Tag Archives: All-Weather Stock

Rudi’s View: All-Weather Portfolio Considerations

In this week's Weekly Insights (this is Part Two):

-Late Shock: 2018 Is The Annus Horribilis
-Outlook 2019: The 'Bear' That Keeps On Rolling?
-The Curse Of The Magazine Front Cover
-All-Weather Portfolio Observations And Considerations
-Gartman's Rules Of Trading
-Final Weekly Insights For 2018
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Thursday]

The Curse Of The Magazine Front Cover

By Rudi Filapek-Vandyck, Editor

One of the old beliefs on Wall Street is that pivotal points of reversal in market trends are usually preceded by front covers of popular magazines. The most famous example of this adage remains the "death of equities" declaration by Business Week in August 1978, roughly three years before one of the strongest bull markets announced itself.

This time around, Wall Street eyes are looking back at the cover of The Economist which in early November last year declared A Bull Market In Everything!

To be fair to the team at The Economist, that declaration went in hand with asking the question: when will it all end?

All-Weather Portfolio Observations And Considerations

Over the past four years equity markets have experienced three serious pullbacks. First there was the gradual deflation that started in late May 2015. It was preceded by nearly six months of piling into everything -anything- that paid out dividends and represented "yield". The downturn that subsequently unfolded simply kept on going until a capitulation bottom was reached in February the following year.

Next came the Big Portfolio Switch late in the third quarter of 2016. Most Australian investors won't have too much recollection about this particular drawdown because banks and resources became the new momentum trade and most portfolios would have been overweight these two sectors.

Next we had a bit of a wobble in February-March this year, but as things turned out, that really was just a blip ahead of what would descend upon us in October-November. With only five weeks left until 2019 arrives, the Australian share market is in negative territory year-to-date, and (potentially) about to accumulate double digit percentage losses over three consecutive down-months.

Ignoring the pain, the angst and the portfolio losses for a moment, the key lesson to learn from all three experiences is that every time, really, is quite different. And what makes each period of rough share market weather unique in its own right are the following three factors:

-the reason(s) for the shift to a downward trend
-whatever happened prior
-portfolio positioning of large institutional investors

Given we are living through a period in which most investors, consciously or otherwise, are trend followers, one might be inclined to think factors two and three are tightly intertwined, which is often the case. But back in 2015 there was no sudden switch in portfolio allocations which meant the pullback was gradual, drawn out and relentless nevertheless, but many an investor had been positioning anti-consensus and was simply feeling a lot of pain on the way down.

By late 2016, however, just about everybody had become overweight cycle-agnostic stocks and expensive defensives. Equally important, there was a genuine general belief that newly elected President Trump was about to ignite the late cycle reflation trade. And thus the switch was violent and relatively quick, but equally relentless.

By now we are late in 2018. September (-1.78%) was mildly challenging, while October (-6.1%) took no prisoners and November (-2.14%, thus far) failed to deliver the widely anticipated relief rally. Three negative months in a row. Most assets down year to date, including most equities in Australia. Time to sit up and take note, if one hasn't already.

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Observation number one, and this one cannot be highlighted soon enough: holding cash has really made a key difference throughout the extreme day-to-day volatility over the past nine weeks. This was not as much the case back in 2015 and 2016. Gold has, sort of, stood its ground throughout the turmoil, but that's the best it could do and it equally showed some wobbles at various times. The same can be said about government bonds, but inside the share market there have been very few places to hide and not feel the pain of broad selling pressure.

Traditional safe havens such as Woolworths ((WOW)), Transurban ((TCL)) and Sydney Airport ((SYD)) initially were sold down as well, if they hadn't fallen quite noticeably throughout September already, but they regained their status in November as amidst the global share market turmoil bond yields started dropping. (When institutional investors shift funds into bonds prices rise, which lowers the yield, with positive read-through for bond proxies in the share market).

Only few stocks have managed to keep the sellers at bay from the get-go, posting gains along the way, when others kept falling. Stocks like Goodman Group ((GMG)) and Charter Hall ((CHC)) certainly picked their opportunity to shine when all got pulled into darkness, but equally so stocks including Alliance Aviation Services ((AQZ)) and TechnologyOne ((TNE)).

Not all of these performances would have been predicted beforehand. In fact, on my daily observations most movements in share prices have been irrational, illogical and inexplicable, other than that selling begets more selling and investors simply were looking to pull cash out of the falling market.

Hence there have been quite a number of utter surprises, both positive and negative. Which just goes to show, when panic buttons are being pressed and withdrawing liquidity becomes the dominant force du jour, one simply cannot be too confident about what likely comes next and what won't happen.

Part of the reason as to why this withdrawal has been so chaotic, and so broad-based, even when only a selection of stocks had been carrying the index to a new cycle high in Australia, is because of the multitude in factors that impacted, all pretty much around the same time. This is not simply about the Federal Reserve tightening rates and US bond yields rising. This is equally about global economies losing momentum while there seems no relief in tensions between Trump and Beijing. This is also about market consensus probably being too optimistic on corporate profit margins, and about growth stocks becoming a well-overcrowded trade, while the valuation gap between high growth and low growth stocks -"Growth" versus "Value"- had once again stretched to extreme.

In Australia, worries about Emerging Markets falling and overcooked US share market sentiment mixed with a deflating housing market, and ever more bearish forecasts, and growing signals the consumer is starting to hoard instead of continuing to spend. More revelations about the banks at the Royal Commission and a seemingly dead men walking federal government in Canberra, while many an investor worries about Labor's intention to fix the budget through reining in negative gearing and franking credit cash repayments, further add to the quagmire.

This is equally about the sum total of extreme liquidity injections by the world's major central banks coming to an end, with every investor worth his salt knowing full well this never before seen injection has pushed up asset prices around the world over the years past. But now global liquidity is pulling back, what will be the exact effect on global assets? Then there is that growing sense this could be the final phase of this cycle.

Combine all of it together and it is not difficult to see why investors are uncertain and worried, and why many an expert preaches caution and restraint. Actually, if one is brutally honest about it all, the first question to ask is why did it take this long for the US share market to finally take notice?

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We can ask the question, but the answer doesn't really matter. Markets finally woke up to the serious challenges that lay ahead, and they responded with a vengeance. Now the world and its outlook have materially changed. For investors it's best to take notice, and respond responsibly.

The FNArena/Vested Equities All-Weather Model Portfolio had been outperforming the broader index, while at the same time throughout the second and third quarter the percentage of cash held in the portfolio increased steadily. At first it seemed this caution had been applied too early, but by the time October arrived it became instantly clear the level of cash was nowhere near high enough. So we increased it.

I advised FNArena subscribers they should do the same. The logical way to achieve this is by getting rid of failures and disappointments. Most investors "take profits", which means they sell off winners and keep the losers. I, however, am convinced the best way forward is by owning higher quality, solid, reliable and sustainably growing companies. In my experience, these are most likely among the outperformers in the local share market.

The Portfolio only had a few genuine disappointers, so a general review and re-allocation had to take place. It is here where past experience mixes with share market "science" and personal assessments. Overlooking the portfolio as a whole, the highest priority is not whether one is attached to a certain stock or not, and certainly not what price had been paid for it. The highest priority is freeing up cash.

The aim is to reduce risk. So you sell/reduce exposure to leveraged balance sheets with lots of debt (if you happen to own such stocks), in particular small cap stocks and cyclicals. Large cap stocks might fall less than smaller cap stocks. In the latter case: watch out for the drying up of liquidity or the departure of one large shareholder.

Companies that do not make profits (as yet) are most vulnerable, in particular if they are small. Don't stick with companies going through a bad news cycle (the last thing you want is them issuing yet more bad news). The most important thing is to go through the portfolio on a case by case basis, every time trying to assess what type of risk are we taking on in this particular case. Part of my consideration was to trust in the quality of out-of-season financial results reporters in that they were most likely to announce good news. Indeed, good news is what most have reported, but in many cases this did not stop the selling, or sometimes only briefly.

One notable exception has been Appen ((APX)) which is acting like a stock reborn after management upgraded guidance for the year in mid-November. Another portfolio member that has put in a remarkable performance, helped by yet again a high quality growth performance, is the aforementioned TechnologyOne. Note that out of caution, the portfolio exposure to both had been reduced, as part of the overall de-risking. Decisions do not have to be 100% in or out. It is easier to buy more shares at a lower level than it is to add from scratch again (it's how the human brain is wired).

A number of other stocks saw their initial rallies upon good news being used as an easy source for more profit taking, including REA Group ((REA)) and ResMed ((RMD)). Others held up well initially, but then succumbed to that same principle of becoming logical targets for profit taking. Here I would certainly include Bapcor ((BAP)), DuluxGroup ((DLX)), Xero ((XRO)), and Orora ((ORA)).

Certainly, a large contingent of stocks has fallen significantly more than I thought they would, and way more than seems justified even if profit forecasts for the year ahead must come down. In cases like Macquarie Group ((MQG)) and Link Administration ((LNK)) the world out there is simply showing its ignorance and lack of specific knowledge because both companies are not nearly as much aligned with the general status in the share market, but during times of panic and turmoil there is no opportunity to set up a debate with the sellers.

And other investors tend to think if the share price drops it must be for good reason, of course. One of the most difficult decisions to make during the past two months is to sit quiet and not re-allocate cash back into the share market. We are far from convinced that the end of turmoil is near. This can potentially get a lot nastier, still. Most importantly, there will be rallies here and there (there always are), but it seems highly unlikely this new phase for global risk assets will be over soon.

The down trend between May 2015 and February 2016 ultimately lasted nine months with a sharp sell-off in the final two months. The portfolio switch post Trump election lasted five months before selling down stocks like CSL ((CSL)), Aristocrat Leisure ((ALL)) and NextDC ((NXT)) reversed into new uptrends.

Having said so, we did buy in a few extra shares near what might have been the market bottom (for now) recently, and among the opportunities we jumped upon were Macquarie, Link Administration, Bapcor, Carsales and Orora. Prior to last week, circa 30% of the All-Weather Portfolio had no exposure to the share market. On my assessment, this has been one decisive factor in keeping overall losses contained, and smaller than the broader market.

That percentage has now declined to circa 25%, which means 75% is invested in the local share market in a basket of 20+ stocks that have no resemblance to any of the market indices. While we have taken the view the changing outlook should not be underestimated, we are also of the view this does not by default mean we are staring at a repeat experience of 2008-2009 or 2000-2002. It doesn't even have to be a repeat of 2011-2012 or of 2015-2016.

But neither of such scenarios should categorically be excluded at this stage and we remain prepared to further reduce risk if circumstances so require. In the meantime, we agree with other voices elsewhere two months of (near) persistent weakness for the local share market has made a large number of stocks look very attractive. Instead of looking through a list of stocks that have fallen the most, as is the inclination for many, I'd strongly suggest investors continue de-risking their portfolio.

In terms of fresh opportunities to take advantage of, why would any investor with a longer term horizon now ignore the fact that high quality, less risky, solid and reliable performers in large numbers have sold off -15%, and more? This is where the real opportunity lies in today's share market.

Paying subscribers have access to my research into All-Weather Performers, including a dedicated section on the FNArena website. I strongly suggest this becomes your new Ground Zero for the future.

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In terms of All-Weather Portfolio performance, October saw a loss of -4.71% compared with the -6.05% that befell the ASX200 Accumulation index. Thus far in November, with three more trading sessions left, the loss is -1.86% for a combined -6.57% for the past eight weeks. The ASX200 Accumulation index has thus far added -2.14% for a combined -8.19%.

Calendar year to date the index is down -2.65% and for the running financial year it is down -6.65%. The All-Weather Portfolio has remained in positive performance territory throughout calendar 2018, albeit with a non-spectacular +1.17% year-to-date (still marking a noticeably better performance); for the financial year to date the performance number is -5.32%.

Late addition: As we are about to publish on the final trading day of November, it appears the All-Weather Portfolio might just escape a negative performance for the month, unlike the broader index.

Gartman's Rules Of Trading

He may not be perfect in all his views and calls, but Dennis Gartman still carries more day-to-day hands on financial markets experience than most of us have aged since birth. Below are his Rules of Trading, as updated and released at the end of last week.

THE RULES OF TRADING - 2018:

1. NEVER, EVER, EVER ADD TO A LOSING POSITION: EVER!:
Adding to losing positions will eventually lead to ruin. All great market humiliations are precipitated by someone doing so such as the Nobel Laureates of Long-Term Capital Management, Nick Leeson, Jon Corzine and now optionsellers.com.

2. TRADE LIKE A “MERCENARY:”
As traders/investors we are to fight on the winning side of any trade. We are pragmatists first, foremost and always with no long-term “allegiance” to either side.

