Everybody Loves CSL

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

In this week’s Weekly Highlights:

– Domestic Reporting Season Thus Far
– Death To The Death Cross
– Everybody Loves CSL
– Rudi On TV

Domestic Reporting Season Thus Far

FNArena is offering two options to stay on track with the current reporting season in Australia. Every Monday we publish a story titled “Weekly Recommendation, Target Price, Earnings Forecast Changes” and every afternoon we publish a day-by-day update under the title “FNArena Reporting Season Monitor August 2015”.

Thus far, it appears the underlying current this month is actually quite positive, despite high volatility, share price weakness and some notable sell-offs suggesting otherwise.

What stood out in particular last week were rather large upgrades to profit estimates, with companies including Transurban, REA Group, Magellan Financial, AGL Energy and Fairfax Media all enjoying double-digit increases.

Observations made by the stockbrokers we monitor:

UBS strategists David Cassidy and Dean Dusanic note disappointments have come primarily from large cap stocks and in particular from those with overseas profits, indicating the market might have underestimated the impact from the weaker euro plus this might also indicate soft global trading conditions.

In addition, some domestically oriented companies, including JB Hi-Fi, Echo Entertainment, Mirvac and Fairfax Media, managed to surprise in a positive manner. UBS thinks Housing and NSW more generally are clearly sweet spots relative to the broader domestic economic backdrop.

Strategists Tony Brennan and Mark Tomlins at Citi take a more negative view, observing while around one third of the stocks Citi analysts cover have so far suffered from significant downgrades to profit estimates, none of the companies under coverage that have reported so far have forced analysts to significantly upgrade estimates.

Citi sees pressures broadening in Australia with some large sectors that used to be fairly resilient (telecoms and insurance) now showing stress signals too. Broader growth challenges put pressure on FY16 profit estimates, note the analysts, while creating doubt for prospects in FY17.

Citi strategists still believe the ASX200 remains poised to surge beyond 6000 in the twelve months ahead, but growth forecasts need to stay high enough to facilitate such outlook, the strategists maintain. The coming two weeks shall be of key importance.

Death To The Death Cross

The favourite pastime for highly annoyed market strategists in the US, so it seems, is debunking the myth that the appearance of a “Death Cross” is signalling the end of the equities bull market.

For those not familiar with the technical set-up behind this trend indicator: a Death Cross occurs when a short term trend indicator crosses below a long term trend indicator. Usually, the 50 days moving average and the 200 days moving average are used, but various alternatives can be swapped instead. The opposite movement is called a Golden Cross.

When looking at various trend lines for individual stocks listed on the ASX, investors will note such crosses appear quite regularly. For example: price charts for all Big Four Banks clearly show a Death Cross over the past two months. And share price performance has been dismal since, helped by three of the Big Four announcing some form of capital raising. But does a Death Cross mean much more than that?

A quick summary of the multitude in reports that have been published in recent weeks and days (I haven’t read them all, mind you) is: it doesn’t. In fact, the Death Cross does not deserve its ominous name. Apparently, US equities have generated only 13 of such crosses since 1990 and only three of these were real money savers, such as prior to the bear market of 2008. The ten other crosses turned out nothing but a short term blip. Stuff for short term traders. Nothing more sinister than that.

However, I did report in recent weeks about deteriorating internals for US equities and within this context the occurrence, public debate and investor angst about this latest ominous sounding technical signal is simply adding to other signals that command caution from common sense driven investors.

Within this framework I note the team of technical analysts at UBS (I have quoted them before) reported last week technical warning signals for US equities’ health are increasing. Short term, the team suggests, markets looks oversold and thus a bounce should be expected, but their expectation remains for the S&P500 “to start a real breakdown campaign into later August and into September”.

Particularly September into mid-October will be very weak for the US market, predicts the team and this, would you believe, would fall perfectly in line with the historical pattern wherein September announces trouble and October forms a bottom prior to ending the year on a higher note as the Santa Rally forgives all and everything.

