Good afternoon,

ASX200 added 59 basis points over the last week, currently trading up 13 points on Friday’sclose at 5844.   Resources & Energy stocks led the gains this week whilst Defensives, after a period of strong performance, were the laggards.

Social Media

As I mentioned last week, we’ve had a big increase in subscribers with the list audience growing by >10% in the last 2 weeks.  I’d encourage you all to get on over to our Facebook, Instagram, LinkedIn, YouTube pages and give Seneca a follow (links below).  There’s a lot more content/value add we have coming up in the next few months.

Late Cycle Bull Market

The market is exhibiting what I’d consider pretty typical, late cycle bull market characteristics.  Don’t get it twisted, that doesn’t mean the market is going to crash soon, it’s a phase that can go on for a couple of years and offer some of the best returns.

We have seen heightened volatility (with measures of 16%+ for the first time in months, currently 12.97% chart below), increasing merger & acquisition activity, slowing earnings revisions and rising employment/inflation (though this has yet to translate into rising wages and subsequently, rising interest rates…yet).

Meanwhile, valuations are not stretched. ASX200 excluding resources is trading on 15x 12 month forward earnings and 1.92x book value, in line with 5 year averages (chart below). Looking back over 10 years, these numbers look c.5% above average.
Though for context, these companies have grown at around 3.5% nominal per annum over the last 10 years and are currently forecast to grow at 5% over the next 12 months, so that ‘above average’ valuation could probably be justified (chart below).
Further, analyst forecasts are actually getting better (in aggregate).  I think with the increase the proliferation of data services, better automation and democratization of financial markets and a period of low volatility in earnings, we’ve seen standard error decline.

Analysts’ forecasts have historically underestimated earnings power of non-resources companies.  As the below chart shows, today’s 12 month  forward forecast has historically been only 88% of the actual result in 12 months time (for those playing at home, I’m taking a historical forecast and dividing by today’s result for the 12 months that have already passed).

All I’m trying to say I suppose is that analysts are inherently conservative in aggregate and their real inaccuracies come when forecasting resources company earnings or ‘black swan’ events like the GFC (where they over-estimated earnings for this same cohort by 30%!)

The Data Exchange Network (DXN)

I was in Sydney at the Australian Stock Exchange last week for the first trading in Seneca’s maiden initial public offering, The Data Exchange Network (DXN).  There’s a few photos of our morning below, first up CEO Peter Christie & I ringing the bell, co-lead manager Cameron Low from Cadmon and I with the plaque and then the management team and key financiers and advisers in front of the boards.

Most importantly, share price is at 24c today after reaching highs of 29c on day one.  Really pleased for the company and shareholders and I am looking forward to their first company update.

Sydney & House Prices

After finishing up with DXN, I headed over to the Citigroup building to attend Development Ready’s invite-only panel discussion and networking drinks with some of the biggest and brightest property developers in Sydney.  It was a very interesting discussion and Q&A session with a clear focus on navigating the slowing property market in Sydney.  There was certainly a feeling in both the discussion and my conversations with developers after of “not chasing new projects” and “being selective” whilst it was also clear that many developers are struggling with feasibility as the banks tighten their lending requirements resulting in the emergence of non-bank financiers.  The consensus in the room was that whilst Sydney might see slow or negative growth in the near future, the quality developers will find niche markets and opportunities to cater to the changing demographic and socioeconomic needs of the city/state/nation.

Left to Right:  Luke Laretive (Seneca Financial Solutions), Nick Materia, Will Pickering (Development Ready Founders), Andrew Antonas (MD, Matrix Property Group) and TC Bakhour (Development Ready Executive)
Interesting chart below I saw today from Morgan Stanley, showing Sydney with slowest growth (negative) in the nation.
Stock prices

Infigen Energy (IFN) got a much needed line of financing whilst more macroeconomic trends dragged up most of the green stocks this week.  Outdoor media stocks continue to do well (we mentioned our liking for Ooh! Media (OML) last week) with peer APN Outdoor (APO) adding 6%. 

Blue Sky Alternatives (BLA) continues to fall, down a further 20% today after management provided significant transparency into previous valuations and subsequent exits, which is commendable.  However, they also reduced net profit guidance by 30% and fee earning AUM guidance from $4.25-4.75bn to $4-4.25bn, citing:

“The revision to fee earning AUM and underlying NPAT guidance is based on the expectation the company will now be constrained from completing new investments outside of unallocated institutional mandates.”

What’s in the mix

As a reward for reading this far, I thought I’d throw in a few names for your consideration.  I’ll do 2 income stocks, 2 growth stocks and 2 speculative/high risk/high growth potential stocks.  If you want to discuss your personal circumstances, feel free to drop me a line/call.

Income stocks

You can’t go past the value in some of the fund managers right now in my humble opinion.Magellan (MFG) is the best of the bunch trading on 5.7% yield at $22-ish.   Woodside (WPL)is also a favourite of mine and well worth the $30 per share.  You’ll pickup 5.85% per annum, growing every year and the oil & gas infrastructure that’s the envy of every single one of their competitors.  For the more adventurous, CSR Ltd (CSR) on a 4.8% yield + maybe some franking credits (maybe) with decent exposure to building and infrastructure spend and an improving balance sheet.

Growth Stocks
Integral Diagnostics (IDX) 
around $2.30 is decent value for it’s growth profile as is Aveo Group (AOG) which whilst not a ‘growth’ stock has the ability to increase by 20%+ on re-rating.

High Risk/High Growth
Gage Roads Brewing (GRB) at 7.5c is a steal.
  That”ll get bought out one day, I’d say around the 15-20c mark depending on how they are travelling.  The east coast roll out has begun.  It’s now being served in “Heartbreaker” here in Melbourne, I had a pint at Woodlands Golf Courselast week and it’s at my favourite Saturday morning coffee shop “Napier Quarter” in Fitzroy.  Follow Gage Roads Vic on Instagram, you’ll work it out pretty quick.  They recently hired the head of marketing from Little Creatures.  Remember them, Little World Breweries… LWB…. it WAS an ASX listed company.

And I mean how can you go past The Data Exchange Network (DXN) at 25c.  I’ve said it a few times now, but you all can hold me to it.  I think this will be a $100m company by Christmas (2x current share price) and has the potential to be a $250m company over the next 3 years.  I’m open to taking bets so feel free to put your best bottle of wine or a lunch at a restaurant of my choosing on the line if you think differently!

And on that smug note…

Have a good week,

* The information contained in this email is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.