3. MENTAL CAPITAL TRUMPS REAL CAPITAL:
Capital comes in two types: mental and real. Holding losing positions diminishes one’s finite and measurable real capital AND one’s infinite and immeasurable mental capital always and everywhere.

4. WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH:
We are in the business of buying high and selling higher, or of selling low and buying lower. Strength usually begets strength; weakness, usually, begets more weakness.

5. IN BULL MARKETS ONE MUST TRY ONLY TO BE LONG OR NEUTRAL:
The obvious corollary is that in bear markets one must try only to be short or neutral. There are few exceptions.

6. “MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU OR I CAN REMAIN SOLVENT:”
Lord Keynes said this decades ago and he was… and still is… right, for illogic does often reign, despite what the academics would have us believe about efficient markets!

7. BUY THAT WHICH SHOWS THE GREATEST STRENGTH; SELL THAT WHICH SHOWS THE GREATEST WEAKNESS:
Metaphorically, the wettest paper sack breaks most easily and the strongest winds carry ships the farthest and the fastest.

8. THINK LIKE A FUNDAMENTALIST; TRADE LIKE A TECHNICIAN:
Be bullish when the technicals and the fundamentals run in tandem. Be bearish when they do not.

9. TRADING RUNS IN CYCLES:
In the “Good Times” even one’s errors are profitable; in the inevitable “Bad Times” even the most well researched trade shall go awry. This is the nature of trading; accept it. Move on.

10. KEEP ALL TRADING SYSTEMS SIMPLE:
Complication breeds confusion; simplicity breeds profitability.

11. AN UNDERSTANDING OF MASS PSYCHOLOGY CAN BE MORE IMPORTANT THAN AN UNDERSTANDING OF ECONOMICS:
Simply put, “When they’re cryin’ you should be buyin’ and when they’re yellin’ you should be sellin’!” But it’s difficult…very!

12. REMEMBER, THERE IS NEVER JUST ONE COCKROACH:
The lesson of bad news is that more almost always follows… usually immediately and with an ever-worsening impact.

13. BE PATIENT WITH WINNING TRADES; BE EVEN MORE IMPATIENT WITH LOSERS:
The older we get the more small losses we take… and willingly so.

14. DO MORE OF THAT WHICH IS WORKING AND LESS OF THAT WHICH IS NOT:
This works well in life as well as trading. If there is a “secret” to trading… and to life… this is it!

15: CLEAN UP AFTER YOURSELF:
Need we really say more? Errors only get worse.

16. SOMEONE ALWAYS HAS A BIGGER JUNK YARD DOG:
No matter how much “work” we do on a trade, someone knows more and is more prepared than are we… and has more capital!

17: WHEN THE FACTS CHANGE, WE CHANGE!
Lord Keynes… again… once said that “When the facts change, I change; What do you do, Sir?” When the technicals or the fundamentals of a position change, change your position, or at least reduced your exposure, perhaps exiting entirely.

18. ALL RULES ARE MEANT TO BE BROKEN:
But they are to be broken only rarely and true genius comes with knowing when, where and why!

Final Weekly Insights For 2018

This is the final Weekly Insights for calendar 2018. I hope you all enjoyed reading my weekly snippets and analyses as much as I did researching and writing them. It's been a long and eventful year, and not just because of share market shenanigans at the very end of it.

During my presentations and media appearances this year I have felt on numerous occasions a genuine connection with investors in that they sensed the overall context for the share market was changing, but nobody had as yet properly explained the how and why of it all.

At FNArena, the team has continued developing new additions and further improvements to our service. Last week we launched ESG Focus, a new dedicated segment to our news service. We have one more fresh initiative upon our sleeves before year-end holidays kick in.

That'll be my final-final effort for the year, before I retreat to spend some time near the water, hiding from the sun, catching up on a million things left to do, including reading some more, and recharging the inner battery.

I sincerely hope 2018 hasn't been too much of a disappointment, and that our efforts at FNArena, including my personal observations and insights, have made a significant and positive contribution. Next year will be different again, as is always the case. May Dame Fortuna smile graciously upon you all.

Weekly Insights will resume at the end of January. Till then take care, and all the best. We shall continue this relationship in 2019, hopefully.

Rudi On TV

My weekly appearance on Your Money (the channel formerly known as Sky News Business) is now on Mondays, midday-2pm.

I shall make an appearance on Peter Switzer's program on Your Money on coming Monday, 7.30pm.

Rudi On Tour In 2019

-ASA Inner West chapter, Concord, Sydney, March 12
-ASA Sydney Investor Hour, March 21
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22

(This story was written on Tuesday 27th November 2018. It was published on the Tuesday in the form of an email to paying subscribers at FNArena, and again on Thursday as a story on the website. Part Two will be published on the website on Friday morning).

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

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
- Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

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.

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

Rudi’s View: Macquarie, Aristocrat Leisure And Emeco

In this week's Weekly Insights (this is Part Two):

-Out With The Garbage
-Change: Rudi On TV
-Zimbabwe on Top Of The World
-Conviction Calls
-UBS On Inflation
-Rudi Talks
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Zimbabwe On Top Of The World

Some things a sane mind simply cannot make up, no matter what the context.

With equity markets globally in turmoil, and the Australian share market giving up all the gains that had been booked over the first nine months of calendar 2009, the stock exchange in Harare, Zimbabwe was celebrating an all-time record high.

Make no mistake, the ruling elite is still enriching itself while ruining further what once was a thriving exporter in the south of Africa.

Hyperinflation is no more, but economic decay remains and nobody believes the official inflation estimate currently printing 4.8%.

Businesses are being affected by acute shortages in foreign currency. Investors are treating equities as a preservation of wealth. In local currency, the Zimbabwean Stock Exchange has appreciated some 18% this year, which makes it one of the best performers in the world.

Conviction Calls

First up, a warning from me, again, to all investors out there: do not get sucked into this whole theme of "value" is now going to outperform "growth" by buying into (or holding onto) the wrong stocks.

On Monday, I referred to Domain Holdings ((DHG)) and Fairfax Media ((FXJ)) issuing a profit warning. On Wednesday, as I am writing Part Two of this week's Weekly Insights, shares in The Reject Shop ((TRS)) are down by -34% after yet another profit warning from an under pressure business model that has a long legacy for surprising into the negative.

These examples should remove two misconceptions that have long survived inside the financial industry: the first is that a lower share price takes care of all the risks, which clearly is not the case (not even after this month's heavy sell-off) and the second one is that High PE stocks represent higher risk because, you know, watch what'll happen when they disappoint.

The irony here is, of course, that if you pick the high quality companies among the High PEs you'll seldom encounter a nasty surprise such as delivered by Domain and The Reject Shop. Whereas The Reject Shop shares had fallen from $8 to $6 already, and then further to $4.50 as the share market met broad based selling.

By that stage the shares were trading on PE ratios well below market average and an implied dividend yield well above the banks and the market average. And as we know now, the shares still had another -34% downside in them on the back of today's profit warning.

Fact remains, most stocks in the "value" basket are carrying a lot of operational risks and uncertainties, as old economy stalwarts are struggling to cope with a changing market place, increased competition, technological advances and government policies (or the lack thereof).

Many of the quality growth companies had become too popular and the current share market correction is taking care of this. However, it remains yet to be seen if and for how long these quality companies, providing robust growth outlooks, will remain out of favour.

In the meantime: don't get stuck with value traps such as The Reject Shop which, coincidentally, would also have been a yield trap for those investors desperately seeking income and lured in by what must have looked like a very attractive yield.

(See also Part One published on the website on Wednesday)

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Shares in Aristocrat Leisure ((ALL)) have put in a solid rally this week and that should not surprise. Amidst ongoing positive feedback via industry reports, sector data, conferences and stockbroking research, the shares kept sliding from a high around $33 in July to near $28 on Monday.

Enough reasons for experts to step into the limelight and declare the shares are nothing but a buying opportunity. Cue Mathan Somasundaram, market portfolio strategist at Blue Ocean Equities, alongside analysts at Deutsche Bank, UBS, Wilsons, Baillieu Holst and CLSA (I might have forgotten a few) who all declared Aristocrat shares are a screaming buy at these beaten down levels.

Baillieu Holst upgraded to Buy on Tuesday, declaring the -17% fall from the record closing high of $32.98 "has come to be a rare opportunity in recent years to buy the stock on material weakness". Baillieu Holst upped the new price target to $33.15 from $31 previously. Among the positives cited in support of the move was favourable feedback from last week's global gaming expo in the USA; G2E.

One day earlier, in the midst of the severe sell-down of Australian equities, Wilsons declared it is time to step up and declare Aristocrat shares an unmitigated buying opportunity. Wilsons has a fair value assessment around $33. It's price target sits at $32.95. Over at CLSA the analysts have a price target of $41.26.

I do know Aristocrat Leisure, due to its link with pokie machines in Australia, is not everybody's taste. Just saying...

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CLSA (senior) banking analyst Brian Johnson has been a long time groupie of the Millionaires Factory nowadays operating as Macquarie Group ((MQG)) and amidst October turmoil he has shown no intention to change his view. Quite to the opposite, when selling orders started hitting Australia, and Macquarie Group shares too started sliding ever further away from the $130 all-time high, Johnson issued a special missive to the database of clients: buy the dips.

Admittedly, said Johnson, this is a high beta stock, and one cannot but point out Macquarie is, essentially, "an asset recycler leveraged to rising asset values in an environment where bond rates are also rising". But this is no time to bail, declared he.

Amongst the numerous reasons pointed out, Johnson points out conservative accounting virtually guarantees tailwinds to persist for a long while yet. Unless impairments would rise, market consensus forecasts are most likely to be proven too low yet again for the years ahead.

The company is also a beneficiary of market volatility, a weaker AUD and US tax cuts. Plus it carries surplus Common Equity Tier 1 (CET1) capital in combination with regulatory approval for a $1bn buyback, while generating $750m in suplus CET1 each year.

Bell Potter banking analysts TS Lim and Tim Piper, on Monday, equally used a general preview to the upcoming banks reporting season to reiterate their sector preference remains with Macquarie Group. This despite Bell Potter rating three of the Big Four as Buy (Westpac ((WBC)) being the exception) while also viewing Suncorp ((SUN)) shares worthy of the highest rating possible.

Bell Potter has a $132.50 price target for Macquarie Group, declaring "the recent share price decline provides a great opportunity to invest in this “Cash and Growth” story".

In case you wondered, and I have no doubt many among you do, here's Bell Potter's view on the Big Four: "ANZ ((ANZ)) and NAB ((NAB)) appear to be most resilient to medium term Royal Commission headwinds while CBA ((CBA)) has, in our view, reached an inflexion point that now justifies an upgrade to a trading Buy".

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One of the yield/value traps that had many an investor bamboozled in 2018, G8 Education ((GEM)), has proven quite resistant this month. I guess there's only so far a share price can fall and Australia's number one owner/operator of childcare centres is still paying dividends, despite persistent industry headwinds.

Those dividends were cut in FY17, and the same scenario applies to FY18 (financial year to December). Most analysts covering the stock are projecting dividend increases again from next year onwards. We'll see. In the meantime, analysts at Wilsons are not budging from their view the shares are not worth more than $2.03 (around where the shares are trading) and their message to long suffering shareholders is as clear as pie: you will have to be patient.

Inside the FNArena universe of stockbrokers covering this stock, Wilsons sits near the bottom in terms of valuation, rating G8 Education no more than a firm Hold. If you have access to Stock Analysis on the FNArena website, you'll find the likes of Morgans, UBS and Ord Minnett are still willing to stick with a more positive view.

But hey, take it from me, there's nothing as easy as adopting a positive view after the share price has been walloped. Investors do it every day in the share market. It didn't work so well with Slater & Gordon ((SGH)), iSentia ((ISD)) or The Reject Shop, just to name a few.

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One sector that has quite a number of analysts excited are the contractors and equipment providers to miners and energy producers. Overall activity is forecast to pick up for the coming 2-3 years or so, though this hasn't helped RCR Tomlinson ((RCR)) of late. And who could forget Forge Group?

Nevertheless, Goldman Sachs this week initiated coverage on Emeco Holdings ((EHL)) with a Buy rating and a price target of 47c, suggesting significant upside given the share price on Wednesday is trading around 38c, no doubt already on the up because of Goldman's positive expectation.

Emeco, which is Australia's largest mining equipment rental firm, is making a come-back after having been in the dog house from 2014 until mid-2017. If Goldman Sachs' projections prove correct, CAGR for the next three years is 27%. Further adding to the analysts' confidence is the forecast Emeco will announce the return of a dividend for shareholders in the second half of FY20.