Only a few more weeks now…

Everybody Loves CSL

Most investors have a short memory. CSL ((CSL)) shares earlier this month briefly crossed the $100 mark and this has brought out all kinds of tributes and reflections about how well managed this company is and how good it has been to loyal shareholders.

Certainly, most readers of my reflections and analyses know the stock is constantly on my radar and it forms part of that select group of stocks in the Australian share market I label “All-Weather Performers”.

Despite all the accolades that are being printed and re-published these days, investors are quick in forgetting it wasn’t that long ago that CSL shares weren’t overly popular and there was a very good reason for it too: the share price wasn’t going anywhere in a hurry.

It was in those early post-GFC years that BRRMedia ran a popular Friday Afternoon Round Table discussion over the internet and many among you were regular viewers. I was one of the regular guests on the show and one of my recurring habits in those days was to quarrel with stockbrokers who habitually sang a love serenade for the company, having directed their clients’ funds into the stock.

My view at that time was that, although CSL was a high quality company, the macro-headwinds such as a strong Aussie dollar, were simply too strong for the share price to perform. Hence the quarrels.

Looked from one angle, my view was absolutely correct. Anyone can pop up a price chart today to see the CSL share price went absolutely nowhere between 2009 and mid-2012. However, this is only one way to look at this.

Another way to look at CSL in those years is by considering company management was making all the right moves, and profits and dividends continued to grow each year. Once those headwinds disappeared in 2012, there was no stopping the share price.

I am simplifying the story, but only a little bit. Since 2012 CSL shares have risen from circa $30 to circa $96, having briefly traded above $101, and that alone is a remarkable performance. One does not need to go back to the turn of the millennium, or further back into the nineties.

The alternative view therefore is that if you get set during times of macro-duress or temporary headwinds, you don’t have to worry about getting in on time later on. In defense of myself, my research into “All-Weather Performers” was still relatively immature at the time and I was probably a little too focused on the fact that a high PE stock such as CSL didn’t offer enough yield to stick around and wait for the turnaround that seemingly never arrived.

Besides, isn’t Harry Hindsight a wonderful companion?

The reason why I am digging back into the past is because CSL might well have arrived at a similar pause in its admirable long term growth story. The FY15 report did not trigger any ahhs or wows from stockbroking analysts and instead the likes of Morgan Stanley are now digging in their heels, telling everyone who cares to listen, the shares look well-well-well-overvalued. Morgan Stanley has a twelve month price target of $84.99, suggesting near double-digit losses could be on the horizon while the prospective dividend yield is only 2%.

Indeed, many analysts covering the company agree the underlying growth prospects look a bit soft for the year ahead. Were CSL a “normal” company listed on the ASX, one would probably be best advised to adopt a more cautious approach for the time being. After all, we’ve all seen what has happened to stocks like Ansell and FlexiGroup earlier this month, but CSL, of course, is not “normal”, it’s an “All-Weather Stock”, even if most experts, investors and analysts do not use the same label when they mention the company.

The market’s collective memory has not forgotten about what happened in 2012 after the shares had a sideways adventure for a few years. Besides, the high quality management at CSL already seems to have secured a new growth engine from FY17 onwards through the acquisition of Novartis flu vaccine business. Combine with great confidence in management’s capabilities and I think it’s more than likely the market is not going to drop CSL shares in a hurry.

For investors the story is now the same as back in 2010. It may well be that the shares remain locked into a sideways pattern for a while. It still doesn’t pay a great deal in “yield”, but it continues to hold a lot of promise and of future potential.

If there’s one lesson to be learnt from history, it is that during such times when CSL shares are taking a breather, that’s when true opportunity arises for investors.

(Note CSL is -of course- included in my research on All-Weather Performers, see further below. It is also included in the FNArena/Pulse Markets All-Weather Model Portfolio.)

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves

(This story was written on Monday, 17 August 2015. It was published on the 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.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

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THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

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

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MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, 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

For paying subscribers only: we have an excel sheet overview with share price as at the end of July available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms