Buy Hold Sell

One of the busiest times on the investor calendar is finally over. Fund managers are returning home to see their families, and investors don't need to worry about stocks crashing on bad results for time-being. 

This August, just 22.4% of stocks covered by FNArena beat expectations, the weakest result in more than three years, with the ratio of beats to misses also sitting at multi-year lows. It’s not all bad news though, as the number of rating upgrades improving significantly compared to February.

In this week’s Thematic discussion, Ben Clark from TMS Capital speaks to Jun Bei Liu from Tribeca and Andrew Mitchell from Ophir Asset Management to get their take on how the health of corporate Australia is holding up this year.

Transcript

Ben Clark: Welcome to Buy, Hold, Sell. I'm Ben Clark, and today we're going to do a wrap of reporting season. It's been a really busy couple of weeks. We're getting close to the end of it. I'm sure we're all looking forward to a break. But before we do, we've got Andrew Mitchell from Ophir and Jun Bei Liu from Tribeca.

Ben Clark: Jun Bei, I might start with you, overall impressions of reporting season, maybe a bit of an overview of the market, generally, defining themes that you saw coming through?

Jun Bei Liu: Yeah, look, we quite like this reporting season because we feel the companies that delivered a good result, good outlook, have generally been bid up, whereas the companies that delivered disappointment, no matter how cheap they were, they continue to get sold off. So I guess one of the theme that coming out of reporting season, that there's been a lot of value traps and it works on both sides. Some of the examples such as Boral (BLD), it was cheap and then the savage reaction to the share price was down 20%, and on the upside was the tech companies such as WiseTech and Afterpay that delivered to expectations with strong growth outlook, the share price rallied away.

Ben Clark: Yeah, I think that's a pretty good summary. But Andrew, have you got anything you can add to that?

Andrew Mitchell: From our point of view, I won't disagree but I'll come from a different tack. We found it actually quite frustrating. We felt that we've done as well as we have in past reporting seasons in terms of forecasting the earnings. But the six weeks of trading in July has been really what's taken stocks either skyrocketing that way or falling through the floor the other way. So, obviously the retailers, you saw JB Hi-Fi (JBH), Supercheap (SUL), Lovisa (LOV), seven weeks good trading. The market really catches on to that.

Andrew Mitchell: But then we've had other stocks that have given weaker outlooks, like Cleanaway (CWY), which has always been quite conservative and has done so well for so long, and has been punished significantly. So, we've found it a bit harder, this reporting season compared to the previous reporting seasons. But hopefully it all clears.

Ben Clark: Work itself out-

Andrew Mitchell: Exactly right. Yeah.

Ben Clark: ... as we're going to the end of the year. An added complexity, I reckon, this time round has been, we've had the big macro stuff going on, the Trump tweets, a fair bit of volatility in overseas markets, to a lesser of extent locally. How have you handled that on top of ... because do you feel like there's a bit of bit of fear, a bit of gloom coming back? But a lot of the CEOs we heard from, I didn't really get that message coming through.

Andrew Mitchell: No.

Ben Clark: Do you think it's been a bit of a disconnect.

Andrew Mitchell: I agree. I agree. Well, I think maybe the companies that have performed well to date, they were more conservative, we saw. They didn't need to be super bullish, because they've always delivered. Where maybe some of the companies, not that it's done badly, but a realestate.com (REA) and a Domain (DHG), they're saying, "Oh, look. Buyer activity is coming back." So we're seeing pockets of optimism there, and as the retailers I mentioned, the Supercheaps, JB Hi-Fi's, Lovisas also all talking about more positive comps, and the retailers really caught a bid this reporting season on that optimism, tax cuts and the likes.

Andrew Mitchell: But at the same time, maybe you look at the builders and we spoke about Boral before, Adelaide Brighton (ABC), Reliance (RWC), there are pockets of concern in that rezzy construction part.

Ben Clark: Yeah. Which is more locally focused, I guess, because the housing market's had a bit of a trickier time. Jun Bei, how did you feel matched up? We had some pretty nasty headlines, $24 billion wiped off the share market. But it felt pretty consistent from a lot of companies that presented.

Jun Bei Liu: Yeah, look, we certainly feel so, but the commentary out of the more international earning facing companies, we have heard a bit more caution in terms of Brexit impact as well as the tariff impact, some of the retailers, Breville (BRG) talked to it, but smaller impact, but then of course Reliance actually got hit on both sides, both the tariff impact as well as the Brexit uncertainty.

