Tag Archives: Rudi’s View

article 3 months old

All About Bonds (And Central Banks)

In this week's Weekly Analysis:

- All About Bonds (And Central Banks)
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

All About Bonds (And Central Banks)

By Rudi Filapek-Vandyck, Editor FNArena

If it's obvious, it's obviously wrong.
[Joe Granville]

Life is perception and nowhere is this universal truth as dominant and as tangible as in the share market.

Take the UK, for instance. The FTSE100 is up circa 12% since the initial plunge post the surprise outcome of the Brexit plebiscite in late June. Economic data have held up surprisingly well. If this is how UK citizens and businesses respond when under siege, then bring it on! When is the next Brexit?

Of course, in real life (IRL) things look a lot different. Analysts at Citi released a report last week in which they highlighted the gap between investors' perception and reality. UK equities have markedly outperformed their global peers over the past three months. The stone cold reality is, nevertheless, the UK's outlook has deteriorated, as explained by the Citi report "Brexit – storm in a teacup? What happens when central banks sugar the outcome".

The real impact was always going to be long term, explain the analysts in the report. The fact the UK economy at face value has been performing so well is because economists' expectations had fallen so low post Brexit. Add additional stimulus from a proactive Bank of England, plus a substantially weaker currency and the cocktail is complete.

To gauge share market performance, one only has to look at various currency movements. A stronger yen means Japanese equities are down double digits thus far in 2016. A slightly softer USD has translated into moderate returns for US equities. A significantly weaker GBP has facilitated substantial outperformance for UK equities.

In Australia, the stronger-for-longer Aussie dollar has kept a lid on the local share market. Total return year-to-date past the middle of the month point in September is still positive, but only just (+1.93%), and only when dividends are included.

Central Banks Rule Bonds

These moves in currencies link back to central bank policies and manipulations of domestic bond markets. The Federal Reserve would like to start unwinding what it started in December 2008 (nearly eight years ago!), but central bankers in Europe and in Japan are nowhere near the point of completion with their extreme stimulus policies.

In fact, while many a market commentator points towards Janet Yellen and the US bond market to explain why shares in Transurban, Sydney Airport and the like are now out of favour on the ASX, it is the Bank of Japan that is causing global bond yields to rise. Pushing short term bond yields ever deeper into negative territory is not working. We know this now.

It does not mean ECB and BoJ are simply going to throw their hands up in the air and declare defeat. The latest "twist" in this sorry tale of extreme bond market manipulation is central bankers are now changing focus on steepening yield curves, whereby longer term yields are higher than shorter duration bonds.

So far bond markets are prepared to stick to the script written by central bankers. The mind shudders when thinking about the day this might no longer be the case.

USA Versus The Rest

One reason as to why many a fund manager is nervously watching, as the latest chapter in global central bank manipulation unfolds, is because there may not be any place to hide if/when this global experiment derails. From gold, to crude oil and metals, to equities,.. everything is impacted by global bond yields.

For equities, the importance of the latest "twist" in central banks' market intervention is probably best illustrated by the two charts below.

The first one shows what has every investor's heart beat racing; even after 7.5 years of strong bull market conditions, US equities continue to confound the critics by reaching for the stars, suggesting there could be a lot more upside potential on the horizon.





The second chart reveals a picture that looks a lot less reassuring. As a matter of fact, this one looks quite frightening. It shows the rest of the world has not quite enjoyed the same bull market as have Facebook, Amazon and the like in the US.




Short Term Trend Lines

As we move throughout what is traditionally the weakest period in the year for equity markets, this glaring disparity between US equities and elsewhere in the world also shows up in shorter term trend analysis.

Take a look at the chart of the S&P500 below. I added two trend lines to illustrate what is going on beyond the multiples in interpretations, forecasts and commentaries. With US equities hitting a soft spot ahead of this week's FOMC meeting, it is possible, probably even likely, the index will puncture the trend line from the February lows (green), but a significant gap remains to the trend line in red, which started in early March 2009.

This suggests ongoing bull market conditions. With support from the February lows about to disappear, it may well be that US equities are in for rougher times ahead, but plenty of weakness can ensue while still keeping the uptrend intact that started in March 2009 (7.5 years ago).




This is not what it looks like on charts for most other markets. In Australia, as your gut probably would have told you, the ASX200 has already broken below the trend line off the February low. We are not about to break through trend support from March 2009, but at the same time, it would not require an extraordinary outburst to the downside to get us there.

Thus far, my basic chart analysis signals we might be facing a less accommodating environment, in line with seasonal patterns for the time of the year, but nothing that suggests the longer term uptrend off the 2009 bear market low is about to be threatened. Investors shouldn't be overly complacent with the 200 moving average (MA) flatlining around 5200, which is where the ASX200 bounced off on Friday.
 



All About Bonds

As per usual, share market weakness goes hand in hand with plenty of uncertainty and unanswered questions. Is the weakness in US data a temporary phenomenon or the harbinger of a softer-for-much-longer environment ahead? Can the Federal Reserve hike interest rates in 2016? Will the earnings recession for corporate America continue? What if Donald Trump makes it to the White House? Is there a Chinese banking crisis but a stronger greenback away? How low will prices fall for apartments in Australia next year?

Most questions on investors' mind are doomed to be of secondary importance only. With government bond yields once again adjusting to a change in central bank policy, watching global yields move in orderly fashion, and through baby steps only, is from now onwards the key factor in the outlook for all financial assets, apart from cash under the mattress, that is.

Stockpickers' Favourites

Those investors who'd like to treat this year's seasonal weakness as a buying opportunity might want to take note of Macquarie's analysis post the August reporting season in Australia. The stocks below have been identified as the highest quality growth options available.





UBS analysts recently identified their own share market favourites: Aristocrat Leisure ((ALL)), Healthscope ((HSO)) and Brambles ((BXB)) for Growth At Reasonable Price (GARP), James Hardie ((JHX)) among the high PE stocks and Orora ((ORA)), Star Entertainment Group ((SGR)) and Wesfarmers ((WES)) for growth at more moderate PEs.

Strategists at Deutsche Bank upgraded mining stocks to Overweight, while reducing banks from mildly overweight back to Neutral, as well as trimming overweight positions in housing sector related stocks. Deutsche Bank is cautious on defensives and doesn't like non-bank financials.

Citi's Small Cap idea for the month is Aconex ((ACX)), with other Buy rated ideas including Ardent Leisure ((AAD)), Asaleo Care ((AHY)), ERM Power ((EPW)), Fisher & Paykel Healthcare ((FPH)), Myer ((MYR)), NextDC ((NXT)), Scottish Pacific ((SCO)), Senex Energy ((SXY)), Village Roadshow ((VRL)) and Wisetech Global ((WTC)).

The team has three Sell favourites: Event Hospitality and Entertainment ((EVT)), Premier Investments ((PMV)) and Orocobre ((ORE)).

FNArena's very own Sentiment Indicator (see website) has The Star Entertainment Group joining Qantas ((QAN)) as the most highly recommended stock on the ASX, followed by NextDC, Lend Lease ((LLC)), Aristocrat Leisure, Evolution Mining ((EVN)), APN Outdoor ((APO)), Cleanaway Waste Management ((CWY)), ResMed ((RMD)), AMP ((AMP)), FlexiGroup ((FXL)), Macquarie Atlas Group ((MQA)) and Downer EDI ((DOW)).

