Part Two of the calendar year's first update on Conviction Calls for the year ahead.

By Rudi Filapek-Vandyck, Editor FNArena

On Thursday afternoon, while I was writing Part One, I couldn't help noticing the local share market was charging higher. I thus tweeted: Question that needs to be asked: is that a raging bull out there or are we witnessing a herd of lemmings?

To which a few fellow-twitterers responded by asking: what is the difference?

The difference, of course, is a sustainable rise in scenario number one and the opposite, exact timing unknown, under scenario numero secundo.

Here's what market strategists at CLSA had to say on the same day: "With sentiment indicators at or near record levels, we see global equity markets vulnerable to a short 2- to 3-week lasting pullback/washout into a second half of January, which we would expect to be the set up for another rally in equities into April/May.

"From there we would expect to see selectivity and distributive signals develop."

I cannot help but think about what the local February reporting season is going to offer. My best guess is: elevated volatility. Companies better meet or beat market expectations, or else.

****

I received an invitation to contribute to a general outlook story for the Australian share market. Turned out, they liked my contribution so much at Finder.com.au, they turned it into a stand-alone story for FinderX.

So here it is, my outlook story for Australian equities: https://www.finder.com.au/investing-in-2020-volatility-and-opportunities

****

Contrary to years prior, analysts at stockbroker Morgans have been rather slow to jump back into action post the 2019 end-of-year holiday break, but the strategy desk was fast as lightning to get the short list of Best Ideas across the national network of brokers and advisors.

These Best Ideas, explains the broker, are those stocks believed to offer the highest risk-adjusted return over the coming twelve months, supported by a higher-than-average level of confidence. Another way of looking at it is, these are Morgans'  most preferred sector exposures.

Which is why Best Ideas consists of no less than 26 names; Telstra ((TLS)), Treasury Wine Estates ((TWE)), Woodside Petroleum ((WPL)), Westpac ((WBC)), Sonic Healthcare ((SHL)), Transurban ((TCL)), Aurizon Holdings ((AZJ)), APA Group ((APA)), ResMed ((RMD)), Cleanaway Waste Management ((CWY)), Link Administration ((LNK)), Orora ((ORA)), Frontier Digital Ventures ((FDV)), PWR Holdings ((PWH)), Lovisa Holdings ((LOV)), Baby Bunting ((BBN)), Cooper Energy ((COE)), Kina Securities ((KSL)), Generation Development ((GDG)), Pro Medicus ((PME)), Volpara ((VHT)), Over The Wire ((OTW)), Iress ((IRE)), Orocobre ((ORE)), Red 5 ((RED)), Aventus Group ((AVN)), and APN Convenience Retail REIT ((AQR)).

Oil Search ((OSH)) and OZ Minerals ((OZL)) have both been removed early in the month, while Aurizon is the sole newcomer.

****

Portfolio managers at Morgans kept a low profile during December and early January, only switching out of Oil Search into Woodside Petroleum, and selling OZ Minerals and buying South32 ((S32)) instead.

****

Bell Potter released its selection of most favoured stocks for 2020 and regular readers of my research into All-Weather Performers will notice the overlap. See the website. Sorry, paying subscribers only.

Bell Potter's selection includes Amcor ((AMC)), Aristocrat Leisure ((ALL)), CSL ((CSL)), Downer EDI ((DOW)), Goodman Group ((GMG)), Macquarie Group ((MQG)), Netwealth ((NWL)), Sonic Healthcare ((SHL)), Woolworths ((WOW)), and WorleyParsons ((WOR)).

****

An update by Morgan Stanley strategists on their 37 stocks-selection of Global Best Business Models has revealed an underperformance versus the MSCI ACWI (benchmark for global equities) last year; 19.9% versus 22.9%.

The Best Business Model is an attempt by Morgan Stanley to identify companies that have the best business model in their sector globally supporting the belief that such superiority will translate into outperformance in the share market over the medium to long term. The analysts use additional screening for profitability, use of capital, balance sheet risk and fundamental value as well as Environmental, Social and Governance (ESG) factors.

One could argue their research is an in-depth, quantitative attempt to identify All-Weather Performers across equities worldwide, though I am 100% convinced we'd clash when discussing some of the outcomes from the research. For instance, the 37 stocks include Boeing and iron ore producer Vale.

Other stocks on the list are Amazon, Visa, Komatsu, Tencent, Walt Disney, Eli Lilly, Texas Instruments, Roche, Adobe, Honda Motors, Nestle, Costco, Blackrock, LVMH, UnitedHealth, JP Morgan Chase, and UBS.

****

One of this year's Conviction Calls that has had a bit of a rough start to the new calendar year is CLSA's Top Buy recommendation for Super Retail ((SUL)), considered heavily undervalued and likely to regain investor interest on the back of renewed interest in the value part of equity markets.

CLSA has joined many others in anticipating 2020 will witness the come-back of value stocks in generating outperformance on the back of a resumption in global growth.

At the start of the year, with the share price falling just short of $10.50 on the back of a positive swing upwards in December, CLSA's price target was suggesting potential total return of no less than 33%.

Clearly, not everybody shares the same view. The shares have trended lower since and on Thursday JPMorgan/Ord Minnett chimed in with a downgrade to Hold which promptly pulled the share price down by close to -6% on the day. Don't expect the supporters at CLSA to change their view anytime soon.

And that, as they say, makes a market.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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

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

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

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

First update for the new calendar year and already plenty of material to combine. Which is why Part Two will follow suit on Friday morning (tomorrow).

By Rudi Filapek-Vandyck, Editor FNArena

First observation to make is that one of my personal favourites in the Australian basket of Technology Superstars (a la Sam Neill and Russell Crowe), accountancy cloud software services provider Xero ((XRO)), has made it into the Global Top 30 Best Ideas for 2020 compiled by analysts at RBC Capital.

Minnow Xero (in the bigger scheme of things) has joined the likes of Alibaba, Alimentation Couche-Tard (see also Caltex Australia ((CTX)), Barrick Gold, Diageo, Gilead Sciences, Salesforce.com, Uber Technologies, Visa and 21 other names on RBC's shortlist of best investments to own for the year ahead.

Before anyone starts mumbling about a price-earnings (PE) ratio that is now approaching 1000x (Not a typo. Check it out yourself via Stock Analysis on the FNArena website), here's a quick summation of why RBC Capital is convinced this stock can still be bought and owned beyond the immediate outlook:

-Xero is the only global accounting software player built in the cloud as a SaaS platform since inception for small-medium enterprises (SMEs). This gives the company  material global scalability advantages versus competitors who started life as desktop or on-premise software packages;

-Xero's Australian market share is projected to double to circa 65% by 2025 with market share in New Zealand to surge to around 75%;

-In the UK competitor Sage is struggling to cope with its transition and Xero's market share is expected to triple to circa 24% by 2025;

-Things look tougher in the US where incumbent Intuit is better in defending its home turf. Nevertheless, RBC Capital believes a tripling in market share to 2% by 2025 should be possible, cementing Xero's position inside the US Top Three.

I won't bother you with any of the financial implications other than that the analysts estimate Xero's total addressable market (TAM) in Australia and New Zealand alone should reach NZ$1bn per annum while markets in the UK and the US are twice that size and 10x that size respectively.

Xero is proudly owned in the FNArena/Vested Equities All-Weather Model Portfolio and has been one of the best performing investments over the past five years.

Paying subscribers have full access to my research into All-Weather Performers via a dedicated section on the website where Xero sits under the category of Emerging New Business Models, alongside Altium ((ALU)), NextDC ((NXT)), and others.

RBC Capital's price target for the year ahead is $90. At the time when the Global Top 30 report was released in December, the shares were trading at $81.05. This compares to $86.27 at the time of writing today (it's Risk On this week, alright).

****

Analysts at CLSA, long term supporters of the premiumisation story that has unfolded at Treasury Wines ((TWE)) have -again- reiterated their High-Conviction Buy rating for the stock. CLSA does not ignore the fact that things have gotten tougher in the US market, which is why their forecasts have been reduced. But there is so much more to like about this company and its prospects, in their view.

On a relative comparison, vis-a-vis the broader market, Treasury Wine shares are now trading near an historical low, further reinforcing CLSA's conviction investors will be rewarded. The price target of $26 (down -50c) suggests a total return in excess of 50% over the coming twelve months.

The obvious comment to make here is that if climate change continues to wreak havoc with agricultural assets and properties, both in Australia and overseas, it remains yet to be seen exactly when and to what extent grape growers and wine producers shall be impacted, eventually.

****

Stock pickers at Goldman Sachs equally updated their High Conviction List recently. The selection currently consists of 14 top picks; A2 Milk ((A2M)), Afterpay ((APT)), Domino's Pizza ((DMP)), Freedom Foods ((FNP)), IMF Bentham ((IMF)), Lendlease Group ((LLC)), Lifestyle Communities ((LIC)), National Australia Bank ((NAB)), News Corp ((NWS)), Opthea ((OPT)), Origin Energy ((ORG)), Seven Group Holdings ((SVW)), St Barbara ((SBM)), and Telstra ((TLS)).

****

In similar fashion, small and micro cap specialists at Canaccord Genuity have just released a fresh update on their Top Australian Stock Picks, consisting of the following 16 stocks; Bellevue Gold ((BGL)), Bigtincan Holdings ((BTH)), City Chic Collective ((CCX)), Carnarvon Petroleum ((CVN)), Elmo Software ((ELO)), Healthia ((HLA)), Kathmandu Holdings ((KMD)), Macquarie Telecom ((MAQ)), MNF Group ((MNF)), Nearmap ((NEA)), Nickel Mines ((NIC)), Next Science ((NXS)), NEXTDC ((NXT)), Primero Group ((PGX)), the company formerly known as Ausdrill, Perenti Global ((PRN)), and Resolute Mining ((RSG)).

****

At Bell Potter, technology analysts Chris Savage and TS Lim have now nominated Appen ((APX)) as their key pick for the sector. Catapult Group ((CAT)) and Citadel Group ((CGL)) complete the stockbroker's Top Three of technology sector picks.

Since the prior update in September, TechnologyOne ((TNE)) has been removed due to a favourable response post the release of FY19 financials. The duo had been carrying WiseTech Global ((WTC)) as a Conviction Sell for a long time. That changed late last year too when, under attack from offshore short sellers, the share price weakened considerably.

As stated earlier, more to follow in Part Two.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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

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

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

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

Dear time-poor reader: Quality has proved the absolute winner in Australian equities, but has the time come to diversify through Value?

Time To Diversify The Portfolio?

By Rudi Filapek-Vandyck, Editor FNArena

As another calendar year is drawing to its natural end, time has arrived to once again reflect upon what might have been and what has actually transpired since the world was staring into the abyss this time last year. If not now then when, n'est-ce pas?

