Tag Archives: All-Weather Stock

article 3 months old

Rudi’s View: February Trepidation

In this week's Weekly Insights (the first in 2024):

-All-Weather Model Portfolio
-Rudi Unplugged
-February Trepidation


By Rudi Filapek-Vandyck, Editor

Weekly Insights returns with a bang this week, so too much material forces me to publish this week's update in two separate parts.

The story below is best read in conjunction with the Part Two follow-up which will be published on the website on Thursday, zooming in on potential winners and losers in February, alongside best ideas, conviction calls and strategy preferences.

As per always, I hope you'll enjoy it and are able to use the input to your personal advantage.

All-Weather Model Portfolio

On occasion, we receive questions about the All-Weather Model Portfolio and it's probably but a fair assessment we can do a better job with updating and communicating all things relating to the portfolio.

The performance last year was nothing to be sniffed at (up more than 20%) which goes to show a cautious approach to share market risks does not have to go hand-in-hand with a disappointing outcome.

Over the December-January holidays, we updated late last year's portfolio review with the key 2023 performance numbers: https://fnarena.com/index.php/2023/11/29/rudis-view-all-weather-portfolio-in-2023/

The All-Weather Model Portfolio's performance as per January 31st:



For those as yet not familiar: the All-Weather Model Portfolio is run in the form of self-managed accounts (SMAs) on the Dash financial platform in cooperation with Queensland-based Vested Equities. Stock selections are based upon my personal research into all-weather performers on the ASX.

Paying subscribers have 24/7 access to a dedicated section: https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Note: the All-Weather Model Portfolio does not own all stocks mentioned, but only circa 20 of them. Most inclusions are kept for elongated periods (as it should given the nature of the companies involved).

Rudi Unplugged

One new initiative this year will be your chance to ask questions ahead of online video recordings during which I shall answer as many questions as possible.

The idea has been suggested a number of times by subscribers and we're finally ready to execute on it.

We should see the first Rudi Unplugged video session in mid-March, after the dust has settled for the February results season. So keep your note blocks ready!

I shall remind you in time.

February Trepidation

Every reporting season has its own background and characteristics and this year's investor dilemma yet again consists of positive sentiment led by general belief interest rates and bond yields will fall this year.

This is a positive for equities generally, but economies and corporate profits are not in an upgrade cycle just yet.

Some three months ago, global equities looked relatively "cheap" but a double-digit percentage rally into late January without much of an uptick in earnings forecasts has pushed up price-earnings multiples above longer-term averages, and that's usually when the investor community starts getting cold feet.

We have been here before. Both February and August last year had been preceded by firm rallies, only for share prices to deflate again when corporate profits did not justify the multiples at which markets were trading.

Maybe it's no coincidence local share market moves have become noticeably more volatile in February?

The past five trading days each have seen the ASX200 move by 0.90% or more, of which only two sessions in positive direction. The problem with macro-inspired market rallies is that, eventually, company fundamentals need to catch up, or else the share price will (by weakening).

Aussie Banks

Probably the best way to illustrate this month's investor dilemma is through the major banks in Australia.

Operationally, the banks are still in pain with margin pressure continuing to weigh on cash profits. Consensus forecasts are anticipating falling EPS numbers in combination with static dividend payouts, yet the banks are on a roll because of RBA rate cuts that haven't arrived as yet.

The "banks are expensive" is a commonly heard phrase these days. Investors need not look any further than CommBank ((CBA)) whose share price briefly touched $118 on Wednesday last week, more than 20% above FNArena's consensus price target of $91.86.

Does CommBank truly deserve to be the world's most highly valued mortgage lender?

For good measure: shareholders need not be concerned about the shares needing a reset of at least -20% in order to become good value again. What those who value CommBank shares in isolation always miss out on is the sector premium the local leader commands versus its lower-quality peers.

In other words: CommBank shares trade relative to share prices of National Australia Bank ((NAB)), ANZ Bank ((ANZ)) and Westpac ((WBC)), and always at a premium. Understanding CBA means one has to look at its share price through the lens of that relative sector premium.

If we look at share prices of the other three, we see all are currently trading above consensus target. The smallest valuation premium is presently granted to ANZ Bank shares which are only trading 2.4% above the average target set by six brokers monitored daily by FNArena.

This set-up suggests at face value there's more downside risk hiding in that "expensive" looking CBA share price than there is in ANZ Bank shares, but history has shown plenty of examples when the opposite occurred. As said: Australian banks tend to move in tandem, including relative premia and discounts, that form over longer periods of time.

There's a whole graveyard underneath Martin Place in Sydney of sector analysts that have predicted the demise of CommBank shares and their persistent sector premium. At the same time, the current premium vis-a-vis the rest of the sector seems well above average, suggesting this time there may well be less downside in ANZ Bank & Co if/when the next downward move arrives.

For many years I used the Big Four banks in Australia as the obvious measure for investor sentiment generally. With all four share prices above consensus, take it from me, market sentiment is running 'hot'. But hey, that's what happens when we all start buying shares on the prospect of interest rate cuts later in the year.

It should therefore not surprise, shares in BHP Group ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Macquarie Group ((MQG)), Aristocrat Leisure ((ALL)), and numerous others are all trading around or above targets. If you're not a member of the Eternal Bulls Club, it's fairly natural to feel a little bit uneasy when looking at the local share market set-up today.

But it's equally important to understand that PE ratios, and the forecasts on which they are based, are not a static concept. And reporting season, even if it entails mostly half-yearly updates in Australia, will offer plenty of 'beats' and 'misses' that subsequently trigger upgrades and downgrades to forecasts (and thus to valuations).

Another consideration to make is whether a little bit of weakness is such a bad thing after what has been another stellar few months. I am making the point because on my observation, which spans multiple years, those companies that are truly great quality achievers tend not to fall as deeply as others. They tend to recover from weakness more quickly too.

The risk you run as an investor who's too eager to sell out and secure profits at the top, is that any subsequent weakness remains rather benign, thus creating an automatic barrier to get back on board, with the share price quickly running away.

The likes of REA Group ((REA)) tend to weaken post the release of financials, in particular when shares rally in the lead-up. But look again twelve months later, and the price is yet again a lot higher.

Selling high and buying low turns out a lot more difficult when you're not concentrating on low quality, small cap explorers and developers.

Laggards Are Back

Late last year I suggested healthcare and REITs looked destined for a come-back, and the past three months have not disappointed. ResMed ((RMD)) shares have been the best performer in the All-Weather Model Portfolio, and CSL ((CSL)) -whatdayaknow- has already revisited the $300-plus region.

Contrary to the names mentioned earlier, both share prices are still well-below consensus targets and with ongoing potential for positive newsflow in 2024, I'm not even thinking about securing profits at this stage.

For my updated thoughts on ResMed, read the story I published on January 31 (see bottom today's story).

The best description I came across is from analysts at Wilsons who described what has happened in between last August and the release of December quarter financials by the company as "irrational fear of the improbable".

Those curious about what a potential positive outcome from CSL's AEGIS-II Phase III trial can do to the share price, read my Rudi's View story from January 24: https://fnarena.com/index.php/2024/01/24/rudis-view-healthcare-reits-uranium-banks/

The resurgence of both healthcare stalwarts does highlight an important question for investors: is 2024 the year to own last year's laggards? If the answer is 'yes', it also reflects positively on REITS, on small and mid-cap stocks, on most commodities, and on Emerging Markets.

I am inclined to think this year's come-backs won't be a universal move and it's probably wise to remain selective.

I note, for example, there are still significant question marks surrounding pathology and radiology services providers. This suggests it may yet be too early to get overly excited about what a company such as Sonic Healthcare ((SHL)) can achieve in the short term.

Investors are being reminded time and again not all healthcare companies are made from the same cloth. For every long-term success story through Pro Medicus ((PME)), Cochlear ((COH)), ResMed and CSL there are many more disappointments through Ramsay Health Care ((RHC)), Healius ((HLS)) and others, while prior high-flyers Nanosonics ((NAN)) and Ansell ((ANN)) continue to operate in struggle street.

The picture won't be much different for REITs, I suspect, or for smaller cap companies. The domestic economy has plenty of headwinds to deal with. Companies are still battling higher costs, be it through labour, interest rates, funding, supply chains, or otherwise. Not all sectors are impacted equally, but smaller companies tend to be more exposed, and have smaller buffers (if they have any).

Local mining services providers and contractors are mostly smaller cap companies and one question investors have on their mind is whether last year's disaster for lithium and other parts of the smaller-cap commodities space will show up in this month's market updates from companies such as Imdex ((IMD)), Emeco Holdings ((EHL)), and NRW Holdings ((NWH)).

Among REITS, it has been remarkable but Goodman Group ((GMG)), despite its outperformance and relative sector premium, has remained the sector favourite for most property sector analysts in Australia. The share price seemed to be facing a ceiling above $24 in January but more recently another leg upwards has ensued on further data centre newsflow.

In case you haven't caught up yet: Goodman Group is the most exposed ASX-listed large cap to the megatrend that is also supporting the likes of Amazon, Microsoft and Nvidia in the USA: data centres. Other local exposures include NextDC ((NXT)), Macquarie Technology ((MAQ)), Megaport ((MP1)) and smaller cap Global Data Centre Group ((GDC)).

As also reiterated in my recent interview with AusbizTV (link at bottom), megatrends remain firmly on my radar. And I am far from the only one. It is no coincidence shares in NextDC, Macquarie Technology and Global Data Centre Group are all trading at or near all-time record highs.

Goodman Group shares could be in the same boat if it weren't for the fact they were casually trading at much higher levels pre-GFC. Post near-death experience in 2008 and the subsequent rebirth into today's high quality, high achieving local sector leader, the shares are setting new record highs post GFC.

Another short-term boost may well be related to the potential inclusion of Goodman shares into the FTSE EPRA Nareit Global Real Estate Index. Following a change in eligibility criteria, Citi analysts think this year's inclusion looks like a shoe-in, potentially triggering another wave of buying from passive investors who benchmark against that index.

When it comes to dividends, always important for Australian investors, the outlook is the worst it has been since covid-impacted 2020. Banks are either expected to reduce their payout a little, or increase it by a minuscule amount. But dividends might be due for a positive surprise from iron ore producers, insurers, REITs, consumer discretionary and potentially even media companies.

For potential take-over targets, medical devices company Clarity Pharmaceuticals ((CU6)) is widely regarded a "sitting duck" waiting to be snapped up by big pharma.

Bapcor ((BAP)) seems like a franchise in deep trouble, but management departures and disappointing newsflow are no longer pushing the share price into further weakness. Investors trying to look beyond the immediate outlook to when the turnaround arrives, potentially?

It will be a feature this reporting season, no doubt, but there will also be plenty of fireworks either way. I think a smart investor is keeping a portion of his funds in cash this season, as volatility is already picking up and there will be plenty of punishments when results are released, of which at least a few will be excellent opportunities for longer-term oriented portfolios.

August last year opened up one such opportunity in WiseTech Global ((WTC)) shares, as well as in ResMed. What will it be this month?

Start preparing by drawing up your personal wish list.

Part Two will be published on the website on Thursday.

FNArena's results season monitor (with calendar): https://fnarena.com/index.php/reporting_season/

More reading:

-https://fnarena.com/index.php/2024/01/31/resmed-recovery-turns-into-hollywood-script/

-https://fnarena.com/index.php/2024/02/05/rudi-interviewed-megatrends-a-go-go/

-https://fnarena.com/index.php/2024/01/15/rudis-view-boss-energy-mineral-resources-tpg-telecom-resmed-wisetech-global/

-https://fnarena.com/index.php/2023/12/06/rudis-view-bearbull-market-to-continue-in-2024/

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 5th February, 2024. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi Interviewed: Megatrends A Go-Go

In late January, I participated in Tech2024, a series of expert interviews on the outlook for technology companies in the year ahead, and beyond. The video of that interview can be viewed at https://ausbiz.com.au/ (sign up and logging in is required).

In addition, I can be followed on the AusbizTV platform via https://ausbiz.co/RudiFV

Below is a curated transcript of that 13 minutes interview.

Interviewer Danielle Ecuyer: My next guest says not all tech companies are good investments, and not all beneficiaries are labeled tech. For more Rudi Filapek-Vandyck from FNArena joins me now. Rudi, it's really great to have you here. I like to ask the guests to explain what is the process that you go through for stock selection?

Rudi Filapek-Vandyck: In my case it's probably a little bit different from most other people. I like to own stocks that can be kept in portfolio for longer than next week, or next month, hopefully for the next number of years. So for me, it's very important that I look at the prospective growth of companies. And I find that more important than a cheap looking valuation in the short term.

Interviewer: Okay. So within the context of that, you published a book in 2015, which is a great book, and it certainly opened my eyes about this whole concept of megatrends, growth and technology. So just share some insights that you established then.

Rudi: I've been writing about this since 2015. And I think too many people are too busy with valuation on a micro-scale: whether a stock is cheap or not; whether interest rates go up or down; and whether markets have a correction or not; or are they in a bubble?

I think the most important message for investors today, as it was in 2015, is that we are going through a period of technological innovation that is pretty much unprecedented in history. We have, however, one potential precedent: the 1920s. What we remember about the 1920s is what happened next in the 1930s. But the 1920s itself were absolutely fabulous for equity investors.

Society changed. Innovation changes society, and that means you actually create megatrends. Megatrends are new developments in society that will support companies that are riding the wave of that trend for many, many years on end. Most industrials and other companies have a few good years but then growth peters out. If you successfully identify megatrends, and you successfully pick the quality companies inside those trends, you can keep those companies in portfolio for multiple years on end.

If people go back to 2015, they can clearly see that has been the case for more than just a few companies. Yes, shares move up and down with interest rates, currencies and because of other influences, but at the end of the day, share prices move from the bottom left corner on price charts to the top right hand corner, and that's exactly what you want as an investor.

For me, that's the type of company you want to own as a long term investor who doesn't want to switch every five minutes into a new discovery.

Interviewer: Your point about labeling is really interesting. As a classic example, people look at secular themes from the top down, like clean energy. They say, wow, this is off to the races, and they dive into an ETF and then they discover all is not necessarily rosy. Does the same thing apply with technology?

Rudi: Absolutely. We are going to look back in 10 years time, to today or to 2015, and we'll conclude why didn't we see these developments coming? Why haven't we been more exposed to this? What is happening, essentially, is the technological innovation is coming through. As a first result, the stock exchange in Australia has changed, a lot. The ASX used to be all about financials and resources, and a little bit of industrials on top. Now we have a lot more technology on the stock exchange, and those who complain we don't have technology should open their eyes.

