand-out to date is Ansell ((ANN)), not a typical healthcare stock, but Credit Suisse believes this is the early stage of a structural switch that will put the company’s growth outlook on much firmer footing.

The most talked about remains, of course, Australia’s number one biotech stock, CSL. It’ll be interesting to see how much guidance management is prepared to share regarding the outlook for plasma and other parts of the business in FY21, and beyond.

CSL is too complex for most investors during less complicated times. This time around it’s anyone’s guess what will become the focus post reporting on August 19.

****

Outside of the local healthcare sector, analysts are still busy assessing what might and can be revealed this month, but investors should appreciate uncertainty has seldom been at this year’s level.

For sectors including airports, airlines, accommodation, travel and leisure, and Australian banks, August comes too early; many questions will remain unanswered. Analysts anticipate companies might defer to the AGM season in November when attempting to predict what comes next.

Iron ore producers are generating lots of cash, but how cautious will company boards be when deciding how much to pay out in dividends to shareholders?

Sectors like oil and gas producers will have horror updates to make, including the scrapping of dividends and capex/expenses, while writing down the value of assets – but investors are very well aware of it all.

Meanwhile, portfolio rotation (or at least: attempts to it), currency movements and other macro factors will continue to impact on general sentiment and share prices.

FNArena will be keeping track of post-financial results updates via Australia’s one and only Corporate Results Monitor (including calendar):

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

See also:

-Coming Soon: The August Reporting Season:

-https://www.fnarena.com/index.php/2020/07/30/rudis-view-coming-soon-the-august-reporting-season/

-August 2020: Nothing Like The Past:

https://www.fnarena.com/index.php/2020/08/06/rudys-view-august-2020-nothing-like-the-past/

Equally important, for those who worry share markets are over-priced:

-Forecasts, Not Valuations:

https://www.fnarena.com/index.php/2020/07/23/forecasts-not-valuations/

Rudi Talks

Last week Livewire Markets (livewiremarkets.com) offered me the chance to share my insights and predictions for the Australian share market and the August reporting season via a face-to-face interview over Zoom.

I think the two stand-out features of the 30 minutes interview are my view that investors should carve up Australian equities into four separate baskets of stocks, and the fact I had made gold the largest single exposure in the FNArena/Vested Equities All-Weather Model Portfolio earlier in 2020.

Readers who have been paying attention to my writings in years past would be aware of my basket selections, but here’s a reminder from the interview transcript:

Rudi’s four baskets of Aussie stocks:

  1. High quality stocks that are immune or not affected by the changes taking place in the world. Example: CSL Limited
  2. Stocks benefitting from change. Example: Afterpay
  3. Solid, sustainable dividend paying stocks. Example: Waypoint, previously known as Viva REIT
  4. Laggards. These are the stocks need to transform and change to survive in this environment.

The idea is to treat each basket in a different way. The All-Weather Portfolio invests in the first three baskets and avoids the fourth.

My position on gold:

“I think that the major decision you have to make is do your buy gold, pure gold, or do you buy gold producers? With the gold producers, you are taking on a different type of risk. I'm just after simple, straightforward and uncomplicated.”

The interview in full (video and written transcript) can be accessed here (sign up is required):

https://www.livewiremarkets.com/wires/rudi-s-pandemic-proof-portfolio

Realising the current All-Weather Performers section should do a lot better when it comes to sustainable dividend payers (essentially the focus of the Portfolio) I shall add an update on the theme before the end of this week.

Paying subscribers (6 and 12 months) have unrestricted access to our dedicated section on the website to All-Weather Performers:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Gold, The Enigma

Adding more gold exposure to the All-Weather Portfolio earlier in the year has certainly proven a prescient move, but it’s always good to remind investors bullion has many pros and cons, drivers and headwinds, which makes it a little bit of an enigma for most investors.

While many a gold bull, and there are many around these days, is gloating after this year’s rally, with references being made to how gold equals a nice bottle of red, getting better with older age, I am certainly not singing from the same song sheet.

The 1990s and post-2011 (until last year) should warn investors the sun does not shine in perpetuity in the land of gold and silver, and both idolised protectors against inflation are often very bad safeguards against value erosion.

Gold, above anything else, is often what the majority wants it to be. And that can change within a heartbeat.

The main dilemma for investors using gold as a protection against inflation will arrive if/when inflation does pop up with a vengeance and global bond yields make a decisive switch to incorporate this change.

I have little doubt this adjustment in bond yields will crush the price of gold and silver, at least in the initial knee-jerk response.

Recent history shows us plenty of signals to back up that statement. Witness, for example, how gold quickly pulled back from US$1364/oz to US$1131/oz in late 2016 and again in 2018 when bullion pulled back from US$1349/oz to US$1187/oz.

Despite the ruling mantra that inflation is gold’s best friend the harsh reality is that bond yields are the number one force that sets the direction for gold and this year’s rally is being supported by ever lower bond yields, which has pushed the inflation corrected, real yield on ten-year US treasuries to -1%.

This is why gold is now trading near an all-time high. All the other factors play second and third fiddle.

Conviction Calls

Morningstar’s list of Best Ideas for investors in Australia and New Zealand has lost Bapcor ((BAP)), following an 8% rally in June and July with the added observation that FNArena’s consensus target remains more than 11% above the share price on Monday.

In place of Bapcor, Morningstar’s stock pickers have added waste manager Bingo Industries ((BIN)) whose share price continues to linger around price levels of April-May.

The list equally saw the removal of Spark Infrastructure ((SKI)) as Morningstar’s fair value calculation does not reach higher than $2.40, not that far off from the share price this week.

This leaves twelve stocks on the Best Ideas list, and most have clearly been selected because of a cheap share price: AdBri ((ABC)), Avita Therapeutics ((AVH)), Cimic Group ((CIM)), Computershare ((CPU)), G8 Education ((GEM)), Link Administration ((LNK)), Southern Cross Media Group ((SXL)), Telstra ((TLS)), Viva Energy Group ((VEA)), Westpac ((WBC)), Whitehaven Coal ((WHC)), and Woodside Petroleum ((WPL)).

****

Wilsons’ Australian Equity Focus List has added Appen ((APX)) and removed JB Hi-Fi ((JBH)), increasing the lists’ overweight to the technology sector to 9.5% weight, some 4% more than the benchmark.

Appen has equally been added to Wilsons list of Conviction Calls with health and dairy products company Nuchev ((NUC)) temporarily dropping off because Wilsons is currently acting as a corporate advisor.

Having kept their presence as a Conviction Buy are ARB Corp ((ARB)), Collins Foods ((CKF)), Integral Diagnostics ((IDX)), Telix Pharmaceuticals ((TLX)), ResMed ((RMD)), and Whispir ((WSP)).

Following ResMed’s Q4 market update, which triggered a notable retreat in the share price, Wilsons has stuck with its Overweight rating and a slightly lower $28.55 price target, suggesting the balance remains in favour of strong ventilator sales for the next three quarters.

While SaaS installations have been hit by the pandemic, Wilsons remains convinced it is but a short-term, temporary blip in an ongoing firm looking growth outlook.

(This story was written on Monday 10th August, 2020. 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 $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

The Future Of Healthcare Has Already Arrived

Covid-19 and lockdowns have accelerated the success of telehealth services with Australian companies among key beneficiaries

-Global pandemic has accelerated adoption of telehealth services
-ASX-listed healthcare companies among beneficiaries
-More telehealth small caps to IPO next six months

By Anastasia Santoreneos & Mark Woodruff

The covid-19 pandemic has wreaked havoc on the Australian share market, but one sector that’s skated around the major economic downturn is the health sector, thanks to the quick-thinking of medical tech companies.

