All-Weather Stocks: The Security Of Delivery

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Download related file: All-Weather-Performers-Tracking-Report-10-04-13

By Andrew Nelson

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Three types of Australian listed stocks have proved an absolute boon for loyal shareholders and investors in the post-2008 era: reliable dividend payers such as Telstra ((TLS)) and the Big Four Banks, All-Weather Performers such as Woolworths ((WOW)), Amcor ((AMC)) and CSL ((CSL)) and stocks experiencing an operational sweet spot, generating strong profits and shareholder returns along the way.

All three categories have one key characteristic in common: they are able to generate satisfactory returns even when risk appetite retreats or economic momentum wanes. In mid-March this year FNArena opened this new series with an inaugural update on All-Weather Performers, see story "All-Weather Stocks: MND And BKL In The Red". The following week we took a look into stocks we think are experiencing an operational sweet spot. Note that we intend to make this an interactive exercise: readers are encouraged to nominate stocks they believe should be added to our updates. Send your nominations to info@fnarena.com and we will follow up and consider.

At the basis of all this lays research by FNArena Editor Rudi Filapek-Vandyck since late 2007 which earlier this year led to the publication of "Make Risk Your Friend. Finding All-Weather Performers", an eBooklet which to date is exclusively available to paying FNArena subscribers (if you haven't received your copy as yet, send an email to info@fnarena.com).

The eBooklet argues that successful investing is closely correlated to minimising and managing risk. Hopefully the framework we are creating with these regular updates will assist subscribers in executing successful, long term investment strategies.

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Since we last looked at the All Weather Performers in the middle of March and really since that month began, global equities have continued to give back some of this year’s gains. That is with the exception of the US and Japan. Australia, unfortunately, can’t be lumped in with Japan or the US, the S&P ASX 200 having come off some 2.8% since the middle of March.

The silver lining is that our selection of All Weather Performers have once again shown their mettle during times of selling and headwinds and in most cases outperformed the share market over the past 5-6 weeks. FNArena’s All-Weather stocks are down just 1.1% since mid-March, and up 4.72% as a group since the beginning of the year.

Of the fourteen stocks on the All-Weather list, only three are showing negative year to date price movements. The remaining eleven stocks are up between 28.8% (Invocare) and 1.76% (Ansell) since the beginning of the year. Note that All Weather Performers do not necessarily always stand out with near-term share price movements, but longer term returns tend to be built upon on consistent, rather than sporadic, share price performance.

The best performer of FNArena’s All-Weather stocks in 2013 has proven to be Invocare ((IVC)). Shares have run some 28.8% since the year began. The stock currently offers a 3% dividend yield, although FY13-15 growth forecasts of 12.2% and 8.1% certainly do suggest decent returns. Yet as always, the price of steady performance and secure growth comes at a cost, in this case an FY13 Price-Earnings (PE) ratio of 24.8x. The company has shown to be a steady deliverer, with funeral services proving to not be a discretionary or cyclical business.

ARB Corp ((ARP)) finds itself the next best performer year to date, with shares up 18.8% since we rang in the New Year. 13% growth forecast for this year and next, plus a 2.3% dividend yield are currently adding up to an FY13 PE of 20.8 times.

For Macquarie, the premium is worth it. The broker thinks we may see a short near-term pause, but new products and expanding distribution should keep on supporting the stock. CIMB also likes the stock, but thinks it is too expensive, while Citi can’t get past the fact the current PE is a whopping 42% above the stock's long-term average and at a 40% premium to the Small Industrials.

Ramsay Healthcare ((RHC)), admittedly out of favour with brokers right now, nonetheless keeps delivering share price upside. The shares are up better than 17% so far this year despite the stock boasting mostly Sells and Holds in the FNArena Database. BA-Merrill Lynch is the lone broker at Buy. FY13-14 forecast earnings growth is running at better than 21% and 13%, while the yield is at 2.2%. The real issue keeping brokers at bay is the current 23.2x PE.

Domino’s Pizza ((DMP)) shares are up over 11.5% since the beginning of the year. Share price performance over the past few years has been steady, although growth projections have fallen below the more traditional level of 20%. The PE ratio is also starting to come off, although it is still at better than 27 times FY13 earnings. It may appear a bit steep for 12% and 15% EPS growth over this year and next, but as they say; Dominos delivers, and it has been doing so for years.

Woolworths ((WOW)) has quietly added 16.4% to its share price since 2013 got underway. Not a bad performance from a stock that shows distinctly negative sentiment in the FNArena Database. FY13 earnings growth is pegged at 27%, although FY14 is a much more moderate 5.6%. The dividend yield is close to 4% at current prices and the current year PE is a stretched looking 17.9x.

The main problem for investors is these stocks ran when the market ran, but then continued to run when the market stopped. Thus PE ratios that looked rich two months ago look even more so today.