The other thing, of course, is we get these mega-trends, because of the process I just explained, and it's not just technology companies that are benefiting from those megatrends. Another observation to make is: don't get too bogged down in labeling. Technology is fast becoming a fact of life for most companies, even those who are far, far away from what we would regard as being a technology company.

It doesn't turn these companies into technology companies. I do remember, a few years ago, we had this public discussion whether Domino's Pizza ((DMP)) was a technology company or a pizza deliverer. As it turned out, Domino's was a pizza deliverer trading on a technology company's PE ratios - it's not quite the same.

I do think it's symptomatic of what is happening: technology becomes ever more increasingly important for all businesses. If you want to have a long term investment strategy, and you incorporate mega-trends, don't get bogged down simply on a company carrying the label of technology.

One company I have owned for many, many years is NextDC ((NXT)). Officially, it's a technology stock, in practice it's not. Nevertheless, I like it because it's carried by one of the strongest megatrends in the market. Another example is Goodman Group ((GMG)). Most people would regard Goodman Group a REIT, or a property developer, which, of course, it is, but Goodman is benefiting from one of the strongest megatrends globally.

That gives you an idea you don't have to stick with the stocks that officially have a technology label. Also, biotechnology has 'technology' in its name and it too is technology. One of the industries to look at, of course, is healthcare. Many companies are labeled as healthcare, but in practice, they often are technology.

Interviewer: I think that's such an important point that you draw out and it's particularly relevant with artificial intelligence, now it is being rolled out across so many different industries. So by definition, if investors just look at the big names in AI, they may be missing a whole lot of other opportunities.

Rudi: Absolutely. At the very beginning, it means a lot of companies will have to make lots of investments. What you see in the first phase is the so called pick and shovel providers for the industry are the initial beneficiaries. Later onwards, it's going to define the winners from the losers in every single sector. So quality and the ability to invest become increasingly important.

The other thing, of course, is that while we don't have an Nvidia on the Australian stock market, if you look into the finer details there's this relatively small cap stock, Dicker Data ((DDR)), that happens to be the exclusive distributor of those chips in Australia. So we do have Nvidia on the local stock exchange.

Interviewer: Let's throw some names out there, something like Car Group ((CAR)) by way of example. People would have thought, oh, it's just an online portal to sell cars, but maybe REA Group ((REA)) and Car Group are two great examples of there's a lot more going on beneath the hood?

Rudi: I've been doing the megatrend technology approach now for quite a while. The three of Seek ((SEK)), Car Group and REA Group were always on my radar. They are the so-called previous wave of technology stocks on the ASX. What is important here is that the winner takes all and there's a flywheel effect that benefits those companies. When you are the market leader, you can do a lot more than number two and three in the same sector.

We're now coming into a new wave of technology stocks, and we have new names coming up. Nevertheless, another example is TechnologyOne ((TNE)) and that's still one of the best performers on the stock exchange.

Companies that are maturing more recently in Australia include the likes of Altium ((ALU)) and WiseTech Global ((WTC)). We also have, in the healthcare sector, Pro Medicus ((PME)). The reason why I mention those stocks is because I believe these are amongst the highest quality, best performers we have on the stock exchange.

Two things you need to remember here: if you're constantly reading the Intelligent Investor by Benjamin Graham, you will never invest in those stocks. You cannot value them on the same principles as you do with banks, resources and your traditional industrials. That's number one.

The other element is these stocks usually outperform expectations, and they have been so far. So what's the best strategy to get on board? In my view, if you own them already, by all means, don't get too bogged down about the short term and stay on board. If you don't own them, do what I do: You wait for a significant correction to come through.

For example, for reasons I won't explain here, I did no longer own shares in WiseTech Global. To my delight, last August the market sold out of the stock. Guess who was buying? I think that's the strategy investors should have. Once you're on board, you just wake up with a smile every day and worry less. I mean, yes, the 1920s ultimately ended with the 1930s, but that's a worry, I believe, we might have to revisit later on. It's little bit too early for that at this stage.

Interviewer: I asked a previous guest the same question: Do investors underestimate the strength and longevity of secular trends?

Rudi: Yes, people don't understand a megatrend makes it so much easier for a decent quality management at a decent quality company to create shareholder value, and to continue creating shareholder value over multiple years. It's very difficult for your standard company to do that. Usually, what you see in practice, is companies do it for a few years, or sometimes even less, and then growth becomes more difficult to achieve. When you have a megatrend just carrying you along, it makes the task a lot easier. And I mean: a lot easier.

But, of course, you still have to distinguish quality from the lesser quality ones because, ultimately, quality will drive you through the good times and the bad times. It's particularly in the bad times when the difference becomes very, very visible in portfolios.

Interviewer: Unfortunately, one last question: Australians love their dividends. They love their yield. It's quite bizarre there's been so much investment moving into big tech in the US that doesn't pay dividends. Investors buy it for growth. Yet, for some reason, there seems to be this mental block here in Australia. How do investors get over that hump?

Rudi: They have to realise that even with dividends -and I write about this on a regular basis- even with dividends, it still remains important that the company grows. There are plenty of examples out there of companies that pay dividends and grow and thus will trade on higher multiples and therefore not offer you the same yield as another company.

But if you keep the shares for years, you actually end up with a higher total return and often also with a higher income from dividends as well, because those dividends grow faster. There are technology stocks that pay dividends. Apple pays dividends. Microsoft does. In Australia, the likes of TechnologyOne; they do pay dividends. You just have to combine that with a not overly overpriced share price, and still with growth underneath.

Interviewer: Fantastic Rudi, as always wonderful analysis. Very insightful. Thank you so much for joining Tech 2024.

(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.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

P.S. II - If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

article 3 months old

ResMed Recovery Turns Into Hollywood Script

By Rudi Filapek-Vandyck

What a difference five months can make!

In August last year, global CPAP market leader ResMed ((RMD)) released a rather uninspiring financial update, showing yet again a gross margin under continued downward pressure. Healthcare post covid was in a struggle, globally, to rid itself of the post-pandemic negatives and ResMed's market update revealed the timing of the turnaround lay even further into the future.

Soon after the initial share market punishment, hedge funds started targeting the shares in a global quest to seek out the losers from ultra-successful GLP-1 diabetes/weight loss drugs developed by Novo Nordisk and Eli Lilly. As the world woke up to the fact these modern day 'wonder drugs' promised to eradicate obesity -exact timing unknown- the ResMed share price kept falling, and falling, and falling.

What had previously looked like a volatile journey in between $30-$40 post 2021 had now become a rapid descent into the low $20s. At least one analyst suggested the board should look into pulling up stumps and distribute all the liquidity it could muster to suffering shareholders (more on that below).

ResMed, one of the best performing stocks on Wall Street and locally throughout the prior decade, had met its Waterloo. At least such was the narrative dominating opinions and debates on social media. Add technical analysis-inspired forecasts and it now was pretty much guaranteed; the race to zero had begun.

What a shame! It had looked like such a great success story for such a long time. Every journey must come to an end, eventually.



Fast forward to this week, the release of December quarter financials suggests the death of ResMed's growth story had been grossly exaggerated. ResMed's quarterly financials (the shares are listed in the USA) showed a continuation of robust growth but, most importantly, this time growing sales and services came with a notable jump in the gross margin.

The negative trend that had persisted for six quarters in succession has now been broken. Analysts have been busy remodeling a higher gross margin and what it means for the quarters/years ahead. Company management is confident the gross margin will not only not return to last year's level, but it will further improve over the years ahead.

And the share price? The price is back to where the shares were trading when hedge funds initiated their attack. Yesterday's close just under $29 galvanises a great return for those who acted against the prevailing mood that depressed the shares into the low-$20s. It's not inconceivable at least some of those relatively fresh shareholders are now thinking about securing their windfall.

The return of margin confidence has led to upgraded EPS growth forecasts (in USD) of respectively 18.4% and 21.5% for this financial year and next. FNArena's consensus price target lifted to $33 from $32.22, suggesting, all else remaining equal, there's still plenty in the tank for those who stay put.

The one key factor that had gone missing, albeit temporarily, post August last year is the global sleep and respiratory care markets are huge, and penetration by the likes of ResMed remains benign. It is estimated no less than 424m people suffer from severe sleep apnoea, another 340m people battle with asthma and another 380m with chronic obstructive pulmonary disease, or COPD, a group of long-term lung conditions.

Diagnosis levels remain low with the most-developed sleep market, the US, only having a 20% diagnosis rate. This is why a company like ResMed should continue to enjoy an elongated runway of continued growth. In response to the freshly emerged GLP-1 threat, management has countered those anti-obesity drugs actually support an increase in awareness and diagnoses, which should only prove to the benefit of CPAP providers.

Reading through analysts' updates post this weeks market update, some are toying with the idea ResMed management might be onto something here. Maybe GLP-1s and CPAP are the combination made in heaven for new patients, at least in the initial phase of treatment?

The future will tell. Meanwhile, the vast size of the opportunity that resides with obseity and all its treatments and related devices remains a significant attraction for the pharma industry so don't expect any pause in the efforts from Novo Nordisk, Eli Lilly, and their peers, to command their share. But at least the market at large has come to the understanding this is a far more complex situation, not an instant winners-take-all set up.

And yet, this is not the full extent of this saga just yet...

ResMed's major competitor, Philips of the Netherlands, is in deep struggle street. Gone are the days when Philips and Sony battled for global domination in consumer electronics. Nowadays my former colleagues in the Dutch media are publishing in depth analyses with titles such as: Where did it all go wrong?

Philips' troubles extend into its healthcare operations, including CPAP and other medical devices. Philips has not been able to sell its Respironics competing devices in the lucrative US market since 2021. Oddly enough this too has weighed on the ResMed share price as investors worried Philips upon return would possibly start price discounting in order to regain lost market share.

That prospect has yet again been dealt a blow this week with Philips and regulatory authority FDA agreeing Philips will not sell any new CPAP or BiPAP devices in the US for longer. Respironics will only service and support existing patients. Most analysts had been incorporating the Philips market re-entrance in their modeling from early 2024 onwards.

Philips' announcement coincided with the decision to slim down its suite of products and services. CPAP machines have not been abandoned, and the company continues to sell them outside of the USA, but at least one team of analysts can see a scenario of Philips simply throwing in the towel and concentrating its efforts (and future investments) elsewhere.

Under the FDA agreement, any re-entrance into the US market will be spread out over multiple years.

Before problems started that led to the recall of millions of breathing devices and ventilators three years ago, Philips/Respironics had a market share in excess of 30% in the US. Analysts now assume the market share recovery will stop at 20%. ResMed should grab, and hold on to, the majority of the share permanently lost by the troubled Dutch-based competitor.

Incidentally, there's plenty of anecdotal evidence around the reputational damage done to Respironics' competing CPAP devices is large, and potentially permanent. New patients are overwhelmingly opting for ResMed, which, given the circumstances, should surprise no-one.

Analysts thus far have been hesitant to make bold statements about what this fresh development means for ResMed's outlook. Common logic dictates it can only be a positive, at least for the quarters ahead. Any additional positive, be it through an acceleration in sales or otherwise, has not yet been incorporated in current modeling.

The obvious observation to make from the sideline is that ResMed's fortune seems to have made a 180 degree turnaround incredibly quickly. As your stock standard Hollywood script writer would say: real life is much more surprising than human imagination.

And as far as that analyst advice from last year is concerned: clearly, there's more to share market research than doing the numbers and making numerical assumptions. In-depth knowledge about a company and its industry are simply a necessity.

Investors take note.

(Plus, I am sure, there are a number of lessons to be gained from this experience).

See also: https://fnarena.com/index.php/2024/01/29/resmed-makes-a-comeback/

ResMed is part of my research into All-Weather Performers on the ASX. Paying subscribers have 24/7 access to a dedicated section on the website: 

https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

article 3 months old

Rudi’s View: All-Weather Portfolio In 2023

The story below was originally published in late November 2023. Performance indicators for the All-Weather Model Portfolio were drawn from preliminary estimates and have proven to be too low for the short term (2023) and too high for the post-covid years.

To set the record straight, below is the performance update as per 31 December 2023, straight from Dash (formerly WealthO2), the platform on which the portfolio is managed.


 

In this week's Weekly Insights:

-All-Weather Portfolio In 2023
-Conviction Calls & Best Ideas

By Rudi Filapek-Vandyck, Editor

All-Weather Portfolio In 2023

This week I am visiting Melbourne on invitation of the Big Australian, BHP Group ((BHP)), hence this week's Weekly Insights is written from an inner-city, Melbournian hotel room. It's been raining outside.

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It's not an exaggeration to state the post-covid years have been tough on most investors, with plenty of angst and threats forcing financial markets through volatile swings and roundabouts.

At the macro level, 2021 was all about the post-pandemic recovery and whether the comeback of inflation would prove temporary, but then came 2022, and central bank tightening; it was not much fun.

That much maligned big bear market did not arrive, however, but 2023 has nevertheless still managed to disappoint most. We've seen rallies, and retreats, discussions and debates, the public arrival of AI, but ultimately this year shall be characterised by low volumes, low conviction, lots of trading and very little in sustainable gains.

At least such seems to be the experience for those investors whose main focus is on the Australian exchange.

Performances from indices and general impressions are not every investor's game, and if we dig deeper below the surface of the ASX there are plenty of positive surprises to be found.

Take the banks, for example, prime point of attention for just about everyone in Australia.

The regionals haven't performed well; luckily they pay franked dividends. Sector laggards ANZ Bank ((ANZ)) and Westpac ((WBC)) have more or less kept track with the resources heavyweights BHP Group and Rio Tinto ((RIO)) in generating between high single digit and low double digit share price appreciation for the past three years (in total, not per annum).

All have paid out above-average dividends to shareholders, no doubt yet again highlighting the importance of dividends to many an investor.

It might come as a surprise, however, share prices of National Australia Bank ((NAB)) and CommBank ((CBA)) are up circa 24% and 26% respectively since 1st January 2021. Add six half-yearly dividends and the return from the outperformers can only be described as "excellent", in particular when placed in the context of all that has happened over the past three years.

Note: CommBank shares, despite being the most "expensive" and least liked (pretty much as a standard setting) have once again crowned themselves as the best performer in the Australian banking sector. It's by no means a one-off experience.

What NAB and CBA are suggesting is that investing in the post-covid era is dominated by share market polarisation and thus investment returns are heavily influenced by which stocks in particular are included in the portfolio, and -equally important- which stocks are not.

Avoiding major disasters from a2 Milk ((A2M)), AMP Ltd ((AMP)), Bega Cheese ((BGA)), Chalice Mining ((CHN)), Cromwell Property Group ((CMW)), Healius ((HLS)), Iress ((IRE)), Lendlease ((LLC)), Link Group ((LNK)), and the likes would have gone a long way to achieving decent return from the share market, and with less headaches too.

