Good evening,
The ASX 200 closed up 1.93% at almost 6000 points. Resources had a strong week, though performance drivers were more stock specific than anything commodity price related.
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Technicals converging at 6,000... which has kind of been our core thesis for the past few weeks - there's really nothing incrementally bullish or bearish until we start to see some numbers and outlook statements at the end of this month/start of next month.
You'd have to think with Melbourne falling deeper into lockdown again (438 new cases today) and the US going from very bad to very very bad... most management teams are going to be leaning towards the more conservative, bearish side of things when it comes to outlook.
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This being said, there's always devil and opportunity in the details. I'll personally be paying attention to anyone who's been able to keep customer churn low, maintain prices or grow gross margins while keeping sales ticking along. For example....
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Credit Corp (CCP)
Now you'll see later in the Movers & Shakers that the stock is up 11% for the week, but that's not actually representative of how it performed post the pre-announcement of the result earlier this week.
The stock fell from $21 highs back in early June to under $15 at 30 June. Recovered to $17.50, sold off to under $15.50 after the initial announcement of this result and then closed at $16.90.
On Monday the company announced:
- FY2020 net profit after tax of $10-15 million (down from $64m last year)
- $65m impairment of previously purchased debt ledgers (non-cash) as COVID-19 as a result of 18% reduction in cash collections for the next 2 years
- Loan loss provisions are expected to increase from 19 per cent of the gross loan book to 24 per cent
All sounds pretty bad right? Wrong.
The market already knows and expects CCP to have a harder time collecting debts from the punters - unemployment is double digits for christs sake! However, the company told us that May & June collections are back in line with pre-CV19 levels and management is doing everything you'd expect of a good management team running a business like this.
CCP has no debt, $375m worth of ammo in the till and has perhaps the largest opportunity to buy debt ledgers at record low prices in it's history. Competitors like Pioneer (PNC) just don't have the balance sheet to compete.
I won't bore you with the math or the reasoning but this bad boy can do 20% ROE with it's eyes closed in a normal market. They average 22.5% over the last 5 years.
Whack that through and there's no reason CCP can't recover from COVID19 and bang out $90-100m in NPAT or EPS of $1.40+
Average multiple of last 5 years is 14x... that's $20 per share.
But there's not many 20% ROE companies trading on 14x today....
In fact, on my little database if you can pump out 20% ROE you'll be on at least 20x (its traded on 23x before) $28 per share. It's got naughty written all over it.
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Not sure if you noticed but I found the GIF's in Mailchimp last week. It's an addiction. I need help.
(Oh, and yeah, the Seneca Australian Shares SMA owns CCP... deerrrr)
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Netflix (NFLX), tech earnings, value vs growth
Netflix reported earnings after market last night, Q2 EPS $1.59 vs FactSet consensus $1.82 while revenues beat at $6.15B vs $6.08B as did net new subscribers 10.09M vs 8.26M. Guidance also ahead of consensus EPS $2.09 vs $2.00.
The shares will likely be down tonight, with aftermarket trading having them -9% at $479.20 (about where the arrow is below.)
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I'm not particularly worried about this and I'm going to get my teeth back into NFLX. A higher tax rate cost them a lot (like 50cps of EPS) and Free Cash Flow is 8x what it was in Q1. Company is killing it. The market has missed this in its early reaction to the result and I wouldn't be surprised if it closes UP.
This being said, if tech earnings disappoint this reporting season, it could be a catalyst for this rotation away from growth to value stocks thats currently under way to accelerate. I nicked the below from the boffins over at Morgan Stanley. See that Composite Value move up...
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This is bad news for me. As I really like buying good companies at fair prices, focusing on quality and long term returns rather than mature, undervalued, often fairly structurally challenged businesses - even though you can make just as much money (sometimes more) looking for rough diamonds in the rubbish bin as you can picking the best value wines over $100 at the restaurant. (I hope that analogy works, I'm onto my second beer so this note could go anywhere from here!)
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Anyway, I thought I'd sniff around for a few "value" stocks inside the ASX200. What I did was look for stocks trading on a big discount to their 5 year average PE, 2 years out. I got rid of stocks that have a high average PE in absolute terms (over 30x).
I then ripped out anything paying out more than it earns in dividends and did a bit of filtering on earnings estimates/revisions, a few of my favourite quality indicators and a few other secret herbs and spices and BOOM! here's the list:
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Look, some of these don't really qualify as traditional value stocks but who cares! We aren't here to split blades of grass, we are here to make some money! To be honest, this list really throws up some excellent ideas, but not always the stocks highlighted.
Personally, I bought a listed fund manager this afternoon that's not on this list but MFG, PTM both are. There's some value in that sector in my humble opinion.
Same goes for the REITs. Cromwell looks good on a number of screens. And then stocks like IPH, IDX, ASB and LIC won't be unfamiliar to my clients. AX1 is over priced in my opinion...
Other sectors with a bit of representation here are Insurance and Coal / Coal Services.
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Movers & Shakers
Funny old list of positive movers this week. We like ALQ so don't miss that high quality sleeper stock, I'll run through that next week maybe. It's a lovely company. Credit Corp (CCP) I've already humble bragged about, James Hardie (JHX) on a tear, Reliance (RWC) giving me heart palpatations every day at the moment, I swear to god if they miss that stock is going on the blacklist with QBE and BXB. Collins Foods (CKF) running on the back of its beautiful result... plenty of fundies playing catch up there.
Speaking of fund managers before, PPT and PTM + NWL in the list this week.
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Avita (AVH) - something must have happened there but I actually couldn't care less. Same goes for Polynovo (PNV) and Mesoblast (MSB)... I'm sure they are all going to cure every thing but I got kicked out of grade 11 chemistry because I was too dumb. I've got no idea. And I'd be willing to bet neither does the bloke (lets face it... its always a bloke) who recommended you buy it!
Everything else in this list is a high growth, high PE name... see... rotation.
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Few LIC dividends for anyone who's still stupid enough to own them.
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Plenty of action at Webjet/Flight Centre as Coronavirus kicks off again.
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And otherwise it's just Boral & Avita to worry about. I reckon Boral (BLD) looks good for a break up under new CEO. Clean it up and release the value! Tossing up if I should buy this now or wait to see the result. For the options traders, the $3.70 staddle to August expiry is c. 40c (10.8% return for 32 days after the weekend....) If that's jibberish to you, don't worry.
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I'm already down $5 after thinking the Cats would take care of Collingwood last night in Perth but I think I can redeem myself on Sunday evening with a $5 bet on West Coast to win by more than 40 points and Jack Darling to kick 3 or more goals. The NBA is back today so I might have another beer or 3 and watch a couple of replays.
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Luke Laretive
CEO & Investment Adviser
T +61 3 8639 1601 | M 0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000
AFSL No. 492686 |
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