Equally important are the least recommended stocks by the eight stockbrokers under our watchful eye (these stocks have mostly Sell ratings): Charter Hall Retail Reit ((CQR)), Cromwell Property ((CMW)), Shopping Centres Australasia ((SCP)), Monadelphous ((MND)), Woolworths ((WOW)), Newcrest Mining ((NCM)) and Regis Resources ((RRL)).


Rudi On Tour

I will be presenting:

- Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- On Thursday, I will appear as guest on Sky Business, 12.30-2.30pm
- Still on Thursday, I will re-appear as guest on Switzer TV, Sky Business, between 7-8pm
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 19th September 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).


****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 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 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until August 31st. Paying subscribers can request a copy at info@fnarena.com

article 3 months old

August 2016 Reviewed: The Same, The New, The Numbers

In this week's Weekly Insights:

- August 2016 Reviewed: The Same, The New, The Numbers
- Rudi On Tour (note change of date)
- Nothing Ever Changes, Or Does It?
- Rudi On TV

August 2016 Reviewed: The Same, The New, The Numbers

By Rudi Filapek-Vandyck, Editor FNArena

"In our reporting season preview we flagged that stretched market valuations implied that either market expectations were too low or that stocks were too expensive. The latter now appears to be the case."
[Morgans Chief Economist, Michael Knox]

On the final day of the month, iconic retailer Harvey Norman ((HVN)) provided investors and market watchers with an almost perfect illustration of what had become an all too familiar script during this year's August reporting season.

The operational performance was strong, better than expectations, with all divisions showing growth. There's plenty of cash, and even more franking credits, hence the 55% jump in dividends, lifting the payout to 100% of profits. Analysts' expectations rose for the years ahead and consensus price target lifted to $5.26 from $4.70.

The share price rallied, but is now trading around $5.35, which is above consensus target, albeit not excessively so. No surprise, one broker downgraded to (an equivalent of) Sell and now the balance in the FNArena database stands at two Buys, two Holds and three Sells.

Those with a positive view point at the strong momentum that is likely to last throughout the new financial year, with consumers continuing to reach for electronic gadgets while the late cycle characteristics of the housing-related operations are seen as a relatively safe bet.

Those with a more cautious view see a downtrend emerging in the domestic housing cycle, while the one-off boost from Dick Smith's demise is not to be repeated. Those with a negative view suggest current momentum probably has another six months to go, tops, with a genuine possibility the retailer is at or near peak cycle profits. Their warning: investors should not be chasing peak multiples on peak profits, or else.

Shareholders in Harvey Norman share the same experience as with their peers on the registers of companies such as JB Hi-Fi ((JBH)), Amcor ((AMC)), Corporate Travel ((CTD)), Treasury Wines ((TWE)), Orora ((ORA)), Ramsay Health Care ((RHC)), Domino's Pizza ((DMP)), and others.

Bottom line: many of the strong performers yet again continued to showcase as to why they trade at a sector or market premium, and why they deserve their premium, but they are only worth holding on to if investors remain convinced the growth story still has more legs, irrespective of the many question marks that remain.

Meanwhile, the price chart for Harvey Norman continues to be nothing short of impressive, with no end as yet showing up for the solid, uninterrupted up-trend since late 2012.

The Alternative

Harvey Norman et al are merely the exception in Australia, so there are plenty of alternative scenarios around. We might as well stay on the final day of the reporting season, when large cap building materials stalwart Adelaide Brighton ((ABC)) released its interim financials.

Expectations beforehand were far from spectacular, but still, they were too high for Adelaide Brighton. Competition in lime, declining volumes in cement and plenty of doubt whether recent price increases won't need to be reversed. It wasn't a major shock, simply no medal performance, with plenty of weakness and vulnerabilities, and the result itself was below expectations.

Similar to Harvey Norman, Adelaide Brighton seems to be swimming in cash and the company has decided to pay out more to shareholders in the form of a special dividend. The share price did receive a little bit of punishment post the release while analysts were forced to slightly lower estimates. The share price sits close to the 200 moving average, which should provide support, as does the yield on offer. The latter means Adelaide Brighton shares are not genuinely "cheap".

None of the stockbroking analysts covering the stock in the FNArena database has a Buy rating on the stock. Most will tell their clients: limited downside, due to yield support and the promise of more specials. Ex-special dividends, Adelaide Brighton shares yield some 5%, fully franked. Harvey Norman shares, despite being on higher multiples, still yield circa 5.5%, also fully franked.

One is firmly in defensive mode, with little prospect other than (potentially) a little bit of top line growth, trying to protect its long term shareholders from too many downside risks. The other is firing on all cylinders, with a healthy balance sheet, conservative accounting, international operations... and a share market valuation above its historical average.

Welcome to investing in the Australian share market post August 2016 where struggling companies are maybe "cheap" on a market-relative comparison, but they're not necessarily in their own right, while those with strong and battle-hardened business models are without exception trading on elevated multiples.

Turnaround Potential

As per standard practice, there is always the potential to jump on turnaround stories. This year's come back sector du moment has been mining services with stock broker targets and valuations often tripling after contractors and engineers released financial reports that triggered sufficient confidence the worst is behind and cautious optimism might be the appropriate way forward.

A few problems have risen to the surface nevertheless. One is many share prices have already rallied hard in optimistic anticipation, and share prices are oft seen already trading above price targets despite a doubling or tripling of the latter. Secondly, this is early days under the best of circumstances, and too early under all other scenarios.

Compare, for example, price charts for Monadelphous ((MND)) and for RCR Tomlinson ((RCR)) to see the difference in potential turnaround experience. Needless to say, Mr Market takes no prisoners in case of any slippage or disappointment and present optimism is based more on hope and speculation than on tangible evidence.

There is turnaround potential elsewhere through the likes of Asaleo Care ((AHY)), FlexiGroup ((FXL)), Cleanaway Waste Management ((CWY)), Coca-Cola Amatil ((CCL)), Computershare ((CPU)), GUD Holdings ((GUD)), Infomedia ((IFM)), Shine Corp ((SHJ)), Super Retail ((SUL)) and, of course, Woolworths ((WOW)).

A reminder from Warren Buffett himself: "Turnarounds seldom turn". "Buyer beware" plus "timing is important" come to mind as well.

The Fallen Angels

A lot of attention always goes out to high multiple stocks that experience a stumble, like REA Group ((REA)). To put the REA experience into context: the share price did rally hard leading into the result, while I thought the risk was always going to be to the downside because real estate listings have been lacklustre of late.

Going back three years, such has been the experience of REA Group shareholders in pretty much every reporting season, yet the shares today are still up some 4.5% for the calendar-year-to-date (ex dividend), and they are up strongly on a 12 month flash back, as well as over the past 24 and 36 months.

This, however, is not going to be the script for every market darling that failed to live up to expectations in August. APN Outdoor ((APO)) comes to mind, as well as Cimic ((CIM)) and, of course, Blackmores ((BKL)). All three are now faced with the difficult task of convincing investors last month's disappointment was just a one-off.

There's no denying, however, the fall-of-a-cliff experience in 2016 goes to the local aged care accommodation providers. As I write these sentences, Regis Healthcare ((REG)) is down -16.44%, Japara Healthcare ((JHC)) is down -15.44% and Estia Healthcare ((EHE)) is down -12.70%; on the day!