In the same vein, those who jumped on board the momentum train for specific market segments such as oil and gas, battery minerals, and coal have equally come to appreciate the all-importance of having a timely exit strategy.

All-Weather Portfolio

The experience of the FNArena/Vested Equities All-Weather Model Portfolio pretty much mirrors that of the broader market; many portfolio constituents have been lagging, for a variety of reasons, while others have outperformed expectations.

When I recently checked the returns for 2021-2023 (up until late November), I discovered the average for 2021 and 2022 was shy of 14% while the return to date for calendar 2023 is equally below 14% post last week's general market retreat.

These numbers are better than the local index, also highlighting for investors the market is not by definition the index, and vice versa.

These numbers also prove that sticking by High Quality companies with a long-term growth trajectory that fall temporarily out of favour, think CSL ((CSL)) and ResMed ((RMD)), does not automatically translate into a disappointing outcome overall.

So which companies can be held mostly responsible for the Portfolio's return in 2023?

2023 Winners & Losers

Car Group ((CAR)), previously known as Carsales, has been an outstanding performer, even though rising bond yields in 2022 proved the obvious headwind. Participating in the capital raise earlier in the year was a no brainer.

TechnologyOne ((TNE)) has been an excellent and consistent performer too. No other constituent is able to match TechOne's consistency, but 2023 has given plenty of opportunity to shine to the likes of Aristocrat Leisure ((ALL)), Goodman Group ((GMG)), NextDC ((NXT)), even Wesfarmers ((WES)).

The decision to permanently have some exposure to gold, and to increase that exposure in 2022, has also contributed positively this year.

Equally important, when mayhem hit global markets throughout 2022, the Portfolio moved a large chunk into cash, which limited losses last year. In 2023, some of the new allocations have proved quite fortuitous, including in Dicker Data ((DDR)), HUB24 ((HUB)), REA Group ((REA)), and WiseTech Global ((WTC)).

Some of these allocations were made near the bottom of share prices in October, in line with my Weekly Insights at the time describing equities as technically over-sold and poised for a rally.

The Portfolio is not always able to time its decisions as perfectly as in October. Apart from the positive contributions to this year's performance, we're delighted to once again own a piece of some of the most robust and reliable growth stories on the ASX.

Moving to a safer cash buffer in 2022 meant we had to let go of companies we'd like to own longer term. As the saying goes: no omelet can be made without breaking some eggs. In hindsight, all we had to do was stay true to our conviction, remain disciplined along the way, and wait for market volatility to give us opportunities.

Did we have doubts along the way? Questions? Dilemmas? You bet. The end outcome is but a tiny piece of this story. Then again, we should always remain cognisant we are running a marathon, not a 60 meters indoor sprint.

Next month we'll be celebrating holidays and the start of a new calendar year, but there are no guarantees the quarters ahead will be any easier. Ask any economist, even the ones with a more rosy picture in mind, and they all are bracing for slower economic momentum ahead.

On the other hand, falling inflation and lower bond yields offer support for equities generally, all else remaining equal. As per always, none of this will move in a straight line, without any interruptions.

The most-used credo in the stock market is investors should be on the lookout for shares that are worth one dollar but that can be bought for less, maybe as low as 60c or even cheaper.

This has never been the specific strategy for the All-Weather Portfolio which on occasion is content to pay more than one dollar for shares in a company, knowing the value of the shares will increase towards $2, and even more thereafter.

The fact this upside potential has not revealed itself in the past three years has not reduced our confidence in the outlook for CSL and ResMed, or Woolworths Group ((WOW)), or Macquarie Group ((MQG)).

Among smaller cap companies, the likes of IDP Education ((IEL)) and Steadfast Group ((SDF)) have equally failed to fire up this year, without a deteriorating outlook operationally.

The next round of re-assessments will arrive with the delivery of interim and full-year financial results in February.

Meanwhile, the biggest mistake for investors to make is to assume real opportunity in the share market only presents itself in the form of a subdued PE ratio; see AMP, Iress, and the likes.

The February results season will once again prove just that.

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The All-Weather Model Portfolio is based upon my research into All-Weather Performers on the ASX.

Paying subscribers have 24/7 access to my research via a dedicated segment on the website.

The Portfolio does not own all the stocks mentioned, but cherry picks predominantly from the selections and lists available on the website.

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

More reading/recent editions:

-Quality In Stocks, What Is It Good For?

https://www.fnarena.com/index.php/2023/11/22/rudis-view-quality-in-stocks-what-is-it-good-for/

-Between Perception And Reality

https://www.fnarena.com/index.php/2023/11/15/rudis-view-between-perception-reality/

-Outlook 2024, Is History Our Guide?

https://www.fnarena.com/index.php/2023/11/08/rudis-view-outlook-2024-is-history-our-guide/

Conviction Calls & Best Ideas

Ord Minnett just released its inaugural Analysts' Conviction List, which is to be interpreted on a 12 months horizon.

The selection starts off with 10 stocks:

-Acrow Formwork and Construction Services ((ACF))
-Alliance Aviation Services ((AQZ))
-ARB Corp ((ARB))
-Cosol ((COS))
-EQT Holdings ((EQT))
-Lindsay Australia ((LAU))
-Ramelius Resources ((RMS))
-Sandfire Resources ((SFR))
-Waypoint REIT ((WPR))
-Webjet ((WEB))

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 27th November, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: Quality In Stocks; What Is It Good For?

-Quality In Stocks; What Is It Good For?
-Conviction Calls & Best Ideas
-FNArena Talks


By Rudi Filapek-Vandyck, Editor

Quality In Stocks; What Is It Good For?

Institutional investors and grey-haired market commentators often refer to it; Quality. But what is it exactly and does it really matter in a low volume share market that hasn't made any sustainable progress in 2.5 years?

The simplest definition is to seek out those companies that have superior qualities over the majority that can be measured through financial metrics such as gross margins (and the stability thereof), high return on equity and on capital invested, as well as managerial characteristics such as market-leading products and services, delivering on promises and execution on strategy and plans.

Some experts might take this one step further and also include something as intangible as 'corporate culture'.

Let's face it, a quality company led by quality management is not expected to issue a serious downgrade to forward guidance less than three months after reporting the business is back on track and the only way forward is through higher margins, revenues and profits, like what just happened with Integral Diagnostics ((IDX)).

Financial markets at times can be 'blessed' with a short memory, but those investors who own the shares on the basis of management's previous optimism have plenty of reasons to feel disgruntled and disappointed today.

Quality businesses also don't carry too much debt as that might impact on their operational stability and profitability. Having a strong moat helps with keeping margins stable and high.

Those who manage to continue to generate shareholder value over long periods of time know profitable investments, regularly executed, are but an essential part of the secret sauce that distinguishes the superior few from the low quality peers.

Quality companies are seldom the fastest growing in the share market, and neither will they ever be the cheapest priced, but they are usually adept in dealing with misfortune and challenges, always coming out on top given enough time.

And that, right there, at the end of the previous sentence is the biggest dilemma for today's investor: Quality does not by default distinguish itself through daily share price moves.

In the here and now, Westpac ((WBC)) shares can beat expectations and forecasts, and so can ANZ Bank ((ANZ)) and National Australia Bank ((NAB)), but their performances look pretty bleak when compared against CommBank's ((CBA)) over the past 10-20 years.

Owning Quality then becomes a matter of identifying the strong track record, trusting management at the helm, keeping the faith in their ability and qualities, and having a long-term horizon.



There's no uniform concept of what exactly is Quality, not in the share market, but it remains remarkable that whenever someone tries to identify the select few on the ASX, there's a lot of overlap with other selections and attempts.

Selections that come to mind include those released by Bell Potter, Morgan Stanley and Wilsons; selections that usually find their way into Weekly Insights when renewed or updated.

I've often remarked on the many similarities with my curated lists of All-Weather Performers in Australia (see the website and further below).

"The Best Of The Best"

One investor recently published his Quality Top20 for Australia; the best of the best available through the ASX:

-REA Group ((REA))
-Cochlear ((COH))
-TechnologyOne ((TNE))
-CSL ((CSL))
-Pro Medicus ((PME))
-Altium ((ALU))
-Wesfarmers ((WES))
-Car Group ((CAR))
-Xero ((XRO))
-CommBank
-JB Hi-Fi ((JBH))
-Pexa Group ((PXA))
-Lottery Corp ((TLC))
-ResMed ((RMD))
-Ebos Group ((EBO))
-Dicker Data ((DDR))
-ARB Corp ((ARB))
-Computershare ((CPU))
-BHP Group ((BHP))
-Seek ((SEK))

My main disagreement with that selection centres on Pexa Group, which seems to be lauded by all and sundry for its local near-monopoly in digital housing transaction settlements, but a costly and slow-going expansion into the attractive-looking UK market has eroded much of the company's halo since de-merging from the troubled Link Group ((LNK)).

Having a near-monopoly position in one market is definitely not good enough reason to be labelled High Quality. If it were, the number of companies carrying the label would be a whole lot higher.

For me personally, being part of the select few on the ASX means a company has the track record to earn inclusion, and for Pexa that is definitely not the case today.

I always think in terms of risk-adjusted returns when I shift focus to Quality and All-Weather stocks; the fact these companies have a proven track record of deliveries and success means the risk for heavy disappointment is considerably reduced.

A similar argument can be made against Lottery Corp, which was spun-off by Tabcorp ((TAH)) only in mid-2022.

Observations

The first observation to be made is a number of the selected companies are trading at or near an all-time record high, which by definition means they've achieved great rewards for loyal shareholders.

A second observation is that respective superiorities shine through when compared with similar companies over a longer period of time.

Shareholders in ARB Corp ((ARB)) might be feeling a bit let down post covid, but longer term returns still handsomely beat those from GUD Holdings ((GUD)) or Bapcor ((BAP)).

Domain Group ((DHG)) is only able to keep pace with REA Group during the boom times and while the local software services sector is welcoming a reborn Data#3 ((DTL)), it is but fair to say no company has ever come close to match the phenomenal trajectory of TechnologyOne shares on the exchange, including mini-look-alike Objective Corp ((OCL)).

Sonic Healthcare ((SHL)) is not represented in the above list but it too towers above Healius ((HLS)) -and Integral Diagnostics- in terms of quality characteristics and shareholder rewards.

And while many investors refuse to ever consider Aristocrat Leisure ((ALL)), there's simply no denying its superiority over smaller competitor Ainsworth Game Technology ((AGI)).

Aristocrat Leisure is also outperforming the international competition, which is an achievement the company shares with Altium, Car Group, Computershare, CSL, Cochlear, ResMed, and Pro Medicus.

It takes time and lots of luck and effort to become the global number one, but it takes many times over more effort, tenacity and successful execution to remain on top of the global competition.

This is why established global market leaders should be appreciated for what they are; special.

Unfortunately, as we've also witnessed with CSL and ResMed this year, Higher Quality companies are not 100% immune against the occasional disappointment or set-back. They are simply less likely to be seriously impacted by it, and mostly quicker in successfully dealing with it and recover.

Investors might want to keep this in mind now international shopping platforms Amazon and Temu are starting to make further inroads into Australian household shopping habits. A recent study has found both shopping apps are now the sixth and the first most downloaded shopping apps in Australia.

Combine this with the fact that middle and lower income Australians are under pressure to seek more value for their discretionary and non-discretionary dollars and we may well witness more pain and disappointment from those who are most vulnerable to changing spending habits in the months, if not years ahead.

Consumer Spending Is Changing: Winners vs Losers

Analysts of consumer-related stocks at Jarden have been warning for a while now the gap between winners and losers in the sector is about to widen. They've already spotted the first signals during AGM season indicating the winners may not remain completely unscathed, but the gap with the more vulnerable is likely to only widen further.

The first comparison that comes to my mind is between supermarket operators Woolworths Group ((WOW)) and Coles Group ((COL)). Too many investors still think of them as 'equals' for whom the pendulum swings favourably in alternate periods. What they are missing is that Woolworths is now the CommBank in this sector.

As it turns out, Jarden's analysis agrees with me with the latest sector update identifying Super Retail ((SUL)) and Woolworths as having the "best opportunity to re-rate via successful execution". Jarden equally appreciates Wesfarmers spending $100m on customer data, with $80m more to be spent in FY24.

It is this type of forward-looking investments that ultimately create the division between winners and losers in any sector.

Note companies including Endeavour Group ((EDV)), Accent Group ((AX1)), Coles and JB Hi-Fi ((JBH)) are equally increasing investment in data gathering and employment.

Who's Missing?

And now for the ultimate question: are there any companies that should be included in the above list instead of Pexa and Lottery Corp, and maybe even a few others?

There's always a level of subjectivity of course, and any Top10 or Top20 selection will always have its numerical limitation, but names that spring to my mind are Goodman Group ((GMG)), Macquarie Group ((MQG)) and Wisetech Global ((WTC)), alongside some of the names that had already been highlighted above.

Paying subscribers have 24/7 access to a dedicated section on the website to All-Weather Performers on the ASX, and other curated lists:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Conviction Calls & Best Ideas

Martin Crabb, CIO at Shaw and Partners:

"If we look at the last two and a half years, the market has effectively gone nowhere, but there have been opportunities to trade and add value.

"In fact the 2.5 year return to the end of October was -1.57% in price terms (versus an average of 15.7% since 1990) and 9.7% including dividends versus an average of 28.1%."


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Citi banking sector analysts in Australia:

"We think the unexpected resilience of share prices was driven by strong capital returns, supported by surprisingly benign asset quality.

"Looking forward, we expect price performance will be increasingly pressured by declining core earnings. Higher deposit and funding costs, as well as elevated cost growth are emerging as the key hazards.

"We believe the current set of PEs are not reflective of the growth and risk profile and, thus we no longer have any Buy recommendations amongst the Major Banks."


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The guardians of Wilsons' Model Portfolio have been rather negative on Australia's supermarket operators, arguing while valuations were relatively elevated, there was not enough growth on the horizon for the industry overall, while tailwinds from price inflation were reducing and operational costs are difficult to tame.

Last week they simply reiterated that view, in particular singling out Woolworths Group shares as too expensively priced in a strategy update titled Zero Appetite for the Supermarkets. No room for double-guessing the message there.

The conclusion says it all: "...given the sector’s uncompelling long-term growth outlook, we are structurally cautious the supermarkets."

Now inflation is being replaced with disinflation, Collins Foods ((CKF)) has become the favourite stock to invest in the theme.

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Franklin Templeton:

"The final mile is often the most difficult. While we hope that adage does not result in significant economic hardship in regard to the US monetary policy, we also recognize that hope is not a strategy. Investors may need to prepare for a difficult final ascent.

