Good afternoon,

Short week last week and Victoria & I have resolved to pay more attention to the ASX calendar and take advantage of future public holidays instead of turning up to the office! ASX was pretty much flat Tuesday, down Wednesday and Thursday before a bumper night in Europe drove up markets on Friday. This morning the ASX200 is up 12 points to 6104, which is 0.95% higher on last week.

“Investing is simple, but not easy.” – Warren Buffet

The concept of a ‘recommendation’ and ‘price target’ in broker research really does bug me. From what I’ve learnt so far, investing is nuanced. Not binary. It’s not buy and sell. It’s buy, at a price, in a set of circumstances, at a time, to meet a need. The nuance is what I love about it. It’s what makes it fun and challenging and stressful and rewarding.

But when you are selling to the masses and catering to the crowd, nuance is very, very difficult. The crowd is inpatient and has a very short attention span. They want to be spoon-fed the answer and quickly.

Rather than read 6 pages of argument, critically consider what parts are more/less biased, what insight is really being shared and how that might affect the investment in questions, the crowd rewards those who provide a colour-coded box in the top right hand corner of the paper, a shortcut to ‘the conclusion’ of the argument. The shortcut.

This is akin to reading a 1 paragraph summary of “To Kill A Mockingbird” and then proceeding to bet Martin Luther King your life savings that you have a greater understanding of the Civil Rights Movement. (side note: for many years as a kid I thought the title of this book was “Tequila Mockingbird”…)

Anyone who’s tried to value something knows that valuations are very subjective beasts, even when one is trying to be as objective as possible.

Anyone who’s tried to write objectively, on any topic, knows how hard it is to remove bias. So hard in fact, that when you remove bias, you often indirectly create another, accidental bias. (This note, for example, is biased….)

It’s not that worthwhile shortcuts don’t exist, it’s that they are difficult to identify, hard to follow and require courage and conviction to see through to the end, where the benefits are.

I suppose what I’m trying to say is… IF all you needed to know to make money was if a particular analyst/commentator/person thinks a stock a buy or a sell… IF all you needed to be able to do was look at a price chart and draw a trend line or identify stocks at 5 year lows or read the dividend yield & PE off Commsec… IF all you needed was to attend a $5,000 course or read Warren Buffet’s letters to shareholders or read “The Intelligent Investor” or follow one famous investor on Twitter or some other over simplified rule of thumb…. don’t you think someone would already be doing it? And that someone would be the wealthiest person on earth? It’s not that easy.

How do you solve this puzzle? How do you invest successfully? I don’t know for sure.

I’m going to guess it’s the same way people solve every other problem or challenge.

  • Work hard, work often.
  • Learn from those who came before you, learn from those who are beating you, learn from your own mistakes, learn from the mistakes of others, learn from the experts, learn from the novices.
  • Pay attention, do the right thing, try and test your theories and, and, and
  • Do all this, every day, for a very long time.
  • Understanding that you might do all this and not have what it takes in your DNA to cut it. Natural talent is always a variable (Lebron James is not the best basketball player in the world because he’s 6’8, but he wouldn’t he be the best basketball player in the world if he was 5’7).

I’m working really hard at solving this puzzle of investing. I’ve been working on it since I was 18 (I’m 32 in August) and I’m working as efficiently as I can. I’m building a team of people who are just as focused (and probably more talented if I’m honest!) on solving the puzzle for as many people as we can.

If someone tells you they have the final answer, I’ve done enough work to tell you that they don’t. I’d argue there is no answer. Only better questions, more challenging parts to the puzzle and more great conversations to have with interesting people. Question those who tell you they have the answer, question the colour-coded box. Not sure what questions to ask? Come see me. That’s what I do.


Banks (cont)

Interesting this week that Credit Suisse upgraded Bank of Queensland (BOQ) to “Outperform” with an expected total return of 26% to their target price of $11.40 (with a div of 8.2%). They didn’t upgrade their earnings forecasts but instead, cited valuation as attractive.

“BOQ trades on a 1.1x book multiple and 10.4x earnings (equating to a 7% discount to the major banks vs. 5% four-year average discount), which compares to BEN on 10.9x (BOQ trading at a 5% discount to BEN vs. 1% discount four-year average).”

Not sure about that one with the share price only down c.8%, exactly in line with the other financials (excluding property trusts) over the past 12 months, so it’s not like BOQ is a particularly ‘good’ deal to upgrade your recommendation on valuation grounds. Anyway, share priced jumped 3.4% on Friday, a result proving that investors read headlines rather than actually pay attention.

Let’s keep it simple with banks. Price to Book (x-axis) is a nice, stable, tangible valuation metric and return on equity (ROE%, y-axis) is a comparable benchmark of returns. Everything looks like it’s pretty fairly priced to me. High returns, high valuation. Low returns, low valuation. Simple.