These losses come on the back of already ginormous sell-offs in August. No doubt, this sector will soon become the target for battle hardened, experienced value investors. For all others there are a few valuable lessons in this sorry saga:

- Do not draw long term confidence from short term price action. One thousand traders, a dozen algorithms and five investors pushing up the share price are still wrong when the proverbial hits the fan;
- A rising tide does lift all boats and makes all look healthy, strong and attractive
- An ebb tide separates the weak, vulnerable and low quality options from the strong and high quality companies
- But even the strong and high quality stocks get sold down when a full sector downturn arrives
- It is easy to fall in love with the long term growth story, while overlooking the short term context and dynamics

Other notable "disappointers" in August include G8 Education ((GEM)), Mesoblast ((MSB)), QBE Insurance ((QBE)), AMP ((AMP)), CSG Ltd ((CSV)) and Platinum Asset Management ((PTM)). Many of these names are the living proof for Warren Buffett's warning, see above.

All-Weather Performers

Putting my personal bias aside for now, there are always upside and negative surprises, even among the reliable and the strong. CSL ((CSL)) didn't manage to live up to expectations, providing evidence that buying a troubled division and turning it around is easier said than done, even for an experienced management team as is CSL's. But the All Weather Performers, on my observation, as a group continue to deliver more upside surprises and further ongoing signals of solidity and strength, than downside disappointments.

Within this framework, the best performing sector among All-Weather Performers in 2016 is Paper & Packaging with all three of Amcor ((AMC)), Orora ((ORA)) and Pact Holdings ((PGH)) delivering positive surprises, triggering higher forecasts, valuations and price targets, and enjoying share price improvements since reporting. Further adding to the sector's appeal, both Amcor and Pact subsequently announced additional acquisitions.

Blackmores came out with a shock guidance that is going to reverberate for a long while, but Ansell's ((ANN)) turnaround appeal has been remarkably well-received.

Yield Appeal

The banks showed up their operational challenges and vulnerabilities, as did Telstra ((TLS)), but most bond proxies in the share market, it has to be pointed out, delivered neatly in line with analyst expectations, or even slightly better. The big issue here is not so much operational reliability or not, it is the dilemma between ongoing yield appeal and the share market preparing for higher interest rates in the USA.

Many of the so-called bond proxies (AREITS, Infrastructure) are trading on elevated valuation, even after general weakness in August. Analysts' preferences are all over the shop, depending on whether one favours inner strength (like Goodman Group ((GMG)) or sectorial attractiveness (like Dexus ((DXS)) because of booming office prospects) or cheaper valuation.

In generalised terms, there doesn't appear too much wrong with growth prospects at Transurban ((TCL)), Sydney Airport ((SYD)), APA Group ((APA)), and the likes. For the typical AREITs, there are concerns for retail, and also for residential, in particular apartments in 2017, but all seems well for offices, Sydney in particular.

As said, there will be times when bond proxies simply will be out of favour.

August 2012 - The Numbers

Expectations before the flood of FY16 reports opened up were as low as they've been in a long time, with average EPS projected to decline by -10%. But this number is heavily distorted by the large falls that were expected from miners and from oil and gas producers. Excluding these sectors, underlying EPS was expected to grow by 5-6% and corporate Australia didn't quite get there. Suffice to say, and this is a general observation, not a personal statement, this year's August reporting season as a whole failed to excite.

Most companies still find it difficult to show top line growth, with cost management and capital management front of mind for management teams and company boards. No surprise hence why many a strategist is trying to contain expectations for the year ahead. Both UBS and Ord Minnett are sticking with 5500 for the ASX200 by end-of-December this year. Citi has put forward 5750 for mid-2017.

One stand-out feature from August were many cautious, if not disappointing outlooks provided by companies, while many others decided to stay mum on the subject, indicating it's genuinely tough out there, with uncertainties a-plenty.

In terms of beats and misses, FNArena's numbers signal a marked deterioration from February, but otherwise not anything fundamentally different from experiences in 2015 and 2014. The average price target throughout the month improved by 3.7%, which seems unusually high for August. Offsetting this observation is the fact that stockbrokers are now researching more smaller cap stocks plus share prices were already at elevated levels.

The latter explains the skew towards more downgrades than upgrades, with the gap between the two closing towards the latter part of the month when share prices started weakening on macro considerations.

All in all, the major conundrum seems to be that EPS growth expectations for the year ahead, ex-resources, are not higher than circa 7%, which is unusually low this early into the new financial year. If we also exclude the banks, estimated average EPS growth jumps to 11%, which is a much more palatable starting point given every year sees expectations decline significantly as the year grows older.

Apart from a much contested come-back for the mining and the energy sector, the big questions that now lay ahead are: can banks do better than benign expectations and how much will be left of today's average growth estimate by the end of fiscal 2017?



Many specialised consumer-oriented companies performed remarkably well in August, including the likes of Baby Bunting ((BBN)), Bapcor ((BAP)), Fantastic Holdings ((FAN)), Nick Scali ((NCK)), Reece Australia ((REC)), Shaver Shop ((SSG)) and Vita Group ((VTG)).

Plus BlueScope Steel ((BSL)) continues to prove there's no natural limit to the upside when the tide really does turn after many horrible years in the doldrums. The likes of Capitol Health ((CAJ)), Billabong ((BBY)) Cardno ((CDD)) Cover-More ((CVO)) and Wellard ((WLD)), on the other hand, still show plenty of evidence that once you are in the doldrums, it's not that easy to climb out of it.

As per always, plenty of small and micro caps around that are showing lost of promise, including Catapult Group ((CAT)), Class ((CL1)), Costa Group ((CGC)), GTN Ltd ((GTN)), Hub24 ((HUB)), Motorcycle Holdings ((MTO)), Nanosonics ((NAN)), Reliance Worldwide ((RWC)), and others.
 

Rudi On Tour

Please note the date change for upcoming presentation in Chatswood.

I will be presenting:

- To Chatswood chapter of Australian Investors' Association (AIA) on September 14, 7.15pm, Chatswood RSL

- Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- On Wednesday I will host Your Money, Your Call, Sky Business, 8-9.30pm
- On Thursday, I will appear as guest on Sky Business, 12.30-2.30pm
- I'll re-appear later on Thursday for an interview on Switzer TV, Sky Business, between 7-8pm
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 5th September 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).


****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 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 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until August 31st. Paying subscribers can request a copy at info@fnarena.com

article 3 months old

Your Editor On Switzer: August 2016 Reporting Season

Last week, Switzer TV host Marty Switzer interviewed FNArena Editor Rudi Filapek-Vandyck about his insights, views and observations regarding the August corporate results season in Australia.

To view the broadcast, click HERE

Past broadcasts can be viewed via the Investor Education section on the FNArena website: https://www.fnarena.com/index2.cfm?type=dsp_front_videos


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.

article 3 months old

Cost Reductions Versus Top Line Stasis

 In this week's Weekly Insights:

- Cost Reductions Versus Top Line Stasis
- Reporting Season: The Final Verdict
- Aged Care: Cheap For A Reason
- Most Highly Rated Stocks
- Rudi On Tour (note change of date)
- Nothing Ever Changes, Or Does It?
- Rudi On TV


Cost Reductions Versus Top Line Stasis

By Rudi Filapek-Vandyck, Editor FNArena

Quant analysts at Credit Suisse made two interesting observations during the local August reporting season. One is most companies find it hard to improve on their revenues, which by now might as well be considered an established trend in Australia. Number two is average cost for operating the business and making sales seems to be increasing faster than increasing sales.

