Good afternoon,

ASX200 down 45 points this morning with most of the damage done on Friday with the ASX200 down 2%.  In the grand scheme of things, not a huge deal.  I’ve featured analysis on big share market moves before and to be frank – 2% just doesn’t qualify as that dramatic despite what the financial entertainment would like you to believe (in order for you to click on their ads and buy their newspapers).

Returns for the week are below, Healthcare dominated by CSL’s 4% decline which I’m sure shareholders are just so worried about (not!).  Not a lot interesting to talk about looking at ‘sectors’ when markets pull back like this, we need to dig a little deeper to source the opportunities.

And because I’m feeling generous, I’ll do the hard work for you!  Let’s take a look at returns over the last 3 months categorised in different ways (not just the type of business they operate).  I’ve separated the ASX200 companies into quartiles, based on their individual PE Ratio, Market Cap, EPS Growth, Sales Growth, Net Debt/Assets, Return on Assets (ROA%), Div Yield %.   I’ve then measured average returns for these quartiles over the last 3 months.  I won’t bore you with the data, but here are the findings.

PE Ratio – Q1 PE ratio stocks (highest PE’s) outperformed the Q4 (lowest PE companies by 7%), Q1 PE stocks were the only positive result +1.34%, stocks in this group had an average PE of 37x.  Whilst Q4 averaged a PE ratio of only 10x.

Return on Assets (ROA%) – Q1 ROA companies averaged a ROA of 15.8%. and generated 3.92% alpha.  Again Q4 ROA companies were the weakest performers down 5%.

Earnings Growth (EPSg%) – Again, Q1 is where you want to be with 5% out performance and 57% average EPS growth over the rolling 12 months.

Low Dividend Yield outperformed, with our lowest yield quartile generating 5% (paying 1.31% div return on average) returns, whilst high dividend stocks fell 9.65% (with average yield of 6.48%)

Analyst Upgrades. Bigger upgrades = better performance.  Though they needed to be huge this month to matter, with Q1 generating 5% returns however stocks in this group were upgraded an average of 13.5%.    Those stocks that have been upgraded, but gone down over the last 3 months and have ROA above 7% include MIN, WHC, BSL, RIO, SGM, S32, NSR, SIQ, MND, FMG, TPM, MQA, NHF (bold means that you might want to have an extra close inspection).

Insights and Takeaways

  • Don’t be put off by expensive growth companies, they can still generate excellent returns
  • Quality is king when markets turn south.  Look for strong earnings growth, analyst upgrades, quality markers (like ROA%) and low debt/assets
  • Opportunity is in the detail.  Analysts just upgraded a bunch of companies by more than 10% and some of them have only gone up by 5%…anyone else see an opportunity there?  Yield stocks have been beat up…there’s gotta be something in there that is over sold… this is how you find diamonds in the rough.

And because I know you love it, those diamonds in my mind would have positive earnings upgrades, Net Debt/Assets under 10, ROA% over 10% and positive EPS and Sales growth.   If you run this filter through the ASX200, you end up with a list of the below names:
PTM, MIN, BTT, MFG, PPT, BRG, CWN, NHF, ARB, TNE, BPT, RRL, SFR and ALU. 
Anything catch you eye? Can you spot a dud from an opportunity? Anything been oversold?


Movers
Not especially excited to go through a bunch of gold stocks, FLC who got a contract win or OFX who worked out how to give guidance and actually meet it for the first time in 3 years on the positive side.
And on the negative side of the ledger, there’s just about everything and anything.  When markets get beat up, fund managers like Magellan (MFG) and Janus (JHG) go down.  I think by now you know that I reckon this is more an opportunity than anything to be concerned about.  Decent fund managers figure out how to make money in all markets.  For themselves and for clients.
Data Exchange Network IPO Update
Those clients lucky enough to secure an allocation, funds will be debited from your account on WEDNESDAY 28 MARCH 2018.  With the accelerated timeline, we now expect the shares to list on the ASX on MONDAY 9 APRIL 2018 under the code DXN.  Exciting times!
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.