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Showing posts from 2018

Ten Thousand Words - December 2018

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

This month, Evans & Partners sets out the downward trend in earnings expectations for the S&P/ASX 200; capital flows into short-term bonds while the World Uncertainty Index has been on a long-term upward trend; the best performed stocks in Australia between 2007 and 2017 were yield plays and the worst were stocks with no yield; while back in the US, academics show IPOs can be dicey and Bianco Research highlights an increasing percentage of US companies don't cover their interest expense with Earnings Before Interest and Tax

Revisions to FY19 earnings expectations for the S&P/ASX 200


Source: Evans & Partners



Flows of capita…

Copper Got Hot

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We're finalising a "State of the Market" presentation for clients of Equitable Investors and have been thinking about different ways to look at how "hot" the Australian sharemarket got.

Here's one chart we put together showing a surge in the level of interest in the daytraders chat forum, HotCopper, as measured by Google Trends

















The AFR, the local must-read for investors, has maintained steady interest levels since 2010HotCopper, the home of speculators and daytraders, has experienced a surge in interest“Peak” HotCopper appears to have been January 2018Interest in speculative micro-cap and tech stocks was curbed ahead of the broader market decline in October amid scandals that played out earlier in calendar 2018 such as the collapse of online video review business BigUn and the implosion of logistics app player GetSwift.

Ten Thousand Words - November 2018

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

This month, the stock price of listed hedge fund giant Och-Ziff shows that buying things just because they have plunged in price doesn't mean they will go up again; high-flying ASX listing with P/E multiples greater than 26x were the most heavily sold in October; while The Reformed Broker highlighted just how significant changes in P/E multiples are to returns; historic data shows there's no reason, based on seasonality, to expect a bounce in ASX small industrials in November; Pimco sets out how correlated with equities different debt instruments are;  and Stratfor charts out how the top 15 cities hold ~11% of the world's wealt…

October Sell-Off Hit High-Altitude PE Stocks Hardest

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Companies listed on the ASX with high price to earnings multiples bore the brunt of last month's sell-off.

Equitable Investors reviewed the data on the torrid month for learning and insight. Figure 1, below, shows the worst hit companies were those with price-to-earnings (PE) multiples greater than 26 times the earnings reported in the last 12 months.

Almost 90% of companies with PE multiples of between 40.4x and 80.3x declined in October, compared to about 78% of all stocks.

The least impacted stocks amid the negativity were those trading on multiples close to the market average in the band of 16.3x to 19.6x.


Figure 1: October share price performance sorted by Price-to-Earnings (PE) multiples (using earnings from the last 12 months) at the beginning of the month

Source: Equitable Investors, Sentieo
Note we have excluded most negative PE bands from this table


As noted in this column for livewire markets, a high-flying company like logistics software group Wisetech Global (WTC), priced…

Rocky - tober

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We keep hearing about the "October Effect" - it even has a definition at investopedia.com.au. October 2018 has clearly been a shocker for equity markets. The S&P/ASX 200 Index is down 6.5% and the indices covering smaller Australian stocks are down at least 10%.

Earlier this year we pulled together five years of weekly price data for the S&P/ASX Small Industrials Index and reviewed the week-by-week average performances. So we've returned to that data to have a look at how this index performed in Octobers past.

We counted a week as belonging to a month if its last trading day was in that month - so the week ended September 1, 2017, was grouped in September even though it started in August.

Based on this data, October does not stand out as such a troublesome month: only the first week of October had a negative return on average, with the other weeks up on average. The first and third weeks of October have been negative more often than positive - but other months we…

Ten Thousand Words - October 2018

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

This month, Grandeur Peak shows that the benchmark return can be reliant on just a handful of stocks, while JP Morgan reminds us that when you've really picked the wrong stock, its a long way back. Checking in on S&P/ASX 200 weightings, we see that the financials and materials sectors are just over half of the market benchmark. Cannabis stocks, meanwhile, continue to be favourites with traders and the Wall Street Journal sets out some stark valuation comparisons. And research into private equity deals shows that its increasingly normal for deals such as the transaction this week where accounting software firm MYOB's private equ…

Turning the Spotlight Back on Investment Managers

As investors in listed companies we often highlight the importance of alignment - we want executives and boards to have bought into the ordinary shares of their company just like we have. The data shows - as highlighted in Equitable Investors' "Seeking Advantage" paper (you can read it here) - that listed companies with executives that own a material shareholding perform better than other companies.