Jun Bei Liu: And it's very difficult for companies such as Reliance to really forecast properly of what the impact might be given Brexit. But it's only in certain pockets, and I think quite rightly, Andrew touched on before, is the domestic segment is interesting, because retailers are talking to the green shoots, whereas the builders are actually still in a downgrade mode. But it's quite simply, heading into reporting season, we knew people were way too optimistic with the builders, because any improvement in the housing market will take at least 12, 18 months time before we see the bottoming in any of those activities.

Jun Bei Liu: So, it's just way too early to pile into those those names and it's quite pleasing either reporting season, we see that investors realised that and the reaction is quite rational. But of course, there's overselling and all of that, but reactions quite rational based on what the earnings were.

Ben Clark: Yeah. And so going in to the month, how are your portfolio positioned, and has there been any changes that you've made to it or do you feel you will make to it coming out of August?

Jun Bei Liu: Look on the hindsight of performance that we position strongly into this reporting season. Look, we just stuck to, we held the companies that's expected to deliver earnings upside relative to expectations and we shorted the companies that's going to disappoint. We pay a lot of attention to how expensive they are, because the more expensive you are, the more important it is for the company to meet expectations. There's a few examples of stocks that actually fell meaningfully when they missed marginally.

Jun Bei Liu: One example is Cleanaway. The result itself was actually okay, they missed a little bit, but there is a bit of a downgrade for next year. But because it was expensive, the share price fell quite a lot. So that is what we watch when we head into reporting season. Coming out of it, I don't think we'll make much changes. I think things worked as they expected.

Ben Clark: Okay. And Andrew, sounds like you've found it a little bit more frustrating. Is it a matter of staying the course and sticking with the names that you've got and waiting for the market to catch up to them or is there some changes you feel you'll make coming out of it?

Andrew Mitchell: No, we haven't made any big changes. We feel that we accurately forecasted where the businesses are and they're taking market share and they're growing. We're not so much taking sector bets if you like. We're looking for businesses that are structurally growing, that are taking market share, have new products and the likes. So it's hold the course at the moment.

Ben Clark: Yeah, that's good. And with us, almost a fever pitch leading into the earnings period of the really expensive stocks, they're going to get hit at some stage and they're too expensive, the WAAAX, et cetera. And you're better off looking at cheaper areas of the market. Valuation wise, because we've just seen those expensive stocks have roared ahead. And as Jun Bei was saying, a lot of the cheaper ones have come back even further. How do you see the market value? It's a bit of an arm wrestle in there.

Andrew Mitchell: We think that the big mistake that a lot of people are making is they're looking at historical PEs or where the market's traded previously. And what is not happening is comparing where interest rates are and what that means for valuation. So if you look at 10-year treasuries in the fixed interest market, they're trading at 50 times PE with no growth. So, if you're a company that can show that you can grow, no matter what, take market share, grow into big markets, there's a wall of money that's looking for these businesses. So these quality businesses that trade on big multiples, we don't see while interest rates are further falling, that they really going to get hit hard unless they miss their expectations of course.

Andrew Mitchell: So, while we're not chasing these high valuation businesses or these high growth, high valuation businesses, I'm not particularly concerned that the end is in sight for these businesses.

Ben Clark: Yeah. Okay. And anything you can add to that, Jun Bei, it sounds like you've been on that side of the trade, regardless of a bit of the fear or the concern that was out there?

Jun Bei Liu: What makes you think that? Look, I firmly believe that this is time where you actually do manage the portfolio risk. It's important to have a diversified portfolio, and where you do have growth stocks like we do, we manage that downside risk. We're actually reasonably neutral at in terms of our portfolio average PE, is not very different from the market. Market's sitting at about 17 to 18 times. It's not very different.

Jun Bei Liu: And how we manage it is through short (positions). For example, if we love a couple of tech companies and we position well in them, but we do short others where we feel it's just way too expensive. And so tomorrow, if the NASDAQ falls 20% on the back of Trump tweet or anything, I won't worry because the tech that I hold will be a better tech, a better quality company based on fundamental research. And the ones that are short should be the worse-off companies. So in that environment, I should net-net still do better. At the same time, I hedged of my risk, that is a macro risk I can't control.

Ben Clark: Okay, well I think that's a great wrap. How you're positioned now and how you're going to position over the next few weeks will probably really have a big influence on the next six months of performance of your portfolio, and that's some great advice.

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