article 3 months old

Rudi On Thursday

FYI | Mar 12 2008

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

There are many ways to use the information that is available daily through FNArena’s Australian Broker Call report. Trying to find stocks that are likely to move up or down following a noticeable revision in brokers’ views is only one of them, and certainly not suited for all types of investors.

When I was a much younger journalist -many, many moons ago- one of the experienced traders in a market many miles from Australia showed me a few charts on his pc screen to picture what happens with a certain stock that receives a strong buy signal from such a broker revision. Under the right circumstances such a stock can spike on the very first morning, but if there’s no follow up with any substance -be it from the company or from other brokers- the share price usually starts trending back to where it was before the share price surge. The whole process on average takes about ten days, he said.

That’s one way of trying to benefit from brokers views and insights regarding individual stocks.

This may come as a bit of a surprise, but I believe that our effort to bring multiple experts’ views and opinions together in one place above everything highlights the importance of the individual – not necessarily (or by definition) the strength of group consensus.

Allow me to explain.

When I arrived in Australia, just before the Olympics of 2000, my knowledge of the local market hardly exceeded five listed companies. Burns Philp was one of them. A bit over a year later, however, I was setting up my first new project in the country and had bought my first shares in the market. I relied heavily on brokers’ views, which I combined and analysed and as such I ended up being a shareholder in AMP ((AMP)).

As you would have expected, I had bought shares in the company because most experts, if not all of them, said it was a good stock to own.

One day, in the first half of 2002, analysts at CSFB (nowadays known as Credit Suisse) rang the alarm bells on the company stating they had received information that all was not well inside the company’s operations in the UK. They advised their clientele to sell the stock, and do it fast.

Now this may seem strange for those readers who are now used to having all the main experts neatly lined up in our Australian Broker Call report each morning, or finding references and stories about broker research reports in newspapers, on websites, in blogs, in newsletters and on chatroom postings – but back in those days there was none of all this. It would take on average a few days (no kidding!) for such stories to end up in the Australian Financial Review (there would be none in the other newspapers), and they would still move the share price!

Yes, things certainly have changed a lot over the past eight years.

The CSFB report didn’t look good. I thought there’s no way anyone in the industry would put his name and reputation on the block in such a manner without there being any substance to this. I sold all my shares that very same day. I remember AMP shares had traded at around $20. I had bought them at $16-something. When the report was released they fell from $18-something to $16-something. Including transaction costs it was a no gain-no loss operation. But I was happy I had managed to get out, fearing the worst was yet to come.

Those fears would be proven correct. AMP shares sank as low as $4-something. Those troubled UK operations ultimately needed to be separated to prevent the whole group from going under. In between there was a botched attempt by National Australia Bank ((NAB)) to purchase the main skeleton, which ended with NAB allowing one of the most blatant examples of insider trading in the Australian share market, but the bank ultimately still ended up with empty hands – and a severely bruised ego. Part of the ex-AMP operations is now listed on the local market as Henderson Group ((HGI)).

What struck me most throughout the whole process is how slowly it all went, and how much time it took for the whole story to unravel. Take a look at a chart of the AMP share price and you’ll see that by the time the shares end up at $4 we’re in the second half of 2003. Throughout most of the period in between the shares had been trading between $15 and $10. Admittedly, the trend was down but so was the trend for the rest of the Australian share market until the first half of 2003.

This story has a few different angles to it. The main CSFB analyst at the time later received some industry accolades for making the remarkable call (one has to admit it is difficult to beat placing a Sell on a stock that nearly disappeared off the stock market one year later) and I managed to publish two stories on NAB’s amateurism which allowed unidentified traders to book heavy gains through “timely buying” AMP shares and options. Much later two brothers were convicted for insider trading.

Probably the best way to summarise this story is that market consensus directed me towards buying AMP shares, but one individual voice alerted me when it was time to get out.

Strong experiences like that leave an ever lasting mark. Ever since, I have come to appreciate the individual voices in the market. They are not always right, and seldom do they come out as strongly as CSFB did with AMP, but if one pays close enough attention, one will discover that most of the major trend reversals start with one individual changing its tune.

The trick is to wait until that one voice is being joined by another. It is then that you know you’re onto something.

Take the example of the reversal of fortune for the Australian banks. Shortly after the subprime crisis started to appear on front pages of newspapers late June last year, Brian Johnson at JP Morgan started to make bearish calls on Australian banking stocks. As far as we at FNArena are aware, he was the lone wolf calling in the desert. Everyone else was promoting the “safe haven” label.

For a few weeks it appeared that Johnson was wrong and banking shares surged to new highs in October-November. Then the team at Deutsche Bank reversed its positive view on the sector as well. It was then that I thought: hey, we’re onto a new trend, it’s not looking good for the banks. When, into the new year, one of the strong promotors of the sector, ABN Amro, joined JP Morgan and Deutsche Bank, I knew we had passed the turning point for the banks.

The majority of experts has only recently stepped back from its “buy the banks” advice, or is still holding on to it. If investors would have followed JP Morgan’s initial report they would have missed out on the big surge towards November. They might have concluded Brian Johnson and his team were soooo totally off the mark that they could have bought back into the sector, which would have been a perfect example of buying in at the top. However, if they had acted on Deutsche Bank’s confirmation -two is a trend- they would have missed out on a 30% value drop. If they would have responded to ABN Amro’s reversal there still would have been smaller losses than today’s.

The key message I am trying to get across is that every single subscriber in the FNArena database can do this. All you need is a good memory, if you do things my way, or a logbook, if you’re a bit more organised and structured. (We have an archive if you’re unable to read the daily report every day).

Another example is Emeco ((EHL)). Ever since its listing on the stock exchange all brokers tended to put a Buy rating on the shares, but the stock never seemed to take off. On May 23 last year Credit Suisse turned more cautious on the company, putting questions behind management’s execution abilities while downgrading the stock to Neutral. The following day JP Morgan pretty much did the same. Again, as far as I am concerned: two is a trend.

At the time, Emeco shares were trading around the $1.70 mark, which was already a disappointment as it came from above $2. Today the shares are trading at $0.76. What’s even more remarkable is that if you look at the share price graph of the past twelve months you can clearly see how the share price starts trending down from the moment both brokers cut their ratings and valuations for the stock.

I could sum up quite a few more examples, but I think everyone’s got the hint now. Watch for the individuals to stand out from the pack. It’s what I do every day.

One of those individuals, Brian Johnson, features in an interview with Greg on our service today, see “Don’t Bank On It” – a must read for everyone with access.

Till next week!

Your editor,

Rudi Filapek-Vandyck
(as always firmly supported by Greg, Grahame, Chris, Sophia, Paula, Joyce, Pat and George).

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CHARTS

AMP EHL NAB

For more info SHARE ANALYSIS: AMP - AMP LIMITED

For more info SHARE ANALYSIS: EHL - EMECO HOLDINGS LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED