Highlights From The Sydney Expo

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

By Rudi Filapek-Vandyck, Editor FNArena

Is a bull market still a bull market if only 30% of equities is doing all the hard work?

This question featured highly on the mindset of investors visiting the Sydney Trading and Investing Expo over the past weekend. In particular the many subscribers and readers who stopped by the FNArena booth, to say hello and ask a question or two.

For those who only joined the mailing list recently, or who've missed out on my market analysis from two weeks ago^(*), it is my assessment that most market gains in the Australian share market have been carried by no more than 30% of equities, with another 30% largely going sideways (at least they're not costing their shareholders) but with the largest group of equities, the remaining 40%, building losses upon losses upon losses.

That assessment teaches investors and market experts a few valuable lessons (call it a "reality check"):

– Is it really surprising that overall confidence and sentiment among retail investors remain low even with the index in positive territory?
– It still is easier to lose money than to make some
– Buy and Hold strategies are not dead, but one has to apply them to the correct group of equities (I suggest: the 30% doing all the work)

Note: even the 30% (which is less than one-in-three) cannot be taken for granted. Until last week this select group included McMillan Shakespeare ((MMS)) which for obvious reasons is no longer an ideal long term investment proposition, even though the Coalition has promised to reverse the Rudd government's policy intention that is poised to devastate the salary packaging industry. The stock could end up being the best short term buying opportunity at the upcoming Federal election, but I still think it's probably best current shareholders take at least some of their exposure off the table.

Call it a common sense risk assessment, partially based upon the fact that the bruises on investors' mindsets caused by the government's intentions are likely to stick for a long time. The overall context for both the company and its management and for its listed capital have now changed forever. Bummer.

McMillan Shakespeare featured highly among the conversations in and around the FNArena booth on the weekend. This is no surprise as the company has featured many times in my market analyses and in my presentations around the country. When FNArena released my eBooklet "Make Risk Your Friend. Finding All-Weather Performers in the Australian sharemarket", the company featured prominently among the select few that truly and genuinely deserve the label of "All-Weather stock".

Alas, McMillan Shakespeare has now joined Blackmores ((BKL)) and Monadelphous ((MND)) and can no longer be regarded as part of the exceptional few. Bummer. Even less available high quality, high performance stocks in the local share market.

Other questions that proved popular were:

– How confident am I in BHP Billiton's ((BHP)) dividends? Answer: very.
– Am I certain BHP will continue lifting its dividends in the years ahead? Answer: yes, and very confident about it. Unless China falls out of bed, of course.
– What's happening with Ansell ((ANN))? Answer: No idea, but I still fear they might disappoint in the upcoming reporting season. Maybe the outlook statement will be key?
– Is Australia heading for a recession? Answer: don't know and don't care. What I do know is the economy is slowing, facing some serious challenges. That's what investors need to bear in mind and incorporate into their strategies for the years ahead. Recession or not is merely a side-issue to keep journalists and commentators busy about puny, low-odds extremities.

With regards to that last question: I often draw a comparison with the media hype from the past years about whether China was going to experience a hard landing or not. Arguably, some commentators and economists have been beating their own chests about nothing in recent times. My response is steadfastly the same: China's official GDP growth estimate has fallen from 14% in 2007 to 7.5% this year, with possibly more downside yet to come. BHP's share price has fallen from close to $50 to dividend support level just above $30. Nobody has seen a hard landing taking place, but have you looked at your investment in BHP throughout this deceleration?

The same message applies to your investments and the Australian domestic economy. Don't fear recession. Concentrate on the slowdown and how this might impact on your portfolio instead.

Another way of looking at the share market is through the 30-30-40% I mentioned earlier.

When stocks are in a bull market (otherwise known as a sustainable uptrend) "timing" becomes the all-overriding factor, while "risk" is merely playing a secundary role. However, when stocks are not in a sustainable uptrend, like the 40% in today's share market, "risk" very much remains the all-important, key factor, and "timing" becomes much less of an issue.

Combine these assessments and it is not difficult to see why I have been warning the upcoming reporting season in Australia will throw up some truly horrible company announcements. I stick by the view that investment returns will be more impacted by the stocks investors do not own (avoiding losses) than by the ones they do own. I think it's only fair to say the past few weeks have proven just that with oil and gas producers Woodside Petroleum ((WPL)) and Santos ((STO)) coming out with mildly disappointing market updates, but with the likes of Orica ((ORI)), Treasury Wine Estates ((TWE)) and Boart Longyear ((BLY)) genuinely giving investors a heart attack (not to mention what has been happening at the lower end of the mining sector).

There will be more, many more. Resources and mining services providers will be at the forefront, of course, but other sectors will provide their contributions too. All in all, investors will have to focus on the weaker spots, even in what looks like a reasonably solid business environment. It's these weaker spots that carry the potential to become a source of disappointment this reporting season. For AMP ((AMP)) it was the struggling life insurances operations. For Woolworths ((WOW)) it was the ill-organised expansion into home-improvement. For Treasury Wine Estates it has been management's inability to work the US market. For McMillan Shakespeare it has been a Federal government desperate to find budget savings, and they found it in salary sacrificed automobiles.

