Weekly equities note
Written and accurate as at: Jun 15, 2017 Current Stats & Facts
The faded winds of the Trump reflation trade, coupled with concerns over softer domestic consumer spending, left the local equity market with limp sails as the S&P/ASX 300 fell -1.8% last week. Sentiment has also been crimped by concerns over global equity valuations, with investors asking what can continue to drive markets higher should the Trump administration fail to deliver on their pro-growth agenda. In this vein, it was interesting to see significant weakness in US tech stocks in the back half of last week.
Locally, the bond-sensitives underperformed (S&P/ASX 200 AREITs -3.1%) despite the fact bond yields remained unchanged while, ironically enough, resources outperformed despite iron ore falling -5%. The S&P/ASX 300 Metals & Mining fell only -0.34%, led by Fortescue Metals (FMG) (+4.1%) and South32 (S32) (+3.1%) while a seasonal expansion of Chinese inventories saw the price of thermal coal rise, supporting Whitehaven Coal (WHC) (+11.2%).
Re-badged fund manager Janus Henderson (HGG) fell -7.4%, unwinding almost two-thirds of the previous week’s gain. With little change in fundamentals this movement is likely to have been driven by technicals as the stock de-listed from the London Stock Exchange, retaining its listings on the New York Stock Exchange and the ASX. Elsewhere in financials, Bendigo & Adelaide Bank (BEN) fell -5.6%, announcing they would change the way they accounted for home values in their Homesafe business, which allows retirees to access equity in their homes, by no longer recognising changes in the home’s value in cash earnings. While this is little more than semantics, the market has seized upon it as evidence that BEN has called the top of the property market and the stock’s fall reflects investor concern about the effect of a potentially softer property sector upon banks.
Caltex Australia (CTX) (-7.5%) took a breather from its recent strong run as a broker report questioned the company’s long-term growth prospects. We remain more sanguine: while volume growth may be lower than has been the case in the past, CTX management have levers to pull – including stronger sales of high-premium fuels, cost reduction, and their convenience strategy – to support further earnings growth.
Metcash (MTS) (-4.2%), another of the portfolio’s higher-conviction positions, also underperformed as the Wesfarmers (WES) (-4.6%) strategy day revealed ongoing margin pressure and discounting in supermarkets. We believe the market is over-estimating the effect on MTS, given the realities of their distribution model. They are due to report results on 30 June, but remain hostage to weaker sentiment in the supermarket sector before then.
JB Hi-Fi (JBH), another of our holdings, was off -6.1% on persistent concerns over weaker consumer spending, plus ongoing speculation about Amazon Prime entering the Australian market. There is no doubt that consumer spending growth has been decelerating, as low income growth, high power bills and the prospect of lower house price growth have seen households tighten their purse-strings. Nevertheless, we believe there will be winners and losers in retail and there could be significant investment opportunities if and when the market throws in the towel on the sector. JBH is sitting on 11x next-12-month P/E and has not yet collapsed in terms of absolute valuation – however on valuation relative to the market it is back to levels last seen in 2012.
Elsewhere Coca Cola Amatil (CCL) (-5.3%) continued to fall as investors contemplate a secular shift away from high-sugar drinks, while a falling oil price finally caught up with Woodside Petroleum (WPL) (-5.3%) and Origin Energy (ORG) (-4.8%).
Vocus Group (VOC) was the stand-out performer, gaining +33.9% following a private equity takeover bid. Otherwise, there were modest gains from ALS (ALQ) (+3.3%) and Orica (ORI) (+2.8%). Qantas (QAN) (+3.1%) also continued to climb following a broker report that argued that recent discipline of costs and industry pricing justified a higher valuation.
Aristocrat Leisure (ALL) (+1.6%) also continued to make gains. It is now up over 75% in the last twelve months, however it is important to remember that this has been driven by earnings growth rather than valuation re-rating. According to our analysis it is just under 22x FY18 P/E which, while higher than the market’s average, must be considered within the context of other growth stocks. By this marker, we think ALL’s ongoing earnings growth, limited capital intensity and strong product cycle continue to look attractive.
This publication does not constitute financial product advice, investment advice or recommendations of any kind. This publication has been prepared without taking account of any person’s objectives, financial situation or needs, and so the reader should consider its appropriateness having regard to these factors before acting on it. This publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information in this publication may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. Past performance is not a reliable indicator of future performance.