The two observations combined have major ramifications for investors considering their investments and exposures.

One is cost reduction is losing out as a major source of profit growth. Two: it pays to be a master in cost reduction, with more potential in the pipeline.

The Quant analysts have done some research into this matter and, no surprise, their conclusion is the market rewards those companies who manage their costs best.

Here's the paragraph that sums it all up: "In particular, we find that low-cost growth stocks tend to outperform in periods of low economic growth and underperform in more buoyant economic environments, while the converse occurs for high-cost growth stocks. Both findings are consistent with what you would intuitively expect."

To further support their thesis, the analysts have come to the conclusion that concentrating on the best cost managers in the Australian share market has been the best performing investment style over the past seven years (since the GFC), including the first eight months of 2016, and also including this year's August reporting season.

Trend In Acceleration

It goes without saying, the CS Quant analysis is only of real value if you agree the seven year trend of tepid top line growth is not about to disappear on us. I think my eBook published last year(*) pointed firmly towards such conclusion. There doesn't appear to be any doubt in the CS Quant report.

But things are not necessarily as straightforward. On the analysis done, picking the best cost controllers only leads to a mildly market outperforming basket of stocks. A far more lucrative strategy is to pick those who cannot contain their costs, and then taking short positions. The latter strategy has significantly outperformed the ASX200 over the past seven years, as well as during 2000-2002.

Anyone looking for more evidence the current period carries many characteristics typical for an equities bear market? Call it a bear market in disguise, if you like.

This is where things get genuinely interesting: on the Quant analysts observation, investor demand for the best cost managers has grown thus far in 2016. In other words: with companies finding it increasingly more challenging to keep cost inflation below growth in revenues, the performance gap between the good and the not so good has widened this year.

Equally important, on the Quant analysts general assessment, the better cost controllers are currently, as a group, trading one standard deviation above historical valuation compared with two standard deviation for Australian shares in general.

An Important New Tool For Investors

CS Quant analysts have compiled a list of companies that appear good cost managers right now plus a second list of companies that appear not very good at it. But they are quick on their feet in admitting their rough data-analysis may not take into account all the twists, quirks and turns, and exceptions that can only be discovered through more detailed analysis.

So their prime advice is for investors to absorb this important piece of information, and conduct their own detailed analysis. Probably good to start with all companies held in portfolio, and those on your radar.

When reviewing both lists (see below), the Quant analysts warn not to take anything at face value. Controlling costs is but one component when judging an investment, and it should be considered as only one input factor when conducting analysis and calibrating one's investment strategy, the report stresses.

One easy to make observation is that a number of companies included on the aggregated "short" list has no problems whatsoever in achieving top line growth, which makes the need for cost control a lot less necessary. Au contraire, if management teams at, say, Bellamy's, Domino's Pizza and Aristocrat Leisure would start focusing on reducing costs and thereby neglecting their growth opportunity, I have little doubt the market would punish them severely, irrespective of any achievements in controlling costs.





In the Quant analysts own words: "This report shows that at different points in the economic cycle direct focus on cost growth will likely be rewarded with positive alpha.

"Given the outlook for a continuation of low economic growth for the foreseeable future, we would argue that investors should be placing more weight on analysis of cost growth, than they possibly have been, in their investment processes."

(*) Change. Investing in a Low Growth World. Published in December 2015. Paying subscribers to FNArena receive a free copy as part of their membership. All other investors can purchase their copy through Amazon or most other online channels.

Reporting Season: The Final Verdict

FNArena is currently wrapping up the August reporting season. Expect more updates of the Daily Monitor as well as a broad, general assessment throughout the remainder of this week.

Aged Care: Cheap For A Reason

Last year providers of accommodation services to Australia's aging population could do no wrong. This year it appears there's very little coming from and towards the sector that has the ability to excite.

My suspicion to date is investors fell in love with the broader theme, ignoring any negatives while share prices kept climbing to ever higher highs. Not every operator is of high quality. Analysts don't like to emphasise this fact, for understandable reasons, but reading in between factual comments and observations reveals an undisputed ranking between the three listed sector-leveraged entities, with Regis Healthcare ((REG)) believed to be of the highest quality, Estia Health ((EHE)) of the lowest, and Japara ((JHC)) sitting in between.

Looking at share price performances for all three thus far this year supports my observation. Regis Healthcare shares are down some -19% since December 31st; Japara shares are down in excess of -29%; while for Estia the losses ballooned on Monday's sell-off to circa -44%.

There is one very important lesson to draw from this: when conditions for the whole sector deteriorate significantly, don't get blinded by the apparent cheap valuation(s) or larger upside potential for the weaker or lower quality industry participants. It is under such circumstances that "quality" makes its presence felt.

Put in another way: you need a bull market for the lower quality stocks to generate better returns than their higher quality peers. In a bear market the principle works the other way around.

There's no denying these three stocks have fallen out of favour since the Turnbull government suggested the sector was probably over-earning at a time when budget repair and containing healthcare costs still are front of mind. One conclusion to draw from the fact Regis Healthcare ranks among the highest rated stocks in the share market is that most analysts (if not all of them) think management should cope when confronted with sector headwinds. See also further below.

Even then, investors should still heed the obvious, as expressed by Moelis on Monday: "We remain cautious on the aged care sector near term given the regulatory uncertainty, rising debt levels and complexity of managing a large pipeline of development work". Current expectations for FY17 are likely to be met, but it's projections for FY18 and FY19 that are less certain.

Estia Health reported as last on Monday and its release was not well received, judging from the double-digit sell-off that ensued. FNArena subscribers will be able to view brokers responses on Tuesday-Wednesday, but an initial assessment by stockbroker Moelis indicates Estia's FY17 guidance on top of a disappointing FY16 implies market consensus has to fall by some 15%.

As they call it in the trade: cheap for a reason.

Most Highly Rated Stocks

As one would expect, the tsunami of rating downgrades and upgrades that hit the Australian share market during the August reporting season has reshuffled analysts' collective preferences for individual stocks.

Take it as a given that overall sentiment towards Qantas ((QAN)) remains buoyant, carried by wide and wildly varied expectations about cash flowing into shareholders pockets in the year(s) ahead. No wonder thus, Qantas has remained as the sole ASX-listed stock with a perfect 1.0 score on the FNArena Sentiment Indicator. A perfect score indicates every broker covering the stock rates it Buy, or an equivalent.

Of course, it helps when the shares entered 2016 with a 4 in front and they are now, even after a meaty rally off the July lows, still trading closer to $3.00.

The old rule of thumb is the FNArena Sentiment Indicator isn't genuinely positive unless the score is 0.7 or higher. On this rule, there are only 21 stocks left in the complete FNArena database (400+ stocks) that carry positive sentiment as signalled by individual stockbroker stock ratings. The full list is included below.

Investors looking to integrate this info into their own market research and strategies should always keep in mind there's a difference between stocks being too cheaply valued, and thus receiving Buy ratings, and stocks carrying robust growth potential which is not yet fully priced in. Admittedly, the latter are harder to find in a stock market trading on elevated Price-Earnings multiples, but I think at least half of the stocks listed falls under that category.

Can you spot them too?



 

Rudi On Tour

Please note the date change for upcoming presentation in Chatswood.

