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Six Out Of Ten

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Aug 17 2016

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

In this week's Weekly Insights:

– Six Out Of Ten
– August: Not All About Financial Results
– Coal Causing Plenty Of Pain
– ASA – Short Interview
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV

Six Out Of Ten

By Rudi Filapek-Vandyck, Editor FNArena

A friend of mine is a loyal subscriber to a micro caps newsletter.

Last week, he explained to me the basic principles of how "it" works.

On average, the newsletter will recommend say 30 stocks. Of these five will absolutely shoot the lights out. Think share price performances of 300%, maybe even higher.

The next ten will still show healthy performances, but not that extreme; still better than the market average. The next ten, however, are disappointing. The remaining five are ab-so-lu-te shockers. You'd be lucky to not lose your socks, your shirt and your trousers if you don't pay close attention.

From here onwards things get interesting. Calculate the average return for the whole basket of 30 stocks and you are well ahead of the ASX200 which, incidentally, hasn't been a great performer in the past two years anyway. So that's one way for this newsletter to grease the marketing machine. Another one is to highlight the top picks: up 300%, who wouldn't like that?!

Of course, none of this is a lie but when you are a subscriber you face a few problems. If you don't just follow all recommendations blindly and buy the lot, you risk picking stocks from the bottom end of the performance ladder and your return will be nowhere near the advertised performance.

And that's not even mentioning the low volumes that might ultimately become the norm again after the initial excitement has dried up. Better to take profits early and don't get stuck with a bunch of others who also like to take profits when there are not many buyers left seems to be equally as important.

Recently, it has transpired, the newsletter has received lots of complaints because a number of recommended stocks had already been popping up before subscribers had the chance to digest the latest information.

Needless to say, my friend's experiences have been a mixture of hits and misses, which have made him more than just a little critical about this particular corner of the share market.  News flash: things often seem easier and much rosier in marketing than they are in real life.

Six Out Of Ten

Years ago, I had the audacity to track and calculate the effectiveness of the bulk of ratings and recommendations issued by the stockbrokers that are monitored daily by FNArena. My assessment at the time revealed a balance that was slightly better than said micro cap newsletter; between six and seven out of ten broker recommendations turned out to be an accurate prediction.

It is often stated among funds managers that if you are good at stock picking you probably score, on average, six out of ten. You get to seven if you are exceptionally good; either that or you're simply enjoying a lucky break, like during a raging bull market period which, as we all know, lifts more boats than usual.

It made me think. Maybe my friend's assessment is a little off because he hasn't actually kept a detailed ledger. Maybe the number of outperformers sits not exactly in the middle at 50%, maybe it is a little more positive. Six out of ten sounds reasonable. It's what the average funds manager is expecting by year-end.

More good choices than bad ones. This is why old trading hands know the adage "let the winners run but cut your losses short" is not just a popular marketing spiel. For many it makes up the difference between success and failure.

Six out of ten, on my observation, is what investors should expect from stockbroking analysts. Here the same problem rises to the surface as for those who subscribe to newsletters or try to emulate purchases by professional funds managers: which choices exactly are the good ones and which are the ones best avoided?

If only Harry Hindsight could make a quick trip from the future and tell us today.

Research Makes Smarter

Stockbroking analysts may not necessarily be worse or better than others who try to predict the future, the big difference is their misses are usually highlighted repeatedly and mocked by all and sundry. We too here at FNArena have had a lot of fun throughout the years.

Remember that "idiot" who rated Slater & Gordon a buy just before the share price started tanking? Or the stock picking "genius" who suggested BHP Billiton shares near $50 were no less than a screaming buy at the time? Don't get me started about the Buy ratings for QBE Insurance. Surely one day they will be correct.

And on and on it goes.

Truth is, for every abject failure in the FNArena database there is at least one accurate call elsewhere. And many inside the financial industry have a vested interest to pick on stockbrokers. Either because they publish their own tip sheet or newsletter, or because they try to convert investors to charting and technical trading, or something similar. They'd all be hiding under their desk if their own failures were to receive the same level of public scrutiny.

This is the point where I probably should start an elaborate marketing spiel for FNArena and why we offer you recommendations by multiple leading stockbrokers, why we calculate consensus forecasts and targets, and added various other services and calculations. For now, however, I am assuming you already know all of this. (If not, there's nothing stopping you from visiting and signing up for a free trial anytime).

Instead, I have chosen to reveal to you what virtually nobody writes or talks about: behind the scenes of every day headlines, financial marketing overkill and popular stockbroker bashing, there's an almost insatiable appetite for research reports produced by the ever shrinking number of employed stockbroking analysts. Those who want these reports range from stockbrokers (yes, indeed!) to financial journalists, to funds managers and publishers of newsletters and tip sheets (yes, indeed!).

They all know there is a lot of detail and information in these reports, and a lot of work has been done to compile them. Reading these reports, even if only in parts and not very thorough, makes one smarter. Instantly.