The government’s swift action on social distancing measures meant regulatory changes came in thick and fast for companies like Cochlear ((COH)) and ResMed ((RMD)), as they could develop remote patient monitoring tools for medical professionals to continue their work without needing to physically be with the patient.

The adoption of these services was phenomenal.

As a direct result of Covid-19, the utilisation of telehealth, that is remote GP consultations, now accounts for 35% of government benefits paid for GP attendances, according to a report by Morgan Stanley.

We’re not in new territory

The shift towards remote patient monitoring isn’t new. In fact, the trend has been continuing for some time, with Cochlear and ResMed already invested in the technology to facilitate this trend.

For example, ResMed had been involved in remote patient monitoring for around 14 years, according to Melior Investments senior analyst Julia Bailey.

“Within their sleep apnea devices, they’ve been recording patient data and relaying that back to doctors for a long time,” Bailey said.

“They now have over 11 million cloud connected devices out in the world, and they’ve made a number of acquisitions of smaller companies in that space like Propeller Health.”

Smaller players have also been in the game for many years: Pro Medicus ((PME)) was one of the first remote medical imaging software providers, which allowed radiologists to access images through their devices, Jun Bei Liu, portfolio manager at Tribeca Investment notes.

“It’s lowered costs, improved efficiency and allows more people to look at the images, increasing accuracy too,” Liu said.

Bailey said there have been three key drivers behind the remote patient monitoring trend: an ageing population, higher healthcare costs, and consumers seeking more control of their health.

“You've got governments and you've got insurance companies around the world looking to contain healthcare costs,” Bailey said.

“And they are looking at value based models. And for a value based model, you need data. So there's pressure on all providers, whether that's doctors or pharmaceutical companies, or medical device companies sort of provide data on the cost effectiveness, and the value of the treatments and the products that they're providing.”

That’s not to say other remote patient monitoring services, in particular telehealth, didn’t gain a significant amount of traction because of the pandemic, however.

“This trend has reached a critical inflection point during this pandemic,” Liu said.

It’s an inflection point Liu believes we would have reached in the next two or three years regardless, but the pandemic was a major catalyst for driving that change forward.

“Patients needed convenience - they couldn’t go to a physical location,” Liu said.

The virus also forced the government to fast-track approvals and provide funding for remote patient monitoring tools, meaning companies had the support and the means to get new  products moving, contributing to the surge in the trend.

Now, Morgan Stanley estimates Australians are saving up to $1.9bn in lost work time by removing the need to travel to their GP.

“It’s saving the operators as well - it’s reduced the costliness of inefficiency in the supply chain,” Liu said.

An opportunity like no other

While the health sector more broadly remained relatively unscathed throughout the pandemic, companies were impacted to some extent, Liu said.

“Obviously private hospitals were impacted because you couldn't have elective surgeries, and companies like Sonic Healthcare ((SHL)) had a bit of an issue as they couldn’t do normal testing.”

But a V-shaped recovery is in sight.

“Many other sectors will need to rely upon consumer demand, but the healthcare sector is one where the demand is not going to go away - it’s inelastic,” Liu said.

“People will still go to the hospital to get their knee replaced, and the backlog for a lot of those services is actually increasing.

“If anything but health care operators will do quite well in the next six months.”

And both investment experts believe there’s a large and “exciting” opportunity for investors interested in the space, and companies seeking to capitalise on the change.

Bailey noted the coronavirus “heightened” awareness of health across the board, particularly respiratory and lung health, meaning both ResMed and Cochlear have a bright future as a result of their remote sensing technology.

CSL ((CSL)) is also poised for success, Bailey said.

“We see an opportunity within their flu vaccine business because obviously, particularly for the northern hemisphere countries, there's an overlap of Covid-19 and flu season”.

“So that is a huge concern, and there's a big opportunity for the flu vaccine manufacturers.”

While Cochlear and ResMed are two big players staying at the forefront of new healthcare changes, smaller tech players that specialise in particular areas are also poised to enter the arena as listed companies.

Med Advisor ((MDR)), a smaller medical tech company, has created an app which, once downloaded, would send automatic reminders to users to order their medicine, making it convenient for both the individual and the pharmacy.

“And there’s a couple more coming through IPOs in the next six month in that telehealth space” Liu said

“You have this refresh of investment opportunities that are coming through, with enormous growth trajectories ahead of them.”

Digital health solutions

As a result of covid-19, Morgan Stanley has identified a significant shift in patient preferences towards digital health solutions. This trend was clear pre-pandemic and has been accelerated by what was initially thought to be temporary regulatory changes.

The new Australian telehealth codes for GP attendances were intended to expire on September 30 this year. Morgan Stanley forecasts that if extended to late March next year, telehealth could account for $2.8bn of the yearly total addressable market of $6.5bn. This would increase “visits” to 43% from April 2020 levels of around 35%.

At first glance, the pie for GP visits has merely been divided between telehealth and traditional visits. The good news hides inside the many hidden benefits.

According to Morgan Stanley's forecasts, patients win to the tune of $1.9bn Australia-wide, due to a mixture of reduced travel costs and the opportunity gain of staying productive at work.

Medical centres may also derive significant cost savings by reducing office space and reducing usage of consumables.

Finally, new capacity from time savings may help rectify a projected shortfall in GP numbers.

Cochlear & ResMed, key beneficiaries

In response to the pandemic, the US FDA awarded Cochlear approval for the company’s “Remote Check” solution.

Similarly, the US Center for Medicare & Medicaid Services introduced reimbursement changes to spur remote patient monitoring (RPM), from which ResMed’s Propeller is likely to benefit.

Cochlear:

Formerly, the ability to on-board new patients was constrained by the ongoing demands of existing patients upon cochlear audiologists. This caused bottlenecks at cochlear clinics.

Remote Check will enable patients to complete hearing tests and prevent unnecessary clinic visits.

A synergistic combination with Cochlear Sycle software could increase capacity for Cochlear markedly, and accelerate new patient growth along with market share gains.

ResMed:

Propeller is a digital health platform for the management of Chronic Obstructive Pulmonary Disease (COPD) and asthma.

An inhaler sensor tracks medication usage via a smartphone app. This leads to a better understanding of the disease and increasing adherence to medication regimes.

ResMed has already demonstrated expertise in patient connectivity. This combined with current relationships and pharmacy agreements may see Propeller access around 50% of the greater than ten million COPD users of inhaled medicine. 

Additionally, Morgan Stanley foresees many of these users progressing to use the company’s product in the portable oxygen concentrator (POC) market.

****

Already we have seen a rapid uptake of telemedicine for GP attendance in Australia. This trend is set to continue should current temporary regulations be extended.

However, the real benefit is largely unseen and extends to patients, medical centres and GP availability going forward.

At the company level, both Cochlear and ResMed look well placed with products likely to benefit from remote patient monitoring.

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: What’s Wrong With CSL?

Dear time-poor investor: the debate continues about what to expect from economies and equities in the year(s) ahead, plus a glimpse into the headwinds affecting the CSL share price

In Part One of this week’s Weekly Insights:

-What’s Wrong With CSL?
-T.RowePrice: Market Optimism Is Deceiving
-Corporate Debt: New Records
-Conviction Calls

What’s Wrong With CSL?

Seldom have we seen such a lacklustre share price performance from all-around star stock CSL ((CSL)) when regular defensives including Woolworths ((WOW)), Coles ((COL)) and ResMed ((RMD)) are putting in a stellar performance.

The question is on many investors’ lips these days: what is wrong with CSL?

The answer, it seems, is two-fold. On the one hand investors now realise the virus and related lockdowns are impacting on plasma collection, in particular in the south of the USA where infection numbers are thriving (so to speak).

The offsetting factor is that a higher US unemployment rate, equally a result of the pandemic, should translate into more donors, which should boost CSL’s collection abilities.

The company is offering higher incentives to US donors to compensate for the temporary interruption, and this will put pressure on its margin.

The public debate that is currently raging behind the scenes is whether one cancels out the other, or whether we are witnessing a sequence of events, i.e. first comes the dip, then to be followed by a firm boost.

Further complicating the debate is that global demand for CSL’s flu vaccines remains robust, suggesting potential for an upward surprise.

Then there is the other matter of growing potential for increased competition with a number of biotech firms across the globe successfully trialing potential future treatments that, if successful, will eat into CSL’s core products and markets.

It is this potential future competitive threat that is possibly weighing most on the share price post-April.

Keen observers will have noticed CSL is not acting like the proverbial sitting duck, keeping the fingers crossed and hoping for the best. The company announced two acquisitions already with the latest, a gene therapy product for haemophilia B, (more) tangible proof the company is not afraid to potentially disrupt itself, according to commentary by various analysts post the announcement.

Of course, one of the major attractions for owning CSL shares is the in-house pipeline of future products under development. Here the company should have a few announcements to make in 2021.

Put it all together and the correct conclusion is probably that the market genuinely doesn’t know what to do with CSL shares at the moment.

A dilemma that is further complicated by diverging views on the direction of the US dollar, a key component for translating CSL’s profits for shareholders in Australia.

One observation stands irregardless* and that is I have seldom spotted so many professional investors declaring they are buying CSL shares with a longer-term view in mind.

From Roger Montgomery, to T.RowePrice, to UBS, and numerous others; they all declared recently they have been buying as CSL shares continue to lag the overall market, instead bobbing around the $280 level – quite the distance from the $341 seen earlier in the year.

Anyone can draw his/her own conclusions from this apparent discrepancy.

*Irregardless was recently added to the Merriam Webster dictionary, causing public uproar among those aficionados of the English language who believe just because words creep into the daily usage it doesn’t mean they should thus be officially recognised.

Irregardless looks like a merger between irrespective and regardless and, apparently, Maria Carey sang the word on her 2018 album.

In case anyone wondered: irregardless had already been recognised by the Oxford English Dictionary, and it means exactly the same as regardless.

T.RowePrice: Market Optimism Is Deceiving

Global asset manager T.RowePrice organised a webinar with Head of Australian equities, Randal Jenneke for global media last week.

Conclusion number one put forward was that investors have been too optimistic in pricing in a swift V-shaped recovery in global equity markets.

No surprise thus, Jenneke’s Australian asset allocation has been directed towards a more defensive bias with “quality” and “durable profits” high on the agenda.

T.RowePrice’s strategy continues to focus on resilient earnings and structural growth stories, so no surprise the Australian equity fund has now gone overweight CSL ((CSL)).

Sectors currently held in Overweight allocations include consumer discretionary, health care (see CSL), information technology, and utilities.

Deepest Underweights are financials and banks, which is not surprising given Jenneke’s scepticism about what is currently implied and priced-in.

Underlying all of the above is T.RowePrice’s view that the world is still in the early stage of dealing with the global pandemic. And they mean early, early stage.

The most dangerous position to be in as an investor, it appears, is projecting recent share price movements for equities out much farther into the future, assuming the implied V-shaped recovery is happening and won’t be flattened or interrupted.

Jenneke cannot see the risk for an inflation outburst that some experts have been warning about, instead arguing the damage done by this year’s global recession effectively guarantees central banks will continue to fend off deflation for years to come.

He also agrees it will be extremely difficult for the Federal Reserve, and other central banks, to wind back the extreme liquidity-oriented policies with the next policy announcement from the Fed to focus on yield curve control, a la RBA and the BOJ.

Jenneke does not believe negative interest rates in the US as the next logical policy step are out of question.

Corporate Debt: New Records

We live in an era of ever-increasing debt levels, and corporates remain very much part of that story.

Corporate debt globally rose by a further 8% throughout 2019 to reach US$8.3trn, an all-time record. Fixed interest researchers at Janus Henderson note total new debt taken on board in the US by mid-year 2020 has already reached the total level of new corporate debt in 2019.

In other words: what was already happening at an accelerating pace pre-pandemic is now accelerating even faster in 2020.

Companies are making sure they will survive lockdowns and the repercussions from the virus, with total fresh debt expected to rise by a further US$1trn by year- end.

On Janus Henderson’s assessment, corporate debt has grown significantly faster than profits over the five years past.

Yet, the analysts suggest investors need not worry as central banks are supporting credit markets as much as they can in order to prevent a repeat of 2008/09.

Janus Henderson does warn a new cycle of defaults is starting here and now, which means Australian banks’ provisioning is picking up with ramifications for share buy backs and dividends for the sector overall.

Post the sudden lockdown of credit markets in March (since successfully re-opened on central banks interventions) Janus Henderson believes investors can achieve equity alike returns from owning corporate bonds of quality companies whose operations should gradually recover from the virus impact.

These returns are partially derived from spreads that currently have not fully normalised, but are expected to do so over the year(s) ahead.

With dividends from equities anticipated to remain under pressure, Janus Henderson believes corporate debt remains attractive for income-seeking investors.

That sentiment was echoed by another global asset manager specialised in corporate bonds, Neuberger Berman.

Investors worried about central banks lifting cash rates are way too early on Janus Henderson’s assessment with Head of Australian fixed interest, Jay Sivalapan suggesting cash rates are likely to stay at current (extreme) low levels for four to five years.

FNArena will be publishing a dedicated story about Janus Henderson’s latest research into global corporate debt. See the website for a follow-up story coming soon.

Conviction Calls

Portfolio strategists at Goldman Sachs have drawn the conclusion that Melbourne’s second wave lockdown will have more negative consequences than the first lockdown.

Facts supporting this assessment include:

-A much higher (apparent) level of community transmission this time;

-This second lockdown may be less successful in suppressing the virus as quickly as the first one was;

-Many of the “silver linings” from the first lockdown are unlikely to be repeated this time;

-Businesses may be significantly slower to restart on re-opening, and a higher percentage may not come back

Of course, the main offset for all of the above is that the resultant significant hit to the Australian economy also significantly increases the likelihood that the federal government in Canberra might decide to extend the provision of fiscal support.

To help investors making up their own mind, Goldman Sachs analysts have lined up some of the heaviest affected ASX-listed companies, including:

-Among retailers, Officeworks ((WES)) and JB Hi-Fi ((JBH)) are believed to have the highest exposure while 50% of Vicinity Centres’ ((VCX)) portfolio value is located in Victoria. For GPT ((GPT)) the portfolio exposure is estimated at 35%, mostly through retail assets.

Among banks, National Australia Bank ((NAB)), Bendigo & Adelaide Bank ((BEN)) and ANZ Bank ((ANZ)) are most affected through their respective mortgage books.

For insurers, Goldman Sachs estimates 29% of the personal lines premiums at Insurance Australia Group ((IAG)) and 30% at Suncorp ((SUN)) are Victoria-based.

The lockdown state represents some 29% of policies for health insurer Medibank Private ((MPL) and 22% for competitor nib Holdings ((NHF)).

Among building materials companies, CSR ((CSR)) with 25% of group revenues, and Adbri (24%) are seen as most heavily impacted.

Melbourne gaming revenue amounted to 54% of total revenue for Crown Resorts ((CWN)) in FY19. For Transurban ((TCL)), H1 saw circa 30% of all toll revenues coming from Melbourne.

Qantas ((QAN)) and Qube Holdings ((QUB)) are also heavily affected, the latter derives an estimated 16% of operating revenues from Victoria.

For online real-estate classifieds, Domain Holdings ((DHG)) will be most affected with REA Group ((REA)) having more business in Sydney and elsewhere.

Ramsay Health Care ((RHC)) is the most affected in the health care sector with circa 20% of revenues stemming from Victoria.

That ill-guided acquisition of Spotless has made Downer EDI the most exposed among services companies and contractors.