"Franklin Templeton says investors risk underestimating the resolve of the Fed to engineer below-trend economic growth and rising unemployment to achieve its inflation target.

"A harsher-than-expected recession is likely.

"Rate cuts will probably occur later and more gradually than is currently priced into the market."


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Morgan Stanley:

"There's too many sellers, too many buyers, making too many problems. And not much "dove" to go around.

"Can't you see this is a land of confusion?

"Lower central bank policy rates, smaller balance sheets, more sovereign bond supply, and a global economy near recession mean lower rates, stronger USD."


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Wilsons:

"Despite calls for structurally higher inflation, the US headline consumer price index (CPI) appears to be falling as fast as it went up.

"This should provide support for both fixed interest and equity markets over the coming year.

"The past 12 months have shown that the trend improvement in inflation will not be a straight line."

"Overall, the decline in inflation is supportive for our relatively constructive fixed interest and global equity market view, and provides support to Australian equities (and bonds) despite our own stickier inflation situation and higher-for-longer cash rate expectations."


Also, from another strategy update:

"Overall, we see a mixed outlook for the local share-market, with disinflationary global trends likely providing some upside pressure, while a higher-for-longer domestic cash rate will create headwinds for the local market.

"Within our neutral view on the Australian equity market (global equities still marginally preferred), investors should focus on active portfolio management, with the local market’s heavyweight banking sector particularly likely to struggle to grow in 2024."


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Real estate sector analysts at Citi:

"Historical regression analysis suggests REITs outperformance starts 0-4 months prior to the first RBA rate cut."

Stock beneficiaries identified include:

-Residential stocks Stockland ((SGP)) and Mirvac Group ((MGR))
-Defensive retail real estate stocks BWP Trust ((BWP)), Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX)) benefitting from lower interest rates on both the consumer and the real estate loans.
-Industrial including one of our top picks Goodman Group with best in class financial and operational position.
-Higher Beta value stocks such as GPT Group ((GPT)) and Charter Hall ((CHC)) where valuations may be supportive of performance.

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Barrenjoey:

"In our view the largest commodity and equity positioning market debate is in the lithium sector.

"The 70%+ correction in prices and up to 60%+ in equities has been severe, but we don’t see enough evidence to call a market bottom.

"As always markets can over-shoot and capitalize a short-term problem. Our preference in mining is to be generally exposed to free cash generation in iron ore and now emerging in gold."


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T.Rowe Price:

"Equities are still the best place to be for the long term, but the playbook that worked for the last 10 years won’t work for the next 10. In a more uncertain environment, valuations will become even more important.

"A sensible investing approach to generating excess returns in the new regime is to balance growth and value style factor tilts, to invest in durable growth themes, to balance recession and macro risk, and to find companies with a positive catalyst for change.

"In an uncertain world, areas of investment opportunity include artificial intelligence, such as the semiconductor ecosystem and AI infrastructure, health care innovation, such as obesity drugs and bioprocessing, and residential and commercial construction.

"Artificial intelligence is a big deal, in both the boardroom and in the public’s imagination. We can all feel it – AI is going to proliferate in nearly every facet of our daily life. This unique technology has the potential to be the biggest productivity enhancer for the global economy since electricity, and we’re positioning our strategy to navigate this rapidly changing environment responsibly.

"The global market environment is now in a state of purgatory, with continued uncertainty about both inflation and recession risks as the Fed considers its next move. Stock/bond correlations are constantly shifting. Investors need to hedge their bets accordingly, taking advantage of attractive yields while choosing their stock, bond, and real asset allocations wisely."


FNArena Talks

Last week I was interviewed by Peter Switzer about share markets and a bevvy of individual companies.

That video of approximately 37 minutes is now available via Youtube: buff.ly/3usNHUG

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 20th November, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: Between Perception & Reality

In this week's Weekly Insights:

-Between Perception & Reality
-Conviction Calls & Best Ideas


By Rudi Filapek-Vandyck, Editor

Between Perception & Reality

Probably the biggest surprise I have come across over the past year or so is the observation that so many investors are firm believers in the 'Market Knows All' narrative; this idea that share price moves are highly efficient, because someone out there, on the other side, hiding in obscurity, knows something you and I are as yet not privy to.

Yet most of us will specifically refer to sentiment, bullish and/or bearish, and money flows when we discuss markets generally. It's as if we have decided that trends and moves at the macro level occur through a two-way loop with human group sentiment, but at the individual stock level it all boils down to specific knowledge by those in-the-know.

Bizarre.

I've long held the belief the concept of the efficient market thesis was dreamt up by an academic who would observe and judge financial markets from afar. More than three decades of watching share prices move up and down has only galvanised my conviction.

To illustrate what's going on inside financial markets, my favourite parallel is with the Olympic games. Look to your left and you might see an athlete trained in weight lifting. The one on your right looks more like a swimmer or a future champion in gymnastics. Behind you stands a golfer and the back you see in front is that of a rugby sevens player.

The difference with the Olympics is all of you are competing in the same playing field, at the same moment, every single day. Which is why my favourite market description is:

The share market will eventually do the right thing, but not before it first has tried out all other options.

Goes without saying: we never ask further questions when the share price moves in our favour (that's our intelligence being rewarded). Plus, yes, the concept of holding on to your shares when the trend is bending south is not something we are naturally wired for.

Volatility only equals risk for the short-term trader who cannot "risk" the trend moving in the opposite direction, but coping with a falling share price triggers feelings of guilt and failure from most of us.

We have been "wrong", apparently. And the market, well, the market is always right, isn't it? Even if this means that kicking a rugby ball on the seventeenth green has prevented the golfer behind you from shooting a birdie.



In all fairness, sometimes the market is truly telling us we are wrong, at least in the here and now, while other times it is simply being silly and mercurial. And while share prices should not be front of mind constantly -all the legends in the industry tell us it should not be- our human brains are naturally wired for 'momentum', thus share prices guide our perception, our views, even our forecasts and expectations.

To paraphrase the legendary Peter Lynch: the share price of a company should be the least concern for investors, yet it attracts the most attention. Share price down means it's a bad proposition. Share price up equals great management, running a fantastic franchise, and killing it.

Let's not beat around the bush: we've all been guilty of allowing the share price to colour our mind. Most of us would pay heed to Lynch's motto: "know what you own, and why you own it", but that's so much easier when the market follows the script we have in mind.

Nice one, Rudi, I suspect some of you are thinking now, but where exactly is this leading to?

To CSL ((CSL)), of course, one of Australia's most successful business stories from the past three decades, widely regarded the benchmark for 'quality' on the ASX, also because a share price growing from $2-something to $300 and beyond will seldom, if ever, trigger anything but admiration from investors, journalists and market commentators.

CSL is high quality quality, simply because the share price tells us.

At least, such was the case until the pandemic hit in 2020 and CSL's safe haven status propelled the share price beyond $335. It later emerged blood plasma collection centres are not immune during societal lockdowns and the share price has found it difficult to stay above $300 since. More recently the shares temporarily dived below $230 for a total loss of -32% in market cap.

Now, of course, the question being asked is: is this yesterday's case study for why investors (including me) hold on too long to growth stories that, ultimately, cannot last forever?

Experiences with companies including a2 Milk ((A2M)), Appen ((APX)), Lendlease ((LLC)), and Ramsay Health Care ((RHC)), to name but a few, make asking the question all but justifiable.

And investors do hold on too long to yesterday's success stories because opinions don't change quickly, and neither do the embedded perceptions that are the foundation underneath investor views.

In most examples, and I am sure we can all come up with many more names, there's a relatively close correlation between what has happened to the share price and the undeniable deterioration inside the underlying business.

Profits, dividends and key financial metrics for Lendlease today are but a fraction of what they were many moons ago. The same observation stands for a2 Milk, Appen, Ramsay Health Care, and so many more others. Using the same label for CSL, however, looks like a stretch.

While it is true covid and the $11.7bn acquisition of Vifor have unmasked a number of vulnerabilities at the company and its operations, also weighing down a number of financial metrics, CSL's EPS is still forecast to grow this year between 13-17% in constant USD terms on a post-covid margin that is yet to bounce back, with growth poised to continue in the years thereafter.

CSL spends the equivalent of a small to mid-cap company on capex & R&D each year and the company's pipeline of products under development has seldom looked as rich in potential as it does this year. This is not my personal assessment, but of sector analysts who are invited on site tours and investor days.

At this year's investor briefings, management at CSL expressed its confidence of achieving annual double-digit earnings growth over the medium term, on lower capex, higher operational yield (increased efficiencies), lower costs, margin recovery and a number of new initiatives and products.

But also, there's no denying the company's risk profile has risen post 2020. There's more competition for some of its specialised products, through ArgenX and others, and the company had to issue a profit warning ahead of its FY23 release, if only to correct the analysts who had too easily assumed rapid margin recovery.

More recently, CSL shares were dragged down because of the risk (speculation?) that popular GLP-1 anti-obesity drugs from the likes of Novo Nordisk and Eli Lilly could potentially impact on Vifor's dialysis drugs portfolio.

When it comes to explaining the share price performance over the past three years, I am sure we all have our views and opinion. We all carry along our biases and narratives, and if we thought CSL shares were too expensive back in 2020, then that's our explanation. Others like to look at price charts and draw support and resistance lines.

There's a whole group of investors who've never liked the company or its shares, and they are highly unlikely to change their stance. Backward-looking, simple PE ratios will never turn CSL into an attractive proposition.

There's literally no purpose in me trying to address all possible narratives and views, other than pointing out maybe the answers are not to be found with CSL itself?

One of my long-standing observations is most investors and market analysts cannot get their head around the premium valuation for CommBank ((CBA)), which as every investor hopefully realises, is the only bank in Australia that has been worth owning post-GFC.

This inability is because the answer does not lay in the dividend or in the mortgage book of CBA, but in the sector premium the shares have been rewarded with over the past two decades. In other words: to properly assess the prospects and 'valuation' of CommBank, one has to compare and measure against the rest of the sector domestically.

In similar vein, CSL's lagging share price performance post 2020 might be more explained by the fact the healthcare sector over that period has turned into a market laggard - globally. The S&P500 Health Care Index, for example, peaked in mid-2021 at the level of 2015, and has been in a downsloping trend since.

This becomes extra-remarkable if one realises this index includes Eli Lilly whose shares have almost quadrupled since 2020.

There's no denying the healthcare sector has been struggling with re-discovering its pre-covid mojo, as also yet again illustrated by last week's profit warning from Integral Diagnostics ((IDX)) in Australia.

Higher costs in combination with a slower-than-anticipated revenue recovery post covid generally has proven to be somewhat of a ball and chain for many industry stalwarts.

In the USA, the Biden administration is of the intent to address extreme price gauging that makes US healthcare unaffordable for many. This cannot be great news for major pharma companies.

In addition, defensive sectors on the share market have effectively stood still or have gone backwards over the past two years. Think supermarket operators such as Woolworths Group ((WOW)), staples such as Endeavour Group ((EDV)), and local telecommunication leader Telstra ((TLS)).

Clearly, shares in CSL, that has proven to be no longer as 'superior' as it was pre-covid, have not been able to withstand the multiple pressures descending from the macro level. As investors we cannot always accurately anticipate what is likely to happen next, but it's good to keep in mind nothing is ever permanent in finance.

This too shall change, eventually.

If CSL is indeed able to achieve those double-digit annual increases in the years ahead, the share price will pick up on this, and resume its uptrend. It's the response a young Warren Buffett received from his mentor, Benjamin Graham. It's also what history shows us, with the benefit of hindsight.

It's typical for humans to live in the moment, to be impatient and draw far-reaching conclusions on the basis of recent observations and experiences. Sometimes the share price follows its own scenario, and it doesn't match what we had in mind. The task at hand, however, doesn't change because of how the share price has performed.

A period of lacklustre disappointment is nothing unusual. In fact, it happens to the best. In CSL's case, two precedents are 2001-2006, as well as 2008-2012. You didn't seriously think shares in Microsoft or in Apple have only gone up over the decades past, do you?

One of the absolute outperformers on the local exchange over the past two decades is TechnologyOne ((TNE)), which has been a staple in the FNArena/Vested Equities All-Weather Model Portfolio. While total return generated has been nothing short of phenomenal, between 2016 and mid-2018 there was literally no appetite for the stock.

Now cue all the possible reasons and explanations you can think of. Shares too expensive. Growth is poised to slow down. Foreign competitors have bigger balance sheets and more muscle. The shares don't move!

Five years later the share price has tripled and if current market speculation proves correct, management is about to announce underlying growth is accelerating, which would be a bonus indeed for a premium-valued share price already.

CSL's business is a lot more complex, and for many an investor it's too much of a challenge to properly understand its pros and cons and inner-business dynamics. Today's story is not a personal recommendation to buy or hold the shares. It's merely an invitation to re-appraise what happens on the market, and why.

If share price and fundamental prospects of a company are out of sync, they will reconnect. It's what happened to Microsoft shares in 2012 and to TechnologyOne shares in 2018.

The worst narratives investors could have taken guidance from prior to those price pivots include "the share price doesn't move" and "the shares haven't moved since..."

Sounds familiar?

This story is about the share market as much as it is about us.

Conviction Calls & Best Ideas

From a recent strategy update by T.RowePrice:

"Higher interest rates don’t necessarily take all the oxygen out of the system. The market could get excited by the prospect of productivity gains driven by artificial intelligence.

"And, as one T. Rowe Price Asset Allocation Committee member pointed out recently, ‘Sticky inflation historically has been good for earnings.’

"The high level of U.S. government debt was an important caveat.

"It is important not get too bearish. Market segments that don’t trade at nosebleed valuations, such as small and mid-cap stocks and real asset equities, look appealing on a relative basis in our view.

"And if we see a spike in volatility and a market sell-off, it may be an opportunity to buy stocks."

****

Stock pickers at Wilsons believe the time is right to add more exposure to copper, given supply constraints will eventually lead to higher pricing.

Quite a few forecasters are signalling market deficits are on the horizon for copper, though none see this as an imminent possibility given the global economy is still decelerating, and expected to continue doing so in the quarters ahead.

Possibly the top-tier ASX-listed pure exposure is Sandfire Resources ((SFR)), which has now been added to Wilsons' Most Preferred Direct Equities ideas. That portfolio, by the way, is Overweight international equities, but Neutral Australia.

Wilsons does see opportunity in high quality domestic private credit where yields on offer can rise as high as 9%-plus.

Other ideas maintained by Wilsons are Amcor ((AMC)), APA Group ((APA)), CSL ((CSL)), and ResMed ((RMD)).

****

Judging from a recent investor presentation document, Morgan Stanley's favourites among ASX-listed mining companies currently are: 29Metals ((29M)), Alumina Ltd ((AWC)), Deterra Royalties ((DRR)), Evolution Mining ((EVN)), Rio Tinto ((RIO)), Regis Resources ((RRL)), South32 ((S32)), and Whitehaven Coal ((WHC)).

