Rudi’s Response: Qantas Is Not Investment Grade

This story features QANTAS AIRWAYS LIMITED, and other companies. For more info SHARE ANALYSIS: QAN

By Rudi Filapek-Vandyck, Editor FNArena

I received and responded to the question below and thought it apt to share this with other subscribers and readers at FNArena.

Question from Philip P, Victoria:

"Hi Rudi, I would like your opinion on the following stocks. Qantas and Billabong which i unfortunately own. Do they have a future or are they just speculative bets from this point? Some brokers seem to think Qantas has a lot of value there . It just seems too hard to me and BBG appears as if it may just crash and burn. Although they will have a much smaller debt load. It beggars belief that they got into so much debt in this environment.

"On a more optimistic note i listened to BRR yesterday and they spoke about 2 stocks that caught my attention -TTS and NHF. They appear to fit your "all weather performer" category [you have mentioned TTS before] and consistent dividend payers at a reasonable price. Your opinion please.

"In the last 2 years i have bought NAB, ANZ, WBC, WOW in which I timed reasonably well . I also recently bought some more AGK in their capital raising. I also have some Senex energy which have done very well and will take up my entitlement in the upcoming capital raising.

"Those Europeans are sure keeping us entertained as well as of course our prime minister in Mexico.

"I hope to attend one of your gatherings in Melbourne sometime. Regards. Philip"

RESPONSE:

Hi Philip,

To understand the brokers' views on individual stocks, one has to understand they do not care much about durability, sustainability or quality for the long run.

Their main focus is on "cheap/expensive" over a potential 12 months horizon.

It really challenges my intellect to know there are actually funds managers in this country that hold very large equity stakes in a company such as Qantas ((QAN)) and have held such exposure for many years.

One can only hope they are the receiver of someone else's superannuation money.

I am a firm believer that airlines are by definition not investment grade. You fly them, but never buy them is one of my favourite idioms about the industry.

Another one I like to use is: date them, but never get married. That's just another way of saying: trade them as much as you like, but never ever think of including them in your investment portfolio – no matter how low the entry price.

The same principle applies, in my view, to traditional media companies and bricks and mortar retailers. The risk-reward balance on a longer term horizon is so much skewed towards extreme levels of high risk that I wouldn't go near with a barge pole.

To put it very bluntly: yes, Billabong ((BBG)) shares can experience a short squeeze at any point in time but the company is highly unlikely to exist in its current form in five years' time. In fact, its corporate existence may not make it that far at all (regardless of the balance sheet repairing that is going on).

Regarding your questions about Tatt's ((TTS)) and NIB ((NHF)); they are both obvious dividend propositions. But whereas the second one (NIB) is likely to prove a reasonable performer in the years ahead, I'd like you to research TTS in Stock Analysis.

What do you see when you look two years ahead? Today's very attractive looking high dividend yield is expected to drop significantly in FY14. What makes you think this won't have an impact on the share price too?

Again, I know a lot of stockbrokers like to put their clients into gaming stocks for their supposed defensive characteristics and yield, but I don't like the industry dynamics plus most of these dividends are to fall significantly in years ahead.

I hereby accuse many stockbrokers and advisors for having a too narrow and short-timed view when they promote these stocks. Note also these gaming stocks all have a very mixed legacy in terms of investment returns in the long run for loyal shareholders.

I note that AGL Energy ((AGK)) is on many a strategist's list of favourites and as such I can only assume that owning these shares will bring you joy and benefits in the years ahead.

I know many experts also like Senex. As long as you are comfortable with the higher risk profile that comes with a micro-energy play, I see no problem.

In general, I think you did reasonably well with that portfolio of yours. At least you're not down 30-40% or something along these lines. Do bear in mind that you are currently very much concentrated in the financial corner of the market and that is a risk in itself.

I also think I still need to write more clarifications about what exactly defines an "All-Weather Performer" as only Woolworths ((WOW)) and AGL Energy ((AGK)) could possibly deserve that label.

All other stocks you mention are dividend plays. There's a difference between the two, even though I personally like to combine All-Weather Performers with solid dividends.

I hope this helps.

Cheers

Rudi Filapek-Vandyck Your Editor

P.S. Subscriber Philip clarified in response that the stocks mentioned do not represent his complete portfolio, but only part of it.

Readers should note that my personal views are just that. None of the above is investment advice. Investors should always consult with a licenced financial advisor before making any investment decisions.

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