I will be presenting:

- To Chatswood chapter of Australian Investors' Association (AIA) on September 14, 7.15pm, Chatswood RSL

- Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- On Wednesday I will appear as market guest commentator, Sky Business, 12.30-2.30pm
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 29th August 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).


****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 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 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until July 31st. Paying subscribers can request a copy at info@fnarena.com

article 3 months old

Your Editor On Twitter

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

****

- Word play of today: Select Harvest's (SHV) FY16 missed expectations and Moelis suggests almonds to get roasted... #ausbiz #XJO #investing

- Trading Tip from Morgan Stanley: Incitec Pivot (IPL) shares to weaken over next 60 days as market appreciates downside risks #ausbiz #XJO

- Morgan Stanley: Woolworths (WOW) turnaround already priced in, yet we think in all likelihood it will never actually eventuate #ausbiz #XJO

- Moelis sees buying opportunity in share price decline RCG Corp (RCG). Buy, target $2.05 #ausbiz #XJO #stocks #investing

- CLSA reduced price target Blackmores (BKL) to $110 from $140, rating Sell due to too much uncertainty #ausbiz #stocks #XJO #investing

- Noted: CLSA retains Sell rating with $19 target (up from $18.50) for Woolworths (WOW) #ausbiz #investing #stocks #XJO

- Is August really all about corporate hits & misses? How about stretched valuations? Inside the broker data http://goo.gl/4gQz2E  #ausbiz

- Dennis Gartman notes S&P500 futures poised to post weekly reversal on price charts. Ominous signal? #ausbiz #XJO #stocks #investing

- Interesting. UBS (Sell, target $19.30) sticks to view consensus expectations too high for Woolworths, yet shares are rallying #ausbiz #XJO

- Word play of the day, by @DougKass: More Proof that CAT Is a Dog. He's adding more shorts #ausbiz #investing #stocks

- Canaccord Genuity Upgrades Imdex (IMD) to Buy, 56c price target #ausbiz #investing #XJO #stocks

- Citi sees August reporting season as "disappointing". Sees limited upside to ASX200, forecasts 5750 by mid-2017 #ausbiz #investing #XJO

- Citi's base-case for #ironore is average US$55/t in 2H'16E before falling in 2017 to average of US$45/t #ausbiz #XJO #commodities #stocks

- Trading Tip from Morgan Stanley: Japara (JHC) shares to weaken over next 60 days post disappointing FY16 release #ausbiz #XJO #stocks

- CLSA cuts Ainsworth Gaming (AGI) to Sell, target $2.09 on outlook for reduced market expectations post FY16 #ausbiz #XJO #stocks #investing

- Canaccord Genuity initiates Gold Road Resources (GOR) with SPECULATIVE BUY, 85c price target #ausbiz #XJO #gold #stocks

- Moelis reiterates Buy recommendation for Greys Ecom (GEG) with a 12 month target price of $1.55 #ausbiz #XJO #investing #stocks

- Shaw & Partners: market has been more expensive than current levels before,but it usually hasn’t ended well #ausbiz #XJO #investing #stocks

- Citi analysts state now is the time to start selling #gold equities #ausbiz #XJO #investing #stocks

- Moelis initiates Centuria Metropolitan REIT (CMA) with Hold rating and 12 month target price $2.40 #ausbiz #XJO #investing #stocks

- Morgan Stanley initiates Syrah Resources (SYR) with Underweight, target $3.75 as disruption, graphite price weakness loom #ausbiz #XJO

- Macquarie remains a stoic non-believer in the Whitehaven Coal (WHC) outlook story. Underperform. Target $1.10 #ausbiz #XJO #stocks #coal

- Bullish on Bellamy's (BAL)? Ord Minnett has raised its price target to $20 #ausbiz #investing XXJO #China2.0 #stocks

- Moelis upgrades Tassal (TGR) to Buy with revised 12 month price target $4.71 #ausbiz #XJO #stocks #investing

- CLSA downgrades IAG to Sell. Target lowered to $5.10. Retains Sell for Lend Lease (LLC) #ausbiz #investing #XJO #stocks

- CLSA post BlueScope Steel's interim report: "Stock should perform strongly again today" #ausbiz #XJO #stocks #investing


You can add my regular Tweets on Twitter via @filapek

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.

article 3 months old

August Valuation Conundrum

In this week's Weekly Insights:

- August Valuation Conundrum
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

August Valuation Conundrum

By Rudi Filapek-Vandyck, Editor FNArena

I've always gotten a kick out of oxymorons – phrases that are internally contradictory – such as 'jumbo shrimp' and 'common sense'.
[Howard Marks, Oaktree Capital Management]

There are quite a number of unanswered questions haunting investors right now, such as "is OPEC finally ready to coordinate production" and "is Janet Yellen's FOMC finally ready to lift US Fed Funds from its tepid 0.25-0.50%"?

The answers to both questions will have a huge impact on financial assets and trends witnessed in 2016. Thus far, all we have are expert opinions, empty speculation and lots of noise in financial media.

Financial markets don't really know what to make of it either. The rallies off February lows have been robust. There is not a stockbroker or funds manager walking around without an extra twinkle in his eye. Cash from the sidelines is moving back in. Apart from valuations looking high on historical measures, what's not to like?

Well, see those two questions at the start of this market commentary but before we go there, let's zoom in on the local reporting season to date.

It's A Raging Bull Market, Mate

Whitehaven Coal, up 153% over three months. Fortescue Metals, up 157% from a year ago (62% over three months). Independence Group, up 61% since mid-May. However, the bull market for local equities does by no means stop with resources. a2 Milk shares are up more than 200% over the past year. Credit Corp is up 39% since May and Aconex has added 86% from twelve months ago.

Whoever is drawing up past performance tables these days must be rubbing his eyes. Broader indices are nowhere near reflecting such buoyancy, let alone the performances of most investment portfolios. What is happening? Well, it's a raging bull market, mate, just not in the top part of the share market.

Banks and other financials continue to range-trade between semi-loved (because of dividend yields on offer) and un-loved (because of operational hurdles and a tough outlook). Miners and energy companies have started to make a come-back, but the larger stocks are still down on last year because that's how strong and fierce the downtrend was.

All of this has mattered little for investors who have turned their attention to smaller cap industrials and fresh IPOs. Australian Agricultural Co, up 30%. Downer EDI, up 30%. Bellamy's, up 30%.

This is not a story just about "expensive defensives" and the global hunt for yield, but all roads do start and end with the Federal Reserve chaired by everyone's favourite nanna, Janet Yellen.

Fed is confused and confusing

The Federal Reserve is going to raise interest rates. We all have to believe this is still the case. Because the alternative is way, way worse.

The crucial questions then become: when? and at what pace?

Even if we can believe Yellen on her promise any moves shall be gradual, measured and considered, there still is no clarity whatsoever. We can all speculate and debate the issue at hand until the cows come home, but at the end of the day, both answers matter, and they matter a lot since the bond market is not pricing in anything for a long while and equity valuations in the meantime have surged well above historical norm.

Yellen is scheduled to deliver a speech at the infamous Jackson Hole annual economic policy symposium by the end of this week. Those who finally wish to see some real action on interest rate normalisation should heed the warning to be careful what they wish for. Financial markets are not set up for imminent Fed interest rate hikes, and Janet Yellen knows it. But she also cannot let complacency settle for too long.