****

From a strategy update by Citi:

"We have held the view that US Equities would prove more resilient relative to historical recession compares.

"The S&P 500 has experienced a rolling earnings recession, timing disparities at the sector level have masked the overall index impact.

"Should a soft landing materialize in ‘24, the stage is set for material upside to earnings growth as a Cyclicals recovery aligns with new structural tailwinds in the Growth cluster.

"This is reflected in our scenario weighted S&P 500 targets. Currently, we project:

-Year End ’23 – 4,600
-Mid Year ’24 – 5,000"

****

Morgan Stanley strategists are in the process of informing their clientele about prospects for 2024:

"For investors, 2024 should be all about threading the needle: With our baseline expectation that 2024 will see slowing growth, falling inflation, and eventually easier policy, we'd need to see the macro outlook sticking the landing across all of these to justify current valuations – many assets are already fairly priced for this benign environment.

"And the eye of the needle is smaller and narrower than usual, as is the usual case in late-cycle: Financial conditions are tight. Rate cuts generally aren't expected until later in 2024. Downside risks to global growth are high. An earnings recession is still in train.

"Bond supply continues to be a market concern. EM fundamentals face headwinds. Cross-asset correlations have not budged from extremes. Finesse will be needed to find openings in markets which can generate positive returns."

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 13th November, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: To Sell Or Not To Sell?

In this week's Weekly Insights:

-To Sell Or Not To Sell?
-Conviction Calls and Best Ideas
-FNArena Talks


By Rudi Filapek-Vandyck, Editor

To Sell Or Not To Sell?

When it comes to investing in the share market, very few events impact as much on the human psyche as a falling share price. In particular as it goes on and on and on.

As the old joke goes: investing in shares is really easy. You buy low and sell high. And if someone asks what do you do when the share price falls? You respond with: those shares should not be bought!

Life inside the share market is a lot different from the theory and the investment books, and there can be a whole suite in reasons as to why shares fall in price. Plus it can happen any time, including immediately after you bought in, and hit your favourite and biggest holding as well as that mistake you rather not think too much about.

Most investor responses can be identified through two opposites: one either does nothing and waits for the shares to recover back to the purchase price or we too sell our shares, don't look back and move on.

Others might have downside protection in place such as automated stop-loss triggers or an ironclad, no exceptions rule such as sell from the moment the stock falls by -15% more than the market.

By far the most dangerous response is to simply buy more shares, and keep buying, until the average purchase price is exceeded by the share price that must, surely, start rising again at some point? Averaging down under such conditions might turn into a guaranteed route to bankruptcy as many have found out throughout the times.

A dud investment does not become a guaranteed winner by throwing more money at it, and neither does time necessarily work to its benefit, while the market doesn't care at what price we decided to purchase. Then again, not every price fall means our purchase is a dud, or that we made a mistake, or it'll never come good.

Sometimes a falling share price should be welcomed: we can buy more at a lower price! We can finally get on board! But also: I knew it was a mistake and this is the motivation I needed to get rid of it.

As investors, irrespective of our age and time in the market, we move through phases of accumulating experiences during which all of the previously mentioned sins are committed and those dilemmas are encountered.

We know the advice from the legendary Peter Lynch: know your companies and why you own them, but it takes a proverbial mountain of character-building experiences to truly understand it, and then live by it.


****

Once we've managed to upgrade ourselves to the next level of becoming a better investor, there's always the next challenge through transitioning market dynamics, special circumstances, and rare exceptions. Share prices do not weaken on bad news only.

One such special circumstance is when our portfolio holding is suddenly under attack by shorters; market participants who position for and profit from a weakening share price.

Historically, some of the biggest fraud stories have been revealed by shorters who turned into investigative sleuths, including Enron in America, Wirecard in Germany, and sandalwood grower Quintis and asset manager BlueSky on the ASX.

But outside a rather small parcel of success stories, shorters have by no means covered themselves in lots of glory these past few years in Australia.

All of Amcor ((AMC)), Blackmores, Corporate Travel Management ((CTD)), Fortescue Metals ((FMG)), Nearmap, NextDC ((NXT)), Macquarie Group ((MQG)), Rural Funds Group ((RFF)), Seek ((SEK)), TechnologyOne ((TNE)), Vulcan Energy ((VUL)), and Wisetech Global ((WTC)) have found themselves under attack from shorters at some point in the years past.

In all cases the share price came under attack, in first instance, but the impact eventually only proved temporary. Vulcan Energy is the one exception, but we cannot blame the shorters; they publicly apologised and withdrew their negative thesis.

The likes of NextDC, TechnologyOne and Wisetech Global recently traded at all-time highs, which tells us all about the validity behind the attacks!

Once under attack, the share price might only have one direction of choice and that is down. Shorters often coordinate, and like wolves, they attack in pack. With the media as conduit, the news cycle often turns negative and there's a fairly decent chance more shareholders decide to join in the selling. Trends reverse, technicals look bad, people seek to limit losses, panic kicks in, et cetera.

As the share price drops, and the losses accumulate, often quickly, the early experience can be quite scary. What if the shorters are correct and fraud and obfuscation rule the accountancy books?

Some investors might decide to simply not take the risk. We're all into it for generating a decent return, not necessarily through fighting wars or turning into activist investors.

But if history is our guide, most short theses don't play out, apart from the immediate negative impact on the share price under attack. I, for example, have also decided on occasion it's better to avoid the agony and the headaches, but I am extremely pleased I remained a shareholder in NextDC and in TechnologyOne, and the FNArena/Vested Equities All-Weather Model Portfolio has returned as a shareholder in Wisetech Global.

Looking back at those experiences from the past, I do think the proverbial "secret" lays in that statement by Peter Lynch. The more you know about the company, the more confidence you can have in management and operations, and in the fact there's no-one cooking the books.

Shorters be damned!

Having said all of the above, the proposition is never 100% black or white. Shorters do sometimes have additional information, and they do sometimes get it right. As investors, we thus must keep an open mind, and try to make an educated assessment. [Note: short positions are not always "naked". A corresponding long position in a similar stock, or an options position, for example, may offset the short.]

In the initial days of the aforementioned All-Weather Portfolio, law firm Slater & Gordon had been included, which was then one of the emerging success stories on the local bourse. Until management and the board decided the story had outgrown Australia and a large acquisition in the UK was announced.

Those familiar with the UK assets knew Slater and Gordon had suddenly taken on a lot of risk, involving a mountain of debt and assets of questionable quality.

Within no time, short positions in Australia were increasing and the share price sat under heavy pressure.

Long story short, I think the Portfolio sold all shares at a loss of -20%, or thereabouts, as the more information became available about the UK acquisition, and about Slater and Gordon's accountancy practices, the more I realised risk nor time were on our side.

Prior to those events, Slater and Gordon had been one of the best performing holdings in the Portfolio. Seeing it turn from a prior 'Champion performer' into a -20% irreversible loss was one of those seminal experiences we simply need to have as active investors.

This acquisition literally broke the company. The share price ultimately lost -95% from its peak and never recovered. I know people who never sold.

Slater and Gordon was acquired and delisted in April of this year. It's the one experience as to why I keep reminding investors: it's never too late to sell.

Outside of being extremely lucky, time does not work in favour of substandard or damaged companies.

Investors tend to underestimate the mental relief from removing such a grave mistake from the portfolio, and being able to look forward to better and more promising opportunities yet again.

****

Not selling is the bigger challenge for investors sitting on a long-lasting good news story. We should all aspire to witnessing our investments grow by many multiples over time. Imagine buying BHP Group ((BHP)) shares at $9 in 2000, or CommBank ((CBA)) shares below $26 in 2008, CSL shares below $30 in the GFC-aftermath or TechnologyOne shares below $5 in 2014.

Would we have held on to them throughout the multiple ups and downs? Maybe that is the real question.

I definitely feel like I have been punished multiple times over since the All-Weather Portfolio sold out of Audinate Group ((AD8)), Pro Medicus ((PME)), and REA Group ((REA)).

Those familiar with my research know I regard all three as part of a select group of High Quality performers on the ASX, in the same vein as I like to refer to CSL, Carsales, Goodman Group ((GMG)) and TechnologyOne.

Back in 2021, when bond markets resetting and central bankers changing course brought daily volatility and selling pressure to global equities, the decision was made to allocate more to cash. To weather the storm and limit the short-term damage. The share market being the share market, there will always be opportunities to jump back on board.

In theory, yes. In practice, there are times when market momentum and our own mind work against us. The local share market is arguably now in its third month of struggle, but those share prices refuse to join in the weakness for so many others that are owned in the Portfolio. Any share price weakness to date hardly registers on the share price charts!

Memento to ourselves: sometimes selling out is the dumbest thing to do.

Then again, I could be too demanding. Shares like Aristocrat Leisure ((ALL)), Carsales, Goodman Group, NextDC, and TechnologyOne have been an uninterrupted part of the All-Weather Model Portfolio since the early beginnings. Successful investing is a lot like playing golf; it's never about being perfect.

At least Wisetech Global shares received a real shellacking in August, allowing the Portfolio to once again add the stock.

****

Many of the conclusions we draw are, of course, done with hindsight and we should always be careful not to dwell too much on those success stories we missed out on. Investors casually forget how much information was not available at particular points in the past, and thus how much luck plays a part in short term outcomes.

For good measure: short term can be a matter of days or weeks, but it can also be a given year, depending on context and general conditions.

The All-Weather Portfolio, like so many other active investors, had adopted the view that unprecedented central bank tightening and a steep reset in global bond yields would plausibly spell trouble for economies, corporate profits and share market valuations.

That scenario has not played out, at least not until now.

Part of the portfolio's risk management consists of allocating funds to cash. Raising cash levels means shares need to be sold.

Luckily, when such pivot moments arrive, it always makes us realise there's at least one investment in the Portfolio that is probably an error of judgment. Hence, extreme share market volatility helps us keeping the house clean and in healthy shape.

Some of the decisions made in years past relate to High Quality success stories that, unfortunately, lost their mojo and should therefore no longer carry that label.

Ramsay Health Care ((RHC)) is one such case in point. A great local success story that started to wilt in 2016 and things never got better again. Another example is Iress ((IRE)) which today is equally but a shadow of its former self.

Sometimes the change is not in control of the company itself. Bapcor ((BAP)) is one of the most resilient business models listed on the ASX, but the shares are no longer in the Portfolio because tomorrow's cars are electric and the company has yet to find a way to adapt.

On my observation, investors stick too long to the Quality narrative, long after the label no longer applies. It shows we're human. Equally: these are longer-winded processes. Companies that have never been on my radar, but that equally lost their Quality tag in years past include Westfield, Lendlease, Orica, and Westpac.

Ultimately, the loss of Quality shows up in disappointing investment returns. Time does not work to the benefit of the weak or the weakening. Not that your typical value investor cares about any of this, but they usually don't stick around for long either.

****

One sector on the ASX that has lost its former mojo this year is healthcare. Sonic Healthcare ((SHL)) shares, now trading below $30, have effectively returned to pre-covid times. The same observation applies to CSL ((CSL)), now trading below $250 with just about everyone telling me the technical picture looks "awful".

It's worse for others, with the notable exception of Pro Medicus, of course, and Cochlear ((COH)).

This is not simply a local phenomenon, with the sector lagging globally. Probably the most dumbfounding observation is nobody seems to offer a valid explanation. I am inclined to look at rising bond yields myself, but there's enough inconsistency around to dismiss that theory in isolation.

Do all roads start and begin with the new miracle drugs from Novo Nordisk and Eli Lilly?

We know this is what is weighing on the share price of ResMed ((RMD)) with investors taking the view success of these ever-so-popular weight-loss drugs will turn others into losers. Those 'losers' have been identified as every healthcare company whose product or service relates to obesity.

Extend this relationship to the max and virtually every healthcare company will be affected... on the premise that Novo Nordisk and Eli Lilly are about to eradicate obesity from modern day society.

Both CSL and ResMed remain cornerstone holdings in the Portfolio. The first should resume its strong pace of growth in 2024 and ResMed shares are arguably as cheap as they've been in a mighty long while.

Part and parcel of being invested in the share market is that sometimes we simply cannot explain why things are happening in the here and now. But as long as we can trust in the companies behind the share price, we can trust in that share price recovering back to fundamentals.

ResMed is scheduled to release its next quarterly update on October 27.

****

In April 2019, I wrote a story titled The Art Of Selling Non-Performing Stocks, which proved rather popular among readers both at FNArena and elsewhere:

https://www.fnarena.com/index.php/2019/04/04/the-art-of-selling-non-performing-stocks/

Conviction Calls and Best Ideas

Equity markets are increasingly displaying late cycle dynamics, observe global strategists at Morgan Stanley. This is their preferred reading as to where markets are in the current cycle.

"In our view, equity investors should avoid rotating into early-cycle winners like consumer cyclicals, housingrelated/interest-rate-sensitive sectors, and small caps. Instead, we believe a barbell of large-cap defensive growth/quality with late-cycle cyclical winners like Energy and Industrials should outperform."

****

Portfolio strategists at Canaccord Genuity remain Overweight fixed income and Underweight equities.

The broker's Australian Model Portfolio is markedly Overweight Consumer Discretionary and Consumer Staples, as well as Healthcare.

Stocks to achieve these oversized exposures include The Lottery Corp ((TLC)), Wesfarmers ((WES)), Endeavour Group ((EDV)), Woolworths Group ((WOW)), Treasury Wine Estates ((TWE)), Ramsay Health Care, Sonic Healthcare, and CSL.

Both Energy and Mining are kept slightly ahead of local market weights through Woodside Energy ((WDS)), BHP Group ((BHP)), Rio Tinto ((RIO)), South32 ((S32)), plus Amcor ((AMC)) as the latter is officially categorised as a 'Materials' stock.

Banks, including Macquarie Group ((MQG)), are held but as an Underweight allocation, and the same goes for insurers/diversified financials through Suncorp Group ((SUN)).

Goodman Group ((GMG)) represents the full exposure to real estate.

****

Analysts at Morgan Stanley have started to nominate their Key Picks post the August reporting season in Australia.

Thus far companies nominated are:

-IPH Ltd ((IPH))
-Life360 ((360))
-Lovisa Holdings ((LOV))
-Propel Funeral Partners ((PFP))

****

Analysts at Citi have opened a 90-day Catalyst Watch on South32 ((S32)) - effectively launching a fresh trading idea for the remainder of the running calendar year.

Their reasoning: South32 was hard hit from EPS downgrades post financial result in August, but since prices for coking coal and alumina are up. This will force consensus forecasts to lift and the share price should benefit from it.