Last year an overconfident Federal Reserve, alongside other central bankers around the world, thought it had successfully manufactured an escape from the economic straight jacket that has kept economies into a slower-for-longer framework post GFC, with occasional bouts of threatening mini-crises along the way.

It looks like a strange aberration today, but the Fed actually thought it could continue to hike interest rates while also running down the size of its balance sheet and the world would never notice a difference. Odd.

Maybe the most apt description is the one I have been using in my on-stage presentations to investors throughout years gone by: in theory there is no difference between economic theory and practice, yet in practice there is.

Luckily, for all of us who participate in financial markets, central bankers quickly realised the error in their plans and policies and swiftly reversed into providing further support through abundant liquidity. More than 20% in equity markets return later, here we now are, still dependent on excess liquidity sloshing through the global financial system.

The key question has not changed: how on earth will we ever get off this drug?

This dilemma will remain on central bankers' mind as they worry about a distorted world, constantly in change, with long term future problems accumulating while politicians play the "nothing to see here"-game.

With the stakes this high, and answers so few the best advice anyone can provide to investors today is most likely don't feel too comfortable after what might turn out the best investment year post GFC.

Next year is bound to be different.

****

On the micro level, it appears growing parts of the investment community are preparing for a resumption of the so-called "reflation"-trade. These experts see global indicators improving. Some are even boldly predicting economic growth, inflation, bond yields and corporate profits will all noticeably rise as we travel through calendar year 2020.

And on the back of this resumption in global growth miners, energy producers, banks, building materials, contractors, cyclical industrials and discretionary retailers, even the agri-sector (as long as it rains), could turn into Must Have-exposures for investors looking for outperformance next year.

Count me among the sceptics.

This is not to say this narrative of hope cannot temporarily conquer the mindset of financial markets. It has done exactly that on multiple occasions over the decade past.

The most violent switch in market momentum occurred in the second half of calendar 2016 when stocks like Transurban ((TCL)), NextDC ((NXT)) and CSL ((CSL)) lost -20% in a heartbeat and CommBank ((CBA)), Woodside Petroleum ((WPL)) and BHP Group ((BHP)) lifted by similar magnitude at the same time.

But it never lasts for long. It didn't back then, and it hasn't on every other occasion, including in recent months.

Some of you, regular readers of my Weekly Insights, might think I am the closest to a typical Growth investor you'll ever meet. I never hesitate to warn that buying "cheap" stocks in today's environment is not necessarily the smartest thing to do. The truth is I am not your typical Growth investor. I am all about Quality.

One of the untold stories about the Australian share market post 2013 is that despite all the attention (and criticism) that has centred around Growth vs Value, Small Caps vs Blue Chips, Momentum and Overvaluation/Exuberance, the true outperformers have been that selective little basket of domestic High Quality companies including CSL, Macquarie Group ((MQG)), REA Group ((REA)), ResMed ((RMD)), Altium ((ALU)), and TechnologyOne ((TNE)).

CSL is now the undisputed number two for the local index, while Macquarie is inside the Top8, REA Group has climbed into the Top30 and TechnologyOne is part of the ASX200 too.

You don't get there unless you put in a consistent and prolonged outperformance against the rest of the market.

Starting from a Top Down approach that tried to incorporate most of the threats and challenges that have remained with the world and global markets post GFC, it has consistently been my view the best risk-reward investment strategy was through companies with exceptional qualities, including the ability to sustainably deliver for shareholders, no matter the weather out there.

Certainly, my research and managing the All-Weather Model Portfolio have made me truly realise the value of owning "Quality" in the share market. Not as a throw-away label too oft used by professional fund managers every time they discuss their top holdings or recent purchases, but "Quality" in the only sense it counts for long term, Buy & Hold investors: the ability to continue creating added value for shareholders, time and again.

The reason as to why this places me closer to Growth than to Value investors is because I quickly learned such High Quality stocks never trade at genuinely cheap valuations on the stock market. They are literally too High Quality for that. This is one key insight most investors misinterpret.

Assuming you are a longer term investor and your preferred holding period is "forever" (wink to all the Warren Buffett fans out there), then good investing seldom starts with a beaten down, kitchen-sink low valuation.

Good investing starts with discovering which companies on the stock exchange are the Special Ones. Then pick your strategy and your entry point, and don't get side-tracked by all the noise and movement around you.

To those who now are confused, insulted, or both I have one simple message: read the two quotes below. They are from Charlie Munger. Yes, that Charlie Munger. Then tell me again where my analysis and observations are different from Charlie's?

"If you're right about the companies, you can hold them at pretty high values."

"Over the long term, it's hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6% on capital over forty years and you hold it for that forty years, you're not going to make much different than a 6% return - even if you originally buy it at a huge discount. Conversely, if a business that earns 18% on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result."

Je suis Charlie.

****

While the virtues of owning High Quality companies have become irrefutable to observers who pay as close attention to the share market as I do, if one's focus is solely on such companies occasionally there are disadvantages too.

I still vividly remember September 2016 through to January 2017 when buying instantly dried up for just about every single stock present in the All-Weather Model Portfolio, as well as the stocks I chose to add.

All the market could think of was buy resources, buy banks, sell yesterday's winners. It's a tough call to stick to the long term strategy when short term everything seems to go awry.

Plus, of course, I could be wrong about the validity, timing and duration of the next reflation trade. Maybe governments around the world are truly and genuinely prepared to support their central bankers' effort through significant investments in infrastructure and tax reform. Maybe Modern Monetary Theory is the most effective response to the liquidity quandary the world is facing. Maybe inflation does come roaring from out of nowhere in a few months' time. Maybe Xi and Trump can truly stitch together a genuine growth boosting armistice.

Maybe at a time when market positioning is once again extremely one-sided, and there is latent desire by the professional community to have that rotation into "Value" stocks, maybe this is also the right time to re-think the concept of portfolio diversification?

We all like the idea of backing winners, and to continue backing winners, but this may not be as easy as it sounds when rotation arrives, gets interrupted, founders and tries again. Which is essentially the scenario that has been on display inside the Australian share market since September.

One complicating matter for investors in local equities is, of course, the extremely polarised domestic economy, supported by a hesitant RBA while the government in Canberra remains focused on delivering the promised budget surplus, while parts of the country are suffering from drought and fires, which festers an environment that is forcing companies to issue profit warnings. The most commonly heard warning remains: avoid the booby traps!

For those investors whose portfolios are too much weighted towards Growth and/or Quality stocks, and that are currently contemplating re-adjustment, the goal has to be to seek diversification without taking on board too much risk. In practice this means adding "Value" stocks that are less likely to issue a profit warning or other forms of negative news.

As far as the All-Weather Model Portfolio is concerned, not all included stocks have performed in unison over the year past, and this now means portfolio diversification has been achieved by holding on to stocks such as Amcor ((AMC)), NextDC ((NXT)), GUD Holdings ((GUD)), Link Administration ((LNK)), and Reliance Worldwide ((RWC)).

On various days, it's truly fascinating to observe how market momentum departs the likes of CSL, Viva Energy REIT ((VVR)) and Macquarie Group, but also Xero ((XRO)), Altium and Appen ((APX)), and seeks returns through Amcor, Link Administration and Ramsay Health Care ((RHC)) (and various variations as every week progresses).

****

In terms of portfolio performance, this second half of calendar 2019 has largely reversed the outperformance of "Value" coming out of the late 2018 bear market; this despite repeated effort by market participants to trigger market rotation and keep it going for longer.

Look no further than the (out)performance of the FNArena-Vested Equities All-Weather Model Portfolio to support the above statement. Note this includes the Portfolio holding on to smaller cap technology stalwarts that have been under heavy attack since September.

For the near five months up until Friday, November 22nd, total Portfolio return ex-fees had accumulated to 7.63% against 3.22% for the ASX200 Accumulation index.

Separated by month, the respective returns clearly show the market swings between Value and Growth/Quality:

All-Weather Model Portfolio
-July 2.95%
-August 0.47%
-Sept 0.88%
-October 1.31%
-Nov (22) 1.82%

ASX200 Accumulation Index:
-July 2.94%
-August -2.36% (minus)
-Sept 1.84%
-October -0.35% (minus)
-Nov (22) 1.19%

Investors should also note the All-Weather Portfolio has been de-risked (we believe) by adding some exposure to gold and to ASX-listed yield instruments that have a low correlation to the share market in general. Plus we always hold some cash. The comparison between All-Weather Portfolio and the Index is thus not apples for apples, 100% equities on both sides. It's closer to 75% equities versus 100% Index.

The experience since early 2015 (the Portfolio is nearly five years old) has been that a reduced exposure to the share market, as a risk reduction strategy, does not impede outperformance. Calendar year-to-date the return is 21.81% versus 23.58% for the Index.

Special Note: Weekly Insights next week will be the final one for this calendar year. It shall return late January/early February to help you preparing for the February reporting season, and beyond.

Rudi On Tour In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 25th November 2019. 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/index2.cfm?type=dsp_signup

Dear time-poor reader: why CSL continues enjoying upward momentum plus further updates on broker Conviction Calls

In this week's Weekly Insights (published in two parts):

-Positive Momentum Continues For CSL
-Conviction Calls
-Focus On Index Changes
-Focus On Index Changes (2)
-Tickets to Conference on Agricultural and Veterinary Biotechnology [STILL AVAILABLE]
-Rudi Talks
-Rudi On Tour

[The non-highlighted items will appear in Part Two on Friday]

Positive Momentum Continues For CSL

By Rudi Filapek-Vandyck, Editor FNArena

Margin pressure is emerging for collectors and fractionators of human plasma, and this means more good news for CSL ((CSL)), the best and lowest cost operator in the sector.

To understand the industry dynamics it is important to know that operational margins and returns are derived from so-called "last litre" economics. In practice, plasma fractionators end up with two proteins; immunoglobulin (IG) and albumin. Demand for the first continues to grow at 9%-10% per annum while for the latter growth is less than half that.

This is a problem as if a fractionator is left with unsold albumin, even with high demand for IG, the operating margin suffers (and potentially quite significantly too). The current environment is one wherein cost pressures are to the upside, so the combined effect of these two dynamics can be quite profound, if no action is taken by the industry.

UBS analysts on Monday alerted local investors to this. They also made the forecast the most likely decision by the industry is to increase the price for IG and accept that albumin's price will likely become even cheaper as just about everybody tries to collect more plasma to satisfy the high demand for IG. This too implies further upward pressure on costs.

The market for albumin might face the prospect of oversupply, unless China proves its saviour. UBS notes not every player in the industry has equal access to the Chinese market, which means oversupply might materialise in certain regional markets.

Combining these opposing dynamics, and their intertwined impact for the industry, UBS analysts believe the price of IG needs to rise by circa 7% to preserve current margins for major industry participants.

The upshot for CSL is that not only do the company's collection centres operate more efficiently than the competition, the company is also adding additional collection which should translate into enlarged benefits. In simple terms: CSL Behring's margin should expand while competitors are trying to preserve theirs. On top of this come increased revenues and more market share.