Telstra

Kind of in the same vein, Telstra (TLS) got an upgrade in rating from UBS, who are now recommending a “Buy” with a $3.30 price target. To be fair, most of the market still has a buy and price targets of $3.00-$4.40.

The only broker with a sell/underweight is Morgan Stanley (with a $3.00 price target and EPS forecast of 26c for FY20 (consensus at 27c). Top of market is Morningstar (who I don’t pay any attention to) and Morgan’s with a $3.99 price target and EPS forecast of 27c in FY20.

You actually don’t need to know anything about Telstra (TLS) to get this stock call right in my opinion. You need to understand human behaviour/analyst behaviour. (We will leave the argument about whether analysts are humans for another day!)

You’ve got a bunch of analysts cutting forecasts
FY19 numbers down c.7-8%
FY20 numbers down c.10-25%

You’ve got the biggest cuts coming from the bullish analysts (high forecast has come in from 34c to 31c) whilst the low forecast has declined from 26c to 23c. Of the 13 estimates in June, 11 were downgrades, 2 unchanged. In May, 12 estimates, 10 downgrades, 2 unchanged. The guys who aren’t changing their numbers I’d bet are already on the low side of consensus.

This is telling you that people/analysts who are “long and wrong” are “folding” whilst the bears are gaining confidence and conviction.

UBS can bang on about the strategy day and an attempt by the company to protect a 22c dividend in FY19. Facts of the matter are, Telstra, one of the most institutionalised, bureaucratic, red-tape laden, over managed companies in Australian history thinks aspiring to become a nimble tech company is going to save it from competition that’s already winning? In a game, which I’d argue, might not even be worth winning anymore…. stock might go up in the short term but…. (below charts courtesy of one of the bulls with a $3.90 price target, Goldman Sachs)… ARPU and Broadband bundles both declining in price.
This one’s from UBS back in March. It just shows TLS as offering the crapest deal on mobile. Nobody is paying TLS $100 a month for 35GB when you can pay Vodafone $80 for 80GB (which for the uninitiated is like, crazy amounts of “Netflix & chill”…)

Let’s face it. Telstra sold their broadband network advantage to the government, they let the competitors catch up in mobile network coverage and service and then they went into a domestic price war with them on both fronts.

That ended up being a dumb move because they are big, fat and slow, whilst the competitors don’t have physical stores and 10 layers of management and sell online etc.

They couldn’t buy up the competition (which is what normally happens) because the ACCC wouldn’t let them and shareholders wouldn’t let them invest in offshore telco businesses because they were obsessed with their dividends and franking credits and wouldn’t commit capital for growth and expansion.

Meanwhile, competition just intensified. Price of data went down, data packages went up. Soon, broadband will be a thing of the past. You won’t even have a home internet plan.

So Telstra shareholders, the TLS share price disaster is really your fault. You rebelled against their expansion into Asia. You demanded dividends go up and up and up. You did this to yourselves.


Tech Stocks

As most of you know, I’m bullish technology stocks. The NASDAQ index has outperformed the S&P 500 index in the US by 7% and both are beating the ASX200 (this includes dividends). Long tech has been the best trade of the last 10 years.

I think long technology will be the best trade for most long term investors, forever. Why? Tech by definition is the industry of innovation. So whilst other industry sectors ‘defend’ against change, technology businesses aim to leverage it. Not all technology companies win, in fact, very few do.

The best way to invest in this sector is look at who owns the attention. What are people watching, listening to and reading? Apple know this, but of the big tech names (Amazon, Facebook, Netflix, Google), Apple are the only ones who don’t really own any of your daily attention. They share the ‘device’ market with Samsung and they certainly have a powerful brand (not dissimilar to Adidas & Nike) but they lost their dominance in music to Spotify, they don’t own video (Netflix own that) and they certainly don’t own cloud storage (Dropbox, Azure, AWS, Google etc.) Google own search. Amazon own e-commerce. Facebook own social.

I reckon Apple are going after the content (as is Amazon).  As per below, they’ve done a deal with Oprah to make original programming in a bid to compete with Amazon, Netflix and HBO. Optus also tried the same strategy with the World Cup (which has been a disaster due to poor execution.) – don’t expect Apple to make the same mistake.


More takeover action last week with Gateway (GTY) and APA Group (APA) both getting bids. Strong performances from cum-dividend bond proxies (TCL, SYD, ALX, SPK). Blue Sky (BLA) continues to struggle with new CEO announcing fee-earnings assets under management of $3.4 bn and the stock now trading at circa net tanglible asset backing ($1.60). Elsewhere, franchisors Mortgage Choice (MOC) and Retail Food Group (RFG) continue their demise (Domino’s Pizza, DMP still to come).
 
Have a good week,
LL
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