Good morning,

Rather than watch the footy on ANZAC day afternoon, I binge watched a fantastic documentary series on Netflix,  “The Defiant Ones”. It’s about hip hop artist/business-mogel Dr. Dre and producer/record-label executive Jimmy Iovine and the story of how they met and how they ended up selling their headphones business “Beats by Dre” to Apple for US $3.2bn.

Jimmy Iovine was the sound engineer on Bruce Springsteen’s ‘Born to Run’ but Bruce was apparently a perfectionist and very tiring to work with, and Jimmy wanted to quit. (I’d suggest you read this article about this incident on Inc Magazine)

Jon Landau (Springsteen’s manager) convinces him to stay by reminding him  what they were there for. To help Bruce create the best record he can.

This struck a chord with me, it’s really similar to how the client-adviser relationship should be. What I’m here for, why I get employed, is to help my client (normally, a family of some description) create the best life for themselves we can. My job isn’t to prove to you how smart I am or to propel myself into the spotlight, my job isn’t to make myself successful. I’m certainly never going to be the main reason for your success (or lack of it).

My job is (quoting Landau) “to contribute to the project…and it’s Bruce’s project.”

Too often in this game of “other people’s money” do advisers, stockbrokers and financial planners forget that it’s not their project. They exist only to guide, suggest, and challenge. Whether the artist produces a hit record or whether the client is ‘successful’ will always come down to that given artist/client’s talent and hard work, not if they have the best, most famous producer. All someone like me can do is facilitate, engage, support and provide some expertise in a very small area of the client’s life. We (the financial services industry) would do well to remember what our role actually is.


ASX 200 added a further 1.45%  last week and the index closed on Friday 5953. I’m writing pre-market this morning, but expectations are for a flat day after a pretty quiet Friday night trade overseas. US companies are reporting numbers largely ahead of consensus estimates, there’s a bit more on this later in the note. Caterpillar was the only battler, primarily due to weaker guidance resultant from a very strong Q1.

Financials ex-Property is down 7% for the year so far. The banks are all down 10-13% as the Royal Commission, increased regulation, a slowing housing market and low, flat interest rates make life pretty hard for them. They are starting to look particularly cheap though. Westpac (WBC) last week was on near-enough a 10% dividend yield after UBS starting throwing shade at the quality of their loan book.

I’m a simple kinda guy, I appreciate boring things like oligopolies, political influence and aligned interest with people’s hip pocket. WBC, 11.6x earnings (10y median 12.5x), div yield 9.82% (gross) vs 8.78% 10 yr median. Price to book 1.5x, median 1.74x. GFC 1.34x. YoY earnings growth forecast -1%, 10yr median 1.56%.


Gage Roads Brewing (GRB)

A nice quarter of business for GRB based on their progress update out today. For the 9 months of this fiscal year, Gage Roads have increased their ‘brand’ sales from 32% last year to 39% this year, whilst still on track to brew 11 million liters as planned. More brand sales, less contract brewing = big net margin expansion and profit growth for GRB.

GRB is exhibiting all the signs of a brewing company in the exciting ‘expansion’ phase.

  • Sales to independent retailers up 184%
  • Gage Roads draught sales up 275%
  • Total Gage Roads brands volume up 56%
  • Total volume up 27%

The company has also appointed Miles Hull as National Marketing Executive. Miles led Little Creatures’ marketing strategy for 6 years, before it was taken over for $360m in 2012. He’s the architect behind successful and innovative brand extensions such as White Rabbit and Pipsqueak Cider. He was responsible for the expansion of Little Creature’s marketing strategy on the east coast and was instrumental in developing their dining hall concept in Fitzroy, Victoria as well as the establishment of the White Rabbit Brewery in Healesville, Victoria.

In my view, it’s abundantly clear what this $60m market cap company is going to do over the next 3 years and I’m quite certain on what their market cap will be at that time. Check out the Gage Roads Victoria Instagram (click the photo below).

Share price is up 18.3% today. 


Fastbrick (FBR)

As my longer term readers will know, we’ve had FBR shares in the bottom drawer from the 10-15c mark for a while now. There’s been limited news flow from the company since raising money to finalise their prototype. On Thursday FBR put out an update on the work they’ve been doing with EY to figure out the potential addressable market. Fair to say, it’s huge and FBR is targeting 2% share. FBR trading at 20-21c. No change to my positive views on the business, the Caterpillar partnership, the products potential or the high level of execution risk associated with this business.

Share price up 26% this month. 