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Investors should note analysts have equally stepped up support for shares in Link Administration ((LNK)) this week past, but we already published a story about this on Wednesday:

https://www.fnarena.com/index.php/2018/10/17/treasure-chest-investors-missing-link/

For full disclosure: All three of Aristocrat Leisure, Macquarie Group and Link Administration are proudly held in the FNArena/Vested Equities All-Weather Model Portfolio (see also further below).

Investors can read more about the Portfolio here:

https://www.fnarena.com/index.php/2018/10/04/rudis-view-all-weather-model-portfolio/

UBS On Inflation

Prepare for an inflation shock by month's end.

No, not what you are thinking right now. Economists at UBS have conducted a deep dive into what is occurring underneath underlying consumer prices inflation in Australia and their conclusion is the quarterly update locally, scheduled for October 31, is most likely to surprise to the downside.

Mind you, quarterly CPI readings have mostly underwhelmed over the past two years, so we shouldn't be shocked by this. But there is a higher oil price, and a weaker Aussie, plus a number of economists continues to hammer home that wages inflation, it is coming.

If UBS's calculations will be vindicated by month's end, the third quarter is about to generate one of the lowest inflation readings on record. Yes, you read that correctly. One of the lowest, ever.

UBS thinks a reweighting of the CPI basket, plus price deflation for child care, education and autos will more than just compensate for dearer fuel and tobacco tax hikes. On UBS's current estimate, Q3 underlying CPI will print 0.3% (versus 0.4% the previous quarter) to pull down the year-on-year number to 1.7%.

Combine this forecast with a bearish view on the housing market and it is no surprise UBS thinks there will be no action from the RBA until 2020.

Rudi Talks

Audio interview from last week in which I advocate investors raise more cash and keep a list of stocks they do not own, but would like to:

http://boardroom.media/broadcast/?eid=5bbd2c4b7410a23524811618

Rudi On Tour

-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 15th October 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two was written on Wednesday and published on Thursday).

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Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

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.

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

Out With The Garbage

In this week's Weekly Insights (published in two parts):

-Out With The Garbage
-Change: Rudi On TV
-Zimbabwe on Top Of The World
-Conviction Calls
-UBS On Inflation
-Rudi Talks
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Thursday]

Out With The Garbage

By Rudi Filapek-Vandyck, Editor FNArena

After what seems like an eternity of more selling than buying, the Australian share market is now heavily over-sold. Market indices have given up all gains accumulated earlier throughout the running calendar year, plus some. And it all went in a heart beat or two.

If markets follow the standard blueprint, we should see a relief rally, followed by yet another move to the downside. Only then will there be stabilisation, which can develop into a platform for the next rally upwards. Or not.

While it is fashionable to now reel out all kinds of statistics about how many -5%-plus market down drafts have occurred since the second week of March 2009, when the last bear market of late 2007-Q1 2009 was put in a coffin and buried, the objective observation is this bull market is getting more mature by the day, economic momentum inside and outside the USA might be peaking, the Federal Reserve is a lot further into its tightening process and global bond markets seem a bit restless.

In such context, bad things can, and usually do, happen. Quod erat demonstrandum. Forecasters including myself had been building the case that 2019 would likely be a lot tougher for global equity markets, but it now increasingly looks like "tougher" has arrived much earlier.

For good measure: there is no evidence whatsoever to suggest the forward trend is now irrevocably south. But there is a real possibility that equity indices might have peaked, at least for the time being, and a more cautious approach seems but appropriate.

Most experts elsewhere are now telling investors they should grab this opportunity because this October market sell-off has created bargains everywhere. I have a different proposition. I agree share market weakness creates opportunity, but, as always, investors need context to assess what type of opportunity.

Irrespective of what happens to share prices tomorrow or the day after, there's no denying risks have been building throughout calendar 2018. Investors have largely ignored these risks, until the past two weeks. For long term oriented investors, the best strategy is now to de-risk portfolios and to try to avoid that one risk event can completely erase all the positive achievements from the years past.

Conclusion number one: cash is now a valuable asset.

Many a professional funds manager had been increasing cash levels earlier in the year, and so did the FNArena/Vested Equities All-Weather Model Portfolio. You might have done the same, if you'd read my Weekly Insights and had acted accordingly. If not, it never is too late to make changes to one's strategy and/or portfolio.

More importantly: share markets might look over-sold in the short term, this means nothing for the risks that have been building. Hence why I believe the best strategy is to look forward 1-2 years and consider the many risks that may or may not impact over that time span.

On international level, we have US bond yields that might surge a lot higher, the US dollar can rally a lot higher too, which means the Aussie dollar might crash, while crude oil prices can still rally higher too, while growth globally is slowing, US equities can have a much deeper correction (-10-15% is possible), Emerging Markets can throw up a tantrum, and the tension between the Trump administration and China can turn genuinely nasty, with Australia finding itself on the "wrong" side (from China's perspective).

Not to be forgotten: there is debt everywhere.

Domestically, we have banks and the Royal Commission, a housing market that is now correcting, household budgets further under pressure and a political cycle that is not favouring the incumbents.

All this seems a lot to take into account, which is why my preference lies with high quality, resilient businesses, that have a robust growth outlook, with as little risk attached as possible.

Some of such businesses have been communicating with investors recently. I note, for example, Amcor ((AMC)) has used its AGM to reiterate guidance for the year. Company management has a positive track record. This in itself is a de-risking event. The same can be said about Corporate Travel ((CTD)). The latter's management used a conference last week to communicate the new financial year has started strongly, while integrating the Lotus acquisition is progressing well.

Note also that, prior to the share market melting down, Carsales ((CAR)) had received three stockbroker upgrades to Buy in quick succession. Brian Johnson at CLSA and TS Lim at Bell Potter reiterated on Monday they think weakness in Macquarie Group ((MQG)) shares is creating an opportunity for investors who dare look past share market gyrations. Both would say bank shares in general look "cheap", but Macquarie remains the sector favourite.

Note that I don't think investors should be focusing on "value" but on "quality" and "risks" instead. Personally, I'm still not keen on banking shares, but I am a big fan of Macquarie (and so should you be). To prove my point about focusing too much on "value": Fairfax Media ((FXJ)) and Domain Holdings ((DHG)) unexpectedly issued a profit warning, also dragging down groom-to-be Nine Entertainment ((NEC)) and market leading competitor (and of incredibly better quality and resilience) REA Group ((REA)).

To put this in another way: shares have been falling significantly across the board. Why would you now risk being caught inside a yield- or value-trap? Surely the most devastating experience would be to survive this stomach-churning share market volatility only to be caught out in better times because one is still holding multiple stocks of the lesser quality/higher risk type?

Investors who really want to maximise this month's opportunity should, in my view, start cleansing the slate (to mix a few metaphors) and build a robust portfolio for the risks and challenges ahead.

Let's be brutally honest to ourselves: we all have a few. Stocks that seemed like a good idea at the time, but it simply hasn't worked out well. Time to ignore purchase prices and emotional attachment and ask some very apposite questions instead: would you still buy those stocks today (without looking at the share price)? Do you still think this is the ideal stock to own given the challenges ahead?

If not, you know what to do. It's time to get rid of all the garbage and add some real robust quality instead. Share prices have fallen across the board. Don't stick with a pair of brown pebbles whose gloss has worn off while you now can own a selection of true diamonds at much cheaper prices than only one month ago.

The FNArena/Vested Equities All-Weather Portfolio has done exactly this over the past week or so. We got rid of shares in companies like InvoCare ((IVC)) and Pact Holdings ((PGH)), disappointing investments that should have been abandoned earlier, but hey, we are all human. Instead we are looking at, or have been buying, shares in ARB Corp ((ARB)), GUD Holdings ((GUD)), ResMed ((RMD)), Goodman Group ((GMG)), Reliance Worldwide ((RWC)), and the likes.

At the same time, we have increased our cash position, which gives us double comfort in that we can look to deploy more, while also reducing our exposure overall to a share market climate that is volatile at best, and toxic at worst.

A few other things to take into consideration while portfolio re-calibration is in process:

-smaller cap stocks are more vulnerable during risk-off events
-stocks on higher PE ratios might sell-off more because of the perceived "richer" valuation, plus the knee-jerk response of profit taking implies past winners are sold more, and easier, than past losers (it's a human reflex thing, not necessarily useful beyond the short term)
-stocks in companies with no profits and no dividends might fall further (there is no natural support)
-investors should in particular be careful with smaller cap stocks that carry a lot of debt and whose operations might come under pressure
-local technology stocks are essentially beholden to whatever happens with Nasdaq in the US

For example: I would not be left with owning shares in Speedcast International ((SDA)) right now. The company severely disappointed in August and is carrying a mountain of debt, having acquired a multiple of companies since listing. Too much risk for my liking. In similar fashion, I did cast an eye over Ansell ((ANN)) shares, but there still is the possibility that gloves might be affected by Trump's trade tariffs.

A cheaper share price does not tell the full story. Investors should always make sure they try to gauge to the best of their ability the risks involved, so they can make (hopefully) a well-informed decision whether they want exposure, or rather not.

As has been our investment strategy since inception of the All-Weather Portfolio, the focus remains firmly on the various categories shown on the dedicated All-Weather Performers section on the FNArena website (sorry, available to paying subscribers only). To reduce risk and increase our cash position, the Portfolio has dialled back overall exposure to mid- and smaller cap stocks, and to the technology sector.

On a net-net basis, we have noticeably increased the Portfolio's cash position, which should provide both comfort and the optionality of responding to further developments.

Investors who'd like to include the August Reporting Season Monitor in their research/target selection can do so via the following story:

https://www.fnarena.com/index.php/2018/09/12/august-2018-reporting-season-wrap/

The Monitor itself is attached to the story (see top). Plus, of course, we are running a Monitor for post-August results live on the website (soon to be updated with the banks and others).

Change: Rudi On TV

As of this week, I will no longer appear on Your Money (the renamed Sky News Business) on Thursdays, but weekly on Mondays instead (1-2pm). This is likely to also impact on when I manage to write and send out Weekly Insights, in particular when a lot of reading, researching and thinking might be involved.

Hence from now onwards Weekly Insights might become more of a Tuesday event rather than the Monday evening, as has been the rhythm for quite some time. Whenever this happens, Part Two (if there is one) will be published on the website on Friday morning instead of on the following Thursday.

This week, as you might have guessed, everything will remain the same as always.

Rudi Talks

Audio interview from last week in which I advocate investors raise more cash and keep a list of stocks they do not own, but would like to:

http://boardroom.media/broadcast/?eid=5bbd2c4b7410a23524811618

Rudi On Tour

-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

Rudi’s View: All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Last week a reader sent through the following questions regarding the FNArena/Vested Equities All-Weather Model Portfolio. I have decided to share my response with a broad audience as I think many more might be interested.

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?
2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?
3) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

My responses:

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?

One of the key factors behind our decision to run the Model Portfolio via Separately Managed Accounts (SMAs) is the wide-ranging flexibility involved. You can open an account, transfer funds, reduce funds, add more funds, and close your account at any time and at your own volition while having day-to-day insight in which shares are kept, bought and sold, the respective allocations, changes, dividends, costs and performance.

If you decide to join through FNArena you will receive a small discount on costs, but all-in-all most costs are related to platform, admin and license which are pretty much set in stone unless competition forces the platform operator Praemium to lower its standard fee. (This is not inconceivable but hasn't happened as yet).

When asked about costs I usually respond with approximately 1.5% per annum. The "approximately" refers to the fact some costs are related to the size of the funds allocated plus a minor part stems from potential and unpredictable brokerage. The latter is a tiny cost under all circumstances.

Importantly, and directly related to your question, there is no cost for closing the account with Praemium and Vested Equities; once you withdraw all funds and close down the account you simply stop paying any further fees.

Here is the full overview of the costs involved:

Minimum participation is set at $20,000.

2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?

Unfortunately, wide-ranging flexibility does not equal unlimited flexibility. Investment decisions are made for the Model Portfolio and they are being replicated across all SMAs connected. As said above, every investors has access and can make changes anytime about how much funds he/she allocates, but the process cannot have too many exceptions and discrepancies or it simply won't work properly.

The whole idea behind the research into All-Weather Stocks is to find high quality companies with many years of growth ahead of them, that can be owned for many years in the Portfolio. You will find that high quality mostly equals companies that take good care of their staff and clients, communicate well with all stakeholders, invest for the long run and make sure they do not destroy tomorrow's future for a quick benefit today.

Investors globally are increasingly adding Environmental, Social and Governance (ESG) filters to their toolbox when assessing present and future investments and here at FNArena we find All-Weather Performers/High Quality companies are usually already using the same blueprint.

