Finding Opportunities In A Heavily Polarised Market

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In this week's Weekly Insights (published in two parts):

-Finding Opportunities In A Heavily Polarised Market
-Growth Or Weakness?
–Conviction Calls
-Morgan Stanley's US Cycle Indicator
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items will appeared in part two on the website on Thursday]

Finding Opportunities In A Heavily Polarised Market

By Rudi Filapek-Vandyck, Editor FNArena

Strategists at UBS have been struggling for a while with the share market's extreme focus on growth stories, combined with a near equally as extreme aversion for uncertainty and damaged business models.

But can one continue to pour additional funds in stocks like Cochlear, WiseTech Global and Altium while continuing to avoid AMP, CommBank, and Aveo Group?

Strategist David Cassidy and associate analyst Jim Xu have tried to find a third alternative: "Growth At A Reasonable Price", otherwise known as GARP. The two have limited their scope to the ASX100 ex-mining & metals and ex-REITs.

After applying multiple filters, including relative Price-Earnings (PE) ratios versus a company's ten year history, they've come to the conclusion that today's best GARP stocks are Atlas Arteria (formerly known as Macquarie Atlas) ((ALX)), Janus Henderson ((JHG)), and Origin Energy ((ORG)).

Equally important is that their data analysis suggests certain stocks may not necessarily be as "cheap" as forward indicators suggest, such as QBE Insurance ((QBE)) and Star Entertainment ((SGR)), while a number of stocks have been identified that are still trading below historic PE multiples, including Magellan Financial Group ((MFG)), Boral ((BLD)), AGL Energy ((AGL)), Brambles ((BXB)), IOOF Holdings ((IFL)), and James Hardie ((JHX)).

Note the strategists: QBE Insurance looks very attractive on the basis of EPS growth projections, however the company has a consistent track record in recent years of disappointing the market, including the last twelve months. They also believe Macquarie Group ((MQG)) still looks attractive relative to growth potential, but there are equally risks for the outlook such as share market turmoil, sharply higher bond yields and a drop off in M&A.

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Stockbroker Morgans is a lot more explicit in its struggles to find opportunities in today's share market. Morgans sees a local share market that is trading on elevated valuations while lacking earnings momentum. The stockbroker only sees 3% more upside potential for the remainder of calendar 2018 (target 6200).

With a market that is lacking conviction, also because sentiment has been curbed due to rising bond prices and geopolitical risks, Morgans has gone searching for mispriced opportunities because there are always stocks whose share prices have rallied too far, and others that have been ignored for too long.

Morgans sees "tactical opportunities" in QBE Insurance, CML Group ((CGR)) and Catapult Group ((CAT)). Stocks that have been oversold include Ramsay Health Care ((RHC)), Link Administration ((LNK)), Star Entertainment, and LiveHire ((LVH)).

The stockbroker also suggests investors should consider accumulating shares on more weakness in AMP ((AMP)), Pendal Group ((PDL)) -that's the former BT Investment- Magellan Financial, and in IPH ltd ((IPH)).

Also, June usually throws up some opportunities among oversold names as EOFY approaches and portfolios are rebalanced, reports the broker.

The three "tactical buys" are explained as follows:

-QBE represents a trading opportunity leading into the upcoming financial results, scheduled for 16th August. Assuming management finally manages to deliver a positive surprise, Morgans sees potential for a more sustainable re-rating that can last a number of months.

-CML Group remains one of Morgans' High Conviction Stocks and there remains potential for positive outperformance in the years ahead. Morgans sees a conservative, well-managed industrial stock that is likely cum upgrades.

-The market has already priced in heavy losses incurred by Catapult Group, but Morgans thinks positive newsflow and new contract wins leading into the upcoming financial result (scheduled for 23rd August) warrant a tactical buy proposition.

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Wilsons Advisory and Stockbroking recently hosted its bi-annual Rapid Insights Conference in Melbourne, now in its seventh year. The event provides direct access to ASX-listed small cap companies and Wilsons reports this year the event saw a record 135+ institutional investors interacting with executives from 35+ companies.

Key themes that reportedly emerged during the event include a softening environment for residential property markets, alongside a general upbeat mood, though companies seem to have become more cautious around capital deployment.

