Equities

In January, we published the results from our reader survey, including the ten most tipped stocks from the 2500 stock calls submitted. By the end of March, this group of stocks was up on average by 26.9%

They have kept on performing from there, with all ten stocks well in the black, and the group now up by an incredible 43.0% (or 45.5% with dividends).

This is not a group of racy microcaps; all ten stocks are in the ASX200, and five of them are in the ASX20. The average market cap is $51 billion, and the smallest stock, Appen, is $3.4 billion. 

This 45.5% gain year-to-date also puts the readers a good margin ahead of the fundies. If you missed it, yesterday we provided an update on the fundies’ picks for 2019 which are up on average by (an also impressive) 32.9% for the year.

The top performer in the fundies' group was a gold producer, which had nearly doubled on the back of fundamentals and then a surging gold price. However, there was no gold in the readers’ ten most tipped stocks, so where has this remarkable performance come from? 

To find out, in this wire we take a look at how the Ten most tipped stocks have been faring, and what our partners have been saying about them recently. 


WAAAX stocks leading the charge

The three top performers at this stage are from the WAAAX collective: 

  • Appen (APX): +120.3%
  • Afterpay (APT): +99.8%
  • Altium (ALU): +57.1%

Love them or laugh at them, there’s no disputing these stocks have generated a lot of alpha for investors who have accepted the nosebleed valuations. 

It’s worth noting however that most of the performance for Afterpay, Appen and Altium came in the first quarter. Since the end of March, only Appen has kept soaring (another 26% over the quarter), while Afterpay and Altium put in more modest gains over the quarter (12% and 6% respectively). Given the headwinds of regulatory issues, and a substantial capital raise, it’s perhaps remarkable that Afterpay is up over this time at all.

We recently reached out to Wilson Asset Management, Investors Mutual and First Sentier Investors to discuss the bull case and bear case for these stocks, which we published in the wire WAAAX on WAAAX off which provided a great review of this group as a whole and at stock level. 

Lucas Goode at Investors Mutual included a remarkable chart in his commentary that shows just how stretched the valuations now are for the WAAAX stocks (minus Xero in the chart as it is loss-making): 

There has been no shortage of cautionary commentary on the WAAAX stocks from other managers in recent weeks as well, most recently from Anthony Aboud at Perpetual, asking ‘How are these valuations behind justified’?

“...the Market Cap/Sales and P/E multiples of these businesses has increased significantly since January. The average Market Cap/Sales multiple of the group of stocks has increased from 9x to 14x and the average P/E has more than doubled in the last four months from 39x to 85x!!!!

Looking at them at stock level, Lucas Goode at Investors Mutual warned investors on Appen (APX), writing that: "While many remain excited about the company’s prospects, APX’s lack of recurring revenue and poor visibility is an issue for us. Despite the growth, we struggle to see Appen as a high-quality business and are unable to justify the current valuation of more than $3 billion."

Martin Hickson at Wilson Asset Management, was, however, more bullish on Appen, saying: "They are currently generating five times the revenue from the customers they acquired four years ago, and so as they continuously keep adding new customers their revenue should continue to grow exponentially over the coming years."

Martin Hickson also wrote on the bull case for Afterpay, in that: "Our catalyst to invest in Afterpay Touch Group Limited (ASX: APT) came from the strong momentum the business was having in signing new clients in the United States, with a number of large retailers such as Steve Madden and Urban Outfitters publically endorsing APT. We believe Afterpay will likely continue to sign large marque brands and successfully penetrate the US market."

Dawn Kanelleas and Michael Joukhador, CFSGAM wrote on Altium to say that: It has demonstrated a disciplined approach to investment to deliver excellent margin growth (highlighting the available operating margin as the revenue increases). The first half result, as a good example, demonstrated 24% revenue growth, margin expansion and 58% profit growth. While many investors would baulk at the PE multiple, we have been able to look through this short term valuation measure and focus on the significant value creation opportunity for the business over the coming 3 to 5 years". 

Resources: Solid performers with solid yields

  • BHP Group (BHP): +26.8%
  • RIO Tinto (RIO): 37.1%
  • Woodside Petroleum (WPL): 19.5%

So while the WAAAX stocks bumped up against a collective PE close to 100, it was not them but the rest of the most tipped stocks that have moved the dial this quarter. In particular, resource majors, Rio and BHP have pushed hard, with Woodside no slouch either. 

I should point out I am including their dividends here, which have been substantial. BHP has paid out $2.19, Rio $5.89 and Woodside $1.27 so far this year, giving them yields of 5.7%, 5.6% and 3.5% respectively from 2018 closing prices. In fact, with Commonwealth and Macquarie paying well too, the average yield across the most tipped list is a not-too-shabby 2.2% (over 6 months), which frankly I'm not accustomed to seeing when reviewing stock tip lists! 