Portfolio stalwarts like Amcor and Orora might be closely linked to tobacco, sugar and waste, but these companies are also at the forefront of new technologies and recycling initiatives for the global packaging industry. Long held Portfolio constituent NextDC has decided to equip all of its data centres with as many roof solar panels as possible.

DuluxGroup is, as I understand it, a core holding for Ethical Partners Funds Management. The company equally is putting in place solar power for a new factory. The company is involved with the 'Paintback' program which aims to be a more responsible pathway to get rid of leftover paint.

Possibly the one constituent that is most likely to trigger some controversy/criticism is Aristocrat Leisure. We thought long and hard before we added this stock to the Portfolio. It is there not because Aristocrat is part of my selection of All-Weather Stocks, but because it has transformed itself into a prime growth story that still has many more years to develop.

Note as the concept of All-Weather Performers is exactly the opposite of miners and energy companies, we automatically shun coal, steel, aluminium, fracking, and other contentious business models. Australian banks are not excluded by default. If the sector ever gets back to its mojo of the 1990s and 2000s we might reconsider them as All-Weathers, but I very much doubt whether such a scenario could possibly be on the horizon in the foreseeable future.

I share my selection, insights and updates on All-Weather Performers regularly with paying subscribers at FNArena. There is also a dedicated section on the website, as well as eBooklets and two published books. Feel free to get acquainted with the companies and sectors that form part of my research and analysis. Needless to say, my research and analysis are continuously ongoing. New insights will be forthcoming and they will have an impact on future investment decisions.

3.) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

I think a little bit of context is required here. When we sat down in 2013-14 to prepare for the chosen investment mandate, we very much believed that future investment returns would be lower than the circa 11% long term average the Australian share market was exhibiting at that time. That assessment has proved to be correct.

We thought circa 8% as an average per annum looked both reasonable and achievable. Thus far, the All-Weather Model Portfolio has outperformed those expectations. A little surprising maybe, is that the ASX200 has equally performed better than 8% on average, despite going through numerous periods of difficulty and weakness.

Note the All-Weather Model Portfolio has outperformed the broader share market since January 2015 ("inception") in all six months periods except for the first, when we started with 100% in cash and the share market was rallying, and the second half of 2016 when en masse portfolio switching out of defensives & winners and into laggards & cyclicals temporarily dominated the market.

Among the promises we made to investors are lower volatility in price movements and a lower risk profile, and history thus far shows we have been able to deliver. In particular the lower risk characteristic implies the portfolio return is highly unlikely to shoot up to 25%, 30%, 40% or higher. In the fabel featuring the hare and the tortoise, the Portfolio very much resembles the tortoise who crosses the finish first, having approached it in a steady and gradual manner.

But the context equally involves other funds, portfolios and strategies. Only this morning I opened a fund manager's newsletter which showed the following performance update: one month performance -0.99%; financial year to date: 0.02%, calendar year to date: -3.22%. However, the number to advertise remains the performance since inception: 198.58%.

This is typical for the large majority of fund managers in Australia. Long-term outperformance mainly stems from halcyon times many moons ago that still compensate for the fact that returns have dropped significantly in recent years. If you visit websites for large listed managers, such as Perpetual and Janus Henderson, and look up respective funds performances in Australia you're most likely to find the numbers (even before fees) are not keeping up with the broader index.

The FNArena/Vested Equities All-Weather Model Portfolio has beaten the index. We just updated performance numbers until the end of August for our brochure (see below).

The third factor to take into consideration is the Australian share market is one of only few to not experience a negative performance to date in the running calendar year of 2018. I wouldn't necessarily exclude the fact that 2019 might turn out quite the challenge, with slowing growth, ongoing Fed tightening, rising inflation, local elections and more Trumponomics just a few factors that come to mind.

Of course, financial markets have surprised in a positive sense since the global turmoil of early 2016, and they may well do so again next year and the year(s) thereafter. But I am not sure whether anyone can confidently promise you in excess of 10% annual return on your investments. I certainly won't be making any such promises.

Regarding the performance update below, one has to take into account your personal return will also be determined by the timing of your SMA, plus for a Portfolio that has run for less than four years, the significant set-back experienced in the second half of 2016 still has a large impact on the averages. Only time can change that, assuming we can continue our track record thus far.

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.

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.

It’s Different This Time, Not A Bubble

In this week's Weekly Insights (published in two parts):

-It's Different This Time, Not A Bubble
-August Reporting Season: The Final Act
-Shame, Shame On You, IOOF
-Rudi & The Switzer Seminar
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Thursday]

It's Different This Time, Not A Bubble

By Rudi Filapek-Vandyck, Editor FNArena

One of my all-time favourite movie scenes is when Woody Allen stands in the queue in Annie Hall (1977) and he ends up having a discussion with the loudmouth academic behind him who professes to know everything there is to know about Marshall McLuhan.

To prove his opponent is more talk than substance, Allen steps out of the camera frame and returns with Marshall McLuhan who tells the academic you're wrong and Woody is right; you should not be allowed to teach any students about me.

Replaying the scene today via Google over the Internet makes the whole act seem a bit out-of-date, but it's the surprise act that has stolen my imagination.

In my naughtiest dreams I see yet another assembly of value-investors appearing on Sky News Business, talking bubbles and investor exuberance, and how all the money flowing into stocks like CSL ((CSL)) and Bapcor ((BAP)) is like playing Russian Roulette; inevitably this story is going to end in tears and it will be ugly, they assure.

But then James Daggar-Nickson, or one of his female host colleagues, calls out my name and I step from nowhere inside the TV frame, telling the experts: you have been wrong for the past five years, what makes you think you are right this time around? Personally, I think you will be proven wrong a lot longer.

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If the past five years have taught me anything about the Australian share market it is that most expert investors are, essentially, bottom-up stock pickers. They might join the general debate about what governments should do, or what the outlook looks like in terms of central bank policies and global economic growth, but that's not really their forte.

Bottom-up stock pickers are usually synonymous with value-investing. They find opportunity among stocks that have fallen out of favour and in price. The analysis is concentrated mostly around what the company can and should do to turn its fortune around. At its centre sits the age-old piece of market wisdom that a young Warren Buffett once upon a time received from his mentor, Benjamin Graham: no matter the timing or catalyst, any asset that is undervalued will be priced at true value, at some point.

Enter that other, equally enigmatic ingredient determining success and failure for investing in the share market: investor sentiment. We all prefer to be riding the upward trending slope, but it's not always clear why we are or aren't.

But if most of our attention is spent on identifying individual opportunities, we are bound to miss a broad change in the general investment climate and this is exactly what has occurred in the past five or six years. Look no further if you want to know why most strategies and most managed funds have failed to even keep up with local share market indices over that period.

On my observation, many are seeking solace behind that old John Maynard Keynes statement in that the market can stay irrational longer than you can stay solvent. The underlying implication here is that increasingly popular passive investment products such as ETFs, combined with robots and investors herding behind shorter term momentum, have created a temporary market distortion, but time should do its healing, as it always does.

Many a market update published by value investors today starts off with the old warning from Sir John Templeton: "The four most dangerous words in investing are, 'it’s different this time'".

But is this really all there is to it?

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Morphic Asset Management joint Chief Investment Officer Chad Slater, also part of the value investment community, last month published an analysis that suggested in the USA "value-investing" has essentially been the underperformer ever since the GFC, which means the whole past decade.

Slater also refers to analysis published by O’Shaughnessy Asset Management showing "growth investing" has now outperformed "value" in every single sector in the US since 2010.

On my own analysis, the gap between "growth" and "value" in the Australian share market started to become noticeable from 2013 onwards. This aligns with research published by analysts at Macquarie and stockbroker Morgans, so I think we can safely assume that what apparently started in the US some ten years ago is now on the verge of completing its sixth year in Australian shares.

A long time for something that supposedly is but a temporary bout of irrational greed gripping equities locally and elsewhere.

If one really wants to put the knife in, consider the following observation by Slater: "...since 2007, this recent period of value investing lagging growth has been so severe that value investing has given back all its gains since 2002 and now we are back to where it was in 1988".

Maybe typical for the art of bottom-up stock picking, many critiques about buying the overly expensive Healthcare Champions or IT Copycats is based upon rather one-dimensional analysis. It goes like this: companies such as CSL, ResMed ((RMD)) and Cochlear ((COH)) used to have higher growth rates 10-15 years ago, yet their valuation (PE ratios) has increased substantially. This does not make sense. Irrational exuberance. Sell.

Before we come to such conclusion, let's have a look at the other side first. Everybody agrees calling BHP shares "cheap" because on two earlier occasions (2007 and 2011) the shares traded near $50 is not a correct measure for valuing the stock today. Conditions and circumstances were a lot different then from today; it's a sharply different environment. BHP shares do not deserve to be trading near $50 anymore.

The same argument can easily be made for CommBank shares, which do not belong near $96 today, or Harvey Norman, or G8 Education, or Myer (and so many others). As over-ruling circumstances have changed dramatically, these stocks are anno 2018 all trading at a valuation discount versus historical trends and averages, and even the value-investors themselves agree this seems but justified.

When it comes to assessing CSL, ResMed, and the like, one key factor has changed here too: 10-15 years ago these companies were fast growing in a general environment that offered plenty of alternatives, including banks and other financials, miners and energy stocks, plus most other cyclicals, even retailers and telecommunication companies.

One-dimensional analysis whereby today's growth companies are only being assessed against their own past misses the crucial point that, on a relative comparison, today's high quality, high growth companies, and that certainly includes CSL, Cochlear, ResMed, as well as REA Group ((REA)), Bapcor, TechnologyOne ((TNE)), and others, are standing out much more than they ever did.

So, in essence, large parts of the share market today are trading at a discount to their traditional valuation because these companies are now facing more challenges and threats, and they find it (much) harder to grow and create shareholder value, while in most cases the quality of the growth achieved is much less too, and consistency has gone out the window.

Enter asset sales, cost cutting, price discounting, lower tax rates, acquisitions, share buybacks and restructurings instead of good old fashioned sales growth combined with healthy margins.

Surely everybody agrees the latter is preferred, in particular when combined with sustainability, reliability and market leadership?

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One fine example of O’Shaughnessy Asset Management's assessment here in Australia has been provided by Macquarie Group ((MQG)). Veteran banking analyst Brian Johnson had already started calling for a structurally higher valuation for Macquarie pre-GFC but for many years the shares offered similar dividend yield as most other financials in Australia, including the Big Four Banks.

This only changed recently. Macquarie shares are now offering a consensus forecast (forward looking) yield of 4.5% which implies a significant valuation premium vis-a-vis other banks, and even Australian financials in general. The Big Four are now offering 6%-7%+.

While we can all have a debate anytime about whether Australian banks are cheap, too cheap, or not at all, it is difficult to argue Macquarie Group shares do not deserve to trade at a relative premium. The gap between Macquarie and the rest of Australian financials was once again highlighted in a broad reaching sector assessment by another veteran researching banks and insurers in Australia, Brett Le Mesurier, now at Shaw and Partners.

On LeMesurier's latest assessment, Macquarie is the only financial in Australia poised to achieve significant top line growth for at least the next two-three years. In terms of growing earnings per share (EPS) for shareholders, only Suncorp ((SUN)) seems positioned to (potentially) perform better, but this comes after a disappointing period during which growth was actually negative and Suncorp's immediate outlook is also supported by asset sales.

Long suffering value-seekers might argue low expectations might give the banks and insurers such as QBE Insurance ((QBE)) and Insurance Australia Group ((IAG)) an opportunity to surprise to the upside, which is valid, but it's not like the sole option left for Macquarie is to disappoint at next year's full year result release. As a matter of fact, most analysts think the bias remains in favour of Macquarie lifting its guidance between now and then.

LeMesurier makes a point of highlighting how severe the challenges and risks are for AMP ((AMP)) and Challenger ((CGF)) in the sector.

Macquarie's well-being, of course, is much more aligned with asset markets and investor sentiment globally, but, irrespective, the Shaw and Partners report highlights the consistent revenue that Macquarie has returned on the employment of its capital over the past decade, described as "an extraordinary performance in view of the different market conditions that have existed over that period".

Strictly taken, and this is pretty much a view carried across the community of analysts covering the company, growth at the Golden Donut is slowing, and is likely to be lower in the years ahead vis-a-vis the years past. But it continues to stand head-and-shoulders above the rest in the sector.

Only by also including the second factor can we justify, and understand, the valuation premium that has been priced in Macquarie shares. What goes for Macquarie, also applies to CSL et al.