Among small caps, Lifestyle Communities ((LIC)) is 100% Victoria based, but the company might be able to catch up on sales and settlements later in the financial year, suggests Goldman Sachs.

The development business which is 50% of earnings will, however, be impacted.

Car repairer AMA Group ((AMA)) operates 35% of its sites in Victoria, with the company already declaring it remains cash flow neutral or slightly positive in the state assisted by Jobkeeper payments.

Then there is Adairs ((ADH)) whose online sales are picking up fast, while the retailer still has 44 out of its 160 physical stores in Victoria.

****

Looking forward to August, stockbroker Morgans is anticipating a “difficult” reporting season ahead for diversified financials and insurers in Australia.

Headwinds vary from volatile investment markets, to extremely low bond yields and covid-19 impacting on operations, activity levels and provisions.

Morgans thinks earnings visibility will remain poor for companies including AMP ((AMP)), QBE Insurance ((QBE)), and Link Administration ((LNK)).

The broker’s favourites are (in order of preference) Zip Co ((Z1P)), Computershare ((CPU)), Link Administration, Mainstream Group Holdings ((MAI)), Kina Securities ((KSL)), MoneyMe ((MME)), then QBE Insurance.

Among those least liked, ASX ((ASX)) is the only stock currently rated Reduce (lowest rating).

****

Simultaneously, a recent update by portfolio managers at stockbroker Morgans revealed Amcor ((AMC)) has been added as a defensive exposure, while additional shares in Qube Holdings ((QUB)) have been bought for the Balanced Model Portfolio.

The portfolio has sold out of Woodside Petroleum ((WPL)), while taking profits on National Australia Bank ((NAB)) shares and trimming its position in Sonic Healthcare ((SHL)).

The Growth Portfolio has equally sold out of Woodside Petroleum and taken profits on NAB, while adding Collins Foods ((CKF)) and ALS Ltd ((ALQ)).

This portfolio added additional shares in Aristocrat Leisure ((ALL)) and Lovisa Holdings ((LOV)) while reducing exposure to Megaport ((MP1)).

****

Strategists at UBS see a -$100bn fiscal cliff emerging in Q4. If consumers save more during that final quarter, and further stimulus falls short of market expectations, they predict weakness for the local share market.

For now, UBS advises investors to stay Overweight cyclicals, but be alert for trend reversal into defensives.

Stocks most preferred, for now, include Aristocrat Leisure ((ALL)), APA Group ((APA)), Aurizon Holdings ((AZJ)), CSL ((CSL)), Harvey Norman ((HVN)), Lendlease ((LLC)), Mirvac Group ((MGR)), and Woolworths ((WOW)).

UBS is cautious on Adbri ((ABC)) and JB Hi-Fi ((JBH)).

****

Over at Morgan Stanley, the conviction in a V-shaped recovery remains intact with the Australia Macro+ Model Portfolio retaining a positive skew towards financials, bulk commodities, gold and the energy sector.

The portfolio has added Ampol ((ALD)), Super Retail ((SUL)), Santos ((STO)) and Viva Energy Group ((VEA)) to further skew its exposure to cyclicals and the recovery theme, while using quality and more defensive exposures as the key funding source.

As such, Morgan Stanley has been selling out of Medibank Private ((MPL)), Xero ((XRO)) and Woolworths ((WOW)) while moving Underweight CommBank ((CBA)).

More Conviction Calls in Part II on Friday.

(This Part One story was written on Monday 13th July, 2020. 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. Part Two will be published on Friday).

(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 $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Lessons Learned From 5.5 Years Of All-Weather Portfolio

Lessons Learned From 5.5 Years All-Weather Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Excluding any unforeseen calamities with the June 30 finish line in sight, the FNArena-Vested Equities All-Weather Model Portfolio should finish financial year 2020 with a positive return of circa 4% and only a slight negative performance for those turbulent past six months.

This will be well-above the performance of the ASX200 Accumulation index over both periods, which remains deep in the negative on both accounts.

On my observation, most professional investors have found beating the index over the year past a tough challenge. In many cases the relative underperformance has now been stretched to 3-5 years, which is a long time in today’s 24 hours news cycle-driven world.

5.5 Years ago, the All-Weather Portfolio started off on the promise of an average total investment return of 7-8% and it is pleasing to note that, three mini-bear markets down the track, total return is keeping up with that promise.

For many investors, 7-8% on average over time may not sound like an extremely attractive proposition, but when the industry numbers will be released post FY20, many achieved returns over the past five years will be noticeably slimmer.

This is the point where I could pump up my chest and tell you all how fantastic my skills are in reading market sentiment and trends, but the opposite is likely more accurate.

In fact, if I compare the actions and strategy behind the All-Weather Portfolio with the ruling narratives that dominate daily news cycles in and around financial markets, the Portfolio could never possibly have done as well as it has.

For starters, there is no black box wizardry going on behind the scenes. We don’t use technical analysis. We don’t even try to assess where the next burst in positive momentum is likely taking place.

Because the Portfolio is carried by a specific focus on quality and sustainability, its composition is limited to a small group of stocks only, with resources stocks and other cyclicals off limits.

We don’t buy low and sell high. In true old Warren Buffett-style tradition, we often buy on above market average Price-Earnings ratio, and then keep the stock for many years in the Portfolio.

Buy “expensive” and hold on?

If you think about it for more than a few seconds, this should not be a Portfolio that is performing as well as it has.

So what exactly is The Secret?

I don’t think there is a “secret” as such, but below are a number of observations and conclusions I have drawn from the past 5.5 years of managing the All-Weather Portfolio.

1) Quality Beats Valuation

Too many market participants are too focused on scooping up “cheap” stocks. Sure, we all like a bargain, and a share price that falls to an extremely low price level will (at some point) rally higher, but sustainability and continuity are usually not included.

Cheap stocks, according to the value-investor’s narrative, are most beneficial entry points for long-term returns.

But when societies go through tectonic changes, and economies and business models are being disrupted on a daily basis, “cheap” looking stocks are simply the equivalent of the price discounted block of cheese at the local supermarket.

The expiry date is near. Don’t plan too far ahead. It’s a short-term fix, at best, not a long-term sustainable value creator.

Instead, it pays to identify high quality companies with a multi-year runway for growth, don’t get too spooked when valuations get temporarily a little bit bloated, and stay the course.

The best performing stocks in the Portfolio were trading on a PE multiple well above the market average when purchased, and they are still owned today.

2) Don’t Lose Your Focus Because Of Technical Analysis

I’d be homeless and roaming the streets by now with an empty coffee cup in hand, begging for change if I had to pay a dollar each time one of the stocks in Portfolio got hit by a negative trading signal stemming from technical analysis.

On my observation, technical analysis works best for low quality, highly speculative, small cap stocks. Probably because most of such stocks have nothing else going for them.

Quality, larger cap stocks can fall through the 200 moving average, or be rejected at a certain pivot, but as long as profits and fundamentals remain intact, it’s nothing but short-term market noise.

Pay attention, because so many others do, but don’t lose your focus or conviction because of short-term trading impacting on the share price. Positive fundamentals shall prevail.

Plus, of course, Quality companies surprise positively more than they do not. The latest example, as I am writing today’s story, is provided by Fisher & Paykel Healthcare ((FPH)) shares rising by more than 6% after releasing FY20 financials on a day when screens are almost universally coloured red.

3) Timing Trends Is Really Difficult

Plenty of books and newsletters out there that educate investors about cycles, changing trends and the investment clock, but putting it in practice proves a lot more difficult most of times.

At the beginning of the year the general idea was to jump on board oil and gas stocks, which then fell the hardest.

Only a few weeks ago strategists were re-weighting model portfolios towards more exposure to banks and miners.

