FYI | Aug 24 2011
Daily update on share prices and consensus price targets.
By Rudi Filapek-Vandyck
Matrix Composites & Engineering ((MCE)) had been one outstanding performer in the Australian share market throughout calendar 2010. While the share market overall found the going tough, despite QE2 in the US and ongoing strong support for commodities demand from China, Matrix shares entered the new calendar year priced close to $7. Now consider the shares entered calendar 2010 at no more than $2 and it doesn't take too much imagination as to why Matrix landed on investors' radar in 2010. There was money to be made when all else seemed to stand still!
The new calendar year has not brought an extension to that fabulous run. To the contrary. Everything still seemed fine by March as the share price surged well past $9 (think about this for a few moments) but by late April, when risk assets globally were peaking and topping out, Matrix's share price had already fallen towards $8. It has in essence never stopped falling since. Yesterday, the share price closed at $4.75 after the company's FY11 financials missed market expectations. I was watching a late night "call and we answer" program on financial TV and the host almost couldn't believe it. Net profits up by 85% and the shares close down 10%?
Some people will never learn how the share market works.
There are a few reasons why I mention Matrix Composites & Engineering today. Firstly, there's the usual reminder that popularity does lead to overpricing and one can safely assume Matrix shares had become very popular by the time $7 had become but a distant memory. Secondly, there's the age old observation that while in the short term the share market acts like a voting machine, in the long run true value will come to the surface. In the case of Matrix, the forward looking Price Earnings ratio (PE) had started resembling those of Cochlear ((COH)) and Monadelphous ((MND)), in other words: Matrix had become a high multiple stock.
Is 85% net profit growth enough to be a member of the high multiples club?
Usually the answer would be strongly affirmative. So why are Matrix shares now trading on a single digit PE instead of the 20x from earlier in the year?
The answer probably lies with the fact that JP Morgan, the sole stockbroker in the FNArena universe that covers the stock, foresees no growth for both FY12 and FY13. I repeat: no growth (see also Stock Analysis on the website). As I always point out: being a high multiple stock is a bit like becoming the new world champion. It's easier to get there than to stay there and once you get there, expectations will rise accordingly. It is for this reason I have, in the past, warned about CSL ((CSL)), Cochlear ((COH)) and Wotif.com ((WTF)) shares, to name but a few.
High multiple shares do not combine well with a flattening growth profile. Investors who've stuck to their shares in either of these companies, as well as in Matrix, have learned some hard lessons.
Yet, there is another reason as to why Matrix has remained on my personal radar. JP Morgan is far from the only one who covers the shares and throughout the year, while Matrix shares were trading well above the stockbroker's price target, we received complaints from retail investors whose "other sources" were much more positive on the shares. As such, we received some abuse at times, mostly directed at JP Morgan but also towards "the service we provide" here at FNArena.
I have to add I have not carried any conviction about Matrix. The best I came up with in my replies is that I remain a firm believer in using market consensus, but alas, outside our powers, we are as yet unable to provide any consensus when it comes to Matrix. I sometimes also added that while other experts might be more positive, this didn't by default mean JP Morgan was wrong. The latter message never was one that received any understanding.
Fast forward to this week and yes, 85% growth in FY11 was not enough, because, JP Morgan for example had penciled in 95% growth. In other words: the result missed by no less than 10%. This might explain the market response, even after the gradual de-rating since March.
Equally important, and one key reason as to why Matrix shares have remained on my personal radar since last year, is the fact that strong buying interest in combination with one sole skeptical stockbroker meant that Matrix shares have been trading above target for an extended period. This has now been corrected, the rude way. JP Morgan has post the FY11 release raised its target by 20c to $5.43. This now is well, well, well above the present share price, but it's probably a fair assumption we won't see Matrix shares back at $9 anytime soon.
My congratulations to the analysts at JP Morgan. You have been responsible for some abuse aimed at us over the past months, and you have probably been directly responsible for as to why some investors decided not to take up a paid subscription to our service, but you have been proved correct in the longer run. It will be interesting to see whether those who sent in their emails with acid and skepticism, will now return on a more apologetic note. I am not holding my breath. Investors who lose money usually go feral, blaming the experts who've guided them into the wrong direction. No room for self-reflection or acknowledgment that someone was having it right all the time, and right under their radar.
Icarus' list of stocks trading close but still below consensus target has grown to 11 following renewed buying momentum for the share market in general this week. Investors should pay attention to the finer details as many of these stocks have experienced cuts to price targets in combination with a rising share price.
There are now 18 stocks trading above target, including newcomers Mondalphous ((MND)), QR National ((QRN)) and Walter Diversified ((WDS)). All three prove in their own way that being popular in the share market does come with a bloated share price.
Investors should consider the information and data are provided for research purposes only.
Stocks <3% Below Consensus
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Stocks Above Consensus
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Top 50 Stocks Furthest from Consensus
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To see the full Icarus Signal, please go to this link
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