All-Weather Stocks: An Update

This story features RETAIL FOOD GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: RFG

By Rudi Filapek-Vandyck, Editor FNArena

The irony of the share market is that highly speculative, low quality stocks receive much more attention from market commentators, investment newsletters and investors than their low volatility, high quality peers.

The reason for this is plain and straightforward: participating in the share market comes with the potential of large gains in a short time span and low volatile, high quality stocks simply don't cut the mustard for traders and speculators looking for the Big Bang.

What about investment portfolios with a longer term horizon?

One of the conclusions in my post-GFC analysis of investing in equities is that quality and sustainability of performance does matter, though not necessarily in the short term.

In the short term, most attention goes out to gold-leveraged stocks that rally one day, then collapse the next, and then rally back up again. Sometimes, it's the turn for medium sized telecom operators to fulfill that role. Other days the limelight is on the iron ore sector.

Few investors would have caught on to the fact that a relatively unknown, niche producer of food products in Australia, Retail Food Group ((RFG)), has thus far this year performed more than twice as well as the broader indices which are up around 20% for the year, including dividends. Those investors who held shares in Retail Food Group at the beginning of calendar 2013 have now seen their shares generate a total return (capital appreciation plus dividends) of 50%.

Would you believe, the shares still offer more than 4% in prospective dividends, and growth is anticipated to run in double digits for the years ahead (9% for the present year according to consensus).

The reason why Retail Food Group is on my radar is because I nominated the stock as an All-Weather Performer in my eBooklet "Make Risk Your Friend. Finding All-Weather Performers", released exclusively to paying FNArena subscribers in January this year^*.

I just conducted a quick update on the All-Weather stocks in the Australian share market, taking guidance from the lists I published earlier in the year, and I can report that no less than eight of the 14 stocks I listed in January have clearly beaten the index thus far for the year.

Retail Food Group has been the best performer, but others such as Ramsay Healthcare ((RHC)) (45% return), Domino's Pizza ((DMP)) (44%) and Amcor ((AMC)) (36%) have also clearly beaten the pack. Even Ansell ((ANN)), surrounded by doubt and scepticism earlier in the year, has done better than most with a total return in excess of 26%.

CSL ((CSL)) and Invocare ((IVC)) have both done better with 28%. Even Woolworths ((WOW)), with a total return above 22%, is still outperforming the broader market.

Before I move on to those on the list that have underperformed this year, two stocks on the original list -Blackmores ((BKL)) and Monadelphous ((MND))- have been hit relatively hard this year and in both cases this is the result of rapidly deteriorating industry dynamics. In Blackmore's case, the competitive landscape in Australia is eating away the company's profits while expansion in Asia is yet to deliver sufficient growth to compensate. For Monadelphous, of course, it's now merely a case of sitting tight while the worm has turned for mining services providers.

I am only mentioning both stocks because they were listed in the original publication, but I made it clear at the time the outlook for both was going to be tough and challenging. I don't think both should still be considered as part of the elite squad. At least not until broader industry dynamics change for the better. In both cases, this won't be happening soon.

One special mention goes out to McMillan Shakespeare ((MMS)), which was also part of the original 14. I think everybody knows the story by now. Labor government in dire need of additional income unexpectedly targets the beneficial tax treatment of company cars, causing mayhem and a virtual freeze in the operations for companies such as salary packaging market leader McMillan Shakespeare.

Would you believe, after all the volatility in between, McMillan Shakespeare shares are only down less than 4% (net) since January 1st?

Removing Blackmores and Monadelphous from the tally then generates a short list of 12, including McMillan Shakespeare, of which eight performed significantly better than the market.

I think it's only fair to say that investors have been buying the lower risk, more solid, sustainable dividend growers throughout the rally this year, and my update on All-Weather Performers today (again) proves just that.

Also, BTIG Chief Strategist Dan Greenhaus pointed out a few weeks ago the winning strategy -globally, not just in Australia- has been to buy companies that managed to grow their dividends. All eight outperformers have done just that (even though investors wouldn't buy stocks like Ansell or CSL for dividends, one presumes).

Who are the three underperformers?

There's ARB Corp ((ARP)) where international dynamics temporarily moved into headwind-mode, plus the company sells a lot more vehicle accessories to mining companies than most investors realised. As a result the shares have only generated a positive return of less than 7% so far.

There's Coca-Cola Amatil ((CCL)) for which the consumer market in Australia has effectively moved into "low to no growth"-mode and while management is seeking alternative growth via beer and spirits, we yet have to see whether that's genuinely going to pay off. CCL shares are down less than one percent (including dividends) so far for the year.

There's Tox Free Solutions ((TOX)) which earlier in the year seemed destined for a market beating performance, but the share price has retreated and seems to be holding relatively steady around the $3.30 level, still good for a return of 14% since early January. Tox has also felt the impact from miners minding their wallet, plus the waste management sector seems to have become more competitive too.

A special mention goes out to the following six stocks that were all nominated as potential All-Weather Stocks:

– 1300Smiles ((ONT))
– Freedom Foods Group ((FNP))
– Greencross ((GXL))
– Hansen Technologies ((HSN))
– SAI Global ((SAI))
– Wesfarmers ((WES))

(Note all six are still potential All-Weather Stocks)

Only Wesfarmers on that list is merely keeping pace with the broader indices. Freedom Foods Group shares are up by no less than 315% (and you thought Greencross shares had been outstanding, didn't you?)

SAI Global shares are barely in the positive for the year, but that's after another de-rating occurred between February-July from which high returns could have been achieved.

Morale from this analysis is that high quality stocks, and I regard my All-Weather stocks as part of a small elite, have clearly been doing all the hard work in this share market so far with sustainable, growing dividends the clear outperforming investment strategy. This point is again proven by the excellent (and ongoing) performance of banking stocks in Australia.

Special note to investors doing their own investment research: Australian banks, which have been on my positive radar since mid-2009, have simply put in a mind boggling performance since. (I did make some outrageous predictions at the time, if you remember). One key ingredient is, of course, the cosy oligopoly of the Big Four in Australia. Note that when All-Weather stocks lose their shine (BKL, CCL, MND, MMS, RKN) this is pretty much always the result of less accommodative industry dynamics.

The equally important observation is that, after four years of significantly outperforming the rest of the share market, many of the stocks mentioned in this update look stretched in valuation, but growth is likely to continue, both in profits as well as in dividends. The best scenario would be for the lower quality, higher volatility, more cyclical end of the share market to finally put in their dough, because this might trigger less stretched-looking valuations for All-Weather Performing Stocks.

Every smart investor with a longer term horizon then instantly knows what to do next.

* For more info on "Making Risk Your Friend" – see below.

(This story was originally written on Monday, 28 October 2013. It was published on that day in the form of an email to paying subscribers at FNArena).

(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)

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July this year forms part of FNArena's bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Things might look a lot different today than they have between 2008-2012, but that doesn't mean there are no lessons and conclusions to be drawn for the years ahead. "Making Risk Your Friend. Finding All-Weather Performers", was published in January this year and identifies three categories of stocks that should be part of every long term portfolio; sustainable yield, All-Weather Performers and Sweetspot Stocks.

This eBooklet was released in January this year and is included in FNArena's free bonus package for a paid subscription (excluding one month subscription).

If you haven't received your copy as yet, send an email to info@fnarena.com

****

Rudi On Tour

– I have accepted an invitation to present to ATAA members in Canberra on November 19, which shall be my final presentation for calendar 2013.

Click to view our Glossary of Financial Terms