This is unlikely a short-term phenomenon and the compounding effect on projected profits and cash flows for CSL means UBS's valuation for the company has jumped to $295 (from $265) on what appear relatively benign upgrades to margin and volume forecasts. Apart from the projected impact that has now been incorporated into the broker's freshly updated modeling, this also implies there remains potential for further upside surprise.

UBS implicitly acknowledges this by explaining it has also modeled an outcome with more and additional upside surprises materialising. This scenario takes the CSL valuation to $319 per share.

Now, there is nothing wrong about getting excited by further upside potential for the quality operator that is CSL, but group profits and margins equally depend on other divisions to perform in the year(s) ahead and not everything tends to always go CSL's way. Some of its sales in the Specialty Products division are under pressure, and are likely to face more pressure.

This, by the way, is nothing unusual. Products come and go, peak in popularity and ultimately might be replaced, either by a new product developed in-house or by the next innovation developed by a competitor. Such has been the dynamic since the company listed on the ASX 25 years ago. This easily explains why 10% of annual sales is reinvested into the business every year.

For the short to medium term, at least, it appears the favourable context for the collection of human plasma is very much favouring more upside for CSL, even with the potential for some sales and margin erosion elsewhere in the group. This is also why UBS is not banking on the ultimate bullish scenario whereby everything plays out positively.

On Monday, CSL shares surged to a new all-time high of $270.56 on the back of the UBS research release. CSL's performance since 1st January has been roughly double the broader market's gain.

Investors should be aware that a sudden violent switch in market momentum between "Growth & Quality" and "Value & Laggards" -a la late 2016- can always put the stock temporarily out of favour with investors. Equally, a sudden bear market for the US dollar would represent a formidable headwind.

As far as operational dynamics are concerned, however, it doesn't look like the CSL success story is nearing its end anytime soon.

Conviction Calls

The guardians of Wilsons list of Conviction Calls made a few changes since September. GUD Holdings ((GUD)) is no longer on the list as the share price has rallied steeply since bottoming in August. In its place the list now includes Class ((CL1)) and ARB Corp ((ARB)).

Class has been added given Wilsons has turned more optimistic on forecast sales. ARB Corp's valuation had fallen far enough to be considered "compelling".

Other stocks included in the selection of Conviction Calls are EML Payments ((EML)), ReadyTech ((RDY)), Whispir ((WSP)), Ridley Corp ((RIC)), ImpediMed ((IPD)), National Veterinary Care ((NVL)), Countplus ((CUP)), EQT Holdings ((EQT)), Pinnacle Investments ((PNI)), Noni B ((NBL)), Perenti Global ((PRN)), Mastermyne ((MYE)), and Whitehaven Coal ((WHC)).

It has to be noted, Wilsons' list of conviction calls has absolutely smashed it over the past six months with a total combined return of 11.56% versus a Small Ordinaries Accumulation Index that could not muster a positive performance (-1.84%) over the half year ending on 31 October 2019.

****

Better not to mix up the two, but Wilsons also runs an Australian Equity Focus List. This list saw the removal of Medibank Private ((MPL)) following the health insurer's profit warning last week. Wilsons believes the sudden spike in claims inflation exposes the premium valuation multiple the stock has been enjoying.

National Australia Bank ((NAB)) was kept on the Focus List as Wilsons saw the strongest sector result of the three major banks reporting recently. The absence of a capital raising a la Westpac is seen as an opportunity for the NAB share price to reduce the valuation gap with its peers.

News Corp ((NWS)) equally did not lose its inclusion. Wilsons sees News Corp as a "corporate simplification strategy", which means further disappointment in short term earnings matters less.

****

Amidst all the market talk about "Value" coming back in favour, it remains remarkable -to put it mildly- portfolio strategists at Macquarie continue to preach caution. Macquarie very much favours a defensive bias with its Model Portfolio comprising some 40% of bond proxies and defensives.

Over at UBS, there is a lot of sympathy for the Macquarie view. UBS's Model Portfolio, however, has large overweights in CSL ((CSL)), REA Group ((REA)) and Altium ((ALU)); the strategists' three most preferred exposures for the twelve months ahead.

UBS does not like InvoCare ((IVC)), Sims Metal Management ((SGM)) or IOOF Holdings ((IFL)) and the Portfolio has made the tactical decision to move underweight AREITs for the month of November. At the same time, the portfolio reduced its underweight in Metals and Mining ex Gold.

UBS still doesn't like the banks and had increased the sector's underweight exposure.

****

Over at Morningstar, market analysts have updated their Best Ideas (read: stocks with most conviction) by adding G8 Education ((GEM)), Southern Cross Media ((SXL)), and Viva Energy ((VEA)). Domino's Pizza ((DMP)) and Nufarm ((NUF)) have been removed.

Morningstar's list of Best Ideas now contains ten stocks with the remaining seven being Ardent Leisure Group ((ALG)), Computershare ((CPU)), Iluka Resources ((ILU)), Link Administration ((LNK)), Pact Group ((PGH)), Telstra ((TLS)), and Woodside Petroleum ((WPL)).

Tickets to Conference on Agricultural and Veterinary Biotechnology

Pitt Street Research, whose work can also be found on the FNArena website: https://www.fnarena.com/index.php/pitt-street-research/, is organising its inaugural Life Sciences Conference with the focus on Agricultural and Veterinary Biotechnology.

The Conference takes place in Sydney's CBD on November 28th and runs from 8.45am till 1pm on the day. ASX-listed companies presenting include PainCheck, Anatara Lifesciences, Abundant Produce, PharmAust ltd, CannPal, EM Vision and Osteopore.

FNArena has ten tickets available for investors who'd like to attend this event at no cost; paying subscribers receive this opportunity first. If interested, send an email to info@fnarena.com

Rudi Talks

Last week's audio interview about portfolio rotation and what it means for the Aussie share market:

https://www.youtube.com/watch?v=bZ8AybO5aDE

We created a YouTube channel for such interviews, which was recently upgraded (technically speaking):

https://www.youtube.com/watch?v=bZ8AybO5aDE&list=PLVMOgaPqrk1s55RujzgMerIzdOX2RrXl9

Rudi On Tour In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 11th November 2019. 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 shall follow on Friday morning).

(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/index2.cfm?type=dsp_signup

Dear time-poor reader: what can investors learn from 25 years of CSL on the ASX?

In this week's Weekly Insights:

-25 Years CSL: What Can We Learn?
-WiseTech Global Is A Target Now
-Rudi Talks
-Rudi On Tour

25 Years CSL: What Can We Learn?

By Rudi Filapek-Vandyck, Editor FNArena

This month marks the 25th anniversary of CSL ((CSL)) as a listed company on the ASX. In fitting fashion, shares in Australia's highest quality global success story surged to an all-time high of $253 in October.

Looking back, corrected for share splits, the initial opportunity to add some CSL shares to anyone's portfolio translates to circa 76.7c per share on the first day of public trading. In other words, regardless of what the immediate future holds, the investment return from owning CSL shares over the period has been nothing short of ginormous.

This realisation becomes even more so when one considers the share price graph over the period shows what looks like a steady, gradually rising uptrend unlike, say, Fortescue Metals which also reached a new all-time high in 2019.

That steady, almost un-natural looking performance has made CSL today's third largest component of Australia's leading share market index, the ASX200. Now also consider the fact that Commonwealth Bank shares peaked in May 2015, along with the other banks, and that BHP Group shares in 2014 were trading above $40, and one can only conclude CSL's performance has been even more impressive.

If it hadn't been for index heavyweights such as CSL, Macquarie Group, Transurban and Goodman Group it would have been near impossible for the ASX200 to reach for a new all-time high in 2019. Yet, the sad fact remains most investors don't own shares in CSL, though some may have owned shares at some point throughout those 25 years.

The usual explanations heard are "too expensive" and "cannot get my head around it". This goes both for the self-managing retail crowd as for professional fund managers. The logical observation to make here is that everybody who bought shares in the company, no matter when or at what price, is today sitting on a profit.

This story is not aiming to convert the masses. With the shares trading on FX adjusted, forward looking estimate of circa 37x FY20 earnings per share, it will nearly always be too "expensive" for typical value-seekers, while the implied 1.2% dividend yield is too low for the income hungry.

Maybe, without owning shares in the company, there are some valuable lessons to be learned from CSL for investors of all kinds and various levels of experience?

***

For starters, it is easy to declare CSL Top of the Pops, King of all Kings, the Ultimate Performer in the share market when total return has once again exceeded 40%, or about double the index for calendar year 2019 thus far. In the perception of many an investor and/or market commentator, a positive view on a company goes hand in hand with the performance of its shares in the here and now.

While CSL management is highly regarded, as is the business itself, it is good to realise there are other forces at work in the share market that temporarily at least can hold back, or further stimulate share prices higher. In CSL's case, the easiest identifiable external factors at play are the Australian dollar (in particular against USD and Swiss Franc), the level and direction of global bond yields, and market sentiment generally towards the healthcare sector.

In 2019, all three major external factors have ultimately aligned to push CSL shares to a new all-time high. This is not necessarily always the case. When bond yields rise strongly in a short time-span, as they did in late 2016, the CSL share price temporarily faces a formidable headwind.

When the Aussie dollar strengthens against foreign currencies this too tends to create a headache, and similar underperformance follows when investors temporarily favour cheaper looking, beaten down cyclicals like they did when the GFC bear market ended in 2009-2010.

Another complicating matter is the fact that CSL is now the number three index component in Australia which makes the stock more susceptible to general market sentiment. Whereas in the past the shares were at times able to not necessarily follow general market sentiment down, such idiosyncratic behaviour is a lot more difficult when large sell orders aiming to replicate the index hit the local market.

Most importantly, however, is that 25 years from the past show that whatever external factor is holding back the stock at any given point, as long as the business continues to perform, its shares will ultimately perform too. As such, every period of weakness or stagnation in the share price ultimately proved a profitable entry point.

This takes us to the operational reliability that has become one of the trademark characteristics of CSL. How come most businesses cannot replicate the solidity and sustainability of CSL? Never a profit warning. Seldom an operational disappointment. This company, throughout various managers, has an almost alien-like track record in a share market that regularly shocks through corporate failures and mishaps.

The answer is two-fold. Firstly, CSL has managed to transform itself into the highest quality benchmark for the plasma industry globally. In concrete terms, it operates collection centres more efficiently than anyone else, which means it can open additional centres quicker and earn its investments back in a shorter time, while also enjoying a higher return on each centre, young and old.

In addition, in line with general industry practice, CSL invests circa 10% of annual revenues back into its business to expand through new centres and to constantly develop new products. It has a rich history for discovering and developing new therapies and medical solutions, which is necessary in the fast-moving and ever evolving biotech-medical world.