For what it's worth: I think the Federal Reserve might hike in December, to save face and to keep the mantra of "gradual and considered" alive. Note my choice of words; "might" not "will". How exactly this is going to translate through her speech later this week and during the remaining four months until the December meeting, I haven't the faintest idea. But neither has anyone else. And that probably includes Janet Yellen.

In the words of CIBC economist Benjamin Tal, "The Fed is confused and confusing". With central banks in the UK, China, Europe and Japan to remain "loose", "supportive", "dovish" and "extreme" (pick your pick), is it feasible the FOMC is ready to spoil the international central banks' liquidity and stimulus party?

Danske Bank thinks not. The strategist there reiterated his view last week the Fed will be keeping interest rates on hold until June 2017.

August Valuation Conundrum

As can be verified from the pie charts that accompany this market commentary, Buy ratings only represent some 38.5% of total stock recommendations from the eight stockbrokers covered daily by FNArena. Hold/Neutral ratings are by far the largest group, making up 46%+ with Sell ratings taking the remaining 15%.

Only one stockbroker out of the eight, Morgan Stanley, still carries more Buy ratings (Overweight) than Neutral ratings (Equal-weight) and this is probably due to the fact that our one-dimensional approach doesn't account for this stockbroker's two-tiered correlation with underlying sector views. Even stockbroker Morgans, traditionally the most bullish among peers under most circumstances, now carries more stocks under "Hold" than under "Buy".

To put these observations into context: back in 2007, Macquarie proved the last broker standing with more Buys than Neutral ratings. The percentage of Hold ratings peaked at 49% while Buy ratings for a long while hovered around 38%. The difference between now and then, I kid you not, is brokers had fewer Sell ratings than they have today.

Forget about companies missing, meeting and beating expectations. The real share market conundrum is captured into these numbers.

Those looking for answers on oil might want to consider the supportive impact from a relatively weak US dollar, as has been the case for commodities in general and, indeed, for risk and risk assets in general.

Rudi On Tour

I will be presenting:

- To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

- Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Thursday I will be interviewed on Switzer TV, Sky Business, between 7-8pm
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 22nd August 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).


****

BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 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 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until July 31st. Paying subscribers can request a copy at info@fnarena.com

article 3 months old

Your Editor On Twitter

By Rudi Filapek-Vandyck, Editor FNArena

I like to question the ruling logic that goads the herd, or at the very least stimulate independent thinking. There's a big difference between playing market momentum as a short term trader and trying to figure out what the best asset purchases are for longer term investing.

Since 2012 I maintain my own feed of quotes, comments, responses and market insights via Twitter. Not everyone is on Twitter, which explains the requests to make my Twitter items also available through the newsfeed on the FNArena website.

Usually I combine all Tweets from the week past in one weekly story. Below are my Tweets from the week past. Enjoy.

Investors can follow me on Twitter via @filapek

****

- Watch me tonight @SkyBusiness YMYC 7-8pm with @MarkTodd8 + @rjmontgomery #ausbiz #investing #XJO #stocks 

- Trading Tip from Morgan Stanley: Downer EDI (DOW) to weaken next 60 days following miss NSW Intercity fleet contract #ausbiz #stocks #XJO

- Trading Tip from Morgan Stanley: BlueScope Steel (BSL) to outperform sector next 60 days following weakness #ausbiz #XJO #stocks #investing

- So bored hearing talking heads waffling. Domino's Pizza (DMP) trading on 70x. Really? Forward PE is 55.8x #ausbiz #investing #XJO #stocks

- UBS notes topline & margin pressures for BOQ. Suggests bank would be better off cutting its dividend. Target drops to $10.50 #ausbiz #banks

- ANZ Bank: remain sceptical renewed talks of production freeze by OPEC and other large producers will lead to a deal #ausbiz #crudeoil #XJO

- QBE receiving broker downgrades, but CLSA reiterates Buy, lifting target to $14.10, predicting bright future ahead #ausbiz #XJO #stocks

- Morgan Stanley seems convinced BlueScope (BSL) guidance will be a ripper. Upgrade to Overweight from Equal-weight #ausbiz #XJO #stocks

- CLSA reiterates Buy rating for BWX with target raised to $5.40 #ausbiz #investing #XJO #stocks

- Deutsche Bank summarises it neatly: "Another result, another region disappoints". QBE Insurance. One day, one day #ausbiz #investing #XJO

- Macquarie warns: Flight Centre (FLT) poised to surprise, don't be caught short into FY16 release #ausbiz #investing #XJO #stocks

- CIBC: continue to believe data and underlying risks to the economy won't warrant Fed rate increase until December #ausbiz #XJO #stocks

- Meatloaf sang two out of three aint bad. In finance this translates into 6/10. Adjust expectations http://bit.ly/2bd7e05  #ausbiz #XJO

- Some turnaround stories take an excruciating long time to eventuate. QBE Insurance is a case in point (see W Buffett) #ausbiz #XJO #stocks

- CLSA downgrades G8 Education (GEM) to Sell, target price cut to $2.90, balance sheet concerns #ausbiz #XJO #investing #stocks

- A confident Morgan Stanley warns "The reliable Sep-Oct pullback is nigh". It's about #ironore, of course #ausbiz #XJO #commodities #stocks

- CBA says dangerous downward trends in wages and inflation are very likely to support another RBA rate cut in November #ausbiz #XJO #stocks

- Bell Potter says share price weakness in BWX post FY16 report is buying opportunity. Suking sales to remain strong #ausbiz #XJO #stocks

- Trading Tip from Morgan Stanley: Santos (STO) to outperform sector over nxt 15 days with interim report due #ausbiz #XJO #stocks #investing

- Observation: Domino's Pizza (DMP) share price still hasn't reached $80 price target set by uber-bulls Morgan Stanley, getting close #ausbiz

- Citi economists are now expecting the RBA to deliver another 25bp cut in November, no need for exceptionally low inflation #ausbiz #XJO

- Canaccord Genuity has upgraded Galaxy Resources (GXY) to Buy with 65c price target #ausbiz #XJO #stocks #lithium

- UBS upgrades Aussie 2017 GDP growth estimate from 2.7% to 3.0%, albeit with slightly weaker consumer wealth context #ausbiz #XJO #stocks

- Packaging performer Orora (ORA) further highlighting "expensive valuation" is a relative concept in this market #ausbiz #XJO #stocks


You can add my regular Tweets on Twitter via @filapek

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.

article 3 months old

Six Out Of Ten

In this week's Weekly Insights:

- Six Out Of Ten
- August: Not All About Financial Results
- Coal Causing Plenty Of Pain
- ASA - Short Interview
- Rudi On Tour
- Nothing Ever Changes, Or Does It?
- Rudi On TV

Six Out Of Ten

By Rudi Filapek-Vandyck, Editor FNArena

A friend of mine is a loyal subscriber to a micro caps newsletter.

Last week, he explained to me the basic principles of how "it" works.

On average, the newsletter will recommend say 30 stocks. Of these five will absolutely shoot the lights out. Think share price performances of 300%, maybe even higher.

The next ten will still show healthy performances, but not that extreme; still better than the market average. The next ten, however, are disappointing. The remaining five are ab-so-lu-te shockers. You'd be lucky to not lose your socks, your shirt and your trousers if you don't pay close attention.

From here onwards things get interesting. Calculate the average return for the whole basket of 30 stocks and you are well ahead of the ASX200 which, incidentally, hasn't been a great performer in the past two years anyway. So that's one way for this newsletter to grease the marketing machine. Another one is to highlight the top picks: up 300%, who wouldn't like that?!

Of course, none of this is a lie but when you are a subscriber you face a few problems. If you don't just follow all recommendations blindly and buy the lot, you risk picking stocks from the bottom end of the performance ladder and your return will be nowhere near the advertised performance.

And that's not even mentioning the low volumes that might ultimately become the norm again after the initial excitement has dried up. Better to take profits early and don't get stuck with a bunch of others who also like to take profits when there are not many buyers left seems to be equally as important.

Recently, it has transpired, the newsletter has received lots of complaints because a number of recommended stocks had already been popping up before subscribers had the chance to digest the latest information.

Needless to say, my friend's experiences have been a mixture of hits and misses, which have made him more than just a little critical about this particular corner of the share market.  News flash: things often seem easier and much rosier in marketing than they are in real life.

Six Out Of Ten

Years ago, I had the audacity to track and calculate the effectiveness of the bulk of ratings and recommendations issued by the stockbrokers that are monitored daily by FNArena. My assessment at the time revealed a balance that was slightly better than said micro cap newsletter; between six and seven out of ten broker recommendations turned out to be an accurate prediction.

It is often stated among funds managers that if you are good at stock picking you probably score, on average, six out of ten. You get to seven if you are exceptionally good; either that or you're simply enjoying a lucky break, like during a raging bull market period which, as we all know, lifts more boats than usual.

It made me think. Maybe my friend's assessment is a little off because he hasn't actually kept a detailed ledger. Maybe the number of outperformers sits not exactly in the middle at 50%, maybe it is a little more positive. Six out of ten sounds reasonable. It's what the average funds manager is expecting by year-end.

More good choices than bad ones. This is why old trading hands know the adage "let the winners run but cut your losses short" is not just a popular marketing spiel. For many it makes up the difference between success and failure.

Six out of ten, on my observation, is what investors should expect from stockbroking analysts. Here the same problem rises to the surface as for those who subscribe to newsletters or try to emulate purchases by professional funds managers: which choices exactly are the good ones and which are the ones best avoided?

If only Harry Hindsight could make a quick trip from the future and tell us today.

Research Makes Smarter

Stockbroking analysts may not necessarily be worse or better than others who try to predict the future, the big difference is their misses are usually highlighted repeatedly and mocked by all and sundry. We too here at FNArena have had a lot of fun throughout the years.

Remember that "idiot" who rated Slater & Gordon a buy just before the share price started tanking? Or the stock picking "genius" who suggested BHP Billiton shares near $50 were no less than a screaming buy at the time? Don't get me started about the Buy ratings for QBE Insurance. Surely one day they will be correct.

And on and on it goes.

Truth is, for every abject failure in the FNArena database there is at least one accurate call elsewhere. And many inside the financial industry have a vested interest to pick on stockbrokers. Either because they publish their own tip sheet or newsletter, or because they try to convert investors to charting and technical trading, or something similar. They'd all be hiding under their desk if their own failures were to receive the same level of public scrutiny.

This is the point where I probably should start an elaborate marketing spiel for FNArena and why we offer you recommendations by multiple leading stockbrokers, why we calculate consensus forecasts and targets, and added various other services and calculations. For now, however, I am assuming you already know all of this. (If not, there's nothing stopping you from visiting FNArena.com and signing up for a free trial anytime).

Instead, I have chosen to reveal to you what virtually nobody writes or talks about: behind the scenes of every day headlines, financial marketing overkill and popular stockbroker bashing, there's an almost insatiable appetite for research reports produced by the ever shrinking number of employed stockbroking analysts. Those who want these reports range from stockbrokers (yes, indeed!) to financial journalists, to funds managers and publishers of newsletters and tip sheets (yes, indeed!).

They all know there is a lot of detail and information in these reports, and a lot of work has been done to compile them. Reading these reports, even if only in parts and not very thorough, makes one smarter. Instantly.

Not Just About The Ratings

Which takes me to the core of the message I am trying to convene today: too much attention goes out to ratings issued by stockbroking analysts for individual stocks or to exact predictions like crude oil is going to US$20/barrel.

Instead, investors would be much better off if they focused more on the details and the reasoning/insights behind those ratings and predictions. I do it every day, as much as I can. At the very least it keeps me in check with what exactly is bubbling around the traps, but most of all this helps me to understand the key issues.

Of course, if you are a 100% technical trader who likes to jump in and out whenever a trading signal pops up, you probably couldn't care less. And you shouldn't. The fewer distractions, the better. But for investors who like to understand what they are buying, potentially with the goal of holding shares for a prolonged time, I don't think you can ever be experienced or knowledgeable enough.

The more experienced you are and the more knowledge and insights you own, the better you can use the input from stockbroking analysts. This is why I don't end up confused or put off by conflicting ratings and opposing analyses. It needn't be a problem if you manage to decipher the core factor that is at stake.

For example: after Woolworths' shares had peaked near $38 in April of 2014, a national discussion started about industry pressures for local supermarket operators due to increasing pressures from foreign competitors such as Aldi and Costco. That discussion only gained more traction and by late 2015 (Woolworths shares were still trading around $36 then) it almost became a national division; pros against contras, supporters versus detractors.

I am still not sold on the idea that Australia is going to follow the same path as the UK supermarket sector, as suggested by part of the research community locally, but one look at a Morgan Stanley report at that time convinced me that Woolworths was about to go down the gurgler. In it the analysts pointed at the exuberantly high operating margin Woolworths was enjoying and in order to fend off the competition, that margin could only come down.

When one considers a highly priced share price with the prospect of a falling margin multiplied by more than $35bn in annual turnover, it should have been a fait accompli for everyone that Woolworths shares once they fell to $30 were still not a great opportunity to jump on. Yet many thought it was the opportunity of a life time, including a large number of newsletters and funds managers at that time.

In case anyone's memory needs refreshing: Woolworths shares have since threatened to break below $20 on a few occasions and they are currently trading above $23 on general market optimism the worst is over and new management is going to right the ship, soon. Call me sceptical (though I have to admit more bad news is not necessarily going to push the share price a lot lower).

Admittedly, I probably have more opportunity and time to read broker research than most investors in the market, and I can have access to full reports in most cases, plus I have been doing this for more than sixteen years in Australia. That's a lot of accumulation in observations, analysis and hands-on experience.

Regardless, I think the underlying thesis stands. If you want to become a smart investor tomorrow, you should read a big heap of research today. More insights and conflicting views will confound and confuse at first, but they will make you a smarter and better investor over time. The smarter you become, the better you can handle the information and the at times conflicting views and insights.

Always keep in mind: six out of ten. That's synonymous for "human" and for "average to good". (Too many lesser experienced investors are looking for "perfection", which eventually becomes their downfall).

It's not like I am inventing the wheel here. The journalists you read and listen to already, the funds manager who talks to the press with full confidence, the analysts behind the tip sheet or newsletter; they all are doing it already. And by golly don't they all look smart!

Core Issues To Focus On

I could write a lot more about how personal experience and those often maligned stockbroking analysts have equally kept me on the correct trail when false opportunities presented themselves at Orica, Incitec Pivot, Computershare and others. Admittedly, at times they kept me out of future winners as well. At least I understood why. One cannot kiss all the beautiful girls, and one shouldn't try to either.

See the quest for perfection mentioned earlier.