Not Just About The Ratings

Which takes me to the core of the message I am trying to convene today: too much attention goes out to ratings issued by stockbroking analysts for individual stocks or to exact predictions like crude oil is going to US$20/barrel.

Instead, investors would be much better off if they focused more on the details and the reasoning/insights behind those ratings and predictions. I do it every day, as much as I can. At the very least it keeps me in check with what exactly is bubbling around the traps, but most of all this helps me to understand the key issues.

Of course, if you are a 100% technical trader who likes to jump in and out whenever a trading signal pops up, you probably couldn't care less. And you shouldn't. The fewer distractions, the better. But for investors who like to understand what they are buying, potentially with the goal of holding shares for a prolonged time, I don't think you can ever be experienced or knowledgeable enough.

The more experienced you are and the more knowledge and insights you own, the better you can use the input from stockbroking analysts. This is why I don't end up confused or put off by conflicting ratings and opposing analyses. It needn't be a problem if you manage to decipher the core factor that is at stake.

For example: after Woolworths' shares had peaked near $38 in April of 2014, a national discussion started about industry pressures for local supermarket operators due to increasing pressures from foreign competitors such as Aldi and Costco. That discussion only gained more traction and by late 2015 (Woolworths shares were still trading around $36 then) it almost became a national division; pros against contras, supporters versus detractors.

I am still not sold on the idea that Australia is going to follow the same path as the UK supermarket sector, as suggested by part of the research community locally, but one look at a Morgan Stanley report at that time convinced me that Woolworths was about to go down the gurgler. In it the analysts pointed at the exuberantly high operating margin Woolworths was enjoying and in order to fend off the competition, that margin could only come down.

When one considers a highly priced share price with the prospect of a falling margin multiplied by more than $35bn in annual turnover, it should have been a fait accompli for everyone that Woolworths shares once they fell to $30 were still not a great opportunity to jump on. Yet many thought it was the opportunity of a life time, including a large number of newsletters and funds managers at that time.

In case anyone's memory needs refreshing: Woolworths shares have since threatened to break below $20 on a few occasions and they are currently trading above $23 on general market optimism the worst is over and new management is going to right the ship, soon. Call me sceptical (though I have to admit more bad news is not necessarily going to push the share price a lot lower).

Admittedly, I probably have more opportunity and time to read broker research than most investors in the market, and I can have access to full reports in most cases, plus I have been doing this for more than sixteen years in Australia. That's a lot of accumulation in observations, analysis and hands-on experience.

Regardless, I think the underlying thesis stands. If you want to become a smart investor tomorrow, you should read a big heap of research today. More insights and conflicting views will confound and confuse at first, but they will make you a smarter and better investor over time. The smarter you become, the better you can handle the information and the at times conflicting views and insights.

Always keep in mind: six out of ten. That's synonymous for "human" and for "average to good". (Too many lesser experienced investors are looking for "perfection", which eventually becomes their downfall).

It's not like I am inventing the wheel here. The journalists you read and listen to already, the funds manager who talks to the press with full confidence, the analysts behind the tip sheet or newsletter; they all are doing it already. And by golly don't they all look smart!

Core Issues To Focus On

I could write a lot more about how personal experience and those often maligned stockbroking analysts have equally kept me on the correct trail when false opportunities presented themselves at Orica, Incitec Pivot, Computershare and others. Admittedly, at times they kept me out of future winners as well. At least I understood why. One cannot kiss all the beautiful girls, and one shouldn't try to either.

See the quest for perfection mentioned earlier.

For the purpose of this exposition, and to provide some evidence, below are some of the key factors I believe should be on investors' radar for selected stocks and sectors (with many thanks to the analysts for their contribution):

Australian banks – whereas most attention goes out to valuation (banks seem cheap) or to whether other banks will need to follow ANZ Bank and cut their dividend (maybe National Australia Bank ((NAB)), not to mention the potential need for additional capital, an equally important question is whether CommBank ((CBA)) deserves to retain its traditional and rather sizeable premium vis-a-vis the rest of the sector. Old habits die only slowly. It's up to CommBank management to prove the doubters wrong, assuming it will be in their control.

Telstra ((TLS)) – In a few years, the NBN is going to level the competitive field and there will be no more cash payments from the Australian government to shed ownership of the old copper wires. At the very least the former telco monopolist is facing a shortfall of between $2-3bn compared with today. And margins are going to take a dive. Telstra the next Woolworths? Such a conclusion seems premature right now, but the problem is right there on the medium term horizon. This is the reason why management is looking overseas for investment and acquisitions. Expect more cost cutting too. Meanwhile, the clock is ticking.

Automotive Holdings ((AHG)) – the reason why the share price melted upwards once the departure of the old CEO had been made public is because investors salivate by the prospect the new leader is likely to get rid of the logistics operations, considered one of the main reasons as to why the shares are undervalued in comparison with industry peers. On the flipside, investors need to be aware ASIC is investigating consumer credit in the automobile sector and analysts believe a negative revision leading to restrictions and forced changes for the industry could cause a short term drop to the tune of 20% in sales and profits. Always good to know both the risk and the potential opportunity.