Also, CSL managers have built an admirable track record in acquiring new assets and turning them into future growth engines. The latest such acquisition was Novartis' flu vaccines business which was loss-making at the time of purchase in 2014. CSL has managed to integrate these assets into its own division much quicker than most thought possible, and those losses have now become profits, which are growing.

In line with CSL's high quality operational label, the flu vaccines business sits at the forefront of new innovations in this space.

And yet, what is equally important is that the global market for plasma is growing pretty much constantly. While it could be argued plasma is a commodity, like iron ore or wheat, its market dynamics are much more favourable because supply can hardly keep up with demand - a situation not expected to change anytime soon.

As a matter of fact, the current situation whereby the US provides most of the world's plasma supply, also because the country allows blood donors to be paid for their contribution, is simply not sustainable. Ultimately, other countries will have to change their laws and regulations so that more supply can come from non-US donors. China is an emerging new market on its own.

The sum-total of all of the above is that CSL should be able to continue its path of growth and further creation of shareholder value for as long as it retains its position as best in class inside the industry, and as long as nothing fundamental changes to the underlying dynamics for the global plasma market overall.

****

So what important lessons can investors draw from 25 years of CSL on the ASX?

-It is much easier to create shareholder value when industry dynamics are supportive. This is why cyclical companies can have "quality", but they cannot have consistency and/or reliability.

-A good business is not the one that milks its current opportunity to the max. True quality shines through via the ability to add new avenues for growth. CSL today is not simply the ex-government organisation from the early nineties 25 years older. New geographies, new divisions, new products and new customers all make CSL a materially different proposition today. Investors can draw a comparison with the likes of Macquarie Group ((MQG)) or Aristocrat Leisure ((ALL)); large cap locally listed companies that have successfully added additional avenues for growth in recent times.

-A good company steadfastly invests in its business. This keeps it more resilient and in better shape when adversity hits. Or to put this in a better way: companies that do not invest in their business are essentially operating by the grace that nothing ever happens to their position or industry. This is arguably why many Australian companies are finding it so hard to grow these days. Research reports in response to corporate profit warnings (like Bank of Queensland last week) often mention the true reason as to why: structural under-investment over a long period.

-A high quality performer such as CSL will never trade at a cheap valuation a la Amaysim or Galaxy Resources, but this doesn't by definition prevent it from creating plenty of shareholder value. Good things befall good companies. Investors would be wise if they distinguished rapidly growing micro cap fly-by-nights from long-term, structural growth companies that (deservedly) trade on premium market valuations. ResMed ((RMD)), REA Group ((REA)), and Seek ((SEK)), to name but a few, share equal characteristics.

-Identifying a good investment does not equal a low Price-Earnings (PE) ratio, or a high yield, and certainly not backward looking or in isolation. It's all about understanding what makes a company tick, and whether it can be sustained. This is the true Warren Buffett way, which is also why I believe Berkshire Hathaway would be a major shareholder in CSL if Warren Buffet had been born in Australia.

-Technical analysis, on my observation, tends to work a lot better for small cap, low quality, cyclical stocks. All those predictions the CSL share price was on its way to below $100... It just reached $253 instead. Enough said.

-Don't automatically assume there is no potential left once your initial investment doubled, or tripled, or quadrupled. Admittedly, CSL is among the exceptions and its example cannot be used as a guide for most of its peers on the ASX, which is why we all have to admire those shareholders today who stuck by the company even during times when momentum was favouring others. Probably the most heard regrets among long term CSL shareholders today are "I wish I never sold part of my shares" and "I wish I had bought more".

-The human mind is extremely good at fooling us. Over the years, I have heard so many investors telling stories about how they narrowly missed out when the share price fell towards $90, or they sold when the share price doubled from $39, or when it reached $150. Harry Hindsight will tell each of you you could've bought back in, or additional shares, the next day, the next week, at the next pull back or during a general share market correction. You would still have profited handsomely.

-Small cap stocks are not by default better investments than large cap stocks.

-It never is too late to sell out of a bad investment (irrespective what your instinct tells you) and it never is too late to jump on board an excellent investment. Too many investors focus on what could possibly go wrong in the short term, and subsequently miss out on the positives long term. CSL is probably the best example of this. One strategy to circumvent this imaginary barrier is by waiting for the next share price or general market correction. When exactly is the best moment to buy? Well, how long exactly is a piece of string? 

-It's always difficult to predict the future, but assuming the above cocktail of internal and external forces remains in favour, in aggregate, the CSL story about continuing to build value for shareholders should still have much longer to run. Pick your moment. Be ready.

Early in 2019 I launched the CSL Challenge: https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/

WiseTech Global Is A Target Now

Foreign short sellers are increasingly targeting ASX-listed companies in their quest to uncover opportunities to profit from significant falls in share prices. The latest to come under attack is technology icon WiseTech Global ((WTC)).

At face value, WiseTech Global seems an easy target. The share price has performed beyond everyone's wildest expectations and many a critic on the sidelines has been exclaiming "bubble" and "irrational exuberance" for at least the past 18 months.

On top of this, founder/CEO Richard White is being accused of, on one hand, being the ultimate "control freak" and on the other hand of being "full of himself".

Last week J Capital captured the market's attention by, essentially, claiming the company is nothing but a carefully constructed accountancy obfuscation aimed at hoodwinking investors so they believe the company is a fast-growing disruptor to the global logistics industry, while it is not.

As expected, the company has forcefully rejected the accusations and called upon regulators to take action against this type of baseless foreign accusation. But J Capital is not hunkering down, with the company releasing a follow-up report on Monday.

Understandably, investors have taken a sell first approach, if only because where there is smoke... you never know.

Here is where things get interesting. In recent years all of Corporate Travel Management ((CTD)), Credit Corp ((CCP)), Rural Funds ((RFF)), Treasury Wine Estates ((TWE)), and now WiseTech Global have been under attack from hedge funds and shorters; market participants who benefit from a weakening share price.

And the results have been rather mixed. Treasury Wine Estates, for example, saw its share price failing to participate in the 2019 share market rally until June, when investors decided those stories about distributors in China having way too much unsold bottles of cheap plonk didn't appear to have much credence (anymore).

In similar vein, when Credit Corp found itself under attack the share price initially took a dive, but soon it was decided the short sellers report was nothing but a low quality criticism based upon faulty assumptions and incorrect interpretations. Today its share price is near an all-time high (as was Treasury Wine Estate stock until CEO Michael Clarke announced his early retirement on Monday).

For others, the accusations have left a permanent mark, at least thus far. Just look at the share price graphs for Corporate Travel and Rural Funds since.

So in which category belongs WiseTech?

One stockbroker who covers the stock with a positive bias, Evans and Partners, was rather quick last week in releasing two responses to the accusations made by J Capital, calling them "complete utter garbage" and "between inaccurate, and purposefully misleading".

So who's right? Only time will tell. But investors need to be aware that in the short term at least this share price is not going anywhere fast, if not potentially lower. Shorters are a nasty bunch, and fear is a powerful incentive. NextDC ((NXT)) CEO Craig Scroggie has a few stories to share how shorters had been feeding inaccurate insights to journalists in their attempt to force the share price down. If there was any impact, which is not beyond doubt, it would have been rather temporary.

This is not the first time J Capital is targeting an ASX-listed company. Back in late 2014 it issued a report accusing Fortescue Metals ((FMG)) of dishonesty in its communication with investors about the company's debt and cost of production. Fortescue management at that time pretty much responded in similar fashion as WiseTech Global has done.

In Fortescue's case, a subsequent recovery in the price of iron ore, which then remained higher for longer, made investors eventually forget about the accusations. Fortescue's share price has since soared to new all-time highs.

In WiseTech Global's case, this process has only just started.

The FNArena/Vested Equities All-Weather Model Portfolio has exposure to WiseTech Global, and has had it for quite a while. As communicated earlier, risk management guided us earlier to reduce exposure to a size that won't allow such unexpected events from destroying the performance achieved throughout the rest of the portfolio. This remains the case today.

Rudi Talks

Audio interview: are investors buying "cheap" looking stocks at exactly the wrong time?

https://www.youtube.com/watch?v=EQuGHASJ1M4

On Monday last week, I was interviewed by Peter Switzer about the Trade War and where equities might be heading. A separate video fragment has been uploaded to Youtube and can be accessed here:

https://www.youtube.com/watch?v=Z6WHOKXdIak&t=790s

Rudi On Tour In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 21 October 2019. 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/index2.cfm?type=dsp_signup

(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.) 

Dear time-poor reader: August corporate reporting is once again putting quality in focus.

In this week's Weekly Insights:

-The Quality Of Quality Continues To Show
-Rudi On Tour

The Quality Of Quality Continues To Show

By Rudi Filapek-Vandyck, Editor FNArena

A lot of ink and airtime have been spent on the never ending debate on Value versus Growth investing in the Australian share market, but if the August 2019 corporate reporting season is proving anything it is that investors might be best off by focusing on corporate quality and leaving the Value/Growth debate for another day.

Sure, BWX shares were trading not that far off all-time lows when the company released FY19 financials last week which triggered a rally on the day of 28.7%. And Mayne Pharma shares that were trading near $2 not that long ago, and above $1 late last year, jumped nearly 9.5% to 52c upon releasing FY19 numbers.

But for each such positive example -often accompanied by suspicion of forced short covering- there is at least another observation that compensates with a far more negative outcome.

Boral shares dived in excess of -19% on Monday leading the stock to join the likes of Adelaide Brighton, Platinum Asset Management and Event Hospitality and Entertainment in falling to a multi-year low. Shares in ARQ Group fell to a fifteen year low this week. Shares in Michael Hill have never since its IPO traded at a cheaper price level.

In sharp contrast, dependable, high quality, structural growth achievers including CSL ((CSL)), ResMed ((RMD)), and REA Group ((REA)) all traded at all-time highs before another wave of selling hit the local share market on escalations in the USA-China trade conflict.

Equally remarkable, shares in some of the better performing retailers are also at multi-year, if not all-time highs, including Baby Bunting ((BBN)), Lovisa ((LOV)), and JB Hi-Fi ((JBH)). Footwear retailer Accent Group ((AX1)) equally appears to be performing from a sweet spot.

Inside the property sector there is similarly a noticeable divergence between, say, Scentre Group and Stockland (not so good) and the much better performing Aventus Group ((AVN)), Charter Hall ((CHC)) and Goodman Group ((GMG)); companies which are clearly enjoying much better operational dynamics, and are expected to continue enjoying just that in the year(s) ahead.

Investors are usually obsessed with valuations and how much growth can be expected and is potentially already/not yet priced in. But this August reporting season is proving yet again that (much) weaker share prices do not by default equal lower risk. Cue Costa Group. Japara Healthcare. The examples above. Numerous others.

In contrast, high-flying a2 Milk ((A2M)) and IDP Education ((IEL)) equally surprised in a negative sense, and were heavily punished for it, but a rather large number of companies in a similar position met with share market approval, irrespective of large gains, high valuations and sometimes even small misses compared with market expectations. Cue Carsales ((CAR)), Altium ((ALU)), Medibank Private ((MPL)), and numerous others.