For the purpose of this exposition, and to provide some evidence, below are some of the key factors I believe should be on investors' radar for selected stocks and sectors (with many thanks to the analysts for their contribution):

- Australian banks - whereas most attention goes out to valuation (banks seem cheap) or to whether other banks will need to follow ANZ Bank and cut their dividend (maybe National Australia Bank ((NAB)), not to mention the potential need for additional capital, an equally important question is whether CommBank ((CBA)) deserves to retain its traditional and rather sizeable premium vis-a-vis the rest of the sector. Old habits die only slowly. It's up to CommBank management to prove the doubters wrong, assuming it will be in their control.

- Telstra ((TLS)) - In a few years, the NBN is going to level the competitive field and there will be no more cash payments from the Australian government to shed ownership of the old copper wires. At the very least the former telco monopolist is facing a shortfall of between $2-3bn compared with today. And margins are going to take a dive. Telstra the next Woolworths? Such a conclusion seems premature right now, but the problem is right there on the medium term horizon. This is the reason why management is looking overseas for investment and acquisitions. Expect more cost cutting too. Meanwhile, the clock is ticking.

- Automotive Holdings ((AHG)) - the reason why the share price melted upwards once the departure of the old CEO had been made public is because investors salivate by the prospect the new leader is likely to get rid of the logistics operations, considered one of the main reasons as to why the shares are undervalued in comparison with industry peers. On the flipside, investors need to be aware ASIC is investigating consumer credit in the automobile sector and analysts believe a negative revision leading to restrictions and forced changes for the industry could cause a short term drop to the tune of 20% in sales and profits. Always good to know both the risk and the potential opportunity.

- For up to date insights and expectations regarding this month's local corporate reporting season: see Weekly Insights from 1st August; August Reporting Season 2016: Valuations Versus Earnings

Of course I am biased in this, and ultimately I am recommending you join as a paying subscriber to our service here at FNArena, but it's not like I am promising you an automated system that guaranteed will make you rich with only five minutes of your time per day. I am sharing how I try to remain smart and in tune with the market. Yes, it requires time and effort.

It would be foolish to expect otherwise.

August: Not All About Financial Results

Most attention this month goes out to the numerous financial report cards released by corporate Australia. Understandably so. There is ongoing public discussion about the likely outlook for the Australian economy, the direction for the RBA cash rate and what the hell is keeping the Aussie battler at US76c when just about everyone had been expecting sub-70c by now.

FNArena subscribers are hopefully aware we are keeping track of corporate reports, and their impact on stockbroking analysts views, calculations and expectations via a daily news story plus excel sheet update on the website. Check your daily emails, or visit the website for your daily catch up.

For some market participants, the upcoming quarterly indices rebalancing by Standard & Poor's will be equally on the radar. Those who keep their eyes open know these rebalancing acts tend to trigger some argy-bargy between buyers and sellers in the lead-in and immediately after S&P's confirmation/announcements.

This especially tends to be the case for stocks that drop out of the ASX200 or ASX300, given this is where many an institutional fund manager's mandate ends, or for stocks that experience their maiden inclusion. In both cases, those affected tend to be rather small-sized and daily trading volumes are not always exuberant (to put it mildly) so these index changes can have a sizeable impact in September.

Analysts at Morgan Stanley have published their predictions. Nothing spectacular and only limited changes are expected for the ASX200 with the analysts lining up cloud infrastructure provider NextDC ((NXT)) as the most likely candidate to replace engineering contractor Cimic Group ((CIM)) in the ASX200. Recent days have seen the price recovery stall for the latter while NextDC shares are going from strength to strength. Coincidence or ..?

Morgan Stanley has also various changes lined up at lower probability that might see lithium representatives Orocobre ((ORE)) and Galaxy Resources ((GXY)), renewable energy assets owner Infigen Energy ((IFN)), outdoor media company oOh!Media ((OML)) and/or gold producer Resolute Mining ((RSG)) enter the ASX200 index. Their addition would then be expected to be facilitated through the potential removal of Programmed Maintenance ((PRG)), Mesoblast ((MSB)), Select Harvests ((SHV)), Austal ((ASB)) and/or Village Roadshow ((VRL)).

We won't know any of this for sure until the official announcement on September 2, but what's a share market without some healthy speculation, right?

Regarding the ASX300, Morgan Stanley thinks we might see the inclusion of some popular fresh IPOs including Baby Bunting ((BBN)), Class ltd ((CL1)), NetComm Wireless ((NTC)), WiseTech Global ((WTC)) and New Zealand's most successful tech developer, Xero ((XRO)).

No surprise, in exchange S&P might want to get rid of some of the heaviest disappointers, including 1 Page ltd ((1PG)), 3P Learning ((3PL)), Billabong ((BBG)), Mermaid Marine ((MRM)), Reckon ((RKN) and/or SMS Management and Technology ((SMX)).

None of these suggestions should be taken as a given. S&P's index adjustments have surprised many times in years past. The only possible change from the above that carries the tag "Higher Probability" in Morgan Stanley's predictions is the ASX200 swap of Cimic for NextDC.

Coal Causing Plenty Of Pain

It has been almost a "money for nothing" journey for investors who ignored the gloomy outlook for ASX-listed coal producers earlier in the year. Whitehaven Coal ((WHC)) in particular first sank to 38c during the January-February turmoil, but the shares are now at touching distance from the $2 mark.

No, I am not on board this gravy train either.

Now spare a moment for coal producers in North America where, for the first time in US history, natural gas has become more important than "dirty" coal for electricity generation. Renewables are increasing their market share too. The trend has caused US coal producers to lose -wait for it- an astonishing 99.9% of their market valuation since 2011.

Those who want to have a closer look into this matter, might as well start here: http://www.visualcapitalist.com/decline-of-coal-three-charts/?utm_source=twitter&utm_medium=social&utm_campaign=SocialWarfare

ASA - Short Interview

After my presentation to members of the Australian Shareholders Association (ASA) in Brisbane last month, I was interviewed about content and message of my presentation. The interview (audio only) has been made publicly available on the ASA website.

It can be accessed here: https://www.australianshareholders.com.au/presentations
 

Rudi On Tour

I will be presenting:

- To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

- To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.



Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon: http://www.amazon.com/Change-Investing-Low-Growth-World-ebook/dp/B0196NL3KW/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1454908593&sr=1-1&keywords=change.investing+in+a+low+growth+world

See also further below.

Rudi On TV

- On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
- On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 15th August 2016. It was published on the day in the form of an email to paying subscribers at FNArena).

(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 Editor Direct on the website).


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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena 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. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 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 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until June 30th. Paying subscribers can request a copy at info@fnarena.com

article 3 months old

Your Editor On Switzer: August Reporting Season – Early Signals

Reporting season in Australia has only just commenced but there is no reason to be pessimistic, explained FNArena Editor Rudi Filapek-Vandyck to host Peter Switzer last week Thursday. Thus far we have witnessed more "beats" than "misses" and numerous highly valued companies are showing they are worth investors trust, according to his observations.

To view the broadcast, click HERE

Past broadcasts can be viewed via the Investor Education section on the FNArena website: https://www.fnarena.com/index2.cfm?type=dsp_front_videos

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.

article 3 months old

No Weekly Insights This Week

There will be no Weekly Insights this week as FNArena Editor Rudi Filapek-Vandyck is attending the AIA National Conference on Queensland's Gold Coast. Weekly Insights shall resume next week.

 

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.