A second consecutive day of selling with the ASX trading in the red for most of the session – a few stocks bucking the trend on broker moves but in aggregate a fairly soft session across the board. As we discussed in the AM report today, the selling yesterday (and overnight in the States) was focussed on the ‘yield stocks’ and that theme was again obvious today but we also saw the high PE stocks feel some pain. All in all, it seems like a time to sit tight and think about stocks to BUY if the market continues lower from here. We are sitting on a healthy 26.5% cash position in the MM Platinum Portfolio so while we are expecting to bring out the buyer’s hat into weakness, patience feels the best option for now.
In terms of economic data, Retail Sales were good and that helped to put a bid tone under the consumer stocks…+1.2% v consensus of +0.4% - the strength led to buying in the Aussie Dollar which was trading at US78.75/c at 5.15pm
On the market today all sectors ended lower, with the IT sector feeling most pain, falling -1.43% (courtesy of CAR). On the Flipside, the Retailers did ok tks to a broker upgrade on JB Hi Fi (JBH) and decent print on retail sales. We had an overall range today of +/- 44 points, a high of 6097, a low of 6053 and a close of 6067, down -29pts or -0.48%
ASX 200 Intra-Day Chart – some buying into the close
ASX 200 Daily Chart
1. Carsales (CAR) $14.31 / -4.92%; Sellers hit this one reasonably hard today courtesy of a Credit Suisse downgrade and pretty aggressive 12 month price target of $13.50 versus yesterdays close of $15.05. The broker saying that valuation too rich for the growth runway that it has – similar scenario presented a few weeks ago when UBS downgraded. Volatility picking up here which is a sign of a top – similar to the theme I cover below on a2 Milk. We don’t own Carsales Daily Chart
2. JB Hi-Fi (JBH)) $27.99 / +4.44%; On the flipside of that, Morgan Stanley had some nice things to say about JBH, essentially mirroring our thoughts from yesterday as they upgraded their recommendation to overweight (BUY) with a BIG $32 price target. The rest of the mkt is reasonably neutral on JBH as you can see below, however the reasoning given by MS essentially boils down to the stock being oversold near term on Amazon fears. They still caution about the longer dynamics in the sector which we tend to agree with - Our broader view is to still caution a wholesale rotation towards consumer-facing stocks at this juncture. Our view of a slowing housing market, low wages and rising cost of living give little scope for a sustained cyclical rebound in the consumer sector. Furthermore, the structural issues around Amazon-led disruption and continued increases in competitive intensity have far from abated in the medium term. (Morgan Stanley).
In short, they think there is a short term trade there but not a lot more. I think the stock has now run too hard and from a risk / reward perspective, the trade no longer stacks up. Ditto for Harvey Norman – we’re thinking about the levels to sell that stock rather than buy it. We don’t own JBH however we own HVN in the Income Portfolio.
Morgan Stanley are clear outliers in terms of their price target ($32) sitting +20% above consensus
JB Hi Fi Daily Chart
3. High PE Stocks ; Our discussion this morning around higher interest rates focussed on the yield play stocks, and they were hardest hit yesterday + again overnight in the States, however today some of our higher PE ‘growth stocks’ - those names that have dominated newswires in 2017 that felt the pinch – Blackmores (BKL) took it on the chin today losing 5.39% while we also saw some solid selling in A2 Milk (A2M) which traded down -4.63% to close at $7.01 We traded A2 towards the end of last year and was a stock that got a lot of subscribers active on the email – penning their thoughts, which we like. We purchased it into the mid November weakness and Sold it around the 22nd locking in a nice +20% profit. Granted, we were late to the party and missed the big upside move before that however you can’t be in everything! Today’s move is a shot across the bow and the technical structure of that stock now looks very weak – a major topping pattern seems likely. At the time we sold A2M we wrote…
From November 23rd AM report
Yesterday we took a very healthy ~22% profit in a2 Milk (A2M) but some of the comments we received were interesting but happily not negative.
- When we bought the stock after its $1.58 / 20% correction people wondered why we were buying a stock that had run so hard in 2017, questioning if we had missed the party.
- When we sold yesterday, before our $8 target area, people wondered why we sold a stock that looked so good.
Our answer is pretty simple – we were very happy with 22% in just a fortnight, the stock was within a few cents of our technical target and importantly the stocks volatility has gone gangbusters often implying a top is being formed i.e. the average move of the last 4 weeks is over 90c / almost 12%.
A2 Milk (A2M) Monthly Chart
That volatility has continued to play out which as we suggested at the time, is often a sign that a top is forming.
We then covered it early December – and this view still holds true.
From the 5th December report
1 a2 Milk (A2M) $7.48
For now, we will observe but any weakness back under $6.50 is likely to see MM again accumulating A2M. This may seem a large move but A2M can be a very volatile stock.
A2 Milk (A2M) Monthly Chart
…and todays Chart – a2 Milk Daily Chart
4. Iron Ore Stocks: Worth watching in the next 24/48 hours given the Pilbara Ports Authority has activated cyclone response following Tropical low formation. Looks like Port Hedland will be missed but the Pilbara iron ore mining district(s) might get some rain that stops production and puts upward pressure on Iron Ore prices…
Have a great night
James & the Market Matters Team
Prices as at 11/01/18
James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.