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Contrary to those who use Sir John Templeton's famous quote to argue markets have gone temporarily off the proven and tested script, I have been arguing for years now this time IS different, times have changed, it's a different context altogether from pre- and immediately after the GFC, with changing operational dynamics significantly widening the gap between Haves and Have Nots in and outside the share market.

At least Chad Slater is candid enough to acknowledge value investing is, in its essence, buying lesser quality companies in the hope they can overcome their challenges. In the overwhelming number of cases, this has proven to be a bigger-than-usual challenge, which is why detailed analysis, by OSAM, Slater and by others, reveals many "cheap" looking stocks post-GFC have simply proved to be "value traps".

This is also why the share market since 2013 has so clearly favoured quality above lesser quality, yet another characteristic many a value-investor finds it difficult to grapple with.

This is not to say investors should no longer pay attention to valuation when adding shares to their portfolio. Relying on the past, however, or using High/Low PEs as the sole point of reference is almost guaranteed a recipe for disappointment, as has been proven in the years past.

As to what is needed to break the market's obsession with Growth over Value, I'd suggest a dramatic change in overall dynamics, such as the Reflation Trade-inspired portfolio switching in the second half of 2016. Ultimately, that switch, which took place in a different context, only lasted for five whole months.

For all the value investors out there who cannot but stick to the script, here's the advice from Chad Slater, quoting hedge fund trader Paul Tudor Jones:

"You adapt, evolve, compete, or die."

Rudi & The Switzer Seminar

On Friday, 7th September 2018, I participated in an online seminar with Peter Switzer and Paul Rickard. The broadcast is about one hour long with a general assessment on the August reporting season and lots of individual stocks.

The broadcast can be viewed via the Switzer Report website:

https://bit.ly/2xiKIhh

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am, Skype-link to discuss broker calls
-Thursday, midday-2pm

Rudi On Tour

-Presentation to AIA members and guests Chatswood, on October 10
-Presentation to ATAA members and guests Sydney, on 18 October
-AIA Celebrity Lunch, Brisbane, on November 3

(This story was written on Monday 17th September 2018. It was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on Thursday).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

Rudi’s View: Telstra, BHP And Netwealth

In this week's Weekly Insights (this is Part Two):

-Is 'Value' Investing Now Dead?
-Conviction Calls
-All-Weather Stocks: Bell Potter
-Next Week
-Rudi Talks
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts appeared in Part One on Wednesday]

Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

When you look at the Australian share market, ignoring day-to-day noise and volatility, what do you see?

Stockbroker Morgans sees a complacent investor community ignoring the fact headwinds are building and the outlook is becoming less predictable, if not tougher. Investors can still look forward to making a reasonable return from their portfolio, the stockbroker believes, but maybe not if they continue crowding in the same segments of the share market.

Morgans likes Telstra ((TLS)) and local banks the most. Calendar year 2018 is seen as the window into a new normal wherein interest rates are on the rise, central bank stimulus is being wound back, and exceptionally calm markets are in for a lot more volatility. Whatever might transpire, 2018 is not a year for complacent investing, say the stockbroker's strategists firmly.

For investors looking to re-shuffle portfolios, a few ideas have been put forward. Morgans' favourite among the Big Four banks is Westpac ((WBC)). Among diversified financials, Suncorp ((SUN)) and Link Administration ((LNK)) are offered as best ideas.

Among consumer discretionary stocks, the preference goes to defensive business models of Bapcor ((BAP)) and Apollo Tourism & Leisure ((ATL)), plus Lovisa ((LOV)) and Baby Bunting ((BBY)). Elsewhere Orora ((ORA)) and Reliance Worldwide ((RWC)) remain in favour, as do Telstra and Superloop ((SLC)) in the telecommunication sector.

Equally important: the stockbroker has been advising its clientele to trim positions in stocks that have run hard in FY18.

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Morgans' views about prospects for Australian equities would have resonated with market strategists at Morgan Stanley in the US. They have been warming up their clientele for portfolio rotation into defensive stocks and sectors. Last week, Morgan Stanley's view to sell US technology market darlings made headlines around the world, but among investors it was met with a big yawn, report the strategists.

One week later and they reiterate their more defensive view, "with increasing conviction".

The Q2 reporting season will be a bright one, say the strategists, but the market will be forced to focus on the sustainability of growth, and here headwinds are building.

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Meanwhile, miners and energy producers continue to enjoy upgrades with every sector analyst who updates the numbers, including for average input prices and the Australian dollar (weaker). Given ongoing robust economic growth on the horizon, albeit slowing, and the recent pullback in share prices, analysts at JPMorgan/Ord Minnett retain a positive position ahead of the August reporting season.

Key stock preferences are BHP ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Alumina ltd ((AWC)), Newcrest Mining ((NCM)), OceanaGold ((OGC)), Independence Group ((IGO)), and Orocobre ((ORE)).

Equally noteworthy: market strategists elsewhere have been scaling back their exposure to "Materials" (Commodities).

Big picture, point out global strategists at JP Morgan, below the surface red marks are increasingly appearing on forward looking models and indicators. The global economy is slowing, and investors should pay attention.

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Analysts at Canaccord Genuity have updated their Australian Focus List, essentially their selection of High Conviction calls on stocks under coverage. The broker specialises on small cap stocks in Australia, so the composition of the list remains limited to lesser known names in the Australian stock market.

The selection now comprises of 11 members: CML Group ((CGR)), EML Payments ((EML)), FAR ltd ((FAR)), Macquarie Telecom ((MAQ)), Money3 Corp ((MNY)), Perseus Mining ((PRU)), Pioneer Credit ((PNC)), Redbubble ((RBL)), Scottish Pacific Group ((SCO)), Service Stream ((SSM)), and Speedcast International ((SDA)).

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Global strategists at Macquarie describe the investment climate for the second half of calendar 2018 as "complex". No extreme outcomes are by definition on the agenda, but multiple risk factors are presenting themselves nevertheless, say the strategists. If it were up to them, investors should balance portfolios towards "quality", "sustainability" and "thematics", with less exposure to (or even avoiding) "value" and "cyclicality".

One of the conclusions drawn looks like a serious warning in itself: "Peak corporate returns and multiples are here; volatility lies ahead".

For good measure: Macquarie does not believe any of the more sinister scenarios like a recession globally or in the US are on the cards, but the strategists do highlight financial markets at present have embedded a "dangerous cocktail" whereby high asset prices are combined with peak efficiencies and returns for corporates, and expectations remain elevated too, while the pace of disruption is accelerating, at a time when policy errors seem more likely.

Something has to give, at some point.

"Ultimately, we believe policy U-turns are inevitable; it is just a question of timing and the degree of pain that might need to be endured."

All-Weather Stocks: Bell Potter

Most readers of my Weekly Insights market analyses and commentary would be well aware that my personal share market research post GFC has been dedicated to finding All-Weather Performers in the Australian share market; high quality achievers that don't buckle from the moment someone shouts "headwinds" or "change".

But I am not the only researcher whose focus goes beyond the here and now. Last week I reflected upon research conducted by analysts at Morgan Stanley into "Best Business Models". In the meantime, Bell Potter's head of research, Peter Quinton, has updated his selection of local Champion stocks.

These exercises in analysis are by no means exact copies, but they all share that same ultimate goal: finding stocks that are more reliable, more dependable, and more consistent in performance than the average ASX-listed entity. In particular when the going gets a lot tougher for equities, as it always does eventually, such stocks will increasingly attract investors' attention.

In Peter Quiton's words, "These Champion Stocks all have a long term positive thematic, which should drive superior earnings growth and shareholder value over the coming years, notwithstanding inevitable disruptions in the economic and investment environment as well as some corporate stumbles from time to time.

"Therefore, we are not particularly concerned about the current year’s investment arithmetic or the analyst's twelve month buy-hold-sell rating. And, of course, the balance sheet ratios must remain strong in order to provide financial support to the positive thematic driver."

Only one change was made since the prior update on selected stocks: Link Administration ((LNK)) has been replaced by Netwealth Group ((NWL)).

The list contains nine stocks in total. The other eight are APA Group ((APA)), Transurban Group ((TCL)), Challenger ((CGF)), Lend Lease ((LLC)), Goodman Group ((GMG)), CSL ((CSL)), Sonic Healthcare ((SHL)), and Brambles ((BXB)). Investors should note APA Group is currently under take-over interest.

In the view of Quinton, all nine stocks should be seen as "must haves" for any standard, long term investment portfolio. Paying subscribers (6 and 12 months) have access to a dedicated section on All-Weather Performers on the FNArena website.

Next Week

I will be attending a presentation by institutional investors on Monday, which is likely to impact on my productivity and available time on the day. As a result, Weekly Insights won't be e-mailed out late on Monday, as is the custom, but more likely in the afternoon on Tuesday. Non-paying members who receive the email on Wednesdays should notice no difference.

Rudi Talks

Audio interview from Tuesday on why value investing has become such a hard slog in the Australian share market, and what are the dynamics behind the scenery:

https://www.boardroom.media/broadcast?eid=5b4e878073d9bb0cd6e6be58

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 10am Skype-link to discuss broker calls (earlier than usual)
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-AIA National Conference, Gold Coast QLD, July 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written on Monday 16th and Wednesday 18th July 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on the website on Thursday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

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

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
- Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

(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. - 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.

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.

Is ‘Value’ Investing Now Dead?

In this week's Weekly Insights (published in two parts):

-Is 'Value' Investing Now Dead?
-Conviction Calls
-All-Weather Stocks: Bell Potter
-Rudi Talks
-Rudi On TV
-Rudi On Tour

[Non-highlighted parts will appear in Part Two on Thursday]

Is 'Value' Investing Now Dead?

By Rudi Filapek-Vandyck, Editor FNArena

Most investors in Australia, be it consciously or otherwise, are "value" investors.

If you haven't figured out what type you are, consider the following two propositions:

1. A share price drops by -20%; has your interest been triggered?
2. A share price rallies by 20%; do you now think this horse has bolted, I am looking elsewhere?

If both your answers are affirmative, you are definitely a "value" investor. As such, you are in good company, including Benjamin Graham, Warren Buffett, and a large majority of local investment professionals. Many tomes of academic research suggest value investing leads to superior investment returns over time, but the harsh truth is it does not always work so well.

The past five years have frustrated many value investors, in particular the past eighteen months. Stocks like AMP ((AMP)), G8 Education ((GEM)), Automotive Holdings ((AHG)), Greencross ((GXL)), JB Hi-Fi ((JBH)), Reckon ((RKN)) Primary Health Care ((PRY)), and numerous others also including Telstra ((TLS)) and the major banks seemed to offer excellent "value" throughout the period but apart from temporary rallies here and there, these share prices have mostly not kept up with the broader market, if they didn't end up becoming cheap-er after a while.

Explanations as to why are plenty and varied; from an overdose in passive investment products (such as the popularisation of ETFs) to short term focused strategies simply chasing positive momentum stocks into irrational, bubble-like territory. Surely this global chase for momentum is but a precursor to the next day of reckoning for investors who keep throwing caution in the wind, forgetting everything has both a price and a valuation?

Maybe.

In theory the most important virtue for a typical value investor is patience. Whatever has caused the share price to weaken shall be resolved over time and thus the share price will respond accordingly, pulling higher and providing the patient investor with a handsome reward. But what if corporate life anno 2018 has become a lot more complicated than that? Can investors still assume that whatever made Warren Buffett wealthy and famous still applies, or are we genuinely witnessing the death of value investing in the share market?

For good measure: simply buying a stock because it has fallen in price is always and under all circumstances a high risk proposition. Those who bought shares in Retail Food Group ((RFG)), AMP, and BlueSky Alternative Investments ((BLA)), among many others, have found this out the hard way. These shares have been sold down savagely, but for good reasons, and a lot will have to change before investors can recoup their losses, if ever.

Yet, the risks involved are not always company specific and not always that easily identifiable. For years I heard fund managers talk about how "cheap" shares in accountancy software provider Reckon were, with the share price bobbing along $2, paying out an above average dividend yield, and franked too!

Yet this story has come painfully unstuck as the pressure from much better equipped competitors Xero ((XRO), MYOB ((MYO)) and Sage has proved too much for Reckon. By now, profits are down, dividends have been cut, the share price has more than halved, in particular since a plan to merge operations with MYOB met opposition from the ACCC, and investors are now doubting the longer term survival of the business.

Investors who bought shares in Healthscope ((HSO)) or Gateway Lifestyle ((GTY)) may have been "saved" by the emergence of a corporate suitor, the chances for a similar get out of jail-solution for Reckon seem rather slim.

