Investor Optimism Keeps The Bull Alive

This story features AUSCANN GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: AC8

In this week's Weekly Insights:

-Investor Optimism Keeps The Bull Alive
-Quintis Versus Californian Short Sellers
-Marijuana Mania Hits Australian Shores
-Conviction Calls: Bell Potter, CLSA and Citi
-New Website: Rudi On Twitter
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

Investor Optimism Keeps The Bull Alive

By Rudi Filapek-Vandyck, Editor FNArena

So The Donald messed up one of his key election promises, beating his chest, sending his bullies to meetings of elected Republicans, but ultimately it was all to no avail, Obamacare will remain as is for a while longer.

Whether this automatically means the US healthcare system will "explode" in the year ahead, and Democrats will come begging at the White House entrance to do whatever it takes to fix it, as predicted by The Donald, remains very much to be seen.

What can be seen is that financial markets maintain little appetite for a sizeable pull back, let alone an old fashioned bull market correction, for on the presidential horizon has emerged the next promise of tax reform, including reducing the corporate tax rate to an internationally competitive rate of 15-20%.

Officially, US corporates operate under a 35% federal tax rate in the US of A. Not that anyone is actually paying that much in taxes, but that's an alternative fact, for now.

From Russia, With Love

The biggest threat to the Trump Trade, as I see it, is not a belligerent megalomaniac whose political capital might well come under serious threat sooner than anyone is expecting, but Trump's long-standing relationship with shady holders of a Russian passport.

Investors in Australia wouldn't necessarily have picked up on this, but the confidence displayed by some of the elected Democrats, who seem to know more than they can publicly divulge at this stage, that Donald's secret Russian connections will become his undoing is remarkable, to say the least.

Clearly, we haven't seen more than just a tiny tip of the iceberg and one wonders when that moment arrives of the Big Revelation a la Richard Nixon, and what then might follow next.

US Corporate Profits

In the meantime, this year's outlook for US equities, and for the rest of the world in their slipstream, is not solely dependent on The Donald's ability to massage Republicans into "phenomenal" tax reform, points out Citi's bull-du-jour, Tobias M Levkovich.

The Citi global equities strategist points out US companies are finally starting to report genuine profit growth, and it is as yet being achieved without the much hoped for cut in corporate taxes. Strip away the potential tax benefits, says the Citi strategist, and US companies are projected to grow earnings per share this year by some 6% and next year (2018) by some 5%.

As per always, there is upside risk potential if, somehow, The Donald can rejuvenate the animal spirits in the US economy. But even without such extras, Levkovich seems convinced those growth numbers are achievable and as market participants' confidence in these numbers grows, so too will be ongoing support for the present bull market.

He observes earnings estimates have again started to trend higher, further corroborating his confidence. Citi's year-end target for the S&P500 is 2425, or circa 3.5% higher.

In Hope We Live

Market strategists at Goldman Sachs agree with Citi in that they see a reasonable chance for a share market correction this year, but this bull market is not about to end just yet. Goldman Sachs believes US equities are in the final stage of a mature bull market cycle, dubbed The Optimism Phase.

Historically, this phase lasts some 25 months on average. If we assume this final phase started mid last year, it remains thus too early to anticipate its end, suggest the strategists. Average annualised returns for The Optimism Phase are 24%.

Two conclusions stand out in the latest Goldman Sachs update on the US equities bull market: Europe and emerging markets are behind in the cycle and therefore most likely to generate higher returns.

Secondly, the critical level when government bond yields start "biting" for equities and returns from equities is now "much lower" than in the past. Goldman Sachs estimates present day "biting points" are probably around 3% for 10 year yields in the US and 1% in Germany.

The US ten-year yield is currently at 2.40%.

Shorter to medium term, Goldman Sachs is anticipating higher volatility with lower returns and, as said, increased chance for a correction (but not the end of this bull market just yet).

Quintis Versus Californian Short Sellers

The company formerly known as TFS Corp changed name to Quintis ((QIN)) last week and the event was accompanied by California based short sellers Glaucus Research Group diverting all attention to their own investigative research into the company. Glaucus makes no secret of the fact it is "short" Quintis shares.

