All-Weather Stocks: MND And BKL In The Red

This story features MCMILLAN SHAKESPEARE LIMITED, and other companies. For more info SHARE ANALYSIS: MMS

Download related file: All-Weather-Performers-Tracking-Report-13-03-13

By Rudi Filapek-Vandyck, Editor FNArena

Are all equities the same? Of course not. Some equities are simply better suited for longer-term investment portfolios than others.

Today's update is the first of what will develop into a new regular feature to FNArena's coverage of the Australian share market. It expands on market research and analyses conducted by myself since the early beginnings of the market meltdown of 2008. This research led earlier this year 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 rationale behind my research is that certain equities, due to very specific characteristics, represent less risk on a longer term horizon than most other equities in the share market. I have defined two groups of stocks: All-Weather Performers and Sweet Spot Stocks. For more information, see the above mentioned eBooklet.

Today's focus is on All-Weather Performers.

Probably the biggest surprise of 2013 thus far is that those high quality, resilient stocks that proved an absolute blessing for their shareholders during the tough times post 2008 have simply continued their relative outperformance during the share market's strong rally of the past six months or so. This automatically implies those stocks that looked a bit expensive back then, now look a whole lot more expensive. Though Dame Fortuna has not smiled equally upon our selection of 14 All-Weather Performers, with five members underperforming the ASX200 during the first twelve weeks of the new calendar year.

One of these underperformers is business services provider McMillan Shakespeare ((MMS)) with a performance to date of 9% (ex-dividend) while the ASX200 has gained around 10%. Hardly worth mentioning, in particular since the purpose of this update, and indeed of the research behind it, is not aimed at tracking short term performances. All-Weather Performers seldom end up in the Top Ten of Strongest Gainers, but history shows they are the utes in a car park filled with Ferraris, Lamborghinis and Porches. Come rain or sunshine and no worries about any holes or bumps in the road, they simply perform. Just gotta watch the price, of course.

Leaving out McMillan Shakespeare, we are thus left with four members that might deserve our attention as suggested by their share price performance: Ansell ((ANN)), Blackmores ((BKL)), Domino's Pizza ((DMP)) and Monadelphous ((MND)).

History suggests even the Best among the Best are occasionally hit with a flat tire and temporary weakness is thus a blessing for those not yet on board. In practice, however, things are not always as straightforward.

In particular, not if a company's operating environment is changing dramatically and rapidly, as is the case for Monadelphous. Miners and gas companies are now in cost-out mode and competition overall is heating up, not only because everyone wants to stay in business but also because of offshore competitors having "discovered" Australia in recent months. The all-important impact from all of this is that contracts will be cheaper, harder fought over and margins will come under severe pressure. Earnings visibility, usually not that great for most companies in the sector, is now exceptionally low.

Monadelphous has been the stand-out outperformer in its sector for the past decade. On its register are many happy shareholders who, even at today's share price, will be enjoying a 6.6% yield for the financial year, fully franked. This year should also see the company report another double digit profit increase in August, there are very few doubters in the market about that. Monadelphous' potential problems lay beyond the present year: what exactly will be happening next? Until that question has been decisively answered, the share price is likely going to remain subdued as nobody knows what's going to happen in FY14 or FY15, and beyond.

The Price-Earnings (PE) ratio has already fallen from 20-plus to 13, which, by the way, did not stop the shares from putting in another market beating performance in 2012 (up 21%, ex-dividends), but so far this year the performance has been slightly negative. Given the many uncertainties ahead, it cannot be excluded that 2013 will be rather disappointing for the loyal and the faithful. On the positive side, there will be support from what still is a juicy dividend yield.

My research suggests that a supportive operational environment is one key component of what distinguishes All-Weather Performers from other stocks. Alas, for an engineering services provider such as is Monadelphous, it doesn't look like stability is what management can rely upon in the years ahead.
 

[Chart: monthly price action Monadelphous shares 2006-2013]
 

Things look a bit more challenging for vitamins and nutrient supplement company Blackmores ((BKL)) too. With the overall retail environment in Australia tough and competition heating up, Blackmores is forced to spend more on advertising to defend its market share and sales, and this is eating away this year's profits. A new venture in the Chinese market has been a negative too. The result is that management does not expect to achieve any earnings growth this year. This effectively means the company has remained on the same level of earnings per share for three years in a row.

Investors have not taken management's latest admission lightly and de-rated the shares for a negative result of nearly -12% year-to-date. This is partially because of Blackmores shares rallying strongly alongside the broader market leading into the new calendar year. A PE of 18 suggests investors haven't given up on Blackmores refinding its mojo beyond this year, continued successful inroads in Asian markets are likely going to be the panacea. This year's de-rating has pushed up the dividend yield above 4%.

Clearly, investor confidence is higher for a swift turnaround in Ansell's ((ANN)) earnings growth. The manufacturer of medical gloves and condoms had an absolute cracker last financial year (EPS growth 44%) but Ansell is giving back some of that exceptional momentum this year. The half-yearly report disappointed many and there's not one stockbroker in the FNArena database that has a Buy rating for the shares, but guess what? The share price performance is still positive for the year-to-date (up 6%) and Ansell remains one of the beneficiaries were the AUD to finally dip below USD-parity.

Analysts are anticipating profits will resume growing at double-digit speed in FY14 and that probably means Ansell shares are not going to become genuinely "cheap" in the months ahead.

Shares in Domino's Pizza ((DMP)) also still generated a positive return so far this year (up 3%) but that's a big change for shareholders who have become used to see Domino's outperform the broader market with significant gusto. The stock's performance in recent years has been stealth-like on the back of a positive integration of the internet into an otherwise successful business model. Nevertheless, growth projections have now dipped below 20% for the years ahead and that is probably why the PE ratio has fallen as well. The PE is still at 24 which seems high for a company that is expected to grow EPS by 11-14% in the years ahead, but then Mr Market likes companies that deliver year-in, year-out and Domino's certainly belongs into that category.

At current levels, dividend yield doesn't reach higher than 3%. Only one stockbroker in the FNArena database rates the stock Buy, but everyone remains positive on Domino's earnings outlook. The main matter is one of share price and at what level exactly should new shareholders jump on board?

Remarkable, even with two negative performances by Blackmores and Domino's, the average performance year-to-date of the 14 All-Weather Performers still exceeds the ASX200 by circa one percent. Last year not one of these stocks posted a negative result for shareholders. It's probably a distant memory for most today, but in 2011 both CSL ((CSL)) and Retail Food Group ((RFG)) had a negative year.

Finally, market rumour has it Ramsay Healthcare ((RHC)) is working on a large acquisition.

One note regarding the attached file (see top of this story) with overview of share price performances for the 14 All-Weather Performers since the start of calendar 2008: the first row of data for each company is the share price at the start of each calendar year, the second row is the difference with the previous year's share price in percentage terms. So no dividends are included and each percentage thus refers to the share price performance in the previous year. All this remains very much work in progress and we intend to add, amend, expand and refine in future updates.

All feedback welcome at info@fnarena.com or via Editor Direct on the website.

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