REPEAT Rudi’s View: Responses To Questions

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

(This story was originally published on June 8th, 2011. It has now been republished to make it available to non-paying members at FNArena and to readers elsewhere).

By Rudi Filapek-Vandyck, Editor FNArena

This week I have taken up the opportunity to respond to questions from readers and subscribers, and share my responses so that more people can draw benefits.

Your "newsletter" is GREAT, but I am lost with so much information. Where can I learn about your R factor? Thank you for any help.
Peter Solomon

Peter,

I do realise the amount of information and market insights can be daunting, but don't let that discourage you to maximise the benefits you can draw from FNArena. Below is a brief guide to the main tools and services on our website.

Like yourself, most people would have been attracted by the broker info and the consensus calculations we offer, but let me first point out the most popular items on our service are the very personalised ones; the daily Overnight Report written by Greg Peel and my own market commentaries and analyses.

FNArena has a long tradition of providing readers and subscribers with lots of unique, valuable and educational market insights. The Overnight Report is both popular among the professionals in our database as it is among novices and early beginners in the share market, and for the same reasons: it nails down the core of what matters and does so with insight, experience, humour and no-nonsense clarity. Make sure you read it daily. Others do (and with lots of pleasure feedback is telling us).

As far as my own Weekly Insights and Rudi's Views stories are concerned, I think you should (always) read those too.

The Australian Broker Call Report is a daily overview of the most interesting facts and snippets the team at FNArena discovered that very same morning. It's like a newspaper with a defined focus. You want to know who was downgraded or upgraded, and why? It's all in this Report. Plus why a certain company is seen as a prime take-over target, why some companies remain unliked, and why others have become too expensive. Recommended reading for anyone with even the slightest interest in the share market, if you ask me.

Next up is Stock Analysis, which contains info, data, news and charts on some 400 listed companies, including consensus targets and consensus forecasts. I use consensus data all the time when I analyse the share market and individual companies. This service is ideal for anyone doing his or her own research. It doesn't contain everything, but it sure offers a lot.

More recently we developed the R-Factor, which uses the data available in Stock Analysis to rank all ASX200 stocks against each other based on projected earnings growth, valuation and implied dividend yields. In other words: it shows which stocks are, relative against each other, cheap and which ones are expensive. Be careful: cheap can also mean "high risk". On the other hand, not every stock trades on earnings multiples. At the top of the page, in the intro text, there's a big button that allows you to download a pdf document about what it all means and why it was designed as it is. I suggest step number one is downloading and reading that document. Step two is going through the tables and asking yourself lots and lots of questions: why is this stock at the top and why is another one at the bottom? Great to gather your first insights as a value-observer.

Another service, of even more recent birth, is The Icarus Signal. This service uses consensus targets to identify stocks that are potentially fully valued and vulnerable to a pull back. Again, this is yet another "angle" on the share market that will teach you lots and lots of valuable insights. Don't treat it as an automated Buy and Sell service, because you will soon find out that is not without danger. Sometimes the market is ahead of the analysts, more often that is not the case. Allow yourself to get acquainted with the stocks that always trade above target, and those who are always far below. In between are the yo-yos.

There's much more on our website, but I suggest you start with the above and allow yourself enough time to get acquainted and to digest as much as possible. Once you've decided you want to become a paid subscribers there's a Portfolio Section, email alerts, a Weekly PDF, the Sentiment Indicator and more.

Note: one of the popular features on our service is the Calendar, and yes, we do receive compliments about it on a regular basis.

I hope this helps you in your first experiences with our service. In case you have anymore questions, or suggestions, we prefer you use the Editor Direct facility on the website. Works much better than email and you can see in the top right hand corner of the Cockpit whether I have responded.