Shares in Retail Food Group ((RFG)) are also up better than 17% year to date. FY13 growth of 3.9% looks pretty slim, but with FY14 at almost 16% growth and a better than 5% yield, there is support to cover near term softness. Compared to many of its fellow All-Weather Performers, the stock looks a much cheaper proposition at 13.5x FY13 earnings (11.6x FY14 estimates). Analysts at CIMB believe the issues with Michel's Patisserie will be resolved this financial year, while growth in the new pizza segment should outweigh any concerns about the core operations.

Shares in Amcor ((AMC)) have added almost 14.5% so far this year. The share price is factoring in 5.3% growth this year and 15.7% next year. The yield is at 4.3% and compared to some of the above, the PE looks moderate for these types of numbers at 17.2x FY13 earnings, it is nevertheless at the top of Amcor’s historical PE range.

The stock remains reasonably well liked by brokers. A hefty balance sheet and the prospect of acquisitions may well explain some of it. JP Morgan is the only broker to think the stock is too expensive, citing both an absolute and relative basis.

Waste services provider Tox Free Solutions ((TOX)) has advanced more than 11.5% so far this year, with analysts at CIMB commenting just last week the company is one of the best positioned waste services providers in the Australian market given the company’s exposure to the Oil and Gas industry.

The broker expects to see a number of key contract announcements over the coming months, while there is $150m of work already in the pipeline. While sitting at Hold, the broker thinks any sort of price weakness would offer a good chance to buy in. Macquarie, at Buy, says Tox comes with high levels of revenue certainty, with 50% of revenue contracted and 90% from producing assets or committed projects. Typical characteristics for what makes, in essence, an All-Weather Performer.

At the same time, the company enjoys contracts with Gorgon and Fortescue and tender activity in general remains at record levels. The PE is now at 18x this year, with earnings growth prospects at 31% and 17% for this year and next, pushing the yield down to sub 2%.

Coca Cola Amatil ((CCL)) shares are up 8.4% year to date and broker recommendations are all over the place. There are Sells, there are Buys and there are Holds and they all seem to be predicated by an analyst’s position on value. If past performance can be taken as a guide, this stock does deliver for its shareholders, come rain and sunshine.

FY13 growth is currently pegged at almost 29% (following a negative 2012), but FY14 offers a more moderate 8.3%. Dividend yields are running at over 4% this year and next and the current PE is 18.5x. A common denominator of the brokers at Buy is the belief in ongoing growth; BA-Merrill Lynch is confident the company can deliver on its promises and likes the growth potential in Indonesia.

Business services provider McMillan Shakespeare ((MMS)) is so far tracking along with the index, up 4.8% so far for the calendar year. Shares enjoyed but straight Buys until late in February, when Credit Suisse downgraded to Hold on valuation grounds. FY13-14 earnings growth is pegged at 9.3% and 14.4%, the yield is at a decent looking 3.6% and the PE is at 17.3 times FY13 earnings.

BA-Merrill Lynch and Citi are both positioned at Buy and both see the value, the latter noting a proven business track record and growth in the lease book, which should underpin future earnings.

Ansell ((ANN)) is up on the year, but running short of its peers and the broader share market with a share price gain of 1.76% year to date. The stock is not favoured by brokers, showing all Holds plus one Sell. Forecast EPS growth is for a negative 22.4% this year and there’s ongoing doubt whether more potential for negative surprise might at some point hit the share price, or not.

Beyond the short term outlook, FY14 looks much better at 17.1% projected growth. No doubt, this explains the 2.4% current year yield and a 15.7x PE.

The biggest year to date loss amongst All-Weather stocks has been posted by Blackmores ((BKL)), with the share price down 9.8% since the year began. Growth expectations for FY13 are marginally negative at this point. The dividend yield is a little better than 4%, but with shares trading at 18.9 times FY13 earnings, there’s a lot riding on the 10.4% growth expectations for FY14.

Blackmores’ growth potential is located in new markets in Asia, but in Australia the company is facing stiff competition from privately owned Swisse. The latter has excelled in recent months with attention-attracting but expensive TV marketing campaigns.

Swisse’s marketing splurge has forced Blackmores to step up its own marketing expenditure and this is exactly why current forecasts come with a large question mark. Is it all generating any profits or is it solely an exercise in defending market share?

CSL ((CSL)) and Monadelphous ((MND)) round out the tail end of this update, both down on the year. CSL has so far lost 3.6% and Monadelphous 6.9%. Note both stocks enjoyed market outperformance in 2012.

Monadelphous remains the absolute stand-out in the mining and infrastructure services sector, but well-experienced management is now facing a downturn for the sector overall, likely to kick in from FY14 onwards, and that is raising a lot of question marks.

CSL continues to divide the stockbroker community after a stellar performance in 2012 and with growth to decelerate post the present year. The dividend yield on offer is only 1.8% and the PE at 24.7x is part of ongoing public debate.

Deutsche Bank sees the company as being in a good place for at least the next 6-12 months given a strong product portfolio and supply issues at a key competitor. Deutsche Bank sees even further upside the ongoing capital management program.

For more details about share price performances for all the stocks mentioned in this story, see attachment (sorry, paying subscribers only).

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(Do note that 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.)

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