WiseTech Global Outshines Qantas

One of the eye-catching performances was delivered by global logistics services provider WiseTech Global ((WTC)), usually the focus of criticism by value-conscious investors lamenting the stock's bubble-alike valuation for a business that since listing has continuously acquired smaller competitors across the globe at break-neck pace.

More recently, the observation was made that WiseTech Global's market capitalisation now exceeds $10bn. This makes it larger than domestic icon Qantas, which generates operational cash flow in excess of $2.8bn and recently unveiled an underlying operational profit of $1.3bn before tax.

Qantas International reported EBIT of $285m. The latter exceeds total sales generated by WiseTech Global in FY18.

While the Qantas result was positively received, it was still down -17% on the corresponding performance from the prior financial year.

In sharp contrast, every financial metric inside the FY19 update by WiseTech Global grew by a double digit percentage. Sales were up by 57%. Operating profits improved by 37%. Earnings per share increased by 27%. Dividends for shareholders went up by 18%. This is a company that reinvests between 30%-40% of its annual revenues back into the business.

Annual customer retention for the core CargoWise product runs above 99%. The business continues to add additional services, new customers, and expanded geographical reach on its global network. In response to some of the criticism, WiseTech Global added more details in the operational disclosure for investors and analysts, proving it is far more than simply a Pac Man operation that continues to gobble up smaller players.

Organic growth at WiseTech Global is running at no less than 33%. And, so explained founder and CEO Richard White, carefully chosen acquisitions, once properly integrated into the global network, actually accelerate the company's pace in organic growth. FY20 guidance is for revenue growth between 26%-32% and for EBITDA (operational profits) to improve by between 34%-42%.

Note that WiseTech Global since IPO has built up a track record of meeting, if not exceeding, ambitious looking targets and guidance. The FY19 report again forced analysts to significantly increase their forecasts, pushing up the consensus price target by 31.6% to $30. Citi analysts moved their share price target to $36.30, which is still well above where the share price is trading.

While the Qantas result contained many positives, including an additional $76m allocated to buy back its own shares, a $400m benefit from management's transformation program and Qantas winning market shares in a largely moribund domestic market, it's not quite to the same level of enthusiasm that an update as the one provided by WiseTech Global manages to attract.

Qantas shares look undervalued on 9x-8x projected EPS for the next two years and a projected dividend yield in excess of 4.5%, but the cold hard reality here is that WiseTech Gobal shares, trading on more than 100x next year's EPS forecast, might still prove the better investment.

As long as those performance promises keep ticking along. Which remains the same story as for Charter Hall, Medibank Private, the ASX ((ASX)), Iress Market Technologies ((IRE)), ARB Corp ((ARB)) and many more others that continue trading on elevated, above-market valuation multiples.

Citi analysts, in their update on Goodman Group on Monday, formulated it as follows: "Earnings growth that will let you sleep at night". That just about sums it up perfectly. As long as these companies do not destroy the market narrative through heavy disappointment, there is no reason as to why the positive tailwind from robust reporting in August cannot carry share prices longer and higher from here, macro issues not accounted for.

'Cheap' Not Automatically Value Or Defensive

The one hard lesson investors had to learn in years past is that lagging or sagging share prices do not necessarily offer better protection during times of extreme market volatility. This is in particular the case when companies released yet another disappointing market update this month. Cue G8 Education, South32, and numerous other examples - not just from this month, but equally from past reporting season experiences.

Every season offers a number of Phoenix-like resurrections and this month, thus far, companies including Lendlease ((LLC)) and McMillan Shakespeare ((MMS)) have -finally- rewarded patient and loyal shareholders. In plenty of other cases, think Fletcher Building, IOOF Holdings and Crown Resorts, it appears a lot more patience will be required.

August has also become the month wherein the divergence between old economy business models under pressure and modern day disrupters has taken an additional negative turn. Witness how WiseTech Global is responding to market doubts and questions by providing increased disclosure whereas reporting from companies including Scentre Group and Event Hospitality and Entertainment now comes with notably less disclosure and details about how operations are actually performing.

For investors this creates a different type of dilemma: do you want to be on the register of companies that are reducing their communication with investors in the hope this might sustain a higher share price?

All-Weather Model Portfolio

Having said all of the above, only Blind Freddy would disagree the overall risk profile for staying invested in equities has risen noticeably these past few weeks, predominantly because of escalating tensions between the Trump administration and China.

We have made several adjustments to the All-Weather Model Portfolio which should help cushion against potential negative consequences ahead, while also offering a higher return than simply keeping a lot of funds in cash. I'll revisit this in more detail post the August reporting season in September, as I am sure many investors are struggling with similar dilemmas.

More than 25% of the Portfolio is currently not invested in the share market. And while we remain holders of shares in quality smaller cap technology plays including Xero ((XRO)), WiseTech Global and Altium, the portfolio's overall exposure is kept to a level that not one of such stocks is likely to single-handedly destroy the performance in case of unforeseen calamities.

Paying subscribers have access to the dedicated section on the website from which the All-Weather Model Portfolio draws inspiration.

More 'Misses' Than 'Beats'

On a macro level, this reporting season has been repeating the key message that large parts of corporate Australia are, frankly, under the pump. This leads to a wide and sharp division between the Haves and the Have Nots. Australia's corporate earnings recession is poised to continue its underlying trends from the years past, with August reports signalling the gap between the quality top end of the market and the rest might be getting wider and more pronounced.

In recent days, it appears more small cap companies have managed to surprise instead of adding on to the early misses released by Brambles, Woodside Petroleum, CommBank, and others. As a result, the gap between total "beats" -at 21.3%- and total "misses" -at 26.1%- has narrowed markedly, but still retains a bias to the latter.

It'll be interesting to watch whether more upside surprises from Fortescue Metals, Audinate Group, Readytech Holdings, Santos and the likes can close the gap on ongoing disappointments stemming from BHP Group, BlueScope Steel, Boral, G8 Education, IOOF Holdings, Ardent Leisure, Iluka Resources, and others.

FNArena updates daily on August Corporate Results via a dedicated section on the website:

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

Readers of The Australian would have noticed my prior update on the August reporting season made it into the weekend newspaper (24-25 August).

See also:

-August Reporting Season: Early Signals

https://www.fnarena.com/index.php/2019/08/22/august-reporting-season-early-signals/

-August Reporting Season: Early Progress Report

https://www.fnarena.com/index.php/2019/08/15/august-reporting-season-early-progress-report/

-August Preview: Lower Rates & Lower Growth

https://www.fnarena.com/index.php/2019/08/08/august-preview-lower-rates-lower-growth/

Rudi On Tour In 2019

-AIA and ASA, Perth, WA, October 1

In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 26th August 2019. 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. There will be no Part Two this week).

(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/index2.cfm?type=dsp_signup

(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.) 

Dear time-poor reader: early update on corporate results, plus a longer-term assessment of CSL.

In this week's Weekly Insights:

-Financial Joke
-August Reporting Season: Early Progress Report
-CSL Challenge: The Key Ingredient
-Rudi Talks
-Rudi On Tour

By Rudi Filapek-Vandyck, Editor FNArena

Financial Joke

Question: what is a stock that has fallen by -90%?

Answer: that's a stock that falls by -80%, and then the share price halves.

August Reporting Season: Early Progress Report

August is local reporting season for Australian listed companies, but the pace of corporate results releases is so much skewed to the second half of the month that as half-way approaches on the calendar, it remains way too early to draw any definitive conclusions or make far-reaching assessments.

As at Monday, 12th August 2019, the FNArena Corporate Results Monitor still only contains 30 corporate updates. Considering that by month's end the total will have exceeded 300 updates, we have an urge to feel sorry for ourselves. After all, those 300 corporate releases will have to be covered, followed up, updated and summarised. And the slower the season ramps up... you get the idea.

A few early assessments won't go astray (we hope). Corporate Australia clearly is doing it tough. Corporate updates thus far either reveal declining profits, or negative sales growth, or downward pressure on margins, or all three combined.

Subsequent share price responses are often left to management's guidance for the year ahead, potentially supported or negated by hedge funds and other traders taking position prior to the results release.

As such we witnessed Suncorp ((SUN)) releasing a weak result, but with the share price moving higher, and on Friday REA Group ((REA)) missed market expectations, but its share price since put in a notable rally higher. In contrast, CommBank ((CBA)) shares were initially punished upon the release of a weak financial report card, but buyers have since shown themselves.

No such buyers' interest has revealed itself for Insurance Australia Group ((IAG)), whose shares are down quite heavily in a short time, including following the release of disappointing FY19 numbers, and the same observation can be made for Cimic Group ((CIM)), Janus Henderson ((JHG)) and GUD Holdings ((GUD)), whose share prices are all trading significantly below levels prior to the respective results releases.

In the lead-up to August, I predicted investors were most likely to witness a multi-layered experience. The first two weeks are already showing plenty of evidence for this thesis.

We also had a number of major beats, with subsequently solid share price rallies for James Hardie ((JHX)), Pinnacle Investment Management ((PNI)), and Navigator Global Investments ((NGI)). Both ResMed ((RMD)) and REA Group once again proved quality High PE stocks are not necessarily toast, as they have done for many years now.

Continuing on my forecast of a multi-layered August reporting season, Macquarie analysts note companies with direct exposure/leverage to the local housing market have all revealed "headwinds" and tough operational challenges, with each of James Hardie, REA Group, Transurban ((TCL)), CommBank, Mirvac ((MGR)) and Nick Scali ((NCK)) talking the same talk.

But not all housing related business models are similarly vulnerable or operationally exposed with James Hardie and REA Group arguably in a better position than CommBank and Nick Scali.

Macquarie, by the way, continues to recommend investors should buy the dip in selected housing-related businesses, including REA Group, Nine Entertainment ((NEC)), Stockland ((SGP)), James Hardie, CSR ((CSR)), National Australia Bank ((NAB)) and Westpac ((WBC)).

Macquarie's reasoning is that housing will stabilise and subsequently improve on the back of continued RBA rate cuts.

In continuation of recent years, reporting season these days is heavily coloured with capital management (special dividends and share buy backs), as well as with capital raisings. A-REITs in particular are once again using the opportunity to raise fresh capital, but Nufarm ((NUF)), Transurban and AMP ((AMP)) equally have announced fresh raisings.

In terms of general trends, FY19 average EPS growth might not come out too far off the zero mark, predominantly because of another booming performance from resources, in particular iron ore producers and gold miners.

Banks are expected to extend their negative growth period and international industrials are projected to perform significantly better than domestic industrials.

FNArena continues to provide daily updates on Australian corporate updates: https://www.fnarena.com/index.php/reporting_season/

The early data are far from encouraging with decisively more "misses" than "beats" (40% versus 30%) but, as every optimist will tell us, it remains early days.