Kind Regards,

Your Editor

****

Hi Rudi,

After three years and a half years of frustration, and in particular 5 months of this year, the realisation that our market has changed forever is apparent. What do 'real investors' do – especially those nearing retirement? I run a SMSF plus other portfolios outside of this and honestly I can't see why one would place any trust in the share market any more. It seems to have been totally taken over by short-term traders acting solely on their determination to make money no matter what, and with it, dragging the lambs to slaughter.

We constantly hear from economists and the media that there are legitimate reasons for the direction of the market. I think it is laughable and lazy reporting. I have decided to make a concerted effort to join the herds and start trading far more than I do – outside the super fund that is. If you can't beat them join them!

I would very much appreciate your comments on this topic.

Helen Mann

Dear Helen,

I have little doubt your frustration is widely shared, including among many of your peers in the FNArena database. I know it sounds like the ultimate cliche, but I am certain that I will be proven right when I say that: This too shall pass, eventually. Nothing last forever and that goes both for the good times as well as for the bad.

Let me first zoom in on what I believe is being missed by too many people involved in the share market: in its most basic form, the share market is a derivative of corporate earnings. While commentators like to babble for hours about economic data, policy decisions, currencies, interest rates and money flows, too often they forget investors are not investing in any of these matters. Buying a "share" means you are buying a piece of the future profits to be made by a particular company.

This leads to obvious mistakes and misunderstandings, such as "I cannot understand why the Australian share market hasn't performed better with such a good economy". I can. I have been explaining it for two years. Australian companies are not achieving any growth in profits, and I am talking about the share market as a whole, not simply about the minority in mining companies.

In my view, what you should focus on are the reasons why earnings growth has remained absent since 2007. A raging Australian dollar plus a central bank in tightening mode are far from the only explanations, but they have both been very important in this regard. I also think too many people and businesses had leveraged themselves to property prices pre-2007. A government who shuts the door on immigration when skilled labour is tight is not exactly doing the right thing either.

I am sure you can come up with at least a few more factors that have played a key role. Bottom line: time will come when the tide will reverse.

Ever since the GFC hit global markets and headlines, I have done a lot of thinking and a lot of research into what investors should do in the share market. My conclusions today are still the same as in my very first story on this subject in early 2008: you turn yourself into a shorter term trader or you adopt a truly long term strategy (or both, of course).

In terms of becoming a trader, I know this is not for everyone and I do hope you don't put too much at risk, which will only lead to even more disappointment and frustration.

In terms of successful long term strategies, I have tried my best to prove and to convince as many readers and subscribers as possible that solid dividend payers that will continue growing in years ahead remain the best choice for anyone long term in the share market. This seems contradictory at a time when China's appetite for natural resources seems like the only light in the global economic darkness, but I remain of the view that it will be proven true. Think about why David Jones ((DJS)) shares have generated more than twice the returns of Rio Tinto ((RIO)) shares since 2003. Think about how much in dividends you could have received since 2009 compared with your frustration now because share prices have essentially stalled for the past 22 months.

More importantly, think about how relaxed you could be feeling right now, even though your share prices might be going down every now and then (like right now), but if you do own the right companies you should be confident their profits and thus their share price will recover at some point, and in the meantime you are looking forward to your half-yearly dividends. One of my favourite stocks in the Australian share market, Ardent Leisure ((AAD)), is currently yielding 10% on FY12 forecasts, excluding any appreciation. It may not sound like you could potentially win the lottery, but I'd take it – any time.

Most importantly: dividends are not second choice, they are prime sources for market beating investment returns. It's just that stockbrokers (and others) constantly refer investors to the likes of Telstra ((TLS)) and Tabcorp ((TAB)) when they ask about dividends, and thus disappointment (and misunderstanding) follows. Below I have lined up a few stories that might help refreshing your thoughts on this matter.

Whatever you do, don't go feral because you have been frustrated.