Guess which sectors are among the weakest performers in June?

Robust, non-cyclical all-weather performers won’t keep up with those high beta, cyclical exposures when sentiment moves into Risk On mode, but on the other hand, they don’t fall as deeply when market sentiment sours either.

The latter means the Portfolio doesn’t need to make up as much to turn positive after a period of extreme volatility and heavy down-draught.

In simple terms, Quality and robust businesses are more resilient during tough times, and quicker to recover. These core characteristics are mirrored in how their share prices behave during downturns and bear markets.

This, I believe, is one of the key factors supporting the Portfolio’s performance.

A second factor lays with mega-trends; they run for many years, and create long-lasting mega waves along the way.

It’s so much easier for any management team to obtain labels of quality and excellence when their business is carried by such positive mega-trends. But every investor should be aware that the opposite very much holds true as well; irrespective of a "cheap" looking share price.

4) Accept Your Mental Barriers

Suppose you are convinced a share price has overshot to the upside, why would you not sell all your shares?

Because if the long-term growth trajectory of the company remains intact, that share price will end up a lot higher in years to come.

In other words: today’s over-valuation is but a temporary, short-term phenomenon and if the share price doesn’t pull back far enough, you won’t get back on board.

On my observation, quality companies in great shape are most likely to surprise on the upside, and they will take you by surprise shortly after you sold out.

Selling all your shares automatically creates a mental barrier, which makes it much harder to get back on board.

Taking profits in Xero ((XRO)) at $48 in September 2018 would have generated a nice profit, but today the shares are trading at $87. What if I subsequently had failed to quickly buy back in during the pullback?

I could potentially have missed out on the next 80% in additional upside (and the shares have been higher).

Many investors, on my observation, are too easily guided by short-term considerations. Of course, it’s only worth sticking around when companies deliver on their promise and potential, and there will be doubt and disappointments along the way.

One of the ways to deal with constant uncertainties is to adopt a holistic, portfolio-oriented approach. This means you can deal with falling share prices, and small disappointments, because the Portfolio as a whole is performing.

Keep the following motto in mind: for an underperforming company, it’s never too late to sell, while for a consistent, solid performer it’s seldom too late to buy.

5) Risk Management, Not Trading

Irrespective of what transpires inside or outside the share market, you will be selling and buying shares, irregularly or otherwise.

There is, however, a difference between trading the Portfolio or simple risk management.

Over the past 5.5 years I have mostly sold shares to reduce risk when the odds seemed to move in favour of a large drawdown (when Cash is King), or to skim a bit off the top of a temporary overheating market darling.

I sell out completely when I believe the future trajectory of a company has been severely damaged, or when I have to conclude that buying in was a misguided decision.

We all make errors, but the worst one is sticking around because the share price is now lower than when we joined the register.

We must accept things do not always turn out the way we envisage them. Changes are happening every day. Some cannot be anticipated; in other cases, we might have been blinded by whatever.

I tend to sell quickly, without regret, and move on.

Part of my Portfolio management also consists of getting rid of dead wood and disappointments when another bear market hits (we had three since 2015) in order to concentrate on the High-Conviction holdings.

6) Know Your Stocks

Marcus Padley once wrote a story about the one stock portfolio. The idea is to get to know everything about that one company, so you know what moves it, what is important and what is merely noise or market tribulation.

It’s a rather extreme concept, but I see a straightforward similarity as to how I keep track of the companies I own in the Portfolio.

You first select them because you believe in their growth prospect, and once you own them you keep track of them, so you get to know them better as time goes by, learning new things, discovering fresh insights.

The true value of investing with a long-term horizon is that you accumulate knowledge and insights about the investments you own. On the premise, of course, that you continue reading and paying attention to research updates and fresh developments.

As the old saying goes, you can copy somebody else’s stock tip, but you cannot copy their conviction. That conviction to not sell out when Xero shares hit $48 can only come from your own knowledge and personal insights.

7) Regrets, We All Have A Few

The best comparison for investing is a round of golf. It’s never about being perfect. It’s about making sure that the mistakes you make don’t destroy all the positive achievements.

Not being perfect also means we all end up with a few regrets, every now and then, in hindsight. In golf parlance: that’s simply par for the course.

My regret is called Macquarie Group ((MQG)), without any doubt the highest quality financial institution in this country.

When the covid-19 lockdowns arrived, and a new bear market seemed to have been thrown upon us, I sold out of Macquarie shares because I envisaged multiple years of asset write-downs and challenging deal-making conditions.

Of course, things turned around rather quickly since, and as yet another example of the human brain creating barriers, the Macquarie share price simply rallied away from me.

Regrets, we all have a few. That’s simply the nature of this game. But if the overall performance of the Portfolio isn’t too bad, we should not dwell upon them for too long.

The share market being the fragile, unpredictable and mercurial beast it is, there will be opportunities to get back on board, patience permitting.

But before that can happen, we must have Macquarie on our radar in the first place. This too is where my personal narrative differs from the ones that are dominating the general focus and commentary.

I don’t look for “cheap” stocks, and then jump on board. I have a pre-selected list of quality stocks I’d like to own. Then the story begins…

(This story was written on Monday 29th June, 2020. 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 $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

article 3 months old

Rudi’s View: Two Poles Apart

Dear time-poor investor: the share market remains split in two opposing baskets

In this week's Weekly Insights:

-Two Poles Apart
-REITs in June
-Bad News Good For Computershare
-Rudi Talks

Two Poles Apart

By Rudi Filapek-Vandyck, Editor FNArena

Most social scientists share the view that the GFC in 2008/09 played a major role in further polarising modern day societies.

To get an accurate insight into what is happening in the economies around us, we now need to separate the top 1%, while also acknowledging there are major differences between Haves and Have Nots, as well as in between generations and genders.

What is not as often acknowledged or highlighted is that, post-GFC, a similar polarisation has manifested itself in share markets.

When viewed through this prism, a far better understanding of the many waves and movements can be obtained, yet most commentators and experts continue referring to “the market” as if it still were one cohesive bundle of Australian companies reflecting the health and direction of the Australian and the global economy, as well as representing sentiment and investor views about it.

I guess it’s way too difficult for mainstream media to explain to their less-familiar audience why shares in CommBank, BHP Group, CSL ((CSL)) and Goodman Group ((GMG)) are rather seldom moving in synchronicity these days.

But the industry itself is equally guilty. Apart from not taking on the task too difficult (as it requires extra explanation), many professionals are, above anything, bottom-up stock pickers.

Most importantly, this extreme post-GFC polarisation is still quite young, in the bigger scheme of things, and all humans are creatures of habit and loyal servants of history, the long haul. We carry a built-in resistance to change.

Yet, share markets have changed, and quite dramatically so. In the US, the leading indicator for so many things, the pendulum swung in favour of what today is casually been referred to as Big Tech shortly after the recovery out of the GFC.

The Australian share market only caught up post the euro-crisis of 2011/12, with the emerging schism only gradually revealing itself. It still took a few years before the gap in investor enthusiasm started showing up in market research and on performance tables.

By now, one would hope, we are all too familiar with CSL, Goodman Group, Charter Hall ((CHC)) and Afterpay ((APT)) having separated from old economy-stalwarts like Scentre Group, Lendlease, Bank of Queensland and Ardent Leisure.

The gap in performance between these two opposite groups of companies has been nothing short of phenomenal in recent years, which easily explains why so many investors, both professional and retail, have found it impossible to keep up.

No bigger sin has been committed in the share market than through the accumulation of cheap looking stocks that subsequently revealed themselves as perennial underperformers, if not a true-blue value trap.

The difficulty with investing is that none of this ever moves in a straight line. There are times when Lendlease does beat CSL and when the rally in Ardent Leisure shares leaves most others in the dust, but bigger picture, the strong have shown their strength whereas the weak and vulnerable could not.

