With the Easter and Anzac period upon us, for some holiday reading, we’ve rounded up and summarised a baker’s dozen of the top wires of 2019 so far, including some of the most popular stock ideas, fundie interviews and big picture wires.
3 unmissable fundie interviews
If you missed it, in early March, James Marlay landed a truly unique opportunity in hosting CIOs from both Platinum Asset Management and Magellan Financial Group, Andrew Clifford and Hamish Douglass, in the same interview: Platinum and Magellan: Inside the minds of Australia’s most successful global investors.
These two funds are giants of the industry and are usually seen as arch-competitors, making this interview an absolute one-of-a-kind. Watch and hear how these respected managers are thinking about the market.
We spoke with another legend in the industry as well recently, Robert Millner, the longstanding Chairman of Washington H Soul Pattinson (SOL) in ‘A century of dividends’.
Over the last 40 years, total shareholder returns at ‘Sol Patts’ have compounded at a rate of 17.3% - a record that rivals that of some of the most well-known investors globally.
We have been running regular Q&A sessions with a range of high-quality fundies for six months. One of the most popular of which in the March quarter was 7 questions with Roger Montgomery, in which he discusses his view on housing, its implications for the market, his thoughts on Telstra and much more.
7 of the most popular stock ideas
Peter Quinton, Head of Research Services at Bell Potter, publishes his ‘Champion Stocks’ with us regularly. These are stocks covered by their research team that have a ‘long term positive thematic, which should drive superior earnings growth and shareholder value over the coming years, notwithstanding inevitable disruptions in the economic and investment environment as well as some corporate stumbles from time to time’.
You can access his full list in his wire ‘9 Champion Stocks: The must haves in the portfolio’. The strategy is more focused on long-term fundamentals than short-term noise, so the list turns over quite slowly. In this latest Champion Stocks wire, there is just one change, switching out APA Group for packaging giant, Amcor. Peter writes:
After the proposed acquisition of Bemis Company, the combined group will be the global leader in consumer packaging with a footprint encompassing North America, Latin America, Asia Pacific, Europe, Middle East, and Africa. The group offers an attractive combination of defensive earnings in the developed countries with faster growth in emerging markets, which accounted for 30% of group revenue in fiscal 2018.
For three years running, Marcus Tuck at Mason Stevens has run a quant screen on the market using 7 basic parameters of metrics. These are as follows:
- Market capitalization above A$200 million
- Net cash on balance sheet
- Return on equity above 15%
- Positive free cash flow yield and dividend yield
- A forecast 3-year EPS CAGR greater than 10%
- No EPS downgrade compared to 3 months ago
- A PEG ratio below 1.10
The results in previous years have been quite remarkable. Over the first year, the short list of stocks that passed the test gained 90% on average. The second time round, the selection gained 43%.
So it was no surprise that Marcus’ most recent screen in ‘The only 4 stocks to pass our filters’ was very popular. There was only one new name on the selection here too, which was Service Stream:
The new entrant this year is Service Stream (SSM), a provider of essential network services to the telecommunications, energy and water industries. Service Stream is benefitting from NBN activations and the provision of network maintenance and meter reading services. Wisely, the company is diversified across a broad range of utilities.
Over the past four years, more than 50 fund managers have delivered over 1000 calls on our weekly Buy Hold Sell video series. We've reviewed the data to see if the fundies were delivering results and which of them had been the best performers. The results were solid with the top performers striking above 65% accuracy on buy or sell calls. We invited the top performers to share their #1 stock picks for 2019.
At the start of the year, we also announced the ten most tipped stocks from our Livewire reader survey. For our first Buy Hold Sell of the year, The most tipped stocks for 2019 James Gerrish from Market Matters / Shaw and Partners, and Joe Magyer from Lakehouse Capital, reviewed the five most popular stocks in the survey.
By late March this diverse basket was already up 25.6% on average (or 26.9% with dividends), versus 8.6% for the ASX200.
We got in touch with ten high-quality fund managers to provide their view on the stocks for you. Read on for ‘Ten most tipped stocks: Smashing the market by 17%’ to get some exclusive views from the best in the industry on market darlings such as Altium, Appen and Afterpay, as well as big caps like BHP, Macquarie and Commonwealth.