Taking a broad perspective on things, investors wouldn't be completely out of line if they used the predicament management at Reckon is facing today as a template for the share market overall. Frankly, I am quite surprised about how many market analyses and commentary has been released in months past suggesting a new bubble is building in technology and in growth stocks, worldwide, without any mentioning of what is holding back investors from en masse jumping on board the share market laggards.

In simple terms: the global economy is transforming under the weight of debt, low but rising interest rates, demographics, political populism, social inequality and technological advances, and some companies are ready for the future, benefiting from the many changes that are taking place, and others are not.

Faced with the above proposition, where would you put your money?

This has led to the rather unusual situation whereby stocks that had rallied by 20% simply went on with it and added a lot more as more time went by, whereas investors who jumped on stocks after they'd fallen by -20% have mostly been forced to remain patient or change strategy.

Witness, for example, the numbers I compiled earlier this year for ten of Australia's best performing members of the ASX100 (see overview below). The calculated returns assume share prices had been bought in mid-2012 with a Buy-and-Hold mindset throughout the full five and a half year-plus period. The lowest return, ex-dividends, is the 166% achieved by Carsales ((CAR)).

Bottom line: inequality is not just something that is ripping apart modern day societies; it is alive and well inside corporate Australia and in the share market as well.

One of the prime examples in the Australian share market, included in the table above, is Aristocrat Leisure ((ALL)). Having witnessed the share price rise from below $10 in 2015 to now above $30 by mid-2018, investors could be forgiven to think the next item on the menu will be a serious fall-off-the-cliff experience for shareholders who've fallen in love with the stock.

Yet most analysts covering the stock have put forward a valuation/price target in the mid-$30s, suggesting double digit percentage returns post the incredible gains achieved to date remain justifiable. Analysts at Deutsche Bank have a price target of $41. Admittedly, Aristocrat Leisure does not operate in a vacuum and risks are always present that something, somewhere -unexpected or otherwise- can disturb or interrupt this Australian born success story, but recent indications are this company remains on a roll, and management continues executing well.

Quite remarkably, after all those gains, and with the share price near an all-time high, the forward implied Price-Earnings (PE) ratio on the basis of current market consensus forecasts is still only 22.5x (FY19), with the added benefit from a potentially weaker AUD/USD.

So what is it that makes Aristocrat Leisure so different from, say, Metcash ((MTS)), Telstra, or CommBank ((CBA))?

Management has turned Aristocrat Leisure into the number one pokie machine operator in the world, which is why local competitor Ainsworth Gaming ((AGI)) is doing it so tough, despite seeking refuge under the wings of Austrian gaming technology company Novomatic. See also Ainsworth's share price: same story as what happened to Reckon applies here, including fund managers climbing on board the "cheap" looking valuation.

Most of all, the global market for "one armed bandits", as critics describe the poker machines that over-populate Las Vegas and Australian RSL clubs, is considered a mature market and increasing market share through superior products can only stretch that far, which is no doubt why management has moved Aristocrat Leisure into digital gaming. Post recent acquisitions, here Aristocrat's global market share is still only 2% with this segment growing at fast pace. The company has effectively secured itself a strong growth engine which, if executed correctly, offers loyal shareholders many more years of ongoing strong growth.

This is, in a nutshell, the key difference that separates the Haves from the Not Haves in today's corporate world. It is harsh judgment, but accurate nonetheless. This is not, however, a static proposition. Those who have been caught sleeping at the wheel while the world around them was changing rapidly are today being forced into action, and this process has already started.

Wesfarmers ((WES)) is spinning off Coles with the promise of turning itself yet again into a higher growth vehicle. Already, investors have rewarded the company by pushing the share price outside the range that had been firmly in place for many years. Telstra is cutting its dividend and re-orienting the corporate strategy. Major banks are selling non-core assets. Additional investments in technology will be next. InvoCare ((IVC)) is investing more in the business and has started acquiring smaller players outside the main cities. Ramsay Health Care ((RHC)) just launched an unsolicited bid to acquire Gothenborg-headquartered Capio AB.

These actions should all be seen as attempts by respective management teams to steer their businesses away from the bleak future that lays ahead for the likes of Reckon, Ainsworth Gaming, Retail Food Group, and iSentia ((ISD)). Hopefully the end result will be a lot closer to what Aristocrat Leisure, ResMed ((RMD)) and a2 Milk ((A2M)) to date have achieved, but this is by no means guaranteed.

Understanding these dynamics is today understanding the valuation gap between winners and laggards in the Australian share market, and the differences in respective risk profiles.

Investors who had been accustomed to owning shares in old economy blue chips tend to underestimate how much growth can be achieved from success stories such as CSL ((CSL)), Aristocrat Leisure, and a2 Milk, and for so much longer too. On the other hand, any concerns about investing in stocks trading on a higher PE can be easily dismissed with the observation that lower PEs did not prevent CBA shares to fall from $96 to below $70 not that long ago, or Telstra shares to more than halve in three years time.

Within this context, I note Morningstar analyst Chris Kallos updated his thoughts on CSL last week, deciding the company's breakthrough medicine candidate CSL112 is ready to be included in today's valuation modeling, with the odds in favour of CSL launching the next potential blockbuster addressing recurrent cardiovascular events in the first 90 days following an initial heart attack by 2023. This area is currently not well covered by existing drug therapies and success would grant CSL a significant first mover advantage.

Morningstar has decided fair value for CSL shares is now situated at $200, but success with CSL112 can potentially move the dial to $250. Failure would pull back fair value valuation to $140, all else remaining equal. In addition, favourable currency movements remain a key sensitivity for the shares with every 1c move in the AUD/USD cross translating into a $2 move in the share price.

Of course, shares in online retailer Kogan ((KGN)) just lost -30% in only a few weeks time (management sneakily tried to pump up the share price so it could offload some equity). Blackmores ((BKL)) shares went from $206 to $91, to $171, to now around $145. And shares in Domino's Pizza ((DMP)) have covered everything in between $77 and $39 since August 2015. These are all high PE stocks, as are Ramsay Health Care and InvoCare, no doubt fueling anxiety that shares not purchased at bargain basement level pricing must come crashing down, eventually.

Maybe the real message here is that a society and economy in transition have radically altered the risk profile for companies listed on the stock exchange. For investors the key is to understand that, while not every share price that falls in price becomes automatically a great investment opportunity, not every outperformer today is doomed for failure and punishment next.

The upcoming August reporting season should prove exactly that.

The biggest mistake investors in Australia have made in years past is assuming that value investing equals investing. Full stop. This is a mistake investors in the US are less likely to make, and with good reason.

Rudi Talks

Audio interview from last week about the local share market and high valuation stock outperforming their lesser peers:

https://www.boardroom.media/broadcast?eid=5b4429a484c6a07ee10af84f

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 10am Skype-link to discuss broker calls (earlier than usual)
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-AIA National Conference, Gold Coast QLD, July 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written on Monday 16th and Wednesday 18th July 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on the website on Thursday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

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

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
- Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

(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. - 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.

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.

The Triumph Of Quality

In this week's Weekly Insights (published in two parts):

-The Triumph Of Quality
-Share Market Sweet Spot
-Conviction Calls
-Rudi On TV
-Rudi On Tour

The Triumph Of Quality

By Rudi Filapek-Vandyck, Editor FNArena

By now, most investors would be well aware Australian shares have not kept up with the equities bull market in the US since March 2009; that Australian banks have had a horrible few years during which elevated dividend yields were not enough to compensate for capital erosion; that large cap stocks have noticeably lagged the performance of smaller caps; that value investors have found the going much tougher with investor focus almost solely concentrated on new economy growth stocks, and in energy and mining sectors over the past 18 months.

What is not often mentioned is that investor appetite has equally made a big switch towards higher quality businesses, which is a rather moot point among investors. Everybody likes to think he/she owns the best of breed when it comes to long term holdings. Irrespective, 'quality' is one of those labels that, whilst frequently used, has no strict definition or even commonly agreed upon definition.

For some, Australian banks are 'high quality'. Others use the same term for BHP and for Rio Tinto, at times including Fortescue Metals. I even hear the occasional reference to Telstra and/or TPG Telecom, still, despite years of falling share prices. Management at Mineral Resources is believed to be of 'high quality', but then so is the team at Wesfarmers and they went terribly wrong venturing into the UK.

In my own market analysis, I try to combine generally accepted characteristics of quality, such as a lowly geared balance sheet, sector leading products and services plus a solid track record, with less tangible factors such as industry dynamics and longevity/sustainability of cash, profit growth and margins.

Combining such elements has in the past led me towards global market leaders CSL ((CSL)), ResMed ((RMD)) and Cochlear ((COH)) with the added observation all three share prices have been extremely strong outperformers in years past. But then I also selected Ramsay Health Care ((RHC)) and here loyal shareholders have had a rough experience since 2016.

For a number of years I have been referring to CSL as "probably the highest quality, most successful growth story in Australia". Judging by the share price moving from below $30 to nearly $200 it's probably fair to assume few are today prepared to dispute that statement, but many would be asking the question how much upside is there still left, and should we now not worry more about potential downside?

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Within this context, I observe Lazard fund manager Warryn Robertson recently visited Australia, confiding to the Australian Financial Review his fund currently owns 25 stocks, of which none are listed on the ASX. Lazard includes in its concept of 'quality' the ability to forecast the future with above-average certainty (I consider this characteristic as vital myself) and as such the London-based international funds manager is keeping a keen eye on the three healthcare champion stocks I mentioned earlier, as well as on Ansell ((ANN)).

Lazard doesn't own them, but would like to, at the right price. Instead, companies like Qualcomm, Medtronic, Intel, Oracle, ADP, Unilever and Procter & Gamble currently sit among the 25 stocks held in portfolio.

For Australian investors I think the message here is clear: don't fret about short term risk of a weakening share price. Longer term potential is still very much embedded in these high quality business models. If you are as yet not on board, maybe adopt the same strategy as Lazard: treat weakness as an opportunity with a confident eye into the future.

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Another proponent of investing in high quality companies are the fund managers at Morgan Stanley responsible for the Global Quality fund and the Global Franchise/Brands fund. Even though many of the equities currently held in these funds are trading at a premium to the overall market, the responsible managers don't seem overly worried, instead arguing their investment philosophy about 'quality' includes "resilience".

The latter is seen as a key ingredient for inclusion. Say the managers: companies in portfolio are the ones that keep the lights on, rather than shooting them out. They have been described as get rich slowly schemes. The companies in portfolios are less likely than the market to disappoint significantly on earnings because of their inherent stability.

Nine years into a very strong bull market, and with investor concern likely to increase about interest rates, economic growth and corporate profits, these fund managers believe their funds remain well-protected to the downside because the inherent resilience in the companies owned means less chance for sustained de-ratings on the back of significant disappointment in earnings delivery.

Equity analysts at Morgan Stanley dedicate part of their global research efforts on what they label "Global Best Business Models"; consider this a close nephew of the Champion stocks or the All-Weather concept (whatever label we like to use). Here last week's update by the team of responsible analysts can provide investors in Australia with some valuable insights.

Since December 2016, a selection of 37 "global best business model" equities has generated an equal-weighted total return USD performance of 31.4% between December 2016 and June 30, 2018; well above the MSCI ACWI (widely used as a benchmark for global equities) which "only" generated 23.1% and certainly more than widely used benchmarks such as the Dow Jones Industrial Average, the S&P500 and the S&P/ASX200 in Australia.

The 'Best Business Model' concept tries to distinguish quality from the wannabes in each sector on a global scale. Apart from quality inputs about profits, management and the balance sheet, Morgan Stanley equity analysts also include quant modeling, specific top-down strategies as well as Environmental, Social and Governance (ESG) inputs.

Here the interesting observation is that, according to a study released by the Responsible Investment Association Australasia (RIAA), investment funds implementing core responsible investment strategies (i.e. they incorporate ESG in their portfolio inclusion choices) are outperforming peers both in Australia as well as internationally over most time horizons.

Is this maybe because quality companies led by quality management teams simply score high on governance as well?

Increasingly, professional fund managers are separating quality from lesser quality companies by paying attention to corporate culture. Wall Street legend Paul Tudor-Jones recently explained this as follows: "If you have a motivated workforce that you pay and treat well, you produce a high quality and low-cost product that has some benefit, and you treat your customers throughout with respect, this is a winning formula and these companies are outperforming those that don't."

Now cue the many embarrassing revelations at the Royal Commissions into Banking, Superannuation and Financial Services and into Franchising. Or think about the current situation at Aurizon Holdings where management is operating in open conflict with both regulators and key customers. Should investors be genuinely surprised that Telstra and AMP have lost -70%-80% off their value since the late 1990s?