I do realise, most Australian investors do not easily accept terms like “weak” and “lower quality” when the conversation turns to long-held favourite Blue Chips like banks, insurers and major property owners, but that’s what automatically comes to mind when viewing the share market through the prism of Haves and Have Nots.

And investment returns from the post-2012 era have supported this assessment.

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There are multiple reasons as to why the gap between Winners and Losers in the share market has opened up and continued to widen.

There is the ascendancy of new technologies combined with demographic shifts, on top of extremely low interest rates and shorter business cycles that require regular propping up through central bank stimulus.

These tectonic forces are by now so deeply embedded into today’s societies, not even the one in a hundred years covid-19 pandemic has been able to close the gap in the share market.

This is the one remarkable observation that simply needs to be highlighted: history shows this type of deep economic shock combined with a Bear Market period for equities usually breaks the trends that were prevailing prior.

In other words: these events are the trend-breakers that reverse Winners into Laggards and turn Losers into Winners. Such trend reversals were all too obvious post the Nasdaq crashing in 2000 as well as post-GFC.

But not this time.

This time the gap between the two opposing baskets of stocks in the share market has simply widened even further.

This may be hard to swallow for investors whose attention is focused on banks, QBE Insurance, Telstra, Unibail Rodamco Westfield, and the like but Ansell ((ANN)) is today trading near an all-time record high.

So is Afterpay. And NextDC ((NXT)). And Objective Corp ((OCL)), plus many others.

Admittedly, the gap between both poles in the share market is not solely due to differences in operational health and business performances; investor sentiment plays its part as well.

But positive sentiment is only adding to the differences in growth trajectories. It cannot be blamed for all the wrong reasons.

****

Dividing the share market in two opposing baskets of stocks can be quite illuminating, with different observations leading to different conclusions from what quickly becomes common perception.

At face value, it seems like investors decided after March 23rd shares had been weakened to the extreme and value was up for grabs for the brave and those who held their nerves when many others weren’t.

In reality, however, most funds flowed into the top performing basket that holds companies that were not affected by lockdowns or the pandemic, or whose longer-term growth trajectory would only suffer a mere blip.

Investors can easily check this. Open up a price chart of, say, CSL and everybody can see it mirrors the recovery in the ASX200 from late March and into April.

This is why I haven’t been worried about share markets revisiting the March low anytime soon. The sharp recovery has very little to do with ignorant or overly optimistic investors, but everything with the smart money jumping on the most secure and conservative options available.

Similar observations can be made about US equities.

Market updates by CSL, and others, since have proven these buyers correct. CSL shares near $260 (and lower) were an absolute steal. And so was ResMed below $20. And Cochlear at $140 (though that one has been more controversial).

Investors also quickly decided high quality technology Winners including Afterpay, Altium ((ALU)), Appen ((APX)) and Xero ((XRO)) might still be impacted, somewhat, but it won’t derail their longer-term growth potential. These share prices were thus equally quick to recover.

It pays to take a brief pause and reflect on what factually happened in the month after March 23. Investors were not adopting an optimistic view about what might happen with economies and businesses hit by lockdowns and the pandemic – in reality they did the exact opposite.

It’s not a view you might encounter when reading through the many analyses and share market commentaries by experts who take guidance from broad indices or technical price charts.

The irony here is the broadly carried (misguided) perception of markets being “bullish” and “positive” has since carried over into the opposing basket of share market laggards, allowing many more stocks to join in with a noticeable recovery.

In terms of further share market upside, the secondary impact to date has been rather benign, less than 100 points for the ASX200 compared with the three peaks registered in April.

This is equally an important observation that deserves to be highlighted: amidst a general perception that equity markets are on a continuous winning streak, some are even talking about a new bull market, leading indices in Australia have hardly made any real gains over the past month.

This market is essentially trotting sideways. Admittedly, underneath the surface there is more movement than the human eye can possibly register with share prices swinging up and down on a daily basis.

Bigger picture, it is only now that investors are starting to move higher up the risk scale by buying into less secure and more operationally challenged, cheaper priced stocks that will ultimately require a more positive outcome once the lockdowns are finished.

It seems but logical to conclude that from here onwards the share market will become more vulnerable to less optimistic outcomes, and thus to pull backs, or worse.

This is now also the view of US equity strategists at Citi whose proprietary Panic/Euphoria indicator is currently placing investor sentiment in Euphoria territory, and rising, lifting the odds for a general share market pullback to 70% over the next twelve months.

Citi’s modeling of investor sentiment uses a series of indicators including US margin debt data, investor sentiment surveys, retail money flows, the put/call ratio and the price of gasoline in the US.

This indicator has built up a relatively high percentage of accuracy when its signal moves in either of the two extremes.

This is one reason as to why I pay attention. The second reason is the conclusion drawn by Citi’s indicator corroborates my own analysis.

Investors worried should note the Euphoria status of investor sentiment is to date the only factor that troubles Citi strategists. They have no problem with where share markets are, and neither with valuations or earnings forecasts.

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Whenever share markets arrive at the cross-roads, as they have since mid-April, investors start frantically searching for the next big opportunity.

This is when having performed well during the early recovery phase can turn into a temporary disadvantage. The quick money will leave and seek higher returns elsewhere.

And so it is that share prices of supermarket owners Woolworths ((WOW)) and Coles ((COL)), of super-performer a2 Milk ((A2M)) and of healthcare sector leaders CSL and ResMed ((RMD)) have trended lower recently.

This is not the share market indicating bad news is coming up next. This is merely the result of investors (potentially) seeing more profitable opportunities elsewhere.

Understanding where the next opportunities are begins with understanding one’s own strategy and horizon.

Viewing the market through the dynamics of the two opposing baskets certainly helps me with identifying the temporary on and off sentiment switches between the two share market extremes.

Investors should understand today’s laggards and cheap looking ‘value’ opportunities need a vaccine or a quicker-than-anticipated recovery post lockdowns, while sentiment will switch back to Woolworths and the like whenever such optimism becomes less feasible.

My personal view is probably best illustrated through the fact the FNArena/Vested Equities All-Weather Model Portfolio has been adding additional exposure to CSL, Woolworths and Coles recently, while also adding Charter Hall and Aristocrat Leisure ((ALL)).

Earlier, upon the pullback from all-time record highs, we added Fisher & Paykel Healthcare ((FPH)).

REITs in June

June is about to be thrust upon us and this means, above many other things, boards at listed real estate trusts must make a decision about June-half dividends for shareholders.

But lockdowns are only gradually lifting while prior guidances have been withdrawn and talks with renters are still ongoing.

Decisions. Decisions. Decisions.

Many an investor will be on tenterhooks given the banks and many other dividend payers in the Australian share market have gone MIA, at least for the time being.

One of the complicating matters is that landlords such as GPT ((GPT)) will only be receiving April sales data from tenants around… now, indicating covid-19 rent relief discussions probably won’t be finalised before the end of June.

Sector analysts at Morgan Stanley suggest REITs may delay the traditional June 30th record date. There is no legal or any other obligation to stick to that date, unless for the matter of tradition.

Accountancy inconveniences, however, could be triggered and the analysts report several property companies are currently reviewing and debating the issue.

Some might decide it’s better to provide investors with a rough estimate, even if this proves incorrect later on.

Only three members of the listed property sector have to date not withdrawn their distribution guidance: Goodman Group, Charter Hall, and National Storage ((NSR)).

Bad News Good For Computershare

Under the label of “things that caught my attention” recently, analysts at Goldman Sachs and Morgan Stanley pointed out Computershare ((CPU)) might well turn into a beneficiary of rising unemployment in the US.

Traditionally, investors treat Computershare as a beneficiary from bull markets when M&A is all the rage, though fresh capital raisings might equally boost the bottom line for the world’s number one share registry, as do class actions and bankruptcies.