One of the big thematics in the market today is the weakening of the local economy driving interest in local stocks exposed to offshore growth. This is leading to stretched valuations in these names, while domestic cyclicals keeping falling.
We put this thorny issue to the professionals, asking how can investors position a portfolio in such an environment. This wire, 7 stocks for uncertain times, looks at this issue and suggests a few stocks for the watch list.
Income stock investors have had a number of challenges to face in recent years, but the most recent reporting season delivered some good news. As summarised by Peter Gardner from Plato in ‘A dividend bonanza’,
During the February 2019 reporting season, a number of companies announced significantly increased or special dividends and Caltex announced a $260m off-market buyback that is due to complete in April 2019. Overall, of the S&P/ASX 200 companies reporting during February, an impressive 78 companies increased their dividends compared with 24 companies who maintained their dividends and 22 who decreased dividends. The median increase was just 5%, but the value-weighted average increase was a massive 56% reflecting the impact of a number of large companies who had significant dividend increases.
Peter goes as far as to say that the current market and political environment is creating a golden opportunity for yield investing.
Often the best course of action in investing is inaction. In the ever popular ‘High conviction stocks’, Andrew Tang from Morgans notably made no changes in his recent list, “Five high conviction stocks in April: Sticking with conviction”. Click the link to see the current listing, as well as a separate group of stocks he has as outright sells or looking expensive.
3 excellent big-picture pieces
Still one of our most popular housing pieces, this detailed examination of the residential property market from Philipp Hofflin from Lazard, ‘Residential property declines: The lessons of history’, which looks at today’s market in the context of history. Philipp warns that:
Our view is that investors shouldn’t take comfort from the only modest magnitude of the residential price decline, as the worst of the economic damage could be front loaded and be occurring before the official ‘rear view’ economic data is published.
Also warning on property, as well as more broadly on the economy, Chris Watling at Longview caused some controversy on his stark outlook in ‘Australia in 2019/202: Recession likely, rates heading to zero’. The headline gives you a taste, but he concludes to say that:
“As the wealth effect from rising house prices reverses, households should continue to deleverage and their savings rate should start to pick up (as is typical during housing downturns, fig 1). This will, in turn, result in weak/contracting household consumption growth (i.e. the primary component of GDP), and should result in a recession later this year or early next year.
Whilst a series of RBA rate cuts is therefore likely (beginning in the latter half of this year), that policy response is probably too late, given that policy works with lags and downward momentum in housing is already underway. We expect the RBA to cut rates to zero and potentially use other policies, e.g. QE.
In the event of a systemic banking crisis (not our base case – 20-25% probability), it is also likely that significant government intervention would take place to recapitalise Australian banks”.
In ‘The world can’t handle higher rates’, Vimal Gor, who is Head of Bond, Income and Defensive Strategies at Pendal Group discusses the big picture with James Marlay, exploring the ‘big picture’ factors that will impact asset markets through 2019.
Vimal's outlook may not be sugar-coated, and some have called him a perma-bear, but his calls have been correct again and again.
If you've found this piece useful, please like, follow, comment or share it with investing friends. Thank you for your support, have a great Easter break and all the best for a prosperous investing journey through the rest of the year.
Shortlist for links
ANDREW CLIFFORD, Platinum Asset Management; and HAMISH DOUGLASS, Magellan Financial Group; with JAMES MARLAY, Livewire Markets
ROBERT MILLNAR, Washington H Soul Pattinson; with PATRICK POKE, Livewire Markets
ROGER MONTGOMERY, Montgomery Investment Management
PETER QUINTON, Bell Potter
MARCUS TUCK, Mason Stevens
JAMES GERRISH Market Matters / Shaw and Partners; JOE MAGYER Lakehouse Capital
Featuring 10 participating managers
Featuring 7 participating managers
PETER GARDNER, Plato Investment Management
ANDREW TANG, Morgans
PHILIPP HOFFLIN, Lazard Asset Management
CHRIS WATLING, Longview Economics
VIMAL GOR, Pendal Group