So it only seems logical that investors in funds and other investment scheme structures would like to know that the fund managers, similarly, have committed capital alongside the investors.

The Financial Times recently reported that "Half of the 15,000 mutual funds in the US are run by portfolio managers who do not invest a single dollar of their own money in their products". It went on to name funds management giants like Vanguard, Black Rock and State Street as organisations where the majority of their funds were run by managers who had not invested anything in th…

Ten Thousand Words - September 2018

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.

This month State Street demonstrates that buying stocks based on valuation has usually worked - but not in the current calendar year. Does that mean growth is in a bubble? Others ask if there are bubbles in cannabis or in the bond market. Fund managers are fearing trade wars. But Morgan Stanley shows that pulling money in and out of the market is often a flawed approach.

Meanwhile, fund services group Mainstream (ASX code: MAI) and drug prescription adherence tech play Medadvisor (ASX code: MDR) chart out some of their target markets (equitable Investors Dragonfly Fund has positions in both companies).

Value is usually rewarded in both high…

Reporting Season - Plenty of Energy but More Broadly EPS Targets Retreat

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Share prices should be reflective of future expectations rather than the past. Earnings reports provide vital new information to tune expectations but on their own shouldn't dictate share prices. That is why, with the ASX reporting season now at an end, we look at changes in analysts' earnings expectations as an indicator of the strength of the season. We see these changes as far more instructive than simply whether the reported financials were better or worse than analysts' targets.

Analysts have been forecasting earnings on just under 500 ASX listed companies. In aggregate we didn't find much to get excited about. Over the course of the month of August, the average change in the consensus earnings per share forecast for fiscal 2019 was -1.76% - or -0.54% if the average is weighted by market cap.

Looking back over the past two months, capturing the impact of earnings guidance announcements made by man companies in July, the simple average EPS revision for 2019 was -1.…

Confucius didn’t say “One Picture Worth Ten Thousand Words" but here's some charts anyway...

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Apparently, Confucius didn’t say “One Picture Worth Ten Thousand Words” after all. It was an advertisement in in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Starting this month, each month we will share a few charts or images we consider noteworthy.
This month we kick off with charts covering a reversal in fund flows in Australia, metrics on two companies in the Dragonfly Fund portfolio, Citigroup's neat illustration of market liquidity, an illustration of the power of price-to-earnings multiple expansion and Star Wars viewed through the eyes of a volatility trader.

Equity Fund Country Flows - Australia (USD) Source: FT.com, EPFR Global


Rhinomed (RNO) continues to scale up quarter-on-quarter Source: RNO’s “Investor Update - August 2018”


Empired (EPD) - EV/EBITDA (next 12 months consensus) over past 5 years
EV/EBITDA = Blue | Share price = Red
Source: Sentieo

“W…

Big Un's new set of accounts show Cash Flows ain't Cash Flows

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Castrol always told us that "oils ain't oils" and Big Un has now confirmed that cash flows ain't cash flows.

The failed online video review business finally released its accounts for the six months ended December 31 and they showed operating cash flows were sharply negative to the tune of $9.4m (Figure 1, below).

That's completely at odds with the positive $16.8m operating cashflow reported for the same period ("Year to date" column in Figure 2, below) when Big Un announced them six months ago.

Figure 1: Big Un's net cash used in operating activities as reported on its newly released half year accounts.



Figure 2: Big Un's net cash used in operating activities as reported in its quarterly cash flow statemnet released in January 2018.


What's the difference? In the newly released half year accounts, Big Un's accountants have adopted an accounting standard under which "no  revenue  is  recognised  on  receipt  of  monies  from  sponsors, …

Aussie large caps haven't done so great in USD

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Large cap Australian stocks appear at first glance to have held up better than global benchmarks in the latter half of the financial year.