Morgan Stanley points out now that the company has diversified into mortgage loans services in the US and the UK, a higher take-up of forbearances (payment holidays) this year, is likely to turn into a positive next year.

In the short term, explain the analysts, forbearances act as a strain on the company’s cash, but they think overall the impact should remain “manageable”.

Next year should see the positive impact from restructuring and foreclosure fees, which come with increased delinquencies (non-performing loans).

For the time being, the US has a moratorium on foreclosures until June 30th, which may be extended.

Rudi Talks

I was recently interviewed by Peter Switzer. The video was added to the FNArena website:

https://www.fnarena.com/index.php/fnarena-talks/2020/05/19/your-editor-on-switzer-where-to-find-sustainable-dividends/

I also appeared on Elio D’Amato’s Spotee program on TickerTV:

https://spotee.com.au/ticker/green-shoots-from-the-ag-sector/

Here’s my audio interview with Christopher Hall for Finer Market Points:

https://www.youtube.com/watch?v=RHKbHD9z92w

(This story was written on Monday 25th May, 2020. 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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article 3 months old

Rudi’s View: Cheap Quality & Conviction Calls

Dear time-poor reader:  Cheap Quality stocks and Conviction Calls for (re)building portfolios

In today's Rudi's View:

-Joke Of The Day
-Higher, Lower; The Public Debate Continues
-Great Businesses For Sale
-It's Dividend Cuts Galore
-High Quality Shines
-The Mighty 23


Joke Of The Day

It is a slow day in an old outback town and streets are deserted. Times are tough, everybody is in debt, and living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.

The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

The hooker rushes to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveller will not suspect anything.

At that moment the traveller comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything.......

However, the whole town is now out of debt and looks to the future with optimism.

*And that, ladies and gentlemen is how a Stimulus package works*

Higher, Lower; The Public Debate Continues

By Rudi Filapek-Vandyck, Editor FNArena

It's a Bear Market but this doesn't mean all the fun remains reserved for the more bearish experts and commentators. Thus far in April, it's the Bulls who seem to have all the fun, or at least the upper hand in the share market.

Market strategists at UBS have tried to shed more light on that eternally important question, post day-to-day optimism and despair: what will earnings growth look like and what should investors be prepared to pay for it?

A six months hibernation for Australia translates into a fall in average earnings per share (EPS) of around -35%, estimates UBS. While downgrades to estimates have been accelerating over the past two-three months, the expected retreat is still no more than -3% or so, note the strategists. Clearly analysts are not yet prepared to go all the way down that rabbit hole.

-30% or so, excluding capital raisings, is the number investors are looking for in case they were wondering what happened during the GFC. Back then banks didn't reduce dividend payments until 2010, when all the bad news had been left behind and Australia had technically escaped a recession on the back of the Rudd government's timely spending program.

This time the support measures announced by the Morrison government won't be enough to hold off the 2020 economic recession, even though this year's stimulus program will end up being multiple times larger. It goes without saying, this time around the problems are a lot bigger, and more complex too.

Economists at the above mentioned UBS recently calculated Australia's GDP might have already printed a negative outcome in the March quarter. That's on the back of the bushfires, but with social distancing and corporate hibernating only just having started. But I digress.

The market's average Price-Earnings (PE) ratio during Bear Markets and economic recessions in Australia usually sinks to 16x at the trough, but UBS sees multiple reasons as to why "this time should be different".

For starters, and I personally will definitely remember this one, CSL ((CSL)) is now the market's largest constituent and it is casually trading on above-average PE multiples. Insofar that UBS calculates CSL alone adds 100 basis points to the market's average PE multiple.

So on a apples-for-apples comparison with trough multiples from the past, this year's PE for the Australian share market should not fall below 17x.

But then, that's considered too low as well, given multiple supportive factors in play:

-interest rates are exceptionally low plus central banks, including the RBA, are adding unlimited QE
-governments, including in Australia, are launching extremely large fiscal stimulus programs (and we most likely haven't seen the end of it)
-the recovery from the economic recession is likely to be quicker given the above



At face value, the local share market is now trading on a PE multiple below the 14.4x long term average, though that is changing rapidly as the market continues to add more gains with every day passing. By mid-week, UBS estimated the market multiple had risen to 14.7x, above the long term average.

However, if we take guidance from UBS's -35% trough-forecast, then the real PE for the market is 22x. The strategists have added in an extra 5% in capital raisings. In other words: this market is not cheap at all.

Hope springs eternal?

On Monday, in my Weekly Insights, I highlighted how deep recession forecasts among economists are currently clashing with much more benign adjustments made by stock analysts, both here as well as in the USA. Only one of these two diverging estimates can be correct, one presumes.

Which is why the upcoming quarterly results reporting in the US could become quite important. We know the economic data will be awful from here onwards, but because of the built-in delays, they still won't show us the true extent of what is occurring on the ground. Maybe US companies can provide investors with more detailed insights?

In the meantime, UBS's Model Portfolio is sticking with a defensive bias, preferring stocks like APA Group ((APA)) and Aurizon Holdings ((AZJ)), Woolworths ((WOW)) and a2 Milk ((A2M)), as well as CSL and ResMed ((RMD)). The Portfolio doesn't like discretionary retailers or "Other Financials".

Probably fair to say other market participants and forecasters are hoping Australia's lockdown will last a lot shorter than the six months in UBS's projections, which should also keep the overall damage a lot less.

To read some of the other forecasts, this week's Weekly Insights "How Deep, How Long, How Far?" was published on the website on Thursday morning, 8 April 2020:

https://www.fnarena.com/index.php/2020/04/09/how-deep-how-long-how-far/

Great Businesses For Sale

The Australian share market offers exposure to a number of Great Businesses, exclaimed analysts at Wilsons recently. I could not agree more with that statement.

In line with my own recent writings, Wilsons is of the view investors should use this year's opportunity (Bear Market) to obtain exposure to those Great Businesses. They'll thank themselves for it in years to come.

Wilsons has lined up the following Great Businesses on the ASX that today can be added to portfolios at much cheaper share prices:

-Cochlear ((COH))
-ResMed
-Transurban ((TCL))
-Xero ((XRO))
-Amcor ((AMC))
-BHP Group ((BHP))
-Rio Tinto ((RIO))
-Aristrocrat Leisure ((ALL))
-JB Hi-Fi ((JBH))
-Wesfarmers ((WES))
-Woolworths
-Magellan Financial ((MFG))
-Macquarie Group ((MQG))
-CommBank ((CBA))
-Goodman Group ((GMG))

Those familiar with my own research and market analyses will notice a large overlap with my selection of All-Weather Performers, which can be accessed via the website:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

It's Dividend Cuts Galore

It started raining dividend reductions in 2019, remember? Australia was one of few countries that saw total dividends paid to shareholders contract on a twelve months view.

The more optimistic market participants believed it would prove a one-off despite a shaky looking economic environment. We will never know as the covid-19 pandemic and related recession have put all doubts aside: Australia is in a deep dividend recession.

2020 is going to end up a lot worse than 2019, that much already is a certainty.

What about resources stocks? Can they remain a beacon of hope amidst dividend deferrals, reductions and removals that are now taking place on an almost daily basis on the Australian share market?

Analysts suggest the odds are that both BHP Group and Rio Tinto might opt for the more prudent approach too, but both should still maintain relatively high payouts, potentially without any more buybacks and bonuses, for the time being.

Company boards still have a few months ahead of them before making decisions, but the resources research team at UBS has nevertheless decided to lower dividend forecasts for Newcrest Mining ((NCM)), Fortescue Metals ((FMG)), Whitehaven Coal ((WHC)) and Coronado Global Resources ((CRN)), and also for BHP.