– For up to date insights and expectations regarding this month's local corporate reporting season: see Weekly Insights from 1st August; August Reporting Season 2016: Valuations Versus Earnings

Of course I am biased in this, and ultimately I am recommending you join as a paying subscriber to our service here at FNArena, but it's not like I am promising you an automated system that guaranteed will make you rich with only five minutes of your time per day. I am sharing how I try to remain smart and in tune with the market. Yes, it requires time and effort.

It would be foolish to expect otherwise.

August: Not All About Financial Results

Most attention this month goes out to the numerous financial report cards released by corporate Australia. Understandably so. There is ongoing public discussion about the likely outlook for the Australian economy, the direction for the RBA cash rate and what the hell is keeping the Aussie battler at US76c when just about everyone had been expecting sub-70c by now.

FNArena subscribers are hopefully aware we are keeping track of corporate reports, and their impact on stockbroking analysts views, calculations and expectations via a daily news story plus excel sheet update on the website. Check your daily emails, or visit the website for your daily catch up.

For some market participants, the upcoming quarterly indices rebalancing by Standard & Poor's will be equally on the radar. Those who keep their eyes open know these rebalancing acts tend to trigger some argy-bargy between buyers and sellers in the lead-in and immediately after S&P's confirmation/announcements.

This especially tends to be the case for stocks that drop out of the ASX200 or ASX300, given this is where many an institutional fund manager's mandate ends, or for stocks that experience their maiden inclusion. In both cases, those affected tend to be rather small-sized and daily trading volumes are not always exuberant (to put it mildly) so these index changes can have a sizeable impact in September.

Analysts at Morgan Stanley have published their predictions. Nothing spectacular and only limited changes are expected for the ASX200 with the analysts lining up cloud infrastructure provider NextDC ((NXT)) as the most likely candidate to replace engineering contractor Cimic Group ((CIM)) in the ASX200. Recent days have seen the price recovery stall for the latter while NextDC shares are going from strength to strength. Coincidence or ..?

Morgan Stanley has also various changes lined up at lower probability that might see lithium representatives Orocobre ((ORE)) and Galaxy Resources ((GXY)), renewable energy assets owner Infigen Energy ((IFN)), outdoor media company oOh!Media ((OML)) and/or gold producer Resolute Mining ((RSG)) enter the ASX200 index. Their addition would then be expected to be facilitated through the potential removal of Programmed Maintenance ((PRG)), Mesoblast ((MSB)), Select Harvests ((SHV)), Austal ((ASB)) and/or Village Roadshow ((VRL)).

We won't know any of this for sure until the official announcement on September 2, but what's a share market without some healthy speculation, right?

Regarding the ASX300, Morgan Stanley thinks we might see the inclusion of some popular fresh IPOs including Baby Bunting ((BBN)), Class ltd ((CL1)), NetComm Wireless ((NTC)), WiseTech Global ((WTC)) and New Zealand's most successful tech developer, Xero ((XRO)).

No surprise, in exchange S&P might want to get rid of some of the heaviest disappointers, including 1 Page ltd ((1PG)), 3P Learning ((3PL)), Billabong ((BBG)), Mermaid Marine ((MRM)), Reckon ((RKN) and/or SMS Management and Technology ((SMX)).

None of these suggestions should be taken as a given. S&P's index adjustments have surprised many times in years past. The only possible change from the above that carries the tag "Higher Probability" in Morgan Stanley's predictions is the ASX200 swap of Cimic for NextDC.

Coal Causing Plenty Of Pain

It has been almost a "money for nothing" journey for investors who ignored the gloomy outlook for ASX-listed coal producers earlier in the year. Whitehaven Coal ((WHC)) in particular first sank to 38c during the January-February turmoil, but the shares are now at touching distance from the $2 mark.

No, I am not on board this gravy train either.

Now spare a moment for coal producers in North America where, for the first time in US history, natural gas has become more important than "dirty" coal for electricity generation. Renewables are increasing their market share too. The trend has caused US coal producers to lose -wait for it- an astonishing 99.9% of their market valuation since 2011.

Those who want to have a closer look into this matter, might as well start here:

ASA – Short Interview

After my presentation to members of the Australian Shareholders Association (ASA) in Brisbane last month, I was interviewed about content and message of my presentation. The interview (audio only) has been made publicly available on the ASA website.

It can be accessed here:

Rudi On Tour

I will be presenting:

– To Chatswood chapter of Australian Investors' Association (AIA) on September 7, 7pm, Chatswood RSL

– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017

Nothing Ever Changes, Or Does It?

Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.

Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).

Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).

Here's the link to Amazon:

See also further below.

Rudi On TV

– On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes

(This story was written on Monday 15th August 2016. 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: or via Editor Direct on the website).



Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
 Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): 

FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until June 30th. Paying subscribers can request a copy at

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