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Morgan Stanley's selection of Global Best Business Models spans 37 companies, spread over 33 industries across four different regions, but unfortunately, none of the selected companies are listed on the ASX. I think the fact that Australia only represents 2% of equities worldwide probably has a lot to do with this.

Instead, the selection contains companies such as Anheuser-Bush InBev from Belgium, Accenture, Amazon, Boeing and Facebook from the USA, Iberdrola from Spain, LVMH from France, Nestle from Switzerland, Sinopharm Group from China, and TSMC from Taiwan.

Performance for the twelve months to June 30 has been 11.8%, indicating performance overall is slowing, but still good enough to beat the 10.6% achieved by MSCI ACWI. Of equal importance is the observation that 29 of the 36 stocks have performed positively, but seven inclusions thus far are performing negatively. Only twenty of the stocks have outperformed the MSCI ACWI.

Even though Morgan Stanley equity analysts work off a more liberal methodology than myself or the aforementioned fund managers, the underlying basic observation still holds its value for all investors elsewhere: even good companies can at times underperform expectations, the broader market, and their inherent potential.

As a group, higher quality companies are most likely to deliver sustainable rewards for shareholders. Traditionally, their true value starts shining during periods of distress, as also highlighted by the responsible managers for the Morgan Stanley funds, but outperformance has equally occurred for the years past.

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The equity analysts note 17 of the stocks included are rated Overweight by their respective sector analysts (that certainly is "only" 17) with the equally weighted price target upside 17%, +11.7% for the median, with FY18 dividend yield estimated at 2.8%. Some of the best performers seem to have rallied well past intrinsic value (Ferrari) but most are projected to simply add further upside.

Some of the laggards are trading well below Morgan Stanley's price target, such as Brazil's Kroton and Phillip Morris in the USA. Which takes me to two laggards of my own selection of All-Weather Performers here in Australia. One is TechnologyOne ((TNE)) and the second one is Ramsay Health Care ((RHC)).

When I was asked last week to nominate one stock tip for the financial year ahead, I nominated TechnologyOne. My reasoning is that overall sentiment towards the stock has turned too negative, despite the odds remaining in favour of the company continuing to grow at double-digits. Company management even suggested they'll probably be in a position to lift their guidance for annual growth in the not too distant future.

My personal view was backed up on Monday with stockbroker Ord Minnett initiating coverage on four small cap software companies in Australia, and TechnologyOne is the only one starting off with a maiden Buy rating. In line with my own assessment, Ord Minnett sees attractive growth and improving earnings quality. Even on projections that are below company management's long term guidance, Ord Minnett still sees 29% upside from today's share price.

As for Ramsay Health Care, investor sentiment is possibly even worse, which makes Monday's update by CLSA even the more remarkable. Having taken another view into industry dynamics and projections, CLSA remains of the view (with conviction) that today's share price looks way too low on a longer term horizon.

On the stockbroker's observation, public hospitals are not investing in beds, and thus waiting lists will continue to build. This will redirect patients into private hospitals.

Among private hospitals, Ramsay seems to be the only one who is still investing in expansion. Ramsay is planning 13 new operating theatres in 2019 and historically there is a well-established relationship with subsequent EBIT growth one year later. CLSA does not see operating theatres becoming less profitable in Australia.

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As for the FNArena/Vested Equities All-Weather Model Portfolio, total return for the financial year ending on June 30th ex-costs has been 16.59% whereas the ASX200 accumulation index stopped at +13%. The portfolio performance overall was weighed down somewhat by the fact we increased cash levels in anticipation of the risk off environment that, ironically, has actually benefited the Australian share market thus far.

The latter shows up through the fact the Model Portfolio added 1.72% in June, while the index added no less than 3.27%, most of it in the final two weeks of the month. Window dressing by funds managers and profit taking by investors further widened the gap towards the end of the financial year.

Without wanting to sound alarmist, but we think investors should adjust their expectations for the year ahead downwards. If tougher times do announce themselves, we remain as confident as the experts cited earlier that the quality and the resilience of the stocks held in the portfolio will continue to serve their shareholders' best interest, which shall also be reflected in the All-Weather Model Portfolio's performance.

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11am Skype-link to discuss broker calls
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written on Monday 9th and Wednesday 11th July 2018. Part One was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. Part Two shall be published on the website on Thursday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's - see disclaimer on the website.

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

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
- Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

(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. - 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.

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.

Aussie Equities: Where Is True Value?

In this week's Weekly Insights:

-Aussie Equities: Where Is True Value?
-No Weekly Insights Next Week
-Rudi Talks
-Rudi On TV
-Rudi On Tour
-At The AIA Conference

Aussie Equities: Where Is True Value?

By Rudi Filapek-Vandyck, Editor FNArena

And after all that was said and done, the Australian share market entered the final month of financial year 2018 with a total gain (incl dividends) of less than 1% for the first five months of calendar 2018.

Most investors, I have little doubt, would prefer a larger bonus given the risks, the headaches, the uncertainties, and the volatility that has kept the world on edge since global equities (seemingly) peaked in late January.

As illustrated by the excellent graph below from Blue Ocean Equities' strategist Mathan Somasundaram, this year's sideways moving pattern is far from the first "correction" period since this global bull market was born in early March 2009.

The prior time Australian equities went sideways for an excruciating number of months occurred last year, and that period doesn't even feature in the graph below because US equities simply soldiered on.

As is the custom in financial markets, the longer these sideways patterns persist, the more doubt creeps into our collective mindset. Could it be that we are witnessing the final chapter before this raging bull gets kneecapped and experiences a face plant?

On my observation, the number of expert calls for more caution and predictions of potential heavy weather ahead is much larger this year than all of last year. At face value, this makes a lot of sense given the Federal Reserve is now a couple of rate hikes further in its normalisation process, while the shine has come off the global synchronised growth story, plus the global bull market for equities is yet another year older.

There is plenty to worry about ranging from pending inflation in the USA, structural problems inside the eurozone, rising bond yields, and the darker side of the Trump presidency, including growing opposition to the US slapping trade tariffs on selected imports. That list is by no means complete.

Locally, Australians are now facing the prospect of weakening house prices, amidst an ongoing squeeze on household budgets, with average wage increases near all-time lows, while Royal Commissions into franchises and the finance sector continue to unwrap corporate scandal after scandal. Meanwhile, the digital disruption and transformation of yesteryear's economies goes on unabated.

The direct result of all of the above is a share market that has rarely looked as polarised as it is today. Most investors are well aware of the sharp dichotomy between the "Haves" and the "Have Nots" in the share market, but they also have found it difficult to obtain full benefit from it.

This is because Australian investors, be they seasoned fund managers or self-managing SMSF operators, are in large majority "value" investors. They buy low and assume this will guarantee them positive outperformance in the long run. But it's not just Vocus Communications, iSentia and Telstra that have inflicted a lot of damage to investment portfolios, it's the popular top end of town, sometimes referred to as "blue chips", that has kept a lid on the performance of many a value-centric investment strategy.

Consider, for example, that while the broader Australian share market has failed to keep up with international peers in years past, the ASX200 Accumulation Index still returned 7%+ per annum on average over the past 5.5 years. The ASX Top20, however, has only managed some 6% p.a. over the past five years, and no more than 3% p.a. all-in over the past three years.

Now consider the fact that CSL ((CSL)), whose share price has more than doubled since a temporary dip in December 2016, is also included in the ASX20, as are BHP, Rio Tinto and Woodside Petroleum - all part of the resources sector which, as a group, rallied some 150% since the low point in early 2016. These numbers highlight how tough life has been for investors whose strategies do not include cyclical resources and/or high growth companies.

Experts like to point towards global synchronised growth as to why miners and energy producers have regained positive momentum over the past two years, but equally important have been greener policies in China, and elsewhere, infrastructure bottlenecks in the US and a sharp reduction in sector capex overall. Most importantly, these sectors are widely considered "late cycle", implying today's outperformance shall be followed by a much less conducive environment at some stage. Also, prior to early 2016 investors in the sector had to endure five long years of sheer misery.

Nobody likes to highlight it, but value investing has generated more disappointments than successes post 2013. This because the reasons as to why share prices weakened were of a longer lasting, if not permanent nature. Think increased competition. Downward pressure on consumer spending alongside changing spending patterns. Increased government intervention and regulatory scrutiny. We can now also add softer dynamics for house prices.

Buying into cheap looking stocks assumes that whatever is depressing the share price today is of temporary, non-structural origin and shall disappear over time, allowing the share price to resume a firm, sustainable up-trend.

Instead, many an Australian household name has been found unprepared for present day challenges, either because of boardroom and C-suite hubris, or because of structural underinvestment to retain a juicy dividend for shareholders, or because of both.

Such has been the painful truth uncovered at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, but the same machinations have become apparent elsewhere.

Investors need not look any further than Telstra, reportedly the most widely owned stock outside the banks among Australian investors. Its share price more than halved since February 2015 and that 22c dividend looks equally unsustainable as the dry weather in inner Sydney last month.

As for the banks, it seems likely, if not probable, that on a five year horizon today's share prices are offering cheap entry points for patient investors, but with weakening house prices, all-time high household indebtedness, the uncertain consequences from the Royal Commission, plus a potential credit crunch looming, it also remains possible, if not probable, share prices will fall deeper within the next 1-2 years.

That's the real challenge for investors today: identifying which risks are the least dangerous to take on board. Is it the cheap looking stock that is facing structural change and the ongoing potential for more bad news; or is it the glamorous "Winner Takes All"-Champion stock that is being managed by top notch, experienced management but whose share price by now is priced accordingly?

The answer, I believe, lays not necessarily with the individual companies but probably more so with the general corporate climate investors should expect for the remainder of 2018 and the 1-2 years that follow next.

If we do see the Australian economy suffer under too much debt, too little wage increases, banks rationing credit and slowing economic growth internationally, then I don't see a fertile environment for institutional investors to start throwing overboard their investments in high quality, solid growth stalwarts such as CSL, Macquarie Group ((MQG)), Aristocrat Leisure ((ALL)), and others.

If, on the other hand, a more positive scenario were to unfold, one that sees the operational environment for large swathes of today's share market laggards improve much quicker and much more decisively than is currently anticipated, then the risk rises for a repeat experience of the second half of calendar 2016 when money rapidly flowed out of the strong (and defensive) performers at that time and into share market laggards which at that time where cyclical resources and financials, including the banks.

Contrary to general commentary elsewhere (mostly expressed by value-oriented, highly frustrated experts and investors) I do not see a "bubble" in growth stocks. Instead, I believe many of such warnings are based upon one-sided, biased and incomplete analyses.

Most of the strong gains achieved by CSL, Macquarie, Aristocrat & Co over the year past have been underpinned by equally large jumps in corporate profits. But this remains only part of their success story. The failure of AMP, Telstra, the banks, and the likes to offer a positive alternative has equally played an important role.

Herein lies the fundamental dilemma for share market investors as we approach the middle of 2018: are you sticking with what has worked thus far or are you positioning for a decisive break in the trends that have defined performance in the Australian share market over the past five years?

Yes, indeed, it doesn't have to be 100% black and white, and there certainly is room to hedge one's outlook, but when it comes to carrying an overweight bias, I suggest investors do more of what has worked, and less of what hasn't.

All-Weather Model Portfolio

Certainly remarkable in a broader context wherein many calls have been made about an unsustainable bubble in growth stocks, but the FNArena Vested Equities Model Portfolio achieved one of its best monthly performances in May, adding 2.15% between the 1st and the 31st of the month.

The S&P/ASX200 Accumulation Index gained 1.09% over the period. The ASX20 all-in performance was 1.17% during a period when most banks and out-of-season reporters paid out half-yearly dividends, for an 11-month financial year to date total performance of 7.02%. Comparable performance for the ASX200 Accumulation Index is 9.44% and for the All-Weather Portfolio it is 14.62%.

As we have been anticipating a more challenging environment, the portfolio has been increasing cash, which in the short term means we have been sacrificing some upside from the portfolio's performance, in order not to get caught out later on.

No Weekly Insights Next Week

Next week starts with a public holiday on Monday (June 11) and, for me, an interstate flight ahead of presentations to investors and members of the Australian Shareholders Association (ASA) on the Gold Coast and in Brisbane on Tuesday and Wednesday. I will also participate in an online seminar for ASA members on the Thursday.

Hence there won't be a Weekly Insights next week. Next edition shall be written and published on Monday, 18th June 2018.

Rudi Talks

Audio interview about falling share prices and when do we, investors, get rid of disappointing underperformers in portfolio:

http://boardroom.media/broadcast/?eid=5b0cc86f7a67720d3fe99acb

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, from midday until 2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-Presentations to ASA members and guests Gold Coast and Brisbane (2x), on 12 & 13 June
-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-ASA Presentation Canberra, 3 August
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

At the AIA Conference

As stated in the overview above, I will be presenting at the AIA National Annual Conference at the Marriott Resort and Spa Surfers Paradise, from 29th July til 1st August 2018.