See also:

"August Preview: Lower Rates & Lower Growth"

https://www.fnarena.com/index.php/2019/08/08/august-preview-lower-rates-lower-growth/

"Corporate Earnings Still Matter In 2019"

https://www.fnarena.com/index.php/2019/07/25/corporate-earnings-still-matter-in-2019/

CSL Challenge: The Key Ingredient

The prior update for the CSL Challenge zoomed in on the significant rewards that await shareholders who are able to identify a high quality, structural growth story such as CSL ((CSL)), and then stay on board for the long run instead of losing focus because of temporary and intermediary distractions.

Ever since my share market research focused on finding those exceptional All-Weather Performers in the Australian share market, CSL has been a proud and prominent inclusion of my limited selection. As far as I am concerned, this is by far the greatest corporate success story that has ever sprung from Australian soil. Full stop.

Gamblers seldom decide upon which jockey will be riding the horse; instead they punt on which horse is most likely to win the race. Does anyone remember the names of any of the jockeys that had the pleasure to sit on top of Winx lately?

In similar vein, any quality company can only grow into a true All-Weather Performer thanks to a supportive industry structure. This does by no means imply that only monopolists and oligopolists, largely protected from disruptive competitors, can truly provide investors with sustainable longer term rewards.

But the best video shop can only achieve so much when the industry as a whole remains on its way to ultimate extinction. Similarly, if the world tomorrow would have significantly lesser need for blood plasma, that quality label that CSL has carefully built up over the past 25 years wouldn't account for much in the share market.

Luckily for my research, and for loyal shareholders, global demand for blood plasma has been strong over the past decades, and it is expected to remain strong. Because of ongoing strong demand, the industry as a whole is struggling to keep up with supply, which has exerted itself as one of the key growth limitations for the major players in this market.

CSL has developed into the true market leader in a global competitive segment of the healthcare industry that has been growing at circa 9% per annum in sales/revenues since 2007. At face value, there doesn't seem to be an economic moat to protect CSL's market leading position, but practice has shown otherwise.

Primary access to blood plasma remains key and CSL remains the sole top player who is able to source 100% of supply in-house. It operates the largest and most efficient network of collection centres, which apart from obvious sunk investment and operational costs, comes with above average security checks and regulations.

Moreover, it takes nine months between collection of the blood plasma, treating it and ultimately selling for it to be used for medical purposes. This implies ample of cash flows are required to keep the business running in the meantime.

On top of this all major players allocate circa 10% of annual revenues to R&D plus hundreds of millions on investments in new plants and collection centres. It should surprise no-one this industry has consolidated firmly since the time CSL listed on the ASX in 1994.

It still makes for a highly competitive, but rational environment. Such has been the platform that has allowed CSL to expand its market share and to showcase the qualities of management and staff, providing large and sustainable rewards for all stakeholders.

The continuous investments made in R&D are a key part in this success story as the industry continues to find and develop new treatments and medical products for often rare diseases and life-threatening medical conditions.

To understand the industry and CSL, it is important to appreciate the continuous drive towards new discoveries and further innovation. Outside of the CSL business, there is always someone somewhere trying to develop an alternative therapy or competing product.

The fact that CSL has managed to stay on top of the sector, and to retain largest market share in the two key market segments -immunoglobulins and albumin- is a major statement underlining the company's achievement since incorporation in 1991. CSL has now also become a top two player in the global market for flu vaccinations, which simply further complements the company's cabinet of medals and trophies.

For investors: note the key factors that make CSL a very different beast from, say, Telstra. CSL pays out less than 50% of its profits in the form of dividends to shareholders, but those dividends have steadfastly grown and are projected to continue growing in the years ahead on the back of ongoing improvements in sales and profits.

To keep the comparison with lower quality Telstra going for a little longer: a smart cookie elsewhere once established that if at the time of Telstra's initial ASX-listing in the late 1990s, investors had bought shares in CSL instead, and kept them until today, they would have collected more dividends over the period than loyal Telstra shareholders. And that's not mentioning the sharp difference in share price performances.

CSL spends a big chunk of the other half of the profits it doesn't pay out to shareholders on developing new products; effectively finding new avenues for growth and defending (or increasing) its margins and market share. This is not dissimilar from well-entrenched policies at companies including Cochlear ((COH)) and ResMed ((RMD)). No surprise thus, they too are included in my select list of ASX-listed All-Weather Performers.

Of course, an investment in CSL is by no means risk-free. The industry collects most of its supply in the USA, where it pays for donations. Irrespective, American donors couldn't possibly keep up with global demand increases into infinity. US donors already satisfy two-thirds of global demand. The limitations on supply are currently being examined by governments and regulators in Europe. A small group of European countries already allows for plasma donors to be paid.

China commands that all plasma is collected on the ground, not imported from elsewhere. Luckily for the industry, this is opening up a new source of supply (albeit directly linked to demand in one geographical region). The Chinese market is rapidly growing in importance for CSL and its peers. Rapid growth in China underpins current expectations for the sector globally. As China grows in importance, it also shifts the sector's risk profile.

According to a recent report by Citi analysts, the $4bn Chinese plasma protein market is expected to post a five-year sales CAGR of around 15%, versus less than 10% for the $10bn US plasma market, excluding recombinants.

As a rule of thumb, demand growth as it currently stands, is projected to average circa 8% per annum globally for the decade ahead. This is slightly down from 9% over the decade past. As blood plasma, and its many offshoots, enjoy a multiple in applications and therapies that feed into, and support such expectations, there seems to be a lesser chance for major disappointment attached to these projections.

Investors should note all major players in the industry are by now investing heavily in additional collection. If for whatever reason demand slows significantly, or is being disrupted, this would open up the risk for oversupply at some point in the future.

Again, it has to be noted, CSL has been planning and operating ahead of the curve, enjoying most of the industry benefits in years past when supply was unable to keep pace with growth in demand. On current forecasts, demand will be 40% greater by 2023 and current expansion plans industry wide would simply barely keep up. CSL's own expansion plans imply 40% larger capacity by 2023; plans involve opening 30-35 new centres each year.

Apart from continuously addressing new conditions and diseases, the industry's demand outlook continues to be underpinned by aging populations, and growing awareness still, while lower unemployment rates result in more people paying for health insurance in the largest market, the USA.

On simplistic assumptions, assuming supply keeps up with projected growth in demand, and prices continue to increase in line with inflation each year, while all else remains unchanged, then CSL should be able to grow its revenues by double digit percentage each year.

The task lays then with management to not overspend and keep the costs contained, and shareholders should see 10% or more growth coming their way, year-in, year-out.

Of course, things are never that simple. Products go in and out of fashion, or battle a new competitor or an alternative therapy. Not every major investment might generate the hoped for success or projected return on investment. Not every year delivers a nasty flu season. And so forth.

On current expectations, and with CSL expected to deliver yet another year of double digit percentage growth in FY19, stockbroking analysts are currently predicting FY20 will be a year of slow growth only. This is not that uncommon. It has happened in the past, and should by no means be interpreted as a bad omen for future years.

Analysts at Citi, for example, who have set the highest price target for CSL among the seven stockbrokers monitored daily by FNArena, at $239.60, anticipate virtually no growth next year, but then a jump to 24.5% EPS growth in FY21. Beyond the year ahead, Citi remains convinced CSL is ideally placed to grow faster than the industry, and thus take market share, on a three to five year horizon.

All shall be revealed and updated on Wednesday when CSL is scheduled to release FY19 financials.

In case you read this and you still haven't joined the CSL Challenge, do know you can join at any time, from any place of your own choosing.

Here's more info about it: https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/

Also, paid subscribers have access to my eBooks and other writings about CSL and All-Weather Performers, see the dedicated section on the FNArena website.

Rudi Talks

Video interview with Peter Switzer and Julia Lee on Monday last week:

https://www.youtube.com/watch?v=03jqw77Owgg&t=1102s

Rudi On Tour In 2019

-AIA and ASA, Perth, WA, October 1

In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 12th August 2019. 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. There will be no Part Two this week).

(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/index2.cfm?type=dsp_signup

(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.) 

Dear time-poor reader: Part Two offers Conviction Calls, and an update on the CSL Challenge.

In this week's Weekly Insights (published in two parts):

-August Preview: Lower Rates & Lower Growth
-CSL Challenge: A (Not So) Brief Update
-Conviction Calls
-Rudi Talks
-Rudi On Tour

CSL Challenge: A (Not So) Brief Update

By Rudi Filapek-Vandyck, Editor FNArena

Something has gone amiss with my messaging to investors, maybe?

At the recent National Conference organised by the Australian Investors Association (AIA), I showed a price chart during my presentation of a sustainable and structural growth story and asked: anyone a guess which stock this is? The answer came straight from the room: CSL! (In multiple voices).

Yet, it couldn't be CSL as the top of the chart didn't reach beyond $100 and everybody who has been paying attention should know by now CSL ((CSL)) shares surged a second time through $100 in late December 2016 and subsequently never looked back. The share price recently reached a new all-time high of $232.03, more on that further below.

Just as a side-remark: today, I tried to look up recent share price levels for CSL and both Yahoo Finance and the ASX website are ostentatiously displaying incorrect data. What is happening here? FNArena provides access to correct share price data, of course, but for more detail we can all still visit Google Finance.

Upon arrival in Australia, back in late August 2000, I never imagined myself becoming the go-to expert for CSL background and insights nineteen years on. My research into investing in the local share market has led to the concept and identification of All-Weather Performers, and CSL is only one of them.

From memory, my presentations in recent years have specifically highlighted DuluxGroup, Carsales, Bapcor, TechnologyOne and NextDC, alongside others, and occasionally the price chart shown was picturing CSL. The biggest compliment I have received is from investors thanking me for directing their attention, and courage to buy, towards stocks they otherwise would never have considered.

The right answer at the conference was REA Group; yet another one of my all-time favourites, and for good reason. REA Group shares recently surged above $100, equally an all-time high. This means that those who bought at or pre-IPO at $1 a share, and stayed on board since, have enjoyed a 100-bagger, including funds manager Hyperion.

CSL shares, corrected for shares split, IPO-ed at $0.77. Plus there was another shares split pre-GFC. CSL shares have thus performed even better than REA Group's 100-bagger since listing. Needless to say, it is difficult to find a single shareholder today who is unhappy with how management, the company and the share price have performed over the past 2.5 decades (CSL started life in 1991, and listed in 1994).

On  my observation -at the conference and elsewhere- investors do not necessarily grasp the importance of what I just pointed out. The fact that CSL shares, 25 years after listing, have surged to a new all-time high means that everybody who bought the shares, at any given point in time, has made a profit.

Everybody. No matter when the shares were bought.

Think about this for a while and one instantly starts to realise how truly amazing the CSL experience has been for shareholders who stayed the course. REA Group's performance has been equally impressive, but it has only been listed since December 2008. Still very impressive though.

