Good afternoon,

The ASX 200 was down for the week before a strong market open this morning turned it around. ASX 200 is up 1.67% or 94 points today, and that means we’ve added 1.58% since this time last week. Technology, resources, energy and telco the leaders with the more defensive names in consumer staples and property that were sold off (though have been pretty good recently as the market has sold off).

Where we are today could prove an inflection point as the Trump/Xi trade-war seems to have, at least for now, been tabled. I’m going to stick my neck out (again) and say we finish the year above 6,000 points, led by the banks and maybe energy (OPEC+ to meet on 6 December in Vienna). I also think you’ll see a decent rally in technology names (more so in the US) as they report earnings.

Consensus price target across the strategists is still 6401. Over the last ten years, when we look back at actual index prices vs forecast index prices, analysts overestimate by an average of 2%. However, in lower volatility environment since the start of 2016, analysts have been much better, predicting correctly more times than not.

If they end up being right, you can expect 13% price returns + 4.4% dividend yield from here.
But rather than rely on the boffins, let’s look take a look at where we can find some potential bottom-up value. I’m limiting my universe to those stocks with more than three analysts covering them (so we get a decent sample set) and I’ve excluded resources/mining/energy stocks.

Then I’m taking out those companies who have raised a lot of equity. More than 5% is no good for me. I also want some sales growth, improving return profile and have favourable earnings growth forecast. This is simply to get the universe down to a more meaningful size. Am I skipping over some opportunities? Yep, but I’ll live with it.

What’s the cheapest growth you can buy?
This is ranked below by PE multiple and Earnings Growth (PEG)

Price to Book.

Earnings Momentum.

And finally, those stocks whose price target implies a positive forward return and have had their price target increased over the past month.


Australian Economy

Capex and construction numbers out last week were a bit of a concern as the total private sector CapEx fell by 0.5%

Total construction work fell by 2.8%. That brings yearly construction work down 17% y.o.y. Though this probably reads worse than it is, as Q3 last year had an 18% increase, the result of Prelude LNG in WA. Additionally, residential work remains elevated.

And CapEx intentions look pretty good, with a rise in investment ahead.

What’s it all mean? Well, GDP Growth looks likely to come in reasonably close to the RBA’s forecast of 3.25% by June 2020, and that should be a supportive environment for stocks more broadly. While I think the consumer might be subdued, we shouldn’t get too carried away with our bearishness, with employment prospects remaining solid and that sort of GDP growth (above-trend) should allow for wages to grind a bit higher. As a result, I’m more constructive on the AUD from this point (though the bond-yield differentials should cap the potential upside).


Movers & Shakers

Graincorp (GNC) copped a non-binding, indicative bid from Long-Term Asset Partners while WTC, APT, NXT, ALU and TNE all rallied significantly on the back of a refreshed appetite for growth and risk.

Ooh! Media (OML) rallied 12% on a new contract win + it looked pretty cheap last week (as was mentioned in this note – don’t try and tell me you don’t get any stock tips in this email!)

Good gains also across energy/resources.

Aristocrat (ALL) continues its significant de-rate while Coles (COL) has had a rough start. Coca-Cola (CCL) is in a spot of bother facing another “transformation year” and with no guidance offered.

One more weekly note for the year next week and then I’m signing off until January. There’s a podcast from last week we put up today with Cameron Low from Cadmon Advisory & Ventures and there’s a listener question and answer episode that’ll be live on Thursday. Stay tuned!
Have a good week,
LL