Glaucus' freshly distributed research report on Quintis reads like a guilty-as-charged crime novel. There are comparables drawn with past investment disasters like Timbercorp, Great Southern and Palandri Wines. There is what appears an overzealous marketing machine, spreading self-serving lies, Glaucus alleges, presented to the global investment community as "independent" and "non-affiliated", with alleged links to Quintis' headquarters. There is even a (alleged) phantom Chinese buyer of the company's sandalwood to prop up prices, and thus future forecasts and analysts' valuation methodologies.

Add to this an opaque agricultural market, as reflected in the assessment: "sandalwood trees are parasitic and require a host tree to grow, making yields and survival rates difficult to predict. As a result, predicting future cash flows from sandalwood trees is an opaque process which is highly sensitive to assumptions of future market price, yield and survivability of the trees".

Somewhere in between the many Chinese whispers, we even come across Phillip Shamieh, once upon a time the founder of WiseOwl, once upon a time a successful stock picking newsletter in Australia, but that was long time ago. Shamieh found a second career in the United Arab Emirates, apparently also assisting TFS/Quintis with raising funds locally.

All this is written in straight talking, don't know about euphemisms, no holds barred, blunt financial lingo, as reflected in "Ponzi-like structure", "Dubious Promises of Future Profits", "obscure firm", et cetera. The main conclusion leaves little to one's imagination: "We believe that once investors scrutinize TFS's misleading forecasts, dubious marketing materials and questionable customers, TFS will lose the confidence of the capital markets it requires to survive. Thus, we value TFS's shares at AU$ 0.00".

For good measure: that final number is zero, as in zero value.

Of course, Glaucus is talking its own book. When you are heavily short, you want the rest of the investment community to follow in your steps. Fact remains: TFS, now Quintis, has become one of the most shorted stocks on the ASX with ASIC data showing more than 14% of outstanding capital is in the form of shorts, i.e. looking to make money from a weaker share price.

See also The Short Report on the FNArena website.

No surprise, the share price has been flatlining for the past three years and now downward pressure has once again revealed itself. Subscribers looking for additional insights, send us an email at info@fnarena.com

Marijuana Mania Hits Australian Shores

Medicinal cannabis is breaking into the mainstream, including in Australia, and the result is a true blue Marijuana Mania. Already reports are circulating about stockbrokers receiving inquiries from their hairdressers about how to gain exposure to marijuana stocks on the ASX. All of a sudden, electrical vehicles and lithium-cobalt batteries are so last year.

It's not the kind of "investment" anyone would recommend for a conservative, balanced long term portfolio, but hey, who are we to prevent anyone from taking a punt, and maybe earn a well-deserved holiday budget along the way? Just make sure not too much damage is done when the tide does turn.

ASX-listed stocks that offer leverage to the theme include:

-AusCann Group ((AC8))
-Botanix Pharmaceuticals ((BOT))
-Creso Pharma ((CPH))
-Medlab Clinical ((MDC))
-MMJ Phytotech ((MMJ))
-MGC Pharmaceuticals ((MXC))
-Zelda Therapeutics ((ZLD))

Thus far, AusCann Group is leading the pack with a gain of 6000%-plus (not a typo) since late October, and 200%-plus since early February.

Perth-based stockbroker Argonaut, usually immersed into small cap mining speccies, thus all too familiar with risk and taking a punt, initiated coverage last week on Botanix with a Speculative Buy rating. The company hopes to develop a product for acne. The following sentence from the Argonaut research report summarises the proposition best: "Although it is premature to forecast revenues or cash flows, we believe the potential prize is sufficiently large to warrant a speculative buy call."

Canada's Liberal government plans to announce legislation next month that will legalize recreational marijuana use nationally by Canada Day 2018, according to media reports.

Conviction Calls: Bell Potter, CLSA and Citi

Bell Potter is one of few stockbrokers in Australia who keeps a close eye on domestic technology stocks, and publishes regular sector updates. The latest of such updates shows analyst Chris Savage is sticking to his small selection of sector favourites ("key picks"). These are Integrated Research ((IRI)), Appen ((APX)), Adacel Technologies ((ADA)) and Infomedia ((IFM)).