Citi has upgraded to Buy with a price target of $3.80.

FNArena Talks

I'll be MC-ing and presenting at the ATAA 2023 NATIONAL CONFERENCE, in Sydney on the 20th – 22nd October.

Investors interested can still sign-up and enjoy the full in-person experience on offer, or opt for the full streaming service.

For more information and to register visit www.ataa.asn.au

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 2nd October, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: ARB, Corporate Travel, Goodman Group, NextDC, Orora, Worley & Xero

In this week's Weekly Insights:

-Opportunities With A Five Year Horizon
-Company Reports: Early Trends
-Company Reports: Inflation
-Company Reports: Conviction
-Company Reports: Technology Sector
-REITs In Focus


By Rudi Filapek-Vandyck, Editor FNArena

Opportunities With A Five Year Horizon

Most investors like to profess they are in it for the long term, but let's be brutally honest: we are all influenced by what happens in the here and now, irrespective of what the consequences might be in the long run.

Which is also why my own investor heart tends to skip a beat whenever an experienced market researcher makes the effort to identify great opportunities with a longer term focus.

At the very least, in my humble opinion, such research offers the rest of us mere mortals with valuable input to think about, detached from the immediate and daily share price movements.

One extra observation to throw in the mix: whenever analysts try to identify great longer-term investments, they mostly end up overlapping each other's selections, with personal preferences often creating the minor differences.

Wilsons' latest effort fits in almost perfectly with my own research into All-Weather Performers on the ASX.

Last week Wilsons published a list of five stocks for the next five years; a small selection of genuine bottom-drawer stocks, that can be owned and trusted to reward shareholders over the next five years, at least. The selection is supported by attractive structural trends such as healthcare innovation, energy transition, cloud computing, and financial industry disruption.

The five companies selected because, in the words of Wilsons, they deserve a place in every investor's portfolio, are CSL ((CSL)), Macquarie Group ((MQG)), Netwealth Group ((NWL)), NextDC ((NXT)), and Worley ((WOR)). Three of those are currently held in the FNArena/Vested Equities All-Weather Model Portfolio.

Other attractive long-term buys, according to the same analysts, include APA Group ((APA)), Aristocrat Leisure ((ALL)), Goodman Group ((GMG)), James Hardie ((JHX)), IDP Education ((IEL)), The Lottery Corp ((TLC)), ResMed ((RMD)), Telix Pharmaceuticals ((TLX)), and Xero ((XRO)).

More overlap.

Paying subscribers have 24/7 access to a dedicated section on the website on my research into All-Weather Stocks:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/



Company Reports: Early Trends

The focus of investors will increasingly shift towards corporate earnings and their likely outlook, both in Australia and overseas, though the macro picture consisting of central bank actions, China stimulus, bond yields and economic indicators will still be ever-present.

Thus far in 2023, equity indices like to rally on macro-influences, while corporate earnings have not genuinely followed suit, even though there has been no fall-of-the-cliff experience either.

The Australian share market has seen the return of Confession Season, when companies confess they won't make the target for the financial period, but it hasn't been an all-out tsunami of negative announcements.

Companies that came clean over the weeks past have seen their share price fall in response, at times by -10% or more, including the likes of Ansell ((ANN)), Aurizon Holdings ((AZJ)), ASX ((ASX)), Boral ((BLD)), Cleanaway Waste Management ((CWY)), CSL, Johns Lyng Group ((JLG)), Link Administration ((LNK)), Northern Star Resources ((NST)), and Domino's Pizza ((DMP)).

There have been the occasional good news surprises, including from AGL Energy ((AGL)), Ampol ((ALD)), Fletcher Building ((FBU)), and Megaport ((MP1)).

The two lists might not be complete, but I think it's fair to say the bias is leaning towards the negative.

The mining sector certainly is generating its own negative contributions as also witnessed on Monday with South32 ((S32)) flagging a record -US$1.3bn asset write-down, hot on the heels of IGO Ltd's ((IGO)) substantial write-down in the week prior, and Core Lithium ((CXO)) downgrading production guidance.

Ship builder Austal ((ASB)) has requested a trading halt, potentially to downgrade market expectations.

Most strategists in Australia seem to be cautious at best. See also last week's edition: https://www.fnarena.com/index.php/2023/07/19/rudis-view-low-expectations-not-low-enough/

Over in the USA, EPS forecasts are dropping quite rapidly as early Q2 financial reports are being released. It wasn't that long ago the average EPS forecast for the quarter for the S&P500 was sitting at a negative -7% year-on-year. That percentage has over the past two weeks or so quickly dropped to -9%.

It's still early in the season, of course, but positive surprises thus far amount to 75% of reports versus a five-year average of 77%.

What should genuinely worry investors in Australia is how earnings releases in general are being received on Wall Street and in Europe. Market watchers have been observing the trend tends to favour share prices to underperform when companies miss the mark while companies that beat expectations are not necessarily receiving a reward for it.

It also seems the bias has shifted towards more 'misses' and fewer 'beats'. The punishment for a 'miss' tends to be noticeably larger than the reward for a 'beat'.

If Europe is leading Australia, the following trends should be expected to show up locally:

-Momentum is slowing, feeding into more cautious guidances and ongoing downgrades in earnings forecasts
-Less companies are able to beat market forecasts
-Large cap companies are faring noticeably better than smaller cap peers
-Cyclical sectors Energy and Materials are among segments with the weakest earnings trends, but so are Growth companies

The Q2 season in the US has only just begun, but similar observations have been made.

Reporting season in Australia starts unofficially on Wednesday, when Rio Tinto ((RIO)) sets the early tone, followed the next day by Champion Iron ((CIA)), Garda Property Group ((GDF)) and Sandfire Resources ((SFR)).

The following week sees financial updates released by Credit Corp ((CCP)), Janus Henderson ((JHG)), Block ((SQ2)) and ResMed ((RMD)) but, realistically, the August reporting season only starts ramping up the week after next week.

Even then, as has become the local tradition, Australian companies wait until the middle of the month has passed, and only then a true tsunami of corporate updates will be unleashed upon investors and analysts. Many of the small cap companies, those with not great results in particular, wait until the final days of the season.

FNArena will be keeping a close eye, as has become our own self-made tradition since mid-2013. Our dedicated Corporate Results Monitor will be brought to live by the end of this week:

https://www.fnarena.com/index.php/reporting_season/

(The Corporate Results Monitor also includes a calendar for the season).

Company Reports: Inflation

Blame it on excess government support, a resilient consumer, or a this-time-is-different cycle, but resurgent inflation has equally been a supporting factor for corporate results over the year past.

When inflation runs high, many a company finds it much easier to justify a price increase to its customers, even if the latter feels the pain. And as we all live in a nominal world, high inflation also acts as an artificial growth engine; even when customers are ordering less, the increase in prices tends to still lift overall sales and revenues at the top line.

With inflation deflating, as is undoubtedly happening at the moment, achieving growth becomes more difficult for companies. Many will be facing price decreases instead, and with economic momentum slowing, there no longer is an automatic rise in nominal sales and revenues.

Some industries will be faced with too-high inventories and an urgency to ship out products and services through discounted prices.

At the macro-level, falling inflation should see central bankers relax and pause, and bond yields trend lower, which supports higher valuations for listed assets.

Exactly how this combination of negatives and positives from receding inflation will play out is anyone's forecast, but a worst case scenario would imply that higher valuations are already in place, while slower growth still needs to be accounted for.

The Australian share market is currently trading near or above its long term average PE ratio, depending on whose number crunching we rely on. But strip out banks and resources and Shaw and Partners' CIO Martin Crabb believes the average PE ratio is around 20x next year's forecast EPS - not cheap by anyone's account.

All else being equal, companies might have to convince the market they are truly worth the multiple they are trading on, even with lower bond yields potentially providing valuation support (in a general sense).

Company Reports: Conviction

It's never easy or straightforward to know in advance which companies won't disappoint in August, but Morgan Stanley analysts have identified ten ASX-listed companies that come with High Conviction attached:

-Atlas Arteria ((ALX))
-Cleanaway Waste Management
-Corporate Travel Management ((CTD))
-CSL
-Goodman Group
-McMillan Shakespeare ((MMS))
-Medibank Private ((MPL))
-Orora ((ORA))
-Telstra ((TLS))
-NextDC

****

Strategists at Morgans suggest corporate earnings look vulnerable ahead of August, with investors' attention not simply focused on FY23 results, but probably more so on the outlook for FY24.

Key themes to watch, according to Morgans, are the underlying trend for earnings, higher interest costs, cyclical signposts (consumer demand, industrial margins), small cap performance, short selling and investor positioning in resources.

Morgans has lined up a number of key tactical trades for the season at hand (positive outcomes expected):

-Flight Centre ((FLT))
-Lovisa Holdings ((LOV))
-Medibank Private
-Orora
-QBE Insurance ((QBE))
-ResMed

As debt financing costs will come under scrutiny, Morgans sees risk rising for:

-Amcor ((AMC))
-Aurizon Holdings
-Costa Group ((CGC))
-Cleanaway Waste Management
-Cromwell Property Group ((CMW))
-Domino's Pizza
-Star Entertainment Group ((SGR))
-Wagners Holding Co ((WGN))

Also at risk for delivering disappointment:

-APA Group
-ARB Corp ((ARB))
-Treasury Wine Estates ((TWE))
-Transurban ((TCL))

Have been identified for potential upside from capital management:

-Computershare ((CPU))
-Suncorp Group ((SUN))
-Super Retail Group ((SUL))

Costa Group and Iress ((IRE)) have been singled out for potential balance sheet risk.

Company Reports: Technology Sector

One sector that might have to justify this year's share price performances more than others is the local technology sector.

One exception, possibly, suggest analysts at Jarden, are the payment processors with share prices for the likes of Zip Co ((ZIP)) and Tyro Payments ((TYR)) still suffering from prior Afterpay-led exuberance.

Jarden believes investor focus will be on delivery of cash flows and specific outlook commentary, including cost containment and the way to reaching break-even.

As things stand towards the end of July, Jarden only has one Buy rating left for the sector in Australia, for SiteMinder ((SDR)). Four other stocks are rated Overweight (one step below Buy): WiseTech Global ((WTC)), Xero, REA Group ((REA)) and Seek ((SEK)).

Sector analysts at Goldman Sachs recently used an update specific to IT services to reiterate their preferences for Macquarie Technology ((MAQ)) and Data#3 Ltd ((DTL)).

REITs In Focus

One market segment that has experienced a tough time during covid and lockdowns, and then on higher bond yields, under-utilised offices and a slowing in consumer spending are real estate investment trusts.

AREITs are not immune to rising costs, including for servicing debt, and many might find themselves without much organic growth for the year(s) ahead. One can see the general theme already: stockpicking is critical!

Sector analysts at Jarden's preference lays with those who appear to have the strongest growth prospects; Goodman Group, Scentre Group ((SCG)), National Storage ((NSR)), Arena REIT ((ARF)), Vicinity Centres ((VCX)) and Lifestyle Communities ((LIC)).

General apprehension towards the sector has made a few looking very cheap, which is equally attracting Jarden's attention: Region Group ((RGN)), Charter Hall Retail REIT ((CQR)) and HomeCo Daily Needs REIT ((HDN)).

****

Analysts at Macquarie, where the in-house view remains that Australia is facing economic recession, remind investors REITs typically underperform in the early contraction stage of the market cycle. Hence Macquarie's preference for the more defensive exposures in the local sector.

Macquarie's preference lays with Goodman Group, GPT Group ((GPT)), Dexus ((DXS)) among large caps, and Centuria Industrial REIT ((CIP)), Arena REIT and Qualitas ((QAL)) for smaller cap exposures.

For investors worried about potential balance sheet risks, Macquarie is most cautious on Charter Hall Long WALE REIT ((CLW)), Scentre Group, and Lendlease.

****

Ord Minnett remains cautious on office assets, with property valuations in general (read: devaluations) potentially a key factor in August, together with debt profiles and tenant demand in the wake of higher costs. AREITs will need to show fresh initiatives to convince investors they are not ex-growth, suggest the analysts.

Ord Minnett is supportive of landlords of convenience shopping assets, expecting Charter Hall Retail REIT, HomeCo Daily Needs REIT and RAM Essential Services Property Fund ((REP)) to report solid operating results.

The broker's Top Picks are Waypoint REIT ((WPR)), Dexus Convenience Retail REIT ((DXC)), and RAM Essential Services Property Fund.

****

Morgan Stanley states AREITs were traditionally seen as providing relatively steady outlooks for investors, but this has changed in recent times. Hence, those who still can provide stable outlooks are likely rewarded with a valuation premium, the broker suggests.

AREITs best placed to present investors with a stable performance plus outlook in August, according to Morgan Stanley, include Goodman Group, Scentre Group, and Vicinity Centres.

Risk to specific guidances are considered for Mirvac Group ((MGR)), Stockland ((SGP)), Charter Hall ((CHC)), Dexus, and Centuria Office REIT ((COF)).

****

UBS's sector preferences reside with "REITs with business models suitable for either a 'higher for longer' rate environment or with robust cash flow growth in a period of economic weakness."

UBS's most preferred exposures are Goodman Group, Mirvac Group, GPT Group, Lendlease, HomeCo Daily Needs REIT, Centuria Industrial REIT, and Lifestyle Communities.

The broker's list of least preferred REITs include Scentre Group, Vicinity Centres, Dexus, Charter Hall, Region Group, BWP Trust ((BWP)), and Ingenia Communities Group ((INA)).

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 24 July, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: FY23 Returns – Details Matter

In this week's Weekly Insights:

-Earnings Forecasts: Slip Slidin' Away
-FY23 Returns: Details Matter
-Small Caps In Focus


By Rudi Filapek-Vandyck, Editor

Earnings Forecasts: Slip Slidin' Away

The Australian share market has been doing it tough in July, following a rally in June that nobody was genuinely able to properly explain, except, of course, those market commentators that are always brimming with optimism, no matter what the circumstances.

Meanwhile, beneath the surface, the trend in earnings forecasts is accelerating, in the wrong direction.

On UBS' assessment, consensus forecasts are now falling rapidly and markedly, the past few weeks removing -0.6% and -1.4% off the average projected EPS forecast for FY23 and FY24 respectively.

Main victims are resources companies, both materials and energy sector, as well as healthcare (the CSL-effect), real estate and consumer discretionary.

The safest sectors, as things stand right now, are utilities, technology and the insurers.

No surprise, UBS strategists are advising investors to position portfolios in favour of the latter two sectors, accompanied with reliable, stable dividend payers, which includes utilities, insurers, and the infrastructure sector.