Some refreshing thoughts:

– Industrial Stocks Offer Value And Risk
– Big Misunderstandings About… Dividend Investing
– Everything You Need To Know About The Banks
– A Tale To Remember
– Return To The Mean

All the best,

Your Editor

****

Hello,

I am interested in your “Icarus Signal" and I cannot work out the rationale as to which stock recommendations I should follow and why.

Can you please explain how I can view the recommendations and make sense of them? I am seeking clear recommendations.

Hugh McVean

Dear Hugh,

Let me start with the worst mistake you can make: that is by treating anything on the FNArena website as an automated Buy or Sell signal. Above anything, we have always held the view it is much better to teach a hungry person how to fish than to throw him a fish. Similarly, we think it is much better to educate investors and to teach them how to read and to analyse the share market, because it will allow them to become more knowledgeable and thus better informed in what they are trying to achieve.

Let me take a side-step first: the R-Factor shows which stocks are cheaply priced and which are not. This does not mean any of the cheap ones will rise tomorrow, or even next week. Neither does it mean any of the not so cheap ones will become cheaper any time soon. The share market can be a strange beast, not in the least because we all act on a little information and a lot of sentiment. Fact remains though, the more you know and understand about the share market, the better you know how to use the tools and information we provide.

The R-Factor simply shows you which stocks are popular and which ones are not. Because that's how the share market works: if you're not popular you become very, very cheap. This could provide you with ideas and with opportunities, for example if you are a long term investor who is convinced (like I am) that cheap valuations are the ideal starting ground for big returns over time. The problem, however, is that we cannot provide you with "timing". Equally important, we cannot show you the "risk". And there is one big risk with playing undervalued stocks in that they might turn out to be a "value trap".

This is why you should always do your own research, use your own insights and know what you're after when you're active in the share market.

The Icarus Signal stems from my observations that consensus price targets are ideal tools to determine whether and when banking stocks are overvalued. Throughout the years I have used this observation to warn subscribers at FNArena when the share market is overheating. I have been able to warn them well ahead of every sell-down in the market over the past years. In most cases (though not in the recent one) this was because share prices were at or above price targets. Two things I learned from these experiences: if bank shares rise that high, overall sentiment is simply running hot. Meaning: it's not just the banks that will sell-off, it's the whole market.

Secondly, it won't necessarily happen immediately. It might take a while. But it will eventually happen and those targets will give you the signal.

There's a third element to this, and one that proved me wrong in Q2 2009: sometimes the market moves ahead of the analysts. That's when share prices surge ahead of targets who then also have to be adjusted to the upside.

This is why The Icarus Signal doesn't always trigger a "Sell" signal. Ideally, what you should ask is when a given stock surges near or above target: what are the chances analysts are behind the curve on this one? If the answer is: probably not, it's probably appropriate to assume the stock is overvalued. This might be temporary, it might be permanently. There is no one golden, fits-all rule in this.

What I can tell you is that I have in past years successfully warned investors on overheating in stocks such as CSL ((CSL)), Cochlear ((COH)), Coca-Cola Amatil ((CCL)), Wotif.com ((WTF)) and many others. And on each occasion I used consensus targets and the share price as my guidance.

Take note there is a small group of stocks such as Monadelphous ((MND)) and Iress ((IRE)) who almost consistently trade above or near price targets. The Icarus Signal helps me in analysing and observing these stocks even more and no doubt, I'll come back with some new insights at some point.

Bottom line about all this: we have learned that when it comes to investing (as opposed to: trading or speculating) valuation is an investor's best friend. At FNArena, we try to design and develop as many tools as possible that assist investors in their assessments when stocks are cheap or overvalued. We hope they have enough experience and knowledge in how to deal with such information. If not, we hope they are willing to work and develop towards that point.

I hope this answers your question,

Best Regards,

Your Editor

Note a paying subscription to FNArena comes with an e-booklet "Five Observations (That Matter)" in which many of the tools and insights are explained. Subscribers who as yet have not received their copy should send an email to info@fnarena.com
 

(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 Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

 

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