While acknowledging they might be jumping the gun here, no payout is expected this year from Northern Star ((NST)), Western Areas ((WSA)), or OZ Minerals ((OZL)).

High Quality Shines

A Bear Market does not treat every stock in the same fashion, compare NextDC with Ardent Leisure for example, but plenty of High Quality businesses see their share price fall nevertheless. This is when savvy investors receive an invitation to grab the Bear Market opportunity.

Morgan Stanley has a long-standing tradition for keeping a watchful eye on the Higher Quality names in global markets, but unfortunately for Australian investors, its research never includes Australian shares, not even CSL (which does appear on other offshore experts' lists).

Cyclical "value" stocks will eventually lead the market higher when the current economic and healthcare misery have been put to bed, report the analysts, but there is still sufficient uncertainty out there to add more of the Quality companies whose share price has equally weakened.

As said, no ASX-listed stocks are on the analysts' radar, with the list of suggestions instead pointing towards Adobe, Alibaba Group, Alphabet (Google's parent), Apple, Mastercard, Microsoft, Schneider Electric, TSMC, Nike and Vivendi instead.

The colleagues at RBC Capital recently updated their Top 30 Global Ideas to own in 2020, and here we do have one Australian representative, in a Russel Crowe sort of way, since New Zealand born Xero ((XRO)) remains included. RBC Capital's list has some overlap with the Quality assessment from Morgan Stanley but it's selection is far less Wall Street-oriented.

Among the RBC chosen ones we find Barrick Gold, Crowdstrike Holdings, Diageo, Gilead Sciences, ING Groep, LVMH, Pfizer, Siemens, Visa and -acquired taste no doubt- Uber Technologies.

RBA Capital keeps a separate list specifically for Global Mining Ideas and here the focus has shifted to precious metals and fertilisers. Interestingly, portfolio weight for bulk commodities has been scaled back, as too happened to base metals. Australian representatives in this sector are BHP Group among the bulks, IGO ((IGO)) for base metals, and Gold Road Resources ((GOR)), Kirkland Lake Gold ((KLA)) and Saracen Mineral Holdings ((SAR)) in gold. Northern Star ((NST)) was included earlier but has now been removed.

Analysts at Jefferies equally compiled a list of what they regard are the strongest businesses franchises in Asia. Here too, we find a number of ASX-listed names; CSL, Goodman Group, Macquarie Group, Rio Tinto, Transurban and Woolworths are standing side-by-side with Alibaba Group, Kweichow Mouta-a, Tencent, Tata Consultancy, Nintendo, and Sony Corp.

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Market strategists at stockbroker Morgans simply refuse to darken the mood, instead cheering up their clientele with evergreen declarations such as "no crisis lasts forever" and "what has worked over the past 12-18 months will not suffice in an environment that has raised more questions than answers".

Morgans is hopeful the worst of the global pandemic should be over in a few months' time, after which economies can start their healing from the lockdowns and the virus casualties.

On that note, the strategists observe the ASX200 index seems to be finding support in the vicinity of 4,800, which was the support level in the selloff in 2016 and the peak of prices in 2011. At that level, Morgans is willing to stick its neck out and declare the Australian share market undervalued on a long-term view.

On that basis, Morgans has a clear preference for Defensives such as consumer staples, healthcare, telcos and infrastructure and utilities. Favourite names include Coles ((COL)), Freedom Foods ((FNP)), a2 Milk, Sonic Healthcare ((SHL)), ResMed, Pro Medicus ((PME)), Telstra ((TLS)), NextDC ((NXT)), APA Group ((APA)), Spark Infrastructure ((SKI)), AGL Energy ((AGL)), Transurban, and Sydney Airport ((SYD)).

Also preferred are Online Media with REA Group ((REA)) and Iress ((IRE)) the two sector favourites while Agriculture is also liked with Elders ((ELD)) the sector favourite.

A more Neutral stance has been given to Industrials and Resources. Here the favourites are Amcor and Aurizon Holdings, and Rio Tinto, BHP Group, OZ Minerals, Woodside Petroleum ((WPL)) and Beach Energy ((BPT)).

Least preferred segments of the local share market are consumer discretionary and anything financial. Among the consumer stocks, Morgans likes Domino's Pizza ((DMP)), JB Hi-Fi ((JBH)), and Aristocrat Leisure. Among financials, the favourites (or should that be least disliked?) are Westpac ((WBC)), Macquarie Group, and Magellan Financial.

Special Note: Morgans still sticks with its valuation based rankings for banks, of which it believes a lot of bad news still lays ahead. When ignoring valuations and focusing instead on respective assessments of risk, then CommBank becomes most preferred in the sector.

My five cents worth: ignore valuations and consider CBA the best among the best in the sector. Not only will CBA's dividend to shareholders remain the most resilient, its total investment return has proved superior over the past two decades, both during the good times and the bad times. I find it incredibly hard to see how this will change. For this reason alone, I do not understand every analyst and his dog's fixation with "valuation".

CommBank is the superior choice. That's why you pay a premium. Full stop. How difficult to understand is this, really?

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Analysts at Morningstar, which many among you will still remember as Ian Huntley's, have identified four industrial companies in Australia that should remain relatively immune amidst covid-19 impact.

On Morningstar's assessment, the global economy is en route for a GDP contraction of -1.5% this calendar year, hence a robust and reliable business model cannot possibly be valued enough in such an environment.

The analysts preference lays with defensive revenues, undeniably strong balance sheet metrics and preferably accompanied by some sort of economic moat and a still undervalued share price. As such, the analysts have chosen Amcor, Brambles ((BXB)), Orora ((ORA)), and Cleanaway Waste Management ((CWY)).

****

Technology analysts at Credit Suisse readily admit the local sector will not prove immune from covid-19 disruption, but overall, predict the analysts, most local tech names should be able to report comparatively stronger results in the coming reporting cycles than many other segments of the share market.

This Bear Market offers opportunity thus and Credit Suisse's sector favourites are (in order of preference) Xero, Infomedia ((IFM)), Appen ((APX)), and Life360 ((360)).

****

Macquarie has been advocating investor portfolios retain a defensive bias while the world tries to figure out how exactly this year's pandemic will play out and impact on the global economy.

Macquarie's 14 best ideas for the forthcoming recovery are:

-Aristocrat Leisure
-Amcor
-Cochlear
-Cleanaway Waste Management
-Fortescue Metals
-Goodman Group
-Harvey Norman ((HVN))
-Northen Star Resources
-Medibank Private ((MPL))
-Pushpay Holdings ((PPH))
-REA Group
-Steadfast Group ((SDF))
-TechnologyOne ((TNE))
-Transurban

The Mighty 23

Richard "Coppo" Coppleson wrote himself into local legendary status when at Goldman Sachs. He has found a second career at Bell Potter nowadays where he still produces a daily end-of-the-day market summation that is still popular around the tarps, and beyond.

This week The Coppo Report revealed there were 23 stocks in the ASX200 whose share price is up since January 1st. Those 23 names are:

-NextDC
-Elders
-Fisher & Paykel Healthcare ((FPH))
-a2 Milk
-CSL
-ResMed
-Ansell ((ANN))
-Fortescue Metals
-Saracen Mineral Holdings
-Evolution Mining ((EVN))
-Silver Lake Resources
-Chorus ((CNU))
-Coles
-Metcash ((MTS))
-TPG Telecom ((TPM))
-Costa Group ((CGC))
-Bega Cheese ((BGA))
-Gold Road Resources
-Northern Star
-AusNet Services ((AST))
-Spark New Zealand ((SPK))
-Graincorp ((GNC))
-Pro Medicus ((PME))

The list provides a nice overview of what the market has decided is solidly defensive in the current pandemic plus economic recession context: food, cloud and communication, (parts of) healthcare, (certain) utilities, and gold miners.

(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. 

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