Equitable Investors

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 t...

"From Little Things Big Things Grow" is a song by Australian singer/songwriters Paul Kelly and Kev Carmody that may have been about an indigenous protest movement but resonates with how we see investing. The chart below, sourced from the Credit Suisse Global Investment Returns Yearbook 2018 (Summary Edition) is another reminder of the power of growth from a small base. The authors relied on size-ranked US data from the Center for Research in Security Prices (CRSP) at the University of Chicago Booth School of Business. The chart shows the long-term performance since 1926. Stocks were split into deciles, with large-caps defined as deciles 1–5, smallcaps as deciles 6–8, and micro-caps as deciles 9–10. While a dollar invested in larger companies, with dividends reinvested, grew in value to $US5,767, a similar investment in small-caps gave a terminal value almost seven times greater at $US38,842. Micro-cap stocks did best of all, with an end-2016 value of $US60.276. T...

While the return of volatility is interesting, February will ultimately be about profit results and the outlook commentary that accompanies them. ASX listings with a December 31 half-year or full-year balance date have until the end of February to release their financials for the relevant period. Our analysis of Reuters’ consensus earnings forecasts for fiscal 2018 shows that over the past month the average earnings per share forecast drifted 1.4% lower but the median was unchanged. Most of the large downgrades were for resources businesses. Last week alone Canaccord added eight downgrades to their earnings revision list - and noted that eight small industrials have already downgraded at least twice. Myer Holdings (MYR) and Murray River Organics (MRG) were notable for having delivered multiple downgrades. The Equitable Investors Dragonfly Fund maintains a position in MRG because it trades at a discount to its net tangible assets (something that cannot be said of MYR) and we are...

Warren Buffett says, “I just sit in my office and read all day.” Not everyone can afford to devote themselves to reading to that extent so here's a shortcut - the headlines that caught our eye this past week and compelled us to click and read... Short sellers eye better days after Steinhoff and Carillion wins | FT “In the past few months there have been a number of accounting-related shorts, such as Steinhoff International and Carillion, that have been big money makers,” says Alper Ince, an investor in hedge funds at Paamco. “I think there is an expectation among short sellers that we may see more of these after years of companies making big acquisitions and taking on more leverage”. Big Un Limited's cash flow secret revealed | AFR Big Un Limited, the high flying online video firm whose stock gained 1600 per cent in 2017, has admitted its customers are paying for its services with money advanced to them by a Sydney finance company that has itself been issued more th...

In mid-December we had a bit of fun exploring which of the key speculative themes of calendar 2017 had run hardest on the ASX (see original post here ). Today we published the December update for the Equitable Investors Dragonfly Fund and included an update on that race. We declare lithium the winner (represented in Figure 1 below by the grey line with long dashes). The indices presented are based on equal-weighted monthly returns for stocks identified as fitting each theme. Figure 1: relative returns of four "buzz" sectors on the ASX (equal-weighted portfolios)   source: Equitable Investors, Thomson Reuters, companies' data  Equitable Investors has some exposure to the China theme directly through food brands and through food testing. This is the only one of the four themes detailed where there is significant revenue already flowing and the enterprise values, on average, have any real connection to a revenue base. Figure 2: Average revenue & EV of stocks...