Good morning,

February is always a busy time of the year for any professional investors.  Whilst retail clients seem to focus on end of financial year or end of calendar year, I think most practitioners know that fiscal years are made during the reporting season.  This time of year can become confusing for some clients, as they look at a company with rising profits or great prospects in their report and become disillusioned when the share price falls.  It’s important to remember that share prices are the average of the market participants ‘best guess’ at the value of the company’s future earnings and that ‘share prices’ in the long run (and in hindsight) follow earnings, however in the short run, they follow the markets ‘guess’.   As someone who manages other peoples money for a living, I often find myself explaining the difference between ‘price’ and ‘value’.  I get it, it’s a tough concept when talking about financial assets.  Price is the value of something in many people’s opinion.  To quote Oscar Wilde, we ‘cynics’ often “know the price of everything and the value of nothing.” 

Value is the ultimate benefit of a given thing.  What it’s worth, to you, as an investor.  Value includes very tangible elements like price differential (I paid $100 for it, it’s now worth $150, that’s $50 of value to me) and dividends (I invested $100 and it’s paid $10 per annum in dividends for the past 10 years) but also less tangible benefits such as ‘diversification’ of risk.   I mean this not in it’s literal “financial planning” way (the old “eggs in many baskets” analogy… If I can rid your mind of financial ‘rules of thumb’ I’ll save you a lot of money over a lifetime!) but in the proactive, progressive way which acknowledges the probability of one’s view of the future being different from the actual future and saving a few dollars to bet on other less likely, but still possible outcomes.

I’ve got a lot on my mind this week so let’s get to it.   ASX200 is flat-ish this morning and over the past week has picked up a lot of the ground lost recently, now back at 5914.

Reporting Season Wrap

I’m just going to bang out a sentence or two for each relevant result.  If you want more detail on anything in particular, just ask.

  • GWA Group (GWA) – Really sound report, +8% this morning.  It’s a bathroom and kitchen fitting business, it’s well managed and pays >8% dividends.  It (was) cheap on 14x, it’s got modest revenue and profit growth.  Balance sheet is tidy.  Unloved, underappreciated.  Very happy for clients.
  • Ooh! Media (OML) – Really good result, strong performance across the board.  Is a >$5.00 stock in my view, continues to benefit from a shift in spending (not a fall in spending) in advertising.
  • Domino’s Pizza (DMP) – we’ve been talking about aggregators (Deliveroo, Uber Eats etc.) for years now.  Well that is now having a serious impact on Domino’s business.  And finally, people are starting to figure out this is NOT a technology business, it’s a fast food business.
  • Woodside (WPL) – OK result.  Nothing flashy.  Buying out its partners in an asset in the north west called “Scarborough”.  Mixed reviews on this decision from the market but aligns with my reason why WPL is a good business.  WPL is an ‘infrastructure’ play.  They own the real estate and run the production facilities in the NW.  They need ‘feed’ to run those facilities and make that real estate valuable.  They are perfectly capable of finding their own, but if they can’t they can just buy gas from others in the area without the infrastructure.  They are the perfect example of a ‘shovel’ business in the “gold rush” analogy.
  • Invocare (IVC) – good result, lost some market share.  Plenty of scope to buy more and fund through synergies, just got to stay off the ACCC’s radar.  High quality business and as a client said to me recently “they won’t run out of customers”
  • Janus Henderson (JHG) – bit of outflow which isn’t great, but not a big deal.  Volatile markets are bad for fund manager share prices, so timing of market moves probably hurt share price unfairly.
  • Challenger (CGF) – still selling lots of ‘retirement’ investment products to old people.  Was probably priced for a bit more growth than what they delivered.
  • CSL (CSL) – good result.  Beat market expectations.
  • Aveo (AOG) – looks like bottom of the earnings cycle for them after some bad press.  Steadying the ship and I’d think they’ll go well in the retirement village game.
  • Amcor (AMC) – going fine.  Bit of a nothing year for them and suspect growth to accelerate from here.  Everyone thinks they are too defensive to benefit from global cyclical recovery, I think it’s a good business with a ripper strategy that gets most of the benefits from being invested in emerging markets without the drama.
  • Insurance Australia Group (IAG) & Suncorp (SUN) – IAG good, SUN ok.  But SUN way cheaper.   Insurance should win if rates are going higher.
Slightly different format this week for the table of returns, I’ve gone for my pick of the companies with +/- 5% returns for the week, sorted by market capitalisation (size).

Is the market going down further?

I’ve been fielding a lot of questions around my views on the market in general so I thought I’d show you some of the key things I look to to guide my views and identify trends.  I’m using the S&P 500 in the US for my analysis today, but as you can see from the below chart (blue is ASX, green S&P 500, both yoy% returns, inc dividends), the S&P 500 pretty closely moves with the ASX 200 and for our purposes, we can view them all as “the stock market”.

The #1 long term trend I’m looking at on a macro level is the business cycle, the way humanity moves from spending to saving, from greed to fear.  The best measure (in my mind) of this is the Institute of Supply Management Survey (ISM).  It’s similar to the Purchasing  Managers Index in this part of the world (PMI) and as you can see, it matters.  S&P 500 yoy% returns vs the ISM below, it is a 72% correlation.
So if it matters that much, what’s it likely to do in the future and what does that mean for markets? Based on some work from Morgan Stanley, during previous market corrections, like the one we just experienced, MS observed that these events, whilst not connected with recessions, did mark the peak in the business cycle (best measured by the ISM).I think this makes a lot of sense.  Statistically, results near or above 60 don’t last long (currently off highs of 60.2 at 59.1) so I’d be expecting this critical indicator to start to declining.
Does this mean a fall in the market?  Well it might. But I think it’s more likely it just means a normalising of returns (and this view is supported by the historical data).  What does a normalising mean?  Well, the S&P500 went up >20% last year.  That’s not normal.  The ASX200 was up 12%… also not normal.  For the US, returns average 8.85% and for Australia, returns average 9.83%, since 1998.</>

Further, the key short term indicator for longer term ISM direction, the Citi Economic Surprise Index (CESI) is still trending higher.  CESI rolls over, ISM rolls over, expect the stockmarket to follow. Currently though, everything still trending higher and looks like we’ve got 1 more decent leg of returns ahead of us.

Have a good week,
LL


*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.