According to UBS, the consensus EPS forecast for FY23 has now landed at 3%. That number stood at 6.5% six months ago. In similar fashion, the general forecast for FY24 is now a negative -3.2%. Six months ago this number was a minimally positive 0.3%.

The biggest culprits for the below-average growth forecast for FY23 are Materials and Healthcare and, to much lesser degree, communication services and real estate. For next year, Energy is shaping up as the biggest loser, with Materials and Financials equally in negative territory.

The strongest prospects for growth in FY24 seem to be for Utilities and Healthcare. But as always, stock selection will be all-important.

The UBS research also reveals Australia is yet again seriously lagging the rest of the world when it comes to EPS growth forecasts with the FY24 forecast for developed markets sitting at 9.5%.

For Emerging Markets the corresponding number is 18.2%. Even the US forecast still sits at 11.3%, though that remains the subject of heavy debate the world around as many remain convinced there's too much optimism baked into that number.

Companies that have enjoyed upgrades to forecasts locally include AGL Energy ((AGL)), Coles Group ((COL)), Collins Foods ((CKF)), Core Lithium ((CXO)), Johns Lyng Group ((JLG)), Metcash ((MTS)), and Woolworths ((WOW)).

Among the many more that have seen analysts taking a knife (or worse) to estimates are 29Metals ((29M)), CSL ((CSL)), Domino's Pizza ((DMP)), Liontown Resources ((LTR)), Seek ((SEK)), TPG Telecom ((TPG)), and Woodside Energy ((WDS)).

FNArena publishes weekly updates on changes in local analysts' forecasts and projections affecting ratings, valuations & targets, and forecasts.

This week's update:

https://www.fnarena.com/index.php/2023/07/10/weekly-ratings-targets-forecast-changes-07-07-23/



FY23 Returns: Details Matter

I came across the following eye-witness report a number of years ago.

A fund manager is presenting his fund's performance and proudly announces: average return over the past two years is 25% per annum.

One disgruntled attendee in the audience stands up from his chair and shouts: I'm calling BS! I personally have invested in your fund and I can tell everyone the fund hasn't gone anywhere since.

Fund manager, unperturbed, moves to the following slide showing his fund gained 100% in year-1, then declined by -50% in year-2. 100 minus 50 = 50, divided by 2 = 25%.

I've never established whether this anecdote actually took place in real life, but the underlying message remains unchanged: investors should remain cognisant of how finance generally is covered and reported on, while always trying to ascertain whether the finer details do not contradict the headline impressions, or offer a much more insightful background and context.

Those among you who may not be great with mathematics might now be thinking: what's wrong with the story above? Who's correct and who's not?

The straightforward answer is there's a lot wrong with that story, but also: both the fund manager and the angry investor are correct. The fund manager, however, is using the audience's dislike for maths and details to his own advantage, like a good old snake oil salesman.

Like with so many things in finance; one needs both a broader context and the finer details to get to the true picture.

In the example above: if an investor had invested from day one in Year-1, say $30,000, then that capital would have first doubled to $60,000 (100% gain) but subsequently reverted back to the original investment as that is what a decline by half (-50%) amounts to.

The result is a great outcome for marketing purposes (25% per annum!) but not great at all for the investor whose capital went backwards because of fees and inflation.

****

In the never-ending debate between actively managed investment funds and passive ETFs and other listed instruments, it is my observation many a professional investor knows how to outperform the broader market during times of plenty of sunshine (Risk On, bull markets) when taking on risk gets rewarded in spades, but things can go off the rails quite quickly, and quite devastatingly so, when the overall market environment deteriorates.

Investors might keep this in mind over the coming weeks as fund managers and industry consultants are no doubt preparing for a Good News marketing story.

The ASX200 Accumulation index, which includes the dividends paid out throughout the year, has generated a return of no less than 14.78% for the year ending on June 30. Some foreign indices have even done significantly better.

A few things to keep in mind:

-In Australia, the market performed best in H1 while in H2 the bulk of returns were generated in the June rally, which subsequently evaporated again in July

-Such environment usually emphasises the importance of dividends, but banks have been weak in 2023, with the market preferring insurers instead

-While the lists of top performers all contain small caps, it's been a heavily polarised landscape and large caps, as a group, have outperformed their smaller peers

-FY23 has once again highlighted the sweet spot in the Australian share market lays inside the MidCap50; effectively the ASX100 minus the Top50

-The final month of FY22 saw markets take a deep dive into the abyss, creating a low point from which this year's 12 month returns are being calculated

The importance of not simply staring oneself blind on twelve month's performance numbers shows up in many forms and disguises. Take Perpetual's global innovation fund, for example.

With a return of 44%, the fund is sitting on top of Morningstar's performance rankings for FY23. No questions about it, this is a fantastic outcome, but it looks a whole lot less impressive when we take into account this fund lost nearly -50% in the previous year.

Let's assume our angry investor in the opening anecdote had taken his $30,000 and given it to the Perpetual fund to manage two years ago. Today, his capital would have eroded to $30k minus 50% = $15,000 times 44% = $21,600, meaning he effectively lost -$8,400 over that period.

****

When FNArena started the All-Weather Model Portfolio back in early 2015, we promised investors we'd manage the downside by investing in Quality growers and reliable, sustainable dividend payers.

But markets are never 100% predictable and while Quality on average falls a lot less than the majority of listed equities, the past eight years have shown plenty of occasions when extreme volatility ruled the landscape, leaving no protection at all for equities, no matter the Quality, resilience or growth prospects.

How best to deal with these circumstances remains a never-ending dilemma.

Some investors put their faith in that all shall be okay in the long run, buying more at substantially lower prices if they have the means to do so. Certainly, it's great to buy shares at beaten-down prices, but what if the bottom's not in until -25%, or even -50% lower?

The opposite approach is to reduce the portfolio's exposure, so that losses remain smaller. The consequence of that approach is that subsequent gains are likely to be smaller too, as, let's face it, we're unlikely to reallocate funds back at the absolute bottom of the sell-off.

But here's the rub: a portfolio that doesn't fall as much, needs only smaller gains to keep the overall return positive. I think the merits of building up a sizable level of cash during times of extreme duress have been well and truly proven in the past couple of years.

This time around last year, the All-Weather Model Portfolio held 35% in cash and thus managed to limit its losses to -3.93% in June and -2.59% for FY22.

In comparison, the ASX200 Accum lost -8.76% in June last year and -6.07% for FY22.

Yes, the All-Weather Portfolio proudly outperformed throughout those testing, extremely volatile times. But the portfolio's performance for the year thereafter is measured off a higher base, which creates an extra hurdle when measuring the performance for the following year.

To illustrate the importance of the starting point, consider the following: up until mid-June the All-Weather Portfolio, even with 20% in cash, was outperforming the broader index on 3, 6 and 12 month comparison but then a strong rally ensued in resources and market laggards, and the comparison shifts to a much lower point (for the index) by the end of June last year.

In the end, the All-Weather's performance remains better on 3 and 6 month comparisons, advancing 2.91% and 8.91% respectively versus 1.01% and 4.46% for the ASX200 Accum. For the full twelve months, the All-Weathers added 12.71% against 14.78% for the index, suggesting 'underperformance'.

Though the irony of the difference in starting points should not go lost: the index started -3.48% lower than the All-Weather Portfolio and subsequently only performed better by 2.07%. It might seem I am making a big deal out of minor details few others appear to be concerned about, but consider the importance of it when a fund reports it has gained 15% over FY23 after losing -22% in the year prior, to name but one example.

Ultimately, any assessment of success or otherwise needs to be made over a longer horizon. One prediction we made at the time of establishing the All-Weather Portfolio is that investment returns would amount to 7%-8%, on average, over time.

The average per annum return achieved for the All-Weather Portfolio since early 2015 is circa 9.25% - meaning we've done better than promised over the past 8.5 year period.

For reasons of comparison: the average annual advance for the ASX200 Accum is 7.16% for the past 5 years and 8.56% for the past decade.

Ultimately, the key purpose of running the Portfolio is to back up my research, but also: to prove that one can invest in Quality companies, irrespective of their premium valuations.

I think we can safely conclude the Portfolio has proved just that over the past 8.5 years, while providing me also with priceless market insights along the way.

****

One intriguing observation is the repeated relative outperformance in Australia of the MidCap50; that segment of companies not large enough to be part of the ASX50 but on average too large to be included with the many smaller caps listed on the ASX.

Talk to any small cap investor this year and they will assure you times have been extraordinarily challenging. The S&P/ASX Small Ordinaries, for example, generated 8.45% in FY23 total return, but only 1.32% for the first six months of 2023.

In comparison, the MidCap50 is up 4.60% for the six months ending June 30, which is similar to the ASX50, but for the full financial year the gain is 17.97%. Over three years (13.50%), five years (8.80%) and ten years (14.40%) - the outperformance from this segment on the exchange is quite persistent.

Do we know why? Are there any conclusions or insights we can draw from it?

My own view is this segment includes those success stories from the small caps space that are able to grow into a much larger size, and ultimately become part of the ASX50 large caps.

Micro caps and small cap companies will always have an attraction, because such companies can grow rapidly from a low starting point, which can translate into outsized share price gains in a short time. But only few can turn that operational momentum into a sustainable, long-term growth story.

In other words: the best out of the bunch eventually end up in the first half of the ASX200, and if they're truly successful they continue advancing through the rankings until they leave this segment through the front door, i.e. they join the ASX50. Another way of approaching it is through the balance between risk and reward.

Since companies that keep climbing through the ranks have proven the merits and success of their products and services, I'd argue they represent a much better risk-reward balance, in between smaller peers that yet have to prove themselves and the larger sized companies that can be quite sluggish in their growth.

I haven't done or seen any dedicated data analysis, but logic tells us companies that have strongly contributed to the MidCap50's relative outperformance in Australia include Cochlear ((COH)), ResMed ((RMD)), Seek ((SEK)), Treasury Wine Estates ((TWE)) and Xero ((XRO)) but also Fortescue Metals ((FMG)), Mineral Resources ((MIN)), and Pilbara Minerals ((PLS)).

All are part of the ASX50 today, but for many years these companies have been growing their business, climbing the ranks of the ASX, to ultimately join the Top50 on the Australian bourse. Before they got there, these companies helped the MidCap50 consistently outperform all other segments on the ASX.

This doesn't mean we should ignore these companies from the moment they enter the Top50, but equally valid: not every member of the MidCap50 will be a generator of long-term outperformance; picking the winners remains important.

A quick glance through my curated lists (further below) reveals this segment is amply represented, even without a specific focus on mid-caps.

Readers familiar with my research won't be surprised to read companies included are Ansell ((ANN)), Carsales ((CAR)), REA Group ((REA)), Steadfast Group ((SDF)), TechnologyOne ((TNE)), WiseTech Global ((WTC)), and others.

As far as general observations go: I think the numbers and the facts speak for themselves.

****

When it comes to investing and the share market, Mike Tyson described the experience of the past years best: "Everybody has a plan until they get punched in the mouth".

Wall Street legend Bob Farrell's rule number ten also springs to mind: Bull markets are more fun than bear markets.

To say that events, extreme polarisations and momentum switches have tested investors to the max in the three years past can only be a grave understatement. While much of today's public discourse is whether equities are still in a bear market or not, a prudent investor would be prepared for challenging times ahead.

Our view that prudence is best in the slipstream of the steepest central banks tightening cycle ever, and still ongoing, has been repeatedly and severely tested over the past 16 months. Oddly enough, it has not relegated the All-Weather Portfolio to significant underperformance, even despite the Portfolio carrying 20%-plus in cash, and 5% in gold.

But not everything has worked out as planned, and at times changes and amendments needed to be made.

Among the newcomers that joined the Portfolio throughout tumultuous and volatile times are Dicker Data ((DDR)), Steadfast Group ((SDF)) and HomeCo Daily Needs REIT ((HDN)). The first two additions have contributed positively, but the REIT has been weighed down by bond market volatility, which we always knew was a key risk.

At some point, the bond market will provide relief. In the meantime, we are enjoying a prospective dividend yield in excess of 7%. Dicker Data shares equally offer a juicy yield, expected to grow to 6% next year. Insurance broker Steadfast has performed better; its shares are trading on a much lower implied yield.

In terms of your typical income-oriented investments, one of the Portfolio's largest exposures remains Telstra ((TLS)), which, apart from a 4% yield, offers upside through asset sales and much improving industry dynamics.

Dialling back the risk-taking, and reducing the overall equity exposure by lifting the percentage held in cash (and gold), has meant saying goodby to some investments that we would have liked to still own today. But as the old expression goes: one cannot make an omelet without breaking some eggs.

Sometimes sacrifices need to be delivered for the higher cause, in this particular case: limiting capital losses and remaining prepared for tougher, challenging times ahead.

Stocks that remain high on the Wish List include Breville Group ((BRG)), Pro Medicus ((PME)), REA Group, Seek, WiseTech Global ((WTC)), and Xero ((XRO)).

The most prominent disappointment in the Portfolio relates to CSL with new management issuing a rare profit warning towards the end of the financial year. Most importantly: the forecast remains for EPS growth in the order of 14%-18% in FY24.

It goes without saying, even the highest Quality growth stock on the ASX is not 100% immune to bad news! But it doesn't by any means imply that CSL's growth story is nearing its end.

With confidence that this year's set-back is just that, a delay in the post-covid recovery, the Portfolio has responded by purchasing more shares on persistent weakness.

CSL is now the largest single exposure, which is likely to act as a bonus once investors start looking for reliability and Quality during times of corporate stresses and duress.

****

The All-Weather Model Portfolio is run in cooperation with Vested Equities through self-managed accounts (SMAs) on the WealthO2 financial platform. For more info: send us an email.

Paying subscribers have 24/7 access to my curated lists, which form the preferred hunting ground for the Portfolio:

https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

Small Caps In Focus

Last week, I participated in a feature on small cap companies for Livewire Markets.

I offered six names that are worthy of investors' attention; three are owned by the All-Weather Portfolio, the other three are included in my curated lists.

-Dicker Data

Quote: "It was sold down quite heavily last year and as a consequence is today offering a high yield. I have a lot of confidence it will continue to perform in the years ahead."

-Steadfast Group

 "I've done well out of it since purchasing it and used share price weaknesses to add to my position."

-IDP Education ((IEL))

"I bought more when it was sold down. I think the market has been very harsh and there's a lot of shorts on it. That can go either way, prices could stay low for longer. I'm hoping that good news will come out at some point and prices will go up a lot."

Three on my radar:

-Audinate Group ((AD8))

"It's not profitable yet but it's getting there. I think it could be a future success story for the ASX. I'll be watching the August reporting season as I suspect it will be very volatile."