A few stats to highlight the strength and importance of these performances:

-Resources stocks in Australia are still some -33% below their peak in May 2008
-Bank shares are still some -28% below their peak in May 2015

Consider, for example, that BHP Group shares peaked at $50 in late 2007 and again at $49 the following year. CommBank shares reached $96 in 2015.

Hint: local indices recently finally managed to surpass the all-time record (ex-divs) set in late 2007 and while resources and banks were instrumental in getting there over the past seven months, we would still not be nowhere near current level if it wasn't for the steady and continuous, uninterrupted contributions from All-Weather, sustainable, structural growth companies such as CSL, REA Group, and numerous others I have been highlighting through my research in years past.

Yet, when one looks back from the chair I am sitting on, it is difficult to not also remember the abuse, the disbelief, the rejections that have occurred throughout the period. It was only a few months ago I had to stand my ground amidst a wave of criticism and personal attacks. Surely I had lost my sanity? Didn't I know that no single stock trading on a PE multiple above 15x had ever proved to be a genuine, profitable long term investment? CSL is going to crash, and take me and my reputation down with it!

As you all would have guessed, those same voices have gone missing by now. Understanding CSL is effectively understanding how little investors know and understand about the share market. Which is why I launched the CSL Challenge earlier this year (see further below).

To my surprise, a recent analysis by the Australian Financial Review (The stocks doing the heavy lifting, 3-4 August 2019) once again put CSL at the top of the performance table for having contributed the most index points in 2019. My own analysis conducted earlier had the iron ore miners on top, but those share prices deflated quickly while CSL's surged onwards and upwards. Just goes to show how much of these performance tables are determined by timing and time-period.

Time to apologise. Earlier this year I asked long term shareholders to send in their personal experiences to share with other investors but I haven't yet found the time to fully execute that plan. It will happen though. I am aiming for September, after the August reporting season.

CSL is scheduled to release FY19 financials on August 14 and analysts are expecting yet another strong performance, also carried by quite the savage flu season in 2019.  No doubt, this was one of the reasons as to why the share price recently surged to a new all-time high.

To fully understand why CSL shares are where they are, and how much of a stand-out the company's performance has been, consider that a recent analysis by UBS puts the average EPS growth for Australian companies since 2007 at 0.1% per annum. This is not a typo. The Australian share market has effectively lived through an earnings recession over the past twelve years. Judging by forecasts for the upcoming August reporting season, this is not about to change.

One disconcerting observation, however, is that the share price has retreated quite quickly throughout the market turmoil that pulled the local share market in a fierce downdraft this week. It used to be the case that CSL shares held up reasonably well when others were staring into the abyss. Maybe too many momentum and trend followers are on board these days? Maybe this is the price we all have to pay for CSL being such a stand-out?

Maybe, just maybe, in an era of passive investing, this is the toll to pay when CSL is now one of the Top Four in Australia?

Some analysts have been suggesting CSL might disappoint this season as the strong performance over FY19 might be followed up by a more moderate guidance for FY20. I have no extra insights into whether this might happen or not, but history tells me, as with the experiences of REA Group shares I highlighted at the recent conference, that if for some reason CSL's share price comes under pressure upon the release of FY19 financials, this would only be a genuine concern under extremely rare circumstances.

This is what JP Morgan published on Thursday morning: "With a tight market for immunoglobulins, continued solid growth in specialty sales and an expected recovery in albumin and coagulant revenues we are confident CSL will deliver a decent sales result. This should ensure a profit number at or above the top end of the FY19 guidance range as gross margins lift. However, we expect FY20 guidance to come in below our forecasts as management maintains its conservative approach."

It is far more likely that share price weakness in CSL is simply an opportunity to buy (more) shares. See also ResMed shares in late January and where they are trading at today.

In case you read this and you still haven't joined the CSL Challenge, do know you can join at any time, from any place of your own choosing.

Here's more info about it: https://www.fnarena.com/index.php/2019/01/14/rudis-view-join-the-csl-challenge/

Also, paid subscribers have access to my eBooks and other writings about CSL and All-Weather Performers, see the dedicated section on the FNArena website. The slides of my presentations are available through the Special Reports section. The slides I used at the recent AIA National Conference are now included.

P.S. And don't you worry, this success story is nowhere near its end.

Conviction Calls

Market strategists at Morgan Stanley have been taken by surprise by how strongly the domestic equity market has performed over the past seven months. They had warned their customers about generally weaker profits for Australian corporates, which has proved to be a prescient warning, but the share market decided to ignore the earnings and concentrate on falling bond yields and more central bank stimulus instead.

Morgan Stanley had a target for the ASX200 of no more than 6000, which does look a little bit silly in the current context. That target has now been lifted to 6400. In case of a very bullish outcome, the strategists are willing to accept 7000 for the major index which still only leaves a little bit of room for further expansion.

Their current warning is that, in the absence of a solid pick-up in corporate profits (not expected this month), share prices might have to fall to match the rather sober outlook for corporate Australia.

From this starting point, Morgan Stanley strategists have been making a number of changes in terms of Model Portfolio positioning. Cash levels have increased to 5% on the back of selling shares in BlueScope Steel ((BSL)) and Iluka Resources ((ILU)). The idea here is to reduce the portfolio weighting towards resources.

The Model Portfolio has now gone significantly overweight National Australia Bank ((NAB)) in order to neutralise the previous underweight positioning in banks. Inside healthcare the relative overweight has switched to Sonic Healthcare ((SHL)) from Cochlear ((COH)) while among defensives the portfolio is now more underweight Telstra ((TLS)).

In the energy sector Oil Search ((OSH)) has been added to sustain a sector overweight position.

****

Retail specialists at UBS are of the view that forthcoming tax cuts from the Morrison government will only have a small impact on consumer spending with retail sales in FY20 expected to -maybe, potentially- increase by an additional 1% (annualised) on the back of these cuts being delivered.

They are equally of the view this prospect has already been priced in for most retailers listed on the ASX. And then, of course, we have the August reporting season yet to be fully unleashed upon us.

UBS's key consumer sector picks ahead of corporate results are Flight Centre ((FLT)), Treasury Wine Estates ((TWE)), Viva Energy ((VEA)), a2 Milk ((A2M)) and Bapcor ((BAP)). The analysts also like the prospect of Myer ((MYR)) shares.

Recommended Sell views are alive and kicking for Coles ((COL)), Coca-Cola Amatil ((CCL)), JB Hi-Fi ((JBH)), Inghams Group ((ING)) and GUD Holdings ((GUD)).

****

The combination of geopolitical risks increasing and the Aussie dollar being clobbered has proved to be highly beneficial for Australian gold producers. Most share prices have surged, a lot, but stockbroker Morgans still sees selected value in the sector.

Morgans recently elevated gold to its most favoured commodity and junior and emerging gold producers are seen as the best hunting ground for investors still looking to add exposure through the local share market. Morgans in particular likes Ramelius Resources ((RMS)).

****

Market strategists at stockbroker Morgans, still worried about High PE stocks not having any room to disappoint in August, have decided to take profits in Kina Securities ((KSL)) -which led to the removal of this stock from their list of High Conviction Stocks. In its place the strategists have added Volpara Health Technologies ((VHT)).

Other stocks that have retained their inclusion are Sonic Healthcare, OZ Minerals ((OZL)), ResMed ((RMD)), Westpac ((WBC)) and Oil Search ((OSH)) inside the ASX100 and Australian Finance Group ((AFG)) and Senex Energy ((SXY)) outside the Top100.

****

This month's update on Morningstar's Best Stock Ideas has led to the removal of Westpac ((WBC)) with Ardent Leisure ((ALG)) and Computershare ((CPU)) joining the small selection instead.

Morningstar has a predominantly valuation driven methodology to decide on inclusions and exclusions and I personally have been a long term critic of their methodology to determine protective moats for companies. While once upon a time setting rules for corporate moats was cutting edge analysis, today I think Morningstar's methodology is no longer quite in sync with modern economies and shifting market dynamics.

Anyway, Ardent Leisure has been added on the potential for a successful turnaround, while for Computershare share price weakness seems to have been the key ingredient. Westpac's removal follows a strong sector re-rating.

The other seven stocks on the list are Bapcor, Domino's Pizza ((DMP)), Link Administration ((LNK)), Nufarm ((NUF)), Pact Group Holdings ((PGH)), Telstra ((TLS)), and Woodside Petroleum ((WPL)).

****

CLSA has put Ed Henning in charge of researching Australian banks and the direct result has been a removal of the firm's Underweight recommendation for the sector. Instead, CLSA has now adopted the view that, on a relative basis, Australian banks don't look too expensive at all, certainly not when taking into account that interest rates can, and probably will, move lower from here still.

The Underweight recommendation has thus been replaced with a Neutral stance with analyst Henning adopting the view that all of the negatives are by now well known and understood, and in the share prices. One offsetting positive is that today's dividend yields across the sector will prove sustainable.

CLSA's sector ranking in order of preference is ANZ Bank ((ANZ)), National Australia Bank ((NAB)), Westpac and then CommBank ((CBA)).

Elsewhere at the CLSA office, analysts Richard Barwick and Mark Wade have continued repeating and reiterating their Conviction Buy rating for Treasury Wine Estates with an unchanged price target of $23. As reported earlier, both CLSA analysts see the upcoming FY19 results release and the subsequent investor day in September as two catalysts that seem poised to get the share price a lot closer to their target (Trump & Xi permitting).

****

Meanwhile, no changes have occurred to the list of Conviction Buys at Wilsons. The most recent addition thus remains Countplus ((CUP)) which had been added in early July.

Other inclusions are Bravura Solutions ((BVS)), EML Payments ((EML)), ReadyTech ((RDY)), Whispir ((WSP)), Collins Foods ((CKF)), Ridley Corp ((RIC)), ImpediMed ((IPD)), National Veterinary Care ((NVL)), EQT Holdings ((EQT)), Pinnacle Investment ((PNI)), Noni B ((NBL)), Ausdrill ((ASL)), Mastermyne ((MYE)), and Whitehaven Coal ((WHC)).

Just like most other human portfolio managers and stock pickers in Australia, Wilsons' Conviction Insights Portfolio has found it rather challenging to keep pace with share market indices in Australia (unless we go back to last year, or to inception in early 2017).

****

Market strategists at JP Morgan have stuck with their target for the ASX200 of 6300, meaning they are now positioned below Morgan Stanley, usually the low marker in Australia.

JP Morgan has singled out a number of key stocks that are rated Underweight and considered to have downside potential of -20% or more from share prices in late July/early August.

Some of the key Underweights are Magellan Financial ((MFG)), Orica ((ORI)), Wesfarmers ((WES)), Coles ((COL)), REA Group ((REA)), Cochlear (COH)), and Goodman Group ((GMG)).

****

Lastly, but certainly not least, bank analysts at Bell Potter have used this week's sell down in Aussie shares as yet another opportunity to reiterate their positive view on Macquarie Group ((MQG)) shares.