This year's theme is SYNCHRONICITY, Identifying opportunities in a world growing in sync…

For the first time in over a decade, the world’s major economies are growing in sync.

What does a world that is structurally awash in capital look like?

What will it mean for investors?

http://www.investors.asn.au/events/aia-national-investors-conference/

(This story was written on Monday 4th June 2018 and published on the day in the form of an email to paying subscribers at FNArena, 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: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

- The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
- Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
- Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
- Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
- Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $420 (incl GST) for twelve months or $235 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

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.

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.

Rudi’s View: Quality Is Not In A Bubble

In this week's Weekly Insights (this is Part Two):

-Quality Is Not In A Bubble
-Conviction Calls
-Middle Class Poverty? Blame The Banks
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appeared in part one on the website on Wednesday]

Quality Is Not In A Bubble

By Rudi Filapek-Vandyck, Editor FNArena

What if I told you you have the chance to buy into an investment that generates on average a return of circa 25% per annum, significantly above the market in Australia, while also high returning during periods of share market turmoil; say high single digit when European banks and Greece are in trouble (2011-mid-2012) and mid-teen percentage return between May 2015 and March 2016 when very little seemed to work in equity markets worldwide?

Even back in 2008-2009, when the world came to a dangerous stand still and equities lost half, or more, of their value, there was no loss for shareholders.

You'd probably smile and say "Thank You, I'll take it. What's the catch?"

That is, if you believe me. (Trust me, you can).

Now what if I offered you an alternative, say, an investment that, at best, tracks the index in Australia and that sinks like a stone, along with the broader market, every time uncertainty and turmoil hits? Average return over the past four-five years: not much, mostly paid out in dividends, which compensates for the slight erosion in capital. Would you be equally enthusiastic?

Now you say: No, why would I? (Am I stupid, or what?)

But you see, here is where things get interesting. Because, in real life, you are most likely to choose option number two.

Because option number one is CSL ((CSL)), trading at a significant premium towards most other ASX-listed shares, and most professional investors, commentators and other kinds of share market experts won't stop warning we should all be careful about buying stocks that trade at a premium. We might lose a lot of money.

These warnings are nothing new since CSL's premium has been around for more than two decades, but as everyone can see on a simple price chart going back far, far into the past, these constant warnings are in sharp contrast to what actually transpires in real life, and that is that CSL's share price very rarely pulls back significantly, and every time it does it recovers and then moves onwards to a new high.

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The error most people make is to put all stocks in one basket and then try to distinguish on price. A low Price-Earnings (PE) multiple is "good", because you'd want to purchase at a low price. A high PE multiple thus is "bad" because the asset in case has now become "expensive".

This approach is in contrast to standard practice in just about every other sector that exists in the modern day economy. Does a Lamborghini cost the same as a Skoda? Is a Gucci dress more expensive than clothes bought at Target? Why do Ronaldo and Messi cost so much more than Tim Cahill? You can have a cheap holiday in Bali but you cannot replicate that on Capri.

The reason why stocks like CSL trade on a premium is because, simply put, they are of a higher quality. And the difference in quality shows up through much greater, sustainable rewards for shareholders in the long run.

This, by the way, has always been the case. But amid the hectic news reporting on day to day events and the smorgasbord of conflicting predictions for financial markets, this is not something that easily attracts a lot of attention (if any). However, as far as the past five years are concerned, the outperformance of "quality" over every other segment in the local share market has been brutal, as shown in the graph below from stockbroker Morgans.

What Morgans' analysis shows is that consistent high growth achievers have outperformed the ASX200 by 13% per annum since April 2013. All the while, investors rummaging around in "cheap" looking stocks are likely licking their wounds today, while those in the middle where growth is not more than average, with stocks trading on average PE multiples, those stocks have generated rather mediocre investment returns, as did the index.

Wait a minute, I hear you thinking, there have been plenty of examples of High PE stocks that have come crashing back to earth, try Domino's Pizza ((DMP)), for example, and Blackmores ((BKL)). True, but the same can be said about stocks trading on much lower multiples. Shareholders in AMP ((AMP)) just lost one quarter in only a few weeks time. Telstra ((TLS)) shares have more than halved since February 2015. Not to mention what happened to the stoic and faithful in IPH ltd ((IPH)), iSentia ((ISD)), Retail Food Group ((RFG)), Myer ((MYR)), or Village Roadshow ((VRL)), to name but a handful out of an excruciatingly long list.

The conclusion here is not that High PE stocks represent higher risk (which is incorrect - see Morgans' research), rather it is that not every High PE stock is equal. Just like some stocks that fall in price can prove an unexpected bargain, while others are a value trap and nothing less.

****

So how does one distinguish a High Quality stock that deserves to trade at a premium from others that won't be able to sustain it?

Years of research into this matter have taught me that non-cyclicality plays a major role. A true Aristocrat, or Champion Stock, or All-Weather Performer, whatever name we choose for these companies of exceptional qualities, operates above the vagaries of the typical economic cycle. They are the best in their field, which often acts as a moat around their operations and market share. They also have great management running the company with the added notion it is much easier to successfully run a great business than it is a not so great one.

In the words of Warren Buffett: It is smart to invest in a good company, one that, say, your idiot nephew could run. Because if you have a really good business, it doesn't make a difference.

Great businesses run by quality management display consistency, as well as dependability. You won't see CSL issuing a statement that next year's profits might be -30% below previous guidance. They might have debt on the balance sheet, but never in excessive quantities. You want to see consistency and dependability in action? Open a spreadsheet with CSL's annual sales, profits, margins and dividends over the past two decades.

One key characteristic that is often overlooked is these businesses continue to invest for the future. It is no coincidence CSL is one of the most generous spenders on R&D in the Australian share market. Investments effectively keep the business weather-proof through new product development, new markets, improved practices, higher efficiency, new applications, share buybacks, and the occasional acquisition.

Irrespective, after nearly three decades of strong growth, CSL might find the going a tad tougher if only because it has grown so much in size. In fact, this is one reason as to why some critics are warning there is a Bubble in Quality, with a strong suggestion share prices for companies including CSL are about to repeat the boom-bust experience of Bitcoin and other virtual coins.

Their argument is based upon two observations: firstly, the premium that quality growth stocks are trading at versus the rest of the market has never been this large, plus premium valuations today are also well above long term averages for the individual companies involved. Secondly; growth in many cases, including for CSL, has slowed down a notch which sits at odds with an even higher valuation premium.

What is missing in these Bubble Must Burst predictions is these premium valuations are not simply a multiple of next year's profit per share; there is an unquantifiable part that relates to the consistency in delivery and to the high degree of trust investors can place onto management's guidance, targets, and execution.

Equally important, while absolute growth might be slower today, on a sustainable basis, it is not that difficult to make the argument that on a relative comparison, companies like CSL today actually stand out even more from the pack because an increasing number of lesser quality peers finds consistent growth even harder to achieve than, say, five years ago.

Such is the contemporary environment for many an Australian company in which regulatory scrutiny, tight household budgets, rising bond yields, higher energy prices, a peak in the housing cycle, digital disruption and slowing economic momentum outside the USA are creating more headwinds and operational challenges than otherwise might have been the case.

Investors need not look any further than the latest company reports with all major banks bar Westpac ((WBC)) underwhelming on already reduced expectations (all consensus price targets have fallen post financial results releases), and with share prices facing selling pressure post trading updates and financial results releases from Orica ((ORI)), Incitec Pivot ((IPL)), Nufarm ((NUF)), Eclipx ((ECX)), iSelect ((ISU)), Greencross ((GXL)), Australian Pharmaceutical Industries ((API)), Perpetual ((PPT)), Fleetwood ((FWD)), Village Roadshow ((VRL)), Catapult Group ((CAT)), Gateway Lifestyle ((GTY)), and others.

Management at JB Hi-Fi ((JBH)) recently tried to bury their profit warning for the running year inside a presentation to institutional investors (for which it was suitably embarrassed by the stock exchange). Similar to trying to get away with bad news via releasing it after the market's close on a Friday, this too is something you won't see happening from a true quality company. The same goes for accounting shenanigans (no room for "aggressive accounting").

Incidentally, the one result that proved truly awe-inspiring so far this month came from Macquarie Group ((MQG)) which, you probably guessed it, is also a member of the High Quality few enjoying a premium valuation.

****

There is one danger though, and that is that true Champions like CSL and Macquarie stand out too much for too long, which in share market terms means too many participants jump on board while the times are good and momentum is positive. Few ever doubt the quality and merits of an investment when the price is trending upwards.

During a presentation to investors two years ago, I was asked how long before stocks like CSL might fall out of favour? My answer was this is not a matter of time, but of circumstances. Everything needs context. It seems like a distant memory today, but CSL's share price did not perform between 2009 and mid-2012. Apart from some minor company specific issues, and the headwind from a rampant Aussie dollar, those were the years investors focused on the global recovery post the Grand Recession of 2008-2009. Having plenty of choice among beaten down share prices, and with profits surging after heavy falls, there was no need to value consistency, reliability, quality, sustainability or even growth in itself.

Who needs quality when one can make 40% return from beaten down cyclicals?

Another time of heavy investor selling happened in the second half of 2016. Financial markets started pricing out emergency low bond yields, and every fund manager in the country sat overweight defensive growth and Champion stocks. The portfolio switching proved violent and swift, with every stock on a High PE sold down in exchange for "value" among banks and resources stocks.

It didn't last long.

Champion stocks have rallied to new highs and their relative premium versus low growth strugglers (let's call them for what they are) is again near an all-time high. At least, that was the case after the February reporting season during which many a High PE, High Growth company delivered more evidence of why their stock deserved to trade at a significant market premium.

Next came general market weakness during which those stocks on premium valuations displayed better resilience. Oops. That meant the relative premium was now even larger!

The correction since is taking place through relatively stronger performances from energy stocks, miners and various other laggards since the beginning of April. Tellingly, there has been no en masse abandoning of Premium High Quality Growth Stocks, despite higher bond yields in the US and "experts" warning about The Next Bubble.

It is possible this relative underperformance versus cheaper "value" has further to run, as I suspect funds managers have again found themselves with too high levels of cash and not enough risk to warrant a sell-off in markets. I very much doubt, however, we are going to see a repeat of late 2016 anytime soon.

Beyond the short term, I remain of the view High Quality, High Growth will continue to deliver, and continue to perform. Because such is the general corporate and economic context.

****

The FNArena-Vested Equities All-Weather Model Portfolio invests in accordance with the principles outlined above, and in-line with my ongoing research into All-Weather Performers in the Australian share market. Paying subscribers at FNArena have access to my past publications (including eBooks), updates and writings, as well as a dedicated section on the website.

The Portfolio's performance couldn't keep up with the broader market's 3.9% surge in April, but then there were no negative performances in the three preceding months. For the financial year to date, the performance as at April 30th, is 12.21% (10 months). If we go back to April 30 last year, the performance has been 15% (12 months). For the first four months of the calendar year, the return stands at 2.84%.

All these numbers are (well) above the performance of the ASX200 Accumulation index which at the end of April was still slightly negative year-to-date (-0.11%), with the twelve months total return not reaching beyond 5.46%. The market's return for the financial year ending June 30th thus far is 8.26%. Many a balanced fund in Australia has found it hard to beat the index over the longer periods, or even over the past five years. Why do you think this has been the case?

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, noon-2pm
-Friday, 11am, Skype-link to discuss broker calls

Rudi On Tour

-Presentations to ASA members and guests Gold Coast and Brisbane (2x), on 12 & 13 June
-ATAA members presentation Newcastle, 14 July
-AIA National Conference, Gold Coast QLD, June 29-August 1
-Presentation to ASA members and guests Wollongong, on September 11
-Presentation to AIA members and guests Chatswood, on October 10

(This story was written in two parts on Monday 7th May and on Wednesday 9th May respectively. The first part was published on the Monday in the form of an email to paying subscribers at FNArena, and again on Wednesday as a story on the website. This is Part Two).

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.

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.

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Tag Archives: All-Weather Stock

Rudi’s View: All-Weather Portfolio Considerations

Rudi’s View: Macquarie, Aristocrat Leisure And Emeco

Out With The Garbage

Rudi’s View: All-Weather Model Portfolio

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Rudi’s View: Telstra, BHP And Netwealth

Is ‘Value’ Investing Now Dead?

The Triumph Of Quality

Aussie Equities: Where Is True Value?

Rudi’s View: Quality Is Not In A Bubble