Wilsons quotes Arq Group ((ARQ)) CEO Martin Mercer during Q&A that "culture eats strategy for breakfast" in a signal that modern times are putting the squeeze on traditional business models, and their culture. While companies are increasingly aware of this, it ain't easy to address the issue of corporate culture, and it certainly cannot be measured, but we do know it is all-important to both client, staff and investor success, states Wilsons.

Post the Conference, Wilsons analysts have highlighted ten investment ideas: Afterpay Touch ((APT)), ARQ Group, Bravura Solutions ((BVS)), Collins Foods ((CKF)), Nanosonics ((NAN)), National Veterinary Care ((NVL)), Telix Pharmaceuticals ((TLX)), Adairs ((ADH)), OneVue Holdings ((OVH)), and Pinnacle Investment ((PNI)).

Most, but not all of these companies, are also included in Wilsons Conviction Calls, which presently consist of ten inclusions: Arq Group, Afterpay Touch, Bravura Solutions, Ruralco ((RHL)), Collins Foods, Ridley Corp ((RIC)), ImpediMed ((IPD)), Nanosonics, Citadel Group, and Pinnacle Investment.

Growth Or Weakness?

Increased infrastructure spending on top of a buoyant global trading environment, in particular for LNG in Asia, has resulted in an unexpectedly strong GDP growth performance for the March quarter in Australia. Coming in at 3.1% annualised the growth on display had just about everybody questioning their models and forecasts.

Time to maintain a bullish view for the Australian share market for the remainder of calendar 2018?

That remains yet to be seen. Investor sentiment globally is very much intertwined with prospects for international trade in goods and the Trump administration's belligerence in this regard is going to keep more than a few wealth managers on the edge of their seat as the year rolls forward.

In Australia, even the team of equity strategists at JP Morgan are now conceding things may have decelerated a little since that stellar performance in Q1. The team had kept a positive outlook for Aussie equities on the assumption that positive momentum through economic data and forward indicators would equally translate into a better performance for the share market.

As I have been pointing out in recent times, the ASX200 Accumulation Index, which includes dividends paid out, only managed a net gain of 0.99% year-to-date as at the start of June. There are now less than two weeks left to finish off on the financial year ending June 30th. Luckily for all those funds managers keen to advertise their performance, there is still a chance for double digit gains for the financial year thanks to a big rally in late 2017.

Business conditions in general look okay, and governments' spending remains supportive while Asian demand for key exports including LNG, coal and iron ore remains robust, but share market investors better keep a close watch on the weakness that remains among Australian households. If this doesn't impact on the RBA policy intentions, or on the banks' sector outlook, it almost certainly is going to make an impact in the share market, as it already has.

The cautious arrival of Amazon on Australian shores might have led investors to think that share price weakness for the likes of JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), The Reject Shop ((TRS)) and others looked premature and overdone, it's the downward pressure on discretionary household budgets that is preventing share prices to rally decisively from beaten down levels.

And if you believe analysis and forecasts from the likes of the team of economists at Westpac, then there should be no relief on the horizon for Australian consumers. Savings are being run down to underpin low growth in consumer spending, suggesting the onus remains to the downside. The team of strategists at JP Morgan concedes as much, pointing towards the deteriorating outlook for house prices as potentially the next area for (even more) downward pressure.

Some equity market bulls take the view that a generally positive environment for Australian businesses (outside of telcos, discretionary retail and banks) should gradually lift sentiment among Australian consumers. My view is these commentators are living on Cloud 9. My gut feel tells me many households are doing it tougher than might be apparent from generalising surveys and statistics.

In addition, my recent visit to Queensland where I presented to and spoke with local investors, has again confirmed many self-managing retirees have found their equity portfolio sits on the wrong side of market momentum. Instead of potentially double-digit returns for the year past, they are looking at sizable (paper) losses and a whole lot of uncertainty that surrounds large cap household names such as AMP, Telstra, and the banks.

There is no reliable survey out there that can capture the impact from depressing equity portfolio performance on sentiment and spending, but I am willing to bet it is yet another negative factor likely to stick around for longer.

Rudi On TV

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

-Tuesday, 11.00am Skype-link to discuss broker calls
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written on Monday 18th June 2018. Part One was published on the day in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two will be published on Thursday).

(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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(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.)  

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