-Objective Corp ((OCL))

"I'm a big fan of TechnologyOne ((TNE)). The stock has been one of the best performers on the stock exchange over the past two decades. I see similar characteristics in Objective, which I tend to describe as mini-TechnologyOne. I think Objective has strong potential."

-Ebos Group ((EBO))

"They'll be on the 'do not touch' list for many for a while because they are going to lose a big contract in 2025. They are a very good operator and I think they deserve the benefit of the doubt that they can come out stronger down the track."

The quote that summarises my view:

"We are now moving into tougher economic conditions. Rate hikes in Australia, Europe and the US are really now starting to hit. Smaller companies are more vulnerable in this environment. Some of them have cheap valuations but are they cheap enough based on the risks?"

FNArena Subscription

A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.

(This story was written on Monday, 10th July, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).

article 3 months old

Rudi’s View: Which Stocks To Buy?

In this week's Weekly Insights:

-Forecasts Under Pressure
-Which Stocks To Buy?


By Rudi Filapek-Vandyck, Editor

Forecasts Under Pressure

And when all is said and done, the dust has settled, and the verdict is in, we shall all observe it has been a fairly standard central bank tightening process, but one with a greater time lag between tightening and real impact on economic activity.

Financial markets can be prescient and smart, sometimes, but one thing they do not possess is patience. Plus, of course, not everybody is in the market to be reasonable, sensible, and knowledgeable with a longer-term focus.

Ultimately, the share market will do the right thing, but not before it has first tried out all other options available. It's my favourite summary of what a public forum for listed stocks is all about, time and again.

Three attempts to rally this year have ultimately resulted in very little progress made for the ASX, at the index level at least. Meanwhile, companies are issuing profit warnings and cautious/disappointing outlooks, while the trend in analysts' forecasts is negative.

It does beg the question: how many more options are there before local traders and investors take it on the chin and start incorporating this more subdued and challenging outlook in local share prices?

I don't know the answer. Another collective fall-of-the-cliff experience is by no means the only logical outcome, but the elevated risks are there for everyone to see, although thus far share price punishments in response to disappointing market updates remain largely reserved for smaller cap companies.

On Monday it's the turn for one of Tasmania's proud distillers and distributors of whiskey and gin, Lark Distilling ((LRK)), to emphasise increasing challenges and see shareholders' value sink by -16%-plus on the day.

Metcash's ((MTS)) FY23 performance released on the same day proved a slight beat on market forecasts, but management's cautious comments about changing consumer behaviour in the face of multiple pressures is unlikely to trigger significant upgrades for the year ahead.

Metcash is seen as a fairly steady and defensive business, even as hardware sales have an obvious connection with the housing cycle, but market consensus already has penciled in a slight retreat in profits and dividends in FY24. This is probably also why the share price weakened in the lead up to Monday's result, allowing for a positive response on the day.

Market updates by Lark Distilling and Metcash are both indicative of what is trending beneath the surface of the local share market; earnings forecasts are falling, and quite noticeably so. The average EPS forecast for FY24 recently turned negative.

The real reason for caution is this process of general realignment has arguably only just started. Analysts at Morgan Stanley did some data-digging recently and found about half of all ASX300 constituents have not received an update on forecasts for more than 50 days; some 45 companies have not seen an update for up to 90 days.

In line with our own observations here at FNArena, the latter group of companies most likely consists of small and micro cap companies that only receive irregular coverage from stockbrokers, but this only heightens the risks for severe mismatch either before or during the August reporting season for this cohort.

The first rally from last year's bond market quagmire occurred in October. Back then, explains Morgan Stanley, average EPS forecast in Australia was for 9% growth in FY23. By now this has been wound back to 3.6%, with this average falling week after week. One wonders how much will be left by late August?

Equally important, on Morgan Stanley's assessment, the consensus EPS forecast for FY24 is now a negative -2.9%. For good measure, analysts at Macquarie are still working off slightly more positive numbers with EPS forecasts of 4.2% and 1.5% respectively for FY23 and FY24. Those differences can mainly be attributed to Macquarie remaining more positive on the local resources sector.

But the underlying trend remains the same: the few companies enjoying positive revisions to forecasts, such as Adbri ((ABC)), AGL Energy ((AGL)), IGO ((IGO)), Origin Energy ((ORG)) and Webjet ((WEB)), are sharply outnumbered by the many whose forecasts are receiving downgrades, either on more challenging macro dynamics or following a disappointing market update.

Whatever one's view on the ASX's prospects for the months ahead, corporate health and profits should remain top of the list of risks to watch.

FNArena publishes its own weekly update on trends regarding broker ratings, targets and forecasts each Monday morning. This week's update:

https://www.fnarena.com/index.php/2023/06/26/weekly-ratings-targets-forecast-changes-23-06-23/



Which Stocks To Buy?

There is an argument to be made that while markets like to rally on a positive interpretation of macro developments, such as a pause in central bank tightening, the main anchor for equities in 2023 have been corporate profits - more so in Australia than in the USA, where additional liquidity from the Federal Reserve has been a positive factor too.

But, as also proven by the likes of Metcash and AGL Energy, not every ASX-listed company is trading cum earnings downgrade, and there's always room for a positive surprise.

Equally important: not every temporary set-back spells disaster; in many cases a weaker share price is actually a blessing for those investors looking to get on board at a lower price level. The recent market pullback has been quite indiscriminate with share prices generally trading at lower levels.

Time to put some of that cash on the sideline to work? If so, what stocks should we be looking to allocate to?

If your profile looks anything line mine; cautious, focused on Quality and sustainable growers, with a longer term horizon in mind, then my curated All-Weathers and related lists could be a great starting point. Hence, this might be as good as any other time to share some insights on some of the companies that carry my personal interest.

One of the better performers on my lists has been data centres operator NextDC ((NXT)) whose inclusion along other Emerging New Business Models is closely related to the modern day megatrend in data usage and generation, which in my view always meant supply would find it hard to keep up with explosive growth in demand. A prophecy that has been proven correct over the past eight years or so.

However, in the share market nothing ever moves in a straight line, and with bond yields, currencies, inflation, government policies, competition, charts and market sentiment all playing a role, there's always room for doubt, criticism, worries and shorters congregating around the theme of the day.

Eight months after last October's post-pandemic low of circa $8.50, NextDC shares have left most shorters licking their wounds on less stress from rising bond yields and ongoing confirmation both the business and its supporting megatrend remain in good health. Management is now expanding internationally, which raises the overall risk profile, but the advent of artificial intelligence, shortcut AI, is about to add an extra kicker for growth.

NextDC is included in the local Technology Index, but let's be clear: this is an infrastructure play, a la Transurban, whose outlook shall remain closely tied in with financing and building more data centres and signing contracts with telcos and big, international users to fill up capacity.

As can easily be established from the numbers released by NextDC over the years past; the business is fast-growing; into the double digits annually. If industry indications and projections are anything to go by, rapid growth can potentially continue for many more years to come.

One of such indications came from recent presentations by the much larger, Nasdaq-listed Equinix. With a market cap of circa US$70bn, 248 data centres in 27 countries, including in Australia, and 12,000 employees globally, Equinix is many times larger than the local market leader (market cap $6.3bn), but still growing each year at a targeted pace of 7-9%.

Management at Equinix recently explained to Wall Street analysts AI will likely become a major growth driver in the quarter century ahead. For the coming five years or so, Equinix believes the combination of AI and higher inflation (which is passed on as per contracts with clients) suggests the business can probably grow at 8-10% per annum instead.

Adding 1% growth might not seem like a big deal, but when accumulated, in aggregate over many years, it generates a boost to the valuation and thus the future share price. NextDC is much smaller, and predominantly Australia-based, but this likely also means a relatively larger impact on growth overall.

FNArena's All-Weather Model Portfolio was fortunate enough to double its exposure late last year and has been handsomely rewarded since with the share price today no less than 44% higher. But this is a long-term growth story, as also suggested by the much larger Nasdaq competitor, plus only one broker covering NextDC in Australia has a valuation below today's share price.

One smaller-sized AI beneficiary on the ASX should be Macquarie Technology Group ((MAQ)), formerly known as Macquarie Telecom. As data centres are only one of the company's features, any future benefits should be smaller too. The same principle applies for large cap Telstra ((TLS)), which also operates data centres, among much, much more.

Telstra is still considering asset sales, originally the key motivation to add the shares to the All-Weather Model Portfolio back in early 2021, but industry dynamics overall have turned for the better, and analysts are now projecting those attractive Telstra dividends will continue growing in the years ahead. With all the troubles on the horizon locally, ranging from mortgage cliff to spikes in bad loans coming, Telstra's profile comes with a golden frame in 2023.

The only companies I can think of with an even better dividend profile on the ASX right now are the insurers whose operational momentum is currently so strong that even the forced reimbursement of overpaying customers does not dent their share prices. Insurers have put the banks firmly in their shadow as preferred dividend payers this year.

Investors should note: history shows insurance moves through cycles and the impact from changing weather and climate is never too far off.

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As also shown in the above example of NextDC, financial market participants taking short positions (i.e. they position for a much weaker share price) are not by default the smartest mind in the room. On my observation, they end up many times over on the wrong side of history, ultimately, scrambling to unwind positions and limit losses.

In recent years, a number of companies of my personal interest have been targeted by shorters. Without one single exception, in all cases share prices have ultimately recovered, and then some, including for Amcor, Seek, TechnologyOne, and WiseTech Global, though this does by no means imply the shorters can never be correct.

Also, in some cases, think TechnologyOne and WiseTech Global, an attack by shorters can cause the share price to remain weak for a prolonged period, further accompanied by negative news flow (shorters also know how to play the media).

The reason why I mention this is because another megatrend company, IDP Education ((IEL)), recently suffered from a decision by the Canadian government to dilute the company's monopoly with more competition, and the share market has taken quite a negative view on the company's outlook in response.

The latter includes a growing interest from shorters. According to the latest update from ASIC, total short positions in the shares have now increased to 10.93%, making IDP Education the most shorted stock on the ASX. Note the number two, Flight Centre ((FLT)), has been on top of the list for many months and it did not stop its share price from rising from below $15 to near $22, but it's all weakness now in line with the market generally.

As a small investor, extra conviction is needed to stand up against shorters, which is a battle many prefer to avoid. The All-Weather Model Portfolio copied the play book for NextDC and increased its exposure to IDP Education in the days following the Canadian announcement.

It might be a while before we find out the wisdom or otherwise behind that decision.

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Given my research focuses on corporate Quality supported by a so-called long runway of structural growth, it should be no surprise healthcare companies are omnipresent across my lists, as well as in the All-Weather Portfolio.

The healthcare sector has been the best performing on the ASX over the past two decades, with daylight second. Post the 2020 pandemic, however, the sector is carrying more headwinds and question marks than at any other time throughout that period.

Share prices are trending sideways and even an industry stalwarts as is CSL ((CSL)) has been forced into a profit warning this time around. Longer term, AI presents both threats and opportunities while shorter term a lot can be traced back to the 2020 pandemic and societal lockdowns that either hit operations hard or turned companies into temporary giant beneficiaries.

In both cases, the ex machina impact needs to be cycled through. Pandemic winners need to find their old mojo back without the excessive gains and those negatively impacted clearly need more time to genuinely get back to normal business. In both cases, investors today need to look through temporary headwinds and adopt a longer term view.

I'd say this applies to Ansell ((ANN)), Cochlear ((COH)), CSL, Fisher & Paykel Healthcare ((FPH)), ResMed ((RMD)), and Sonic Healthcare ((SHL)). For Fisher & Paykel Healthcare and ResMed there's a new development that is likely to weigh on share prices in the form of appetite-depressing diabetes medicines such as Ozempic and Wegovy, increasingly popular in human society's battle with obesity.

What's easier than a pill a day to wipe the kilos away?

Obesity is one megatrend that has supported multiple sections of modern day healthcare services providers, including treatments for sleep apnoea. The latest "fashion" might offer easy comfort, but it's not without multiple side-effects, including nausea, diarrhoea, constipation, sagging bottoms and faces, hair loss and even thinning fingers.

It will be interesting to find out what companies' response will be to questions asked in August, no doubt.

One healthcare company that has suffered recently through an event outside its control is New Zealand-born Ebos Group ((EBO)). In short: competitor-in-trouble Sigma Healthcare ((SIG)) secured itself a new lease of life through -effectively- selling its corporate soul to the Devil, in this particular case: Chemist Warehouse, and in doing so, snatched a big contract away from the much better run Ebos Group.

The latter now has the challenge at hand to replace this loss, from FY25 onwards, which is likely to weigh on the share price, for now. Based upon the company's track record since listing on the ASX in late 2013, it probably pays to give management the benefit of the doubt, and time.

Note: at the time of the Sigma surprise, Ebos Group shares were trading at an all-time high, which might serve as an indication of how this company was performing, and the market's appreciation of it, including but not solely related to the Chemist Warehouse contract.

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All in all, what my research into All-Weather Performers tries to achieve is to identify those companies that enjoy enough of structural trend support to continue generating shareholder wealth for many years into the future. The Quality tag usually comes with market leadership and size, as well as a positive track record, on top of a habit of R&D and investments.

All Weather Performers are the antithesis of investing in cheap, undervalued assets, while their track record proves a higher PE ratio is not a deterrent for creating attractive, sustainable wealth for shareholders. But it's a big ask to be extraordinary, and to remain extraordinary, which is why my list of All-Weather Performers is quite condensed.

Since we are living through a once-in-a-lifetime era of new technological developments, my selections of stocks also include Emerging New Business Models and Prime Growth Stories. In all cases, I try to identify those companies that have higher Quality and sustainability in their growth trajectory than the average ASX-listing.

Now that bond yields are becoming less of an influence overall, I have felt more confident to re-include old familiar favourites for dividends in addition to Telstra, but there is no room for any retailers given the context and challenges in Australia.

Apart from the section dedicated to Dividend Champions, changes made have remained few and far between, surely a sign of support for those companies selected?

Maybe worth highlighting: I did remove Ramsay Health Care ((RHC)) not so long ago from my lists, and have now decided to also remove Domino's Pizza ((DMP)). In both cases, shareholders have enjoyed rewarding experiences over extended periods of time, but those halcion years truly ended a while ago already.

There are now way too many question marks about future potential and trajectory. This is an important lesson too: sometimes exceptional companies stop being exceptional. Or maybe they all do, allowing for plenty of time?

Paying subscribers have 24/7 access to a dedicated section on the website: https://www.fnarena.com/index.php/analysis-data/all-weather-stocks/

The FNArena/Vested Equities All-Weather Model Portfolio does not own all the stocks included in my selections, but picks and chooses predominantly from these lists, and only sporadically makes changes.

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(This story was written on Monday, 26th, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(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: contact us via the direct messaging system on the website).