While the S&P/ASX 200 has risen to its highest levels since the GFC, globally the Wall Street Journal recently published a chart illustrating that there had been a nearly $US10 trillion decline in world exchange market capitalisation since a peak in January 2018. The Russell 3000, a broad index of US stocks, peaked on January 31 and has pulled back ~4.5% since then.

But once you consider exchange rate movements, you can argue that Australian equities haven’t performed so well. Figure 1 shows that from a US dollar perspective, Australian large cap equities have declined since late January. Note the AUD peaked at $US0.81 in Jan and is now ~ $US0.74.
Figure 1: iShares’ US-listed MSCI Australia ETF (USD, orange) v iShares’ ASX-listed S&P/ASX 200 ETF (AUD, purple) Source: Thomson Reuters
MSCI itself reported that its Australia Index has declined by…

Tax Loss Selling - Footnote

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Earlier in the year we reviewed weekly returns for the S&P/ASX Small Industrials Accumulation Index between January 2013 and January 2018. In the context of the previous blog entry, Tax Loss Selling, we went back to take a second look at that analysis (when we originally did these numbers, we were looking for any sign of the "January Effect" - it is often said that small caps generate their excess return for the calendar year in that one month but we don't see convincing evidence that this holds on the ASX).

This data shows the first week of June as typically the worst of the calendar year over the past five years and subsequent weeks in June also being lackluster.

Consistent with the chart from Wilsons in the previous blog entry, July in contrast has typically started off strongly and continued to power on.

These aren't projections - history may rhyme but doesn't precisely repeat.

Figure 1: Average performance of S&P/ASX Small Industrials Accumulation Ind…

Tax Loss Selling

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June is typically a volatile month for the Australian sharemarket as investors sell poorly performed investments in order to generate losses that offset gains realised throughout the financial year. This trend is thought to impact on smaller stocks the most.

The strength of the June trend is highlighted in Figure 1, from Wilsons. What Figure 1 doesn't show is that after tax loss selling is largely executed, the back end of June can benefit from less selling pressure.

Figure 1: Average monthly index performance since the GFC source: Wilsons Equity Research
Equitable Investors' review of the numbers suggests this year's tax-loss driven activity has probably been greater than in the prior year.

Focusing on the smaller stocks, we identified 205 industrial "tax loss" stocks with market caps between $20m and $200m that had generated negative returns in the first 11 months of the financial year.

Between May 31 and June 19, 68.5% of those stocks have generated an additiona…

Getting Industrial - 5 year returns

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Industrial stocks, within their broader definition (ie stocks that aren't miners or explorers), are what the Equitable Investors Dragonfly Fund is focused on. We ran some numbers for a presentation on the Fund and pulled together the following two charts on the historical performance of ASX industrials.

Past performance is not an indicator of future performance but we think there is still much to learn from history. Our take from the charts below:

the distribution of individual stock returns has been favourable but you've still got to carefully avoid a reasonable number of booby traps;the smallest stocks have been, consistent with our expectation, the source of the greatest performance - on average and in terms of the best performed stocks; but mid-caps have also been a sweet spot.  


Volatility & Valuation - an ASX "chart check" for April 2018

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Things are certainly getting more interesting in equity markets when an Aussie can go to sleep on Wednesday night with the Dow Jones Industrial Average (a very poorly constructed index) dropping as much as 510 points only to wake up on Thursday and find it has recovered 741 points.

Here's some charts we review when checking the market's temperature.

Large cap indices are now down over the past 12 months, while small cap indices have also been in decline.


Figure 1: Momentum (12 month trailing returns)
















Source: Thomson Reuters, Equitable Investors


The ASX version of the VIX (an index that calculates the volatility implied by the pricing of index options by investors hedging or speculating on stocks) rallied late in March.

We see more value in volatility measures when contrasted to pricing and Figure 2 shows the ASX 200 PE multiple divided by the level of risk - our "Risk on Index". This index will be higher when PE multiples are high and the VIX is low, implying higher l…

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