Interesting detail: Bell Potter last updated on its key technology picks in December and at that time made one change; replacing Melbourne IT ((MLB)) with Appen. Alas, Melbourne IT shares have since proved Chris Savage wrong.

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The Small Cap research team at CLSA reported this week on its company visits post the February reporting season. Analysts Scott Hudson, Shaun Weik, Henry Hill remain in awe with quality of the product and management's ability to grow the business at cloud SMSF software provider, Class ((CL1)). The analysts report the company continues to take market share from others, while management is identifying more growth avenues beyond accountants and advisors.

Their enthusiasm is a lot lower for Catapult's ((CAT)) ambition to expand into consumer wearables. CLSA has been a long-time close follower of Range International ((RAN)), still a minnow in the global space for pallets. Range has developed a proprietary manufacturing process that mechanically combines various forms of plastic polymers into plastic pallets and management is gearing up for an aggressive expansion across the Asia Pacific market, the analysts report.

CLSA also sees a lot of potential for Updater ((UPD)), whose app assists people when relocating. Other experts have also concluded the Updater platform could conceptually create a lot of value for its product partners, but it's early days, still.

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Analysts at Citi updated their Focus List Australia/NZ. This, in their own words, showcases the strongest Buy ideas, where analysts have strong conviction levels with no limit on the time that ideas may stay in the Focus List.

Citi's selection of Best Buy Ideas consists of AGL Energy ((AGL)), Aristocrat Leisure ((ALL)), Caltex Australia ((CTX)), MYOB (MYO)), Newcrest Mining ((NCM)), South32 ((S32)), Santos ((STO)), Sims Metal ((SGM)) and Star Entertainment Group ((SGR)).

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Note to readers: This is the fourth consecutive update on brokers' Conviction Calls. The previous three can be found in Weekly Insights from March 20, March 13 and March 6 which can be accessed via Rudi's Views on the FNArena website.

New Website: Rudi On Twitter

I am an avid follower of the fella with the sideburns, but I don't want to sign up to Twitter.

I am paraphrasing, but only a little bit, from one of the emails we received in recent weeks. Lucky for this subscriber, and for all others with similar ideas, the new website shows the latest tweets from Rudi On Twitter, on the right hand side of the front page, underneath the Search facility Search Stocks & Stories.

Rudi On Twitter is FNArena's first endeavour into social media. It acts as a communication channel, for example when there are technical problems with emails or the website, in replacement of the central messages board that stood prominently near the top of the former website, to which many of our loyal subscribers had become used to.

Investors who do follow Rudi On Twitter will appreciate the out-of-consensus remarks, and the highlights from reputable sources, but above all, the additional news flashes that compliment FNArena stalwarts such as The Australian Broker Call Report, The Overnight Report and Rudi's Views on the website.

Rudi On Twitter also allows for communication with non-subscribers, some of whom may have never heard of FNArena.

Of course, this is not where our social media ambition ends. FNArena already has built its own corporate presence on Facebook, LinkedIn, Twitter and Instagram. Next step is to successfully integrate these external social media platforms into our broadening communication channel.
 

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday around 11.15am, Skype-link to discuss broker calls
-Wednesday, host of Your Money, Your Call Equities, 8-9pm
-Thursday, 12.00-2.00pm, co-host in the studio
-Friday around 11.15am, Skype-link to discuss broker calls

Rudi On Tour

Your Editor has been invited to present at the Australian Shareholders Association's (ASA) 2017 Securing Your Investing Future Conference to be held at the Grand Hyatt Melbourne from 15-16 May.

The conference details – www.australianshareholders.com.au/conference-2017

Speaker information – www.australianshareholders.com.au/speakers

Program information – www.australianshareholders.com.au/program

Those who register before 31 March 2017 will receive $70 off the registration fee. Telephone: 1300 368 448

(This story was written on Monday 27th March 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 the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $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

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