Good afternoon,

ASX 200 up 1.80% for the past week and pretty flat today, 5923 points as I type this (post note: closed up 19.5pts, 5941). Property stocks did well last week along, Charter Hall (CHC) and Goodman Group (GMG) both reported Assets Under Management (AUM) ahead of expectations, which I suspect buoyed the sector.

As per below chart, it seems investors have been happy to buy the property stocks on anything over 5.50% yield. Interestingly, we’ve been taking profits earlier and earlier on property stocks, probably reflecting investors lack of conviction given the market outlook here in Australia and the interest rate outlook around the world. The green line shows the sell level has gone from under 5% to more like 5.2% today. I’d expect yields to blow out past 5.6% after the dividends are paid in December.

Despite being in what is clearly a bear market for residential property in Australia, the REIT sector is showing little signs of distress, with red flags from more macroeconomic indicators hard to find as rising land values and rental growth (particularly in office) seemingly offsetting the impact from rising bond yields (the primary threat).


In terms of stocks more broadly, I’m weary of taking too much exposure to a consumer that lacks confidence…

Or the capacity to increase their spending, given savings rates are near-zero.

This is why fund managers have been tilting their consumer exposure to be more staples focused…Discretionary VS Staples below… mind the gap!

So what’s cheap in the sector? Woolies (WOW) and Wesfarmers (WES) have both caught upgrades of late and are busy on the corporate front, with WES divesting Coles and WOW selling off the petrol division.

I like Costa (CGC) closer at $6.00-ish after it’s 22% decline over the past 3 months. On 22x earnings, with 10% sales growth and c. 25% growth in EBIT, I can see returns accelerating from here, 15x EV/EBIT is about as cheap as it’s been since listing. Recently Pendal (the old BT) and Bennelong both increased their positions.

So what’s cheap in the sector? Woolies (WOW) and Wesfarmers (WES) have both caught upgrades of late and are busy on the corporate front, with WES divesting Coles and WOW selling off the petrol division.

I like Costa (CGC) closer at $6.00-ish after it’s 22% decline over the past 3 months. On 22x earnings, with 10% sales growth and c. 25% growth in EBIT, I can see returns accelerating from here, 15x EV/EBIT is about as cheap as it’s been since listing. Recently Pendal (the old BT) and Bennelong both increased their positions.

Elsewhere, the most upgraded stocks (positive net revisions by quantum) over the past month are (grouped together for relevance), bold has my particular interest.

  • Orica (ORI) & Incitec (IPL)
  • ANZ & NAB
  • Macquarie (MQG)
  • Travel: WEB, CTD
  • Emeco (EHL), ALS (ALQ)
  • Media: SXL, SWM
  • Resources: OZL, RRL, SAR, FMG, WHC, BPT, SYR
  • Other: CWY, SGM, SCP, AST, NHL, API

Movers & Shakers

G8 Education (GEM) caught some love from Canaccord, with a price target increase from $2.40 to $2.90. Didn’t read the report but reckon there will be no change to earnings… smells like a cap-raise to me.

ECX and MMS are merging, which makes a lot of sense. Not across it but the first thing that comes to mind is ACCC.

Healthscope (HSO) caught another bid.
Elders (ELD) up on a decent result
Syrah (SYR) up on its first sales deal
REA up on results
CTD bounced back a bit after recent short attack from VGI Partners
GWA Group catching a bid – someone is accumulating I reckon. Price action is interesting to watch.
NextDC (NXT) up on sales (sold 5MW of capacity since 30 June at new Sydney facility… DXN shareholders probably will understand the relevance of this.)

Lend Lease (LLC) down dramatically on $350m write down as a result of under performance in Engineering & Services Business. Most in the market seem to have taken this news as if it will be the first of many property market-related earnings hits for LLC.

APA Group (APA) had their takeover bid squashed by the FIRB.
AMP is still a dog with every variety of flea imaginable.
James Hardie (JHX) disappointed on earnings.

Have a good week,
LL