One of the stand out observations at the Expo was the noticeable thinner foot traffic. I don't know what numbers the organisers will come up with, but visitor numbers were the lowest I have witnessed since 2007 (the first year FNArena participated). This observation was backed up by feedback and commentary from other booth owners. That too is a reflection of the low interest for the share market among retail investors in general.

For good measure, and as explained in my presentations on both Expo days, the 30% of stocks that seem in a sustainable uptrend can be categorised according to the following three groups:

– All-Weather Performers (you should know them by now. Ramsay Health Care ((RHC)), Invocare ((IVC)), Amcor ((AMC)), etc but -alas- no longer McMillan Shakespeare, Monadelphous or Blackmores)
– Sustainable dividend payers (the banks, of course, and Telstra ((TLS)), but also Ardent Leisure ((AAD)) and Transurban ((TCL)) and -this time around- BHP Billiton!)
– Sweet Spot Stocks which includes a few dozens of industrial stocks that are enjoying the wind in the sails, for as long as it lasts. Think second tier telcos, and insurance companies, and names like Carsales.com ((CRZ)), REA Group ((REA)), Ainsworth Gaming ((AGI)), Cash Converters ((CCV)), Collection House ((CLH)), Silver Chef ((SIV)), Breville Group ((BRG)) etc
– That latter group of Sweet Spot stocks now also includes those who stand to benefit from a stronger USD and an economic recovery in the US and Europe, including James Hardie ((JHX)), Brambles ((BXB)), Flight Centre ((FLT)) and, yes, Ardent Leisure.

Does this mean there are absolutely no opportunities elsewhere? Certainly not. As I repeatedly pointed out over the weekend, I know one share holder in Billabong ((BBG)) who bought at 14c and is now staring at a tripling of her investment in a short time span only. The message I am trying to get across is such "opportunities" should be treated with the right risk assessment. Trade like a man but invest like a woman, remember?

As such, I also spent time with David Novac from wealthwiseeducation who, successfully, convinced me there are small cap resources stocks whose market capitalisation is now too far below the cash levels in their respective bank accounts, suggesting there's an obvious valuation mismatch (as investors always sell first and then never take the time to actually research specifics). David suggests investors should cast an eye over Bandana Energy ((BND)) and Molopo Energy ((MPO)).

I think there could also be an opportunity building in Australian iron ore stocks, in particular if the Australian dollar weakens further as this will make these companies more competitive vis-a-vis their offshore peers. Iron ore prices are in a long term downtrend, but Australian producers are likely to remain in business and to reap ongoing cash flows on the back of a weaker currency.

Also interesting was a report published by JP Morgan on Monday in which the analysts conclude, on the basis of an analysis of supply (deteriorating) and demand (ongoing strong) dynamics, that gold might have seen the low price point for the year. I suspect this conclusion is going to attract quite some attention around the globe. JP Morgan's favourites in the sector in Australia remain Newcrest Mining ((NCM)) and OceanaGold ((OGC)), with PanAust ((PNA)) the most preferred in copper.

Lastly, the most endearing moment I experienced at the Expo was when a young girl, Gizelle, estimated around eight years old, recognised me from watching "Market Moves" on Sky Business. She asked for my autograph. I received three big hugs in return. Academic research proves, time and time again, there's a direct correlation between investors' knowledge and experience and their investment returns. The better educated investors do achieve better returns, over time, on average. I guess when you start at such a young age as Gizelle, you are setting yourself up for a successful, long lasting career in the financial industry.

There were plenty of requests to receive a copy of my presentation slides, in particular on the second day. I will upload the slides onto the website. Paid subscribers and trialists with access can look under "Special Reports" on the website – two tabs away from Broker Call Highlights".

I will also attend the Expo in Melbourne next month.

(This story was written on Monday, 22 July 2013. It was published on that day in the form of an email to paying subscribers).

^(*) See my Weekly Insights "Is This A Bull Market, Or What Exactly Is It?" from 8 July.

(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)

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DO YOU HAVE YOUR COPY YET?

At the very least, my latest e-Booklet "Making Risk Your Friend. Finding All-Weather Performers", which was published in January this year, managed to accurately capture the Zeitgeist.

All three categories of stocks mentioned in the booklet are responsible for the index gains post 2009 and this remains the case throughout 2013.

This e-Booklet (58 pages) is offered as a free bonus to paid subscribers (excl one month subs). If you haven't received your copy as yet, send an email to info@fnarena.com

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Rudi On Tour

– I will present at the Trading & Investing Expo in Melbourne, August 23-24 (where FNArena will host a booth) – ticket promotion to follow

– I will present to members of AIA NSW North Shore at the Chatswood Club on Wednesday 11 September, 7.30-9pm

– I have also accepted an invitation to present to ATAA members in Canberra in late November

– I might give my final presentation for the year at the ASA's Sydney Investor Hour in December

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