Good afternoon,

On the face of it, a seemingly quiet week on the market with the ASX200 moving up 62 basis points, we are still almost 5% since the end of last year though. Defensive sectors performing well (property, staples, health) whilst telco continuing to slide (Telstra now $3.10, down 14.5% this calendar year).

Lots of new subscribers to the weekly note after I shared on social media last week, so welcome to those people and remember that these emails/posts/notes are general in nature, we don’t offer advice or consider anyone’s personal circumstances. We do our best to provide accurate data and information, but you shouldn’t rely upon it to make investment decisions. Do your own research or even better, become a client!


Spot the difference?

Despite Donald Trump doing his best Dr Evil impersonation and seemingly playing a school yard game of “whatever you can tweet, I can tweet better!” with Chinese head of state Xi Jinping, I’m actually a lot more focused on the business cycle and how global growth is actually shaping up. Too much chin wagging for my liking to be honest.

Pretty simple for me. Inflation in the US is trending up, not overshooting yet but rising towards 2% target. Profits accelerating, employment improving, rates still low and trailing the economy… all the signs of a late-cycle bull market where historically returns have been pretty solid. I’m not complacent, it’s late cycle, you have to remain vigilant, but it’s not the end of the world (yet).


Whilst volatile markets tend to bring most investors concern and heartache, I reckon it’s just about the most exciting time to be an investor. A lot of wonderful businesses sell at prices that do not reflect the likely success these business will encounter in the future and rather reflect the fear of the unknown.

Behavioral economics teaches us that investors are far more sensitive to losing money than they are to making money and that asymmetry sometimes means we will sell a good business not because our opinion of the business has changed necessarily, but an increase in uncertainty results in a disproportionate emotional reaction.

A current example, Blue Sky Alternatives (BLA)

Short sellers prey on this bias. This week we saw the price of Blue Sky Alternatives (BLA) shares fall by 45% after Glaucus Research published 2 reports questioning the valuation methodologies employed by the company on its investments and subsequently, the fees it levies on the value of those investments, essentially accusing the company of inflating the value of its investments, lying about its historical investment returns and fraudulently collecting fees from investors.

This is a difficult allegation for an alternatives asset manager like BLA to deny. There is an inherent conflict of interest in any asset management business where fees are levied on the value of assets under management. As those assets under management grow, so do the fees. Further, as that asset growth becomes public information, the fund manager attracts more capital to manage, as they are seen as a good custodian of client funds and then fees increase further… and so the cycle continues.

The difference between say, Seneca (we also levy fees based on the value of the assets each client asks us to manage), is that the assets we manage are largely publicly priced. That is, there is no disputing the market price of 1000 shares of CBA (trading at $73.46 per share, it’s $73,460.) However, for Blue Sky, who invest in private markets, it’s very easy to argue that the value of say, their investment in men’s shoe brand, Aquila is worth potentially more or less than what they paid for it.

This argument or debate around the value of an investment (or in BLA’s case, a portfolio of c.80 investments) is essentially enough to sow a seed of doubt in the average investor’s mind. They think “well if they are lying, I stand to lose almost all of my money invested in BLA, so I will sell my shares for whatever price I can get for them.” Despite not being a rational response, it is most common and as a result, the short-sellers profit from your “fear of the unknown” by simply questioning the conviction of your beliefs.

With my own capital, and that of my clients, I try and behave differently. This is facilitated by the high level of conviction that hard work supports. Whilst we can never predict market events like this in a single stock, we can react rationally to the new information presented and do our best to avoid the noise and focus on the important detail.

On balance do I think that Blue Sky is lying, defrauding investors? Probably not. Does it matter unless they can prove it? Not really. Can they prove it? Sort of. Not really. From the communication I’ve seen from the company, they probably won’t as they feel its not in the best interests of investors (which whilst I partially agree, what about shareholders?) If Directors and Insiders keep buying shares that should go some way to allaying fears and restoring some semblance of confidence (they’ve bought in total about $500,000 worth of BLA stock to date, I’d like to see a few more names putting their hand in their pocket and that number increase to over $1m.) Beyond that however, unfortunately, only time will reveal the truth and restore the trust. Last trade in BLA shares is $6.00, up 5.26%. Don’t be surprised if the shorts have some more mud to sling over the next 6 months, if I was them, I’d be licking my lips!


The Data Exchange Network (DXN) – Listing Wed 11 April 2018

I know, I know. I said it was due to list 9 April. It hasn’t listed and assuming the ASX provide the unconditional letter to the company today, it should be on the boards Wednesday 11 April. From all reports the company is tracking well since our last catch up and demand for the stock has been strong.

I’d encourage all of those who participated (and were scaled back) to buy the balance of your bid on market (happy to offer advice to clients on a 1 by 1 basis, give me a call) and for those who bid but weren’t lucky enough to receive an allocation to buy some shares on market. I think DXN is a fantastic business with huge potential, without a doubt the best IPO opportunity I’ve seen in my career.


This week it’s great to see Ooh! Media (OML), a stock that’s been in client portfolios for months starting to get the recognition it deserves, adding 8% since 1 January (and paying 10.5c in fully franked dividends in February). Having broken out hard from its trading range last week, I think earnings and price momentum look set to carry it over $5. Looking forward, it has the potential to earn c.35cps in the FY19 year, putting it on a measly 14x earnings, with >10% growth and 4.5% gross yield. I like outdoor media as I see it being a winner from the demise of TV and outdoor winning a larger share of total ad spend. Digital signage has great engagement and allows advertisers an opportunity to capture a new unique set of data points as billboards utilise a range of new attention-monitoring capabilities.

We’ve done Blue Sky (BLA) to death. Lovisa (LOV) is another market darling that’s caught a haircut after the CEO resigned and delivered an underwhelming Q3 trading update. LOV for me is a retailer and sorry, I’m just not paying 25x earnings for a retailer. My other favourite short is Afterpay (APT) down another 9%, see another $1 or more of downside there (easy).

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.