The strong yield from resource stocks had been well flagged in 2018 by our contributing fundies, but to update and expand on the theme, we recently reached out to Peter Gardner at Plato Investment Management to discuss the yield on the major resource stocks in ‘Digging deep for Dividends’ and also look at some of the other large caps with a reasonable yield. Peter sent us an excellent chart that tells the story:

Summarising, Peter told us that: "The 2018-2019 financial year has seen a dividend windfall for investors from Australian resource companies, an industry that isn’t historically associated with high levels of income. The cause of this windfall has been strong commodity prices (particularly iron ore prices after the Vale dam disaster caused a significant reduction in Brazilian supply, which helps BHP, Rio Tinto and Fortescue) without significant re-investment, asset sell-downs (Rio Tinto sold its Coal mines and BHP its US shale assets) and the potential changes to franking credits if the ALP had won the Australian election."

Thinking about Woodside (WPL), Dr. Suhas Nayak at Allan Gray provided a synopsis on their long-term thesis for Woodside in our last update, which is just as relevant now:

We invested in Woodside because it was low on the cost curve and had long-life, quality reserves to draw upon. In hindsight, we were too early with our call, but in our view the short-term noise did not take away too much of the company’s long-term value. Towards the end of last year the oil price fell sharply again and presented another small opportunity. Despite negative sentiment around oil prices, it’s not all doom and gloom for Woodside in 2019 and beyond. The company’s primary activity is the sale of LNG from three projects in Western Australia. While this year should be a low point in its production profile, two promising large LNG projects (Scarborough and Browse) along with smaller projects in Senegal and Myanmar, suggest that production growth could be strong in the years ahead.

Aristocrat (ALL): +41.7%

Aristocrat Leisure is top performer outside the WAAAX stocks, and also wins 'most improved' over the quarter, coming from +11% at the end of March, to +42%. 

When we asked Charlie Aitken for his take on the stock in our last update, he summarised to say that:

  • Aristocrat has a very strong 5 year track record in the digital space. In 2012 ALL paid $20m to acquire Product Madness, as its first foray into the digital space. In FY17 Product Madness delivered earnings of around $160m.
  • The Big Fish and Plarium acquisitions provide Aristocrat greater exposure to a segment of the industry that is growing much faster than traditional land-based segment. The two most relevant mobile categories (social casino and casual games) grew at a 26% and 35% CAGR respectively between 2015 and 2018 (according to App Annie).
  • For context these acquisitions currently represent only around 12% of ALL’s current earnings stream (ie. they haven’t bet the house on it).
  • At current prices you are arguably getting the two new digital businesses for free."

Financials: Macquarie +19.9%; Commonwealth: +17.0%

Macquarie and Commonwealth (CBA) have put in reasonable performances, with the numbers above including $3.60 and $2.00 in dividends respectively. 

As for the biggest stock on our market, Commonwealth Bank (CBA), its size alone made it an odd choice for a stock tip, but 29 readers put their name on this one, and so it was included in the list.

Livewire contributors have been a bit quiet on the stock since their results, apart from a brief mention in a recent panel discussion on Livewire, Are the banks back in town, with Jun Bei Liu from Tribeca Investment Partners and Sam Granger from Totus Capital. 

They gave their take on the big four, while also naming their standout pick among. Commonwealth didn't get much airtime, and was not popular with the panelists, with Jun Bei telling us that: "CBA has always been expensive because of the high ROE they maintained. But in a latest result we've seen that's coming out."

The silver doughnut, Macquarie Group (ASX:MQG), has generated total returns for the year of nearly 20%. In Bell Potter's recent research wrap, ‘Analyst Outlook and Top Stock Picks for FY20’, Banks analyst, TS Lim, picked Macquarie for the year ahead, saying that:

“Macquarie Group's (MQG) value lies in its ability to manage risk and adapt to changing market conditions. This has allowed itself to gradually transform and push for higher sustainable risk-adjusted returns. MQG is largely a global asset and risk manager with world-class expertise in infrastructure investment and deep capabilities in finance and banking. Buy, price target $140.00."

CSL Limited (CSL): +15.9%

Every growth investor's favourite plasma producer, CSL, has crept higher through the year and is now closing back in again on its all-time highs. The stock was discussed in a recent episode of Buy Hold Sell. Henry Jennings from Marcus Today was guarded on the basis of trade war risks, while Michael Wayne from Medallion liked it: I'm going to say buy on CSL. The Australian dollar's been under a lot of pressure, it generates a lot of its earnings overseas. There's still ongoing issues with some of their competitors and their ability to supply the market. CSL's history, its size, its scale is enabling them to really capture the market at a time when others are struggling so I've got them as a buy despite the high PE.' 

+45.5% at half-way.... so where to next...?

With a mix mid-caps and blue chips, Livewire readers are smashing everyone at this point (they're clearly reading the right stuff)! The question is where to next from here? With 45.5%, many investors would take the risk off the table, lock in the performance and take a long holiday. 

But this is not a portfolio, and we have six months ahead of us. During this time we could see trade wars escalate, the Aussie economy under stress, central bank shenanigans, and a black swan (or two) come in to roost. Who knows. As Rumsfeld put it, 

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don't know we don't know". 

So, with that note of caution, I'll let the market do the talking before reporting back on the most tipped stocks at the end of the September quarter. 

Hit ''follow" for future updates

If you've found this piece useful, please send to your investing friends and colleagues, and hit follow to be the first to get future updates. Thank you for your support, and all the best for a prosperous investing journey through the second half of the year.




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