Good afternoon,

ASX 200 up 1.16% on last week, closing at 6319 points on Friday and looks likely to open up slightly stronger again today. Yay!

Reporting season is now mostly done and dusted. Back in the first week of August, I listed 7 stocks I thought could surprise to the upside during reporting season.

This thesis was based on the standard process I run when selecting stocks, just tweaked for a shorter investment time horizon (a bit more emphasis on momentum and relative value, a bit less focus on quality and sustainability). Here’s the outcome:

Not too shabby…
Ansell (ANN) while it disappointed the market, the primary cause for the fall was the modest (and in my view conservative) outlook statement.

While Amcor’s (AMC) share price return was more about the Bemis (BMS-US) merger than anything to do with the financial result.

Outside of these two, we picked one of the best-performing stocks to come out of reporting season in Breville (BRG) and called the continued, post-earnings upgrade, earnings momentum in Codan (CDA), whose return is understated here, it went ex-dividend on 31 August.

Computershare (CPU) did well while competitor Link (LNK) struggled (nice long/short opportunity). Boral (BLD) bounced on a stronger outlook statement, and QBE Insurance (QBE) didn’t fail completely, which surprised everyone.


What next?
I haven’t got around to taking a step back and working out what I want to sell and what I think might outperform over the next few months. That’s a job for this week. I’ve got Jordan going through every company on the ASX 300, reviewing the result and guidance in the context of the share price and later in the week, we have our investment-grade shortlist finalised. From there, we will look to verify or disprove our thesis, identify the next few potential catalysts for the share price and figure out an execution strategy.

Personally, I’m focused on The Data Exchange Network (DXN) as I feel it’s going to be a big 3-6 months for that business. I’ve had a few calls and queries as the share price has drifted back from 30c to 20c and I guess that’s understandable. There has been no real news to tell the market whilst they are in the ‘construction phase’; no bulge-bracket broker ramping up the share price (as they don’t need any more capital for the current plan and there’s no big fee for a raise on the horizon); and the average investor has the attention span of an A.D.D cockroach after a bag of Skittles. I had investors crawling over me to buy more share in the IPO at 20c (it was >8x oversubscribed) those same people should be interested in buying shares now, as they’re getting a far better deal than what was on offer at the IPO.

The management team is getting out and seeing investors over the next week or so, providing an update and making sure the market is well informed of its progress and plans, though I’m reserving judgement until this time next year and we have an idea of how quickly the sales team can fill these data centres with paying customers.


Out of cycle rate hikes

As I foreshadowed over the past weeks and months, Westpac (WBC) raised it’s variable home loan rate by 0.14% last week as it tries to recoup funding costs and protect margins. While WBC’s aggressive, price-led, mortgage book growth made it the most likely candidate to hike rates, I reckon it’s unlikely that the other banks don’t follow Westpac’s lead in the coming weeks. I mean, they are all facing the same regulatory pressures, the same increase in funding costs and volume growth declines. Given the chance to make more money or less money, what do you think the banks will do?

And here’s what it means if funding costs go up 50bps.

Why do you care though?
Because the cost of housing is a large part of most families weekly expenditure. And for those paying attention to this note on a regular basis, you’ll know that consumption is what drives the economic machine (for those not paying attention, click here to read my blog from 28 May that should help you catch up.)

This should be interesting in the context of the GDP and retail sales data out early this week. The RBA reported slowing demand for housing credit, driven by falling house prices and lower housing turnover.

NAB put out their customer spending analysis last week showing “Average monthly spending in metro areas was highest in Sydney ($2,286) and Melbourne ($2,258), while WA ($2,126) and QLD ($2,009) were the highest spending regional areas. By category, spending grew fastest for Accommodation & Food (with double-digit rates of growth in all states) and weakest for Arts & Recreation, driven down by lower spending on performing arts.

By age, customer spending growth was fastest for 18-29-year-olds (and in nearly all spending categories) perhaps reflecting the more significant use of electronic payment methods than older customers. (Source: JBWere, NAB)


Movers & Shakers

I’m not going to go to hard at this list this week; we’ve covered most of it either this week or recently.

Telstra (TLS) was ex-dividend, so it’s probably unfairly made the losers list, iSentia (ISD) and MNF Group (MNF) disappointed, the old Skydive The Beach, now called Experience Co. (EXP) continued on its dismal run, Speedcast (SDA) surprised many with an abysmal result and RCR did a big, dilutive capital raise. Afterpay (APT) got a bit of bad press in The Age over the weekend, not that shareholders care, for now…

The most exciting thing about this list is column 2. 44 stocks on my watchlist lost more than 5% last week, with an average of 10.4% negative returns. Only 10 are showing positive returns since January 1… momentum mattersJordan and I did a podcast on Momentum recently; you can listen to it here.


Have a good week,
LL