In Bell Potter's view, any weakness in the stock will be temporary at worst and it provides investors with the opportunity to simply buy more. The price target currently sits at $140, accompanied by a Buy rating.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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

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

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

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

In this week's Weekly Insights (this is Part Two):

-In Search Of 'Value', Avoiding 'Cheap Junk'
-All-Weather Portfolio Update
-Unveiling The US Corporate 'Secret' - Three Charts
-Conviction Calls
-Rudi Talks
-Rudi On Tour
-Rudi Talks

All-Weather Portfolio Update

By Rudi Filapek-Vandyck, Editor FNArena

It only took one highly unusual race at the Winter Olympics of 2002 for Australian Steven Bradbury to become a colloquial reference in modern day language.

Just type in Steven in Google search and it is the second suggestion that pops up. No additional info required.

Bradbury has become synonymous for the unexpected victor, the result that nobody expected, the win that is achieved through external and uncontrollable circumstances; when Dame Fortuna smiles upon you and luck is blatantly on your side.

Having read about how the final cricket world cup contest was decided between England and New Zealand, or the Wimbledon tennis final between Novak Djokovic and Roger Federer, I think maybe it's time we also developed a quick reference for playing the game of your life, and still ending up losing by the narrowest of margin at the final finish line.

The thought came to my mind even before both sporting finals had come to their conclusion, when I was doing the sums and calculations for the All-Weather Model Portfolio at the close of mid-2019. In isolation, the Portfolio experienced its best performance over a six months period since its launch in late 2014.

But, really, a return in excess of 13% (before fees) looks rather pale when the ASX200 Accumulation index achieves nearly 20% over the same period. Enter the New Zealand cricket team, and Roger Federer who's understandably taking a full month's rest from tennis.

Below is an overview of how the Portfolio has performed over the past twelve months. Last week, I shared some of my analysis as to why the index outperformed the Portfolio with stocks like Amcor, CSL, REA Group and TechnologyOne, but also Reliance Worldwide, Link Administration, Bapcor and Orora.

See also "Do I Have A Few Surprises For (Most Of) You" https://www.fnarena.com/index.php/2019/07/04/do-i-have-a-few-surprises-for-most-of-you/

And also: https://www.fnarena.com/index.php/2019/07/17/smsfundamentals-10-reasons-why-many-fund-managers-are-now-blank-spaces/

The news about active managers versus passive investment returns has taken another negative bend, according to data supplied by Chant West.

As reported in the Australian Financial Review on Thursday, the two best performing growth funds in Australia, QSuper Balanced and UniSuper Balanced, have achieved returns of 9.9% for the financial year ending on June 30th (FY19).

S&P/ASX 300 Index returned 11.4% over the period while the S&P/ASX 200 Index returned 11.5%. In line with my own observations, the ASX50 performed best, while small cap indices barely managed to return a positive result.

Equally typical for this year's market dynamics, data released by Mercer revealed the Martin Currie Australia Real Income Fund was the best performing over the year with a total return of 18.8% before fees. According to Mercer, the median manager among 134 strategies measured in the Australian shares category delivered a 9% return before fees.

At the bottom of Mercer's total return rankings we find Forager Australian Value with a loss of -18.8%. Next sits Bennelong Concentrated's -6.4% loss. Remarkable, because at the end of the prior financial year Bennelong had ranked the second-best Australian strategy with a 33% gain.

Not all funds are ranked and monitored by Chant West or Mercer. The worst result spotted by FNArena is -20.6%.

Unveiling The US Corporate 'Secret' - Three Charts

For many years, investors in Australia have marveled at the continuous up-trend in US equities carried by what seemed a superior class of corporate entities run by a superior class of business leaders, managing to grow profits for shareholders, year-in, year-out, year after year after year, irrespective of how high the US dollar or how low US Bond yields.

But maybe there is a lot more to this story than meets the lazy eye from far-away Australia?

Glushkin Sheff's Chief economist and strategist, David Rosenberg, always keen to highlight the finer details most bullish commentators elsewhere prefer to ignore, included the three charts below in his daily market commentary last week, and at the very least the three charts combined should answer a large number of questions, while raising a few more.

Consider, for a few seconds, that contrary to bullish market sentiment in the USA, and that one President that cannot get enough of new record highs, the fact that corporate profits, without accountancy adjustments or divided by outstanding shareholders capital, has largely remained stagnant since 2013.

Yes, correct. Stagnant. Similar to what essentially has occurred with corporate profits in Australia over the past six years. See chart number one below.


So how can we explain the American growth numbers that have been supporting this extended bull market? Charts number two and three provide a rather incisive look-in.

Corporate debt (chart number three) has steadily risen to all-time highs and chart number two suggests businesses have been using the additional balance sheet leverage on the back of the historically low cost of debt, to buy in ever more shares.

Anno 2019, the total number of outstanding equities in the US has fallen to a 19-year low (chart number two).

Basic economic theory teaches us that growing demand combined with falling supply equals rising prices, and that's exactly what US share markets have experienced over the past six years.

But these three charts combined also reveal how important the fall in bond yields and ongoing support from the Federal Reserve have been to keep this positive growth story alive.

MST Marquee investment strategist Hasan Tevfik, prior employed by Credit Suisse for many years, points out equity markets are shrinking in the US, Europe, New Zealand and this year also in Australia.

Tevfik predicts that, because of the exceptionally low cost of debt, de-equitisation is like to stay with us for longer. While this might work to the benefit of investors, it does make for an awfully challenging backdrop for business models that are leveraged to expanding volumes and expanding equities supply.

The once almighty Deutsche Bank earlier this month decided to quit trading equities. Tevfik predicts more of such decisions are in the pipeline worldwide.

I am fully aware that the title mentions three charts and one extra will exceed that number, but I nevertheless thought it apt to add the one below, published by economists at National Australia Bank on Thursday morning, as a reminder of how US equities have mostly outperformed just about every other equity market around the globe.

It's not just you, Australia.

 

Conviction Calls

On Wall Street, Morgan Stanley equity strategist Michael Wilson (and the rest of the strategy team) stand above the crowd in that the investment bankers' view on the outlook for equities hasn't changed in 18 months.

That view is that US equities are now capped inside a rather large trading range in between 2400 on the downside and 3000 at the upper end of the range.

Back in January last year (2018) when the S&P500 index surged towards 3000 for the first time, Morgan Stanley strategists warned their clientele to prepare for a multi-year consolidation period. As we know now, US equities sold off subsequently, then made a gradual come-back to again stare at 3000 within reach by September.

After that came the Big Sell-off, as I am sure we all still remember.

By late December, the S&P500 had fallen to around 2350 which, strictly taken, is below the 2400 suggested bottom but what are 50 points between friends, n'est-ce pas?

Approximately seven months of upwards and onwards rallying has now put the S&P500 back near the top end of the suggested range. The index last week rose slightly beyond the 3000 level.

And yet, Morgan Stanley's view has not changed. The decline in interest rates has made US stocks more attractive, acknowledges strategist Wilson in his latest market update, which largely explains why the US index is back near the top of the trading range, but the fundamentals underneath the rally have weakened considerably.

Investors should prepare for disappointment which shall pull back the S&P500 from its current lofty high, warns Wilson. Both corporate earnings and economic growth are on his assessment most likely to disappoint from here onwards. Market consensus still sees a significant resurgence into 2020, but Morgan Stanley remains of the view those expectations will be proven too optimistic.

To be continued, without a doubt.

****

Sector updates are usually heavily dominated by relative valuations, and the latest update by stockbroker Morgans on local insurers and diversified financials is no exception.

Having marked-to market for all sector members under coverage, Morgans lined up its sector favourites in order of preference, and relative valuation shines through like a full moon on a stormy, dark night in Cornwall. Never been to Cornwall, but that's how I imagine it, and it sounds kinda funky.

The order of preference for investors seeking access to this sector is thus Link Administration ((LNK)) first, followed by Kina Securities ((KSL)), Afterpay Touch ((APT)), QBE Insurance ((QBE)), Zip Co ((Z1P)) and Suncorp Group ((SUN)). Other names missing on that list, such as Computershare or Perpetual, are rated Hold with one exception: the local stock exchange ASX ((ASX)) carries the sole Reduce rating due to elevated valuation.

Equally noteworthy: Morgans analysts believe the risk during reporting season for this particular sector remains to the downside; if not in actual released results, than potentially via forward guidance. Health insurers are seen as the exception.

****

Sector analysts at Citi have a different take on things. Number one observation is there are no Buy ratings left for the sector at Citi.

This does not stop the Citi team for putting together a ranking order in terms of preference, but investors should note: most stocks mentioned are rated Neutral, with the exception of ASX and IOOF Holdings ((IFL)).

Citi's order of preference is Janus Henderson ((JHG)) on top, followed by Computershare ((CPU)), Challenger ((CGF)), Link Administration, Perpetual ((PPT)), then ASX and IFL.

****

One most interesting High Conviction Call was released by CLSA analysts Richard Barwick and Mark Wade this week.

Interesting because, as one industry observer put it, "amazing there's still research coming out of there". For those not up to date: US competitor Jefferies has raided the CLSA office luring the core of the Australian operations over (probably offering a lot more money) and market rumour has it talks are continuing with what used to be the local equities team at Deutsche Bank, but no concrete result has been announced thus far.

Apparently, the ex-Deutsche Bank team is trying to stay together. Meanwhile, a number of industry predators are trying to cherry pick their preferred candidates. It truly is a dog-eat-dog world in equities.

Back to CLSA. This week's High Conviction Call was equally interesting because it involves Treasury Wine Estates ((TWE)), of which the share price has been failing to keep any momentum going with market speculation rife distributors are left with excess inventories in China, which must, if accurate, at some stage create a painful bottleneck for the company.

CLSA analysts toured through China, spoke with 45 wine distributors locally, of which 30 distribute Treasury Wine produce, and they have found no indications there is any truth behind the market speculation.

Instead, CLSA reports Penfolds continues to perform well, with Rawson's Retreat a distant second. US based Beringer is doing it tough because of tariffs. Forget about all the other brands in the portfolio: these are the only ones that measure in China.

Chinese consumers continue to love French wine the most, further underpinning Treasury Wine Estates' strategy to develop its own French brand under the label of Maison de Grand Esprit.

Most importantly, management is still aiming at increasing the company's distribution foot print in China by 50% over the next three years. This, CLSA explains, simplistically translates into roughly 15% growth per annum.

On the basis of these fresh on-the-ground insights, CLSA suggests Treasury Wine Estates shares could well present themselves as a huge opportunity in August. Price target is $23 (unchanged). Rating: High Conviction Buy.

Rudi Talks

Audio interview on Wednesday:

https://www.youtube.com/watch?v=BTmBz-IC8JA

Rudi On Tour In 2019

-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

(This story was written on Monday and Tuesday 15th & 16th July 2019. 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 follows 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).

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

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

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

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