Source: Fastbrick Robotics


Zip Co (Z1P)

Z1P reported quarterly cash flows on Friday last week, the company continues to perform in line with management guidance and my expectations.

Transaction volume growth was down 3% on Q2, $136m. This was the case last year and probably will be the case going forward as Q2 is seasonally the strongest time of year (pre-Christmas) for transactions. Compared to Q3 (pcp) transactions were up 123%.

Receivables grew by 15% ($40m) whilst revenue yields and costs are all trending in the respective ‘correct’ direction. Cash flow break even still expected by 30 June 2018.

The most important thing in my mind is the below chart. If Z1P can keep revenue yields rising and ensure the cost of making a sale and managing that debt falling, they’ll make a decent margin (initially c.2% of the receivables in my view.)

Share price up 10% this month. 

Source: Z1P Quarterly Report, Seneca Forecasts


Large Cap Opportunities

It doesn’t really matter if you own BHP or RIO (they move together and over 20 years have a 3% difference in total shareholder returns (BHP 608% vs RIO 605%).

The banks stock selection has been more important with CBA clearly the best investment across the last 5, 10 and 20 years. $1 invested in CBA, with dividends reinvested, on this day in 1998 is worth $586, whilst ANZ and WBC only delivered c.$400 and NAB with an abysmal $192.

If you’re looking at the banks, you’re buying, for example, Westpac (WBC) on a 9.6% dividend yield (inc. franking).

I work this out by taking the share price ($27.97) as the denominator and the 188c of dividend I expect over the next 12 months as the numerator. 188/2797 = 0.0672 x 100 = 6.72%. To estimate franking I take 6.72 and divide by (1 minus 0.30), so 6.72 divide 0.70 = 9.6%

I use 0.30 because corporate tax rate of 30%, you can get nit picky about 0.285 or whatever. I’m not playing for 0.2% return differentials.

Anyway, opportunities in the well researched, highly publicized, bureaucratic top 50 are always hard to find. My strategy in this sector is try and buy companies that benefit from the most likely forward macroeconomic environment, companies that have certain quantitative characteristics in their financials and fit well into the particular client portfolio I am reviewing. By fit, I mean add something. Maybe it’s diversification, maybe it’s concentration, income, or growth to help me achieve my stated objectives.

At the moment, from a quality perspective I like APA Group (APA) & Transurban (TCL), Ramsay Health Care (RHC) and Incitec Pivot (IPL). 


There’s better value overseas though…

As much as investors feel comfortable buying Transurban (TCL) shares because they get a bill from them every month, there’s a heap of better businesses overseas that will probably (read: certainly in my opinion) make you more money.

Facebook (FB) reported earnings on Thursday night and jumped up 9% on the back of higher than forecast ad revenue. Honestly, this ad revenue thing is just getting started. Remember last week when we talked aboutGoogle Ad-words/affliate marketing and  iSelect (ISU)… the reason I worked out that ISU was broken ages ago was because as an actual practitioner, using Google Ad words and using FB ads, FB ads are much cheaper and way more effective. One is massively over priced, one is massively under priced. FB advertising has already got more expensive, it will get even more so over the next 5 years. Until it’s where Google ad-words is and something else will be in its place.

Amazon (AMZN) also surprised the market (but not me) after earnings DOUBLED to $3.27 and the stock added 4%. Revenue was also up 43%. Analysts expected $1.24 of earnings and 33% revenue growth.

Microsoft (MSFT)  revenue growth accelerated to 16% (!!!), earnings grew by 36% (!!!). 21x PE with 17% 4-yr EPS growth track record (CAGR) and 2% dividend yield… why you’d speculate on medical marijuana when you can own stuff like this, I do not know!

As discussed 2 weeks ago, we talked about the fire sale on technology stocks. Since that note, Facebook (FB) stock is up 12%. As discussed last week, US earnings season is coming through with the goods. Stock prices follow earnings my friends. Stock prices follow earnings. Below is the returns on the stocks we talked about on 4 April.


Quick whip around the watchlist

This note is getting out of hand! Sorry, way too long this week. iSelect (ISU) bounced back a bit, Healthscope (HSO) got a takeover bid, Domino’s (DMP), Afterpay (APT) held the shorters at bay this week and MTS copped an upgrade from Morgan Stanley. Infrastructure did well with Sydney Airport (SYD) and Macquarie Atlas Roads (MQA) added 5-7%.

Struggling down the other end was Boral (BLD) after earnings didn’t quite get the boost from infrastructure spending that analysts thought, Experience Co (EXP) down heavily as rain in Nth Qld seriously impacted the quarter.


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.