Finding cheap stocks this late in the cycle is getting harder and harder. Index funds have bid up the prices of large-cap stocks to levels not seen since the tech bubble, while mid-cap growth stocks like Afterpay and Wisetech have been bid to dizzying heights. But attractive opportunities are still out there, if you look hard enough.
This week's guest on The Rules of Investing is Campbell Neal, Co-Founder, Managing Director, and Senior Portfolio Manager at K2 Asset Management. In this episode, Campbell identifies one ASX small cap that's on a PE ratio of 10, yields 8%, and has all the hallmarks of a "mini-Macquarie".
"I believe it's like a small Macquarie Bank. It's listed here in Australia ... The stock's done extremely well over the few years it's been listed. I think it's going to continue to grow."
Tune in below and you'll also hear which stocks he plans to short (when the time is right), and why he believes large-cap stocks are the most overvalued they've been for many years.
- 1:22 - How K2 Asset Management was founded
- 2:43 - A matter of expertise
- 3:17 - Why you should never be too big
- 5:59 - You have to be "somewhat indexed"
- 7:15 - Macro or purely bottom up?
- 8:17 - The M.O.V.E. process & the indexing bubble
- 13:32 - What value means to me
- 16:41 - Who is doing the valuation analysis?
- 20:15 - Should you pay up for growth?
- 21:42 - There are times when cash is king
- 23:27 - Some sobering stats from Goldman Sachs
- 25:18 - Waiting for the worm to turn
- 26:15 - Avoid permanent capital loss under all conditions
- 31:16 - A top idea on the short side
- 35:01 - Can Domino's business model keep delivering?
- 37:36 - The 'mini Mac Bank' from PNG
- 41:31 - Lessons learned from Axsesstoday
- 46:11 - How to be an equities investor late in the cycle
- 47:15 - The TINA conundrum ("There is no alternative")
- 49:32 - Campbell answers our three favourite questions.
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Thanks Patrick Great interview as always but also a new prospective with as the rugby players say Great Learnings
Mr Neal's comment that the market is in a "massive bubble", and quoting John Neff's growth at a reasonable price formula (earnings growth + yield growth/PE) as proof, is disappointingly superficial analysis that ignores both the current extrememly low inflation rate and the fact the real risk free return is almost zero. PE ratios will tend to be higher in a low inflation environment (the average over the past 50 years in sub-3% inflation is about 16.5 vs the current c.15.7); the current real yield on the ASX is at a 25 year high compared to the real 10-year government bond yield (at least, as that's as far back as my data goes), and the current Equity Risk Premium of around 5% is marginally above its 10-year average. In other words, if you're going to say a market's expensive you have to say relative to what, and when the real risk free rate is almost zero a lot of rules change. Perhaps that sort of thinking contributed to Mr Neal's fund underperforming the ASX200 over the last 1, 3 and 5 years with downside volatility higher than the market depsite being an absolute return (long-short) fund.
Dear James Thank you for taking the time to listen to the podcast and providing your comments above. We appreciate the feedback and welcome any engagement from the investor community. Whilst taking on-board your comments, we believe there is significant risk in the earnings forecasts which will impact valuations and dividend yields. We also believe that comparing dividend yields to bond yields at this point in the cycle is a dangerous strategy; QE and regulated capital requirements continues to drive “risk-free” yields lower. However hurdle rates for common sense investments are significantly higher than the current “risk-free” perceptions. K2 Asset Management has a 20 year track record of providing absolute returns and is not benchmarked to an index. The K2 Australian Absolute Return Fund has achieved a 10.5% pa net return since inception.