Good afternoon,
The ASX 200 fell again this week, down another 1.13% with mid caps and small cap stocks underperforming their large cap peers. I'm all over the shop this afternoon so strap yourselves in.
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The market has been oscilating around 6000 points for a number of months now, essentially trading in line with the 200 day moving average after the initial recover in April, May and June.
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For mine, this week has see the first significant bearish breakdown of that sideways trend (same chart, just zoomed in).
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Earnings have been revised down 2.5-3% across the ASX 200 for both FY21 and FY22 in the past 4 weeks.
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This has really been driven by a handful of concerns:
- How much are companies/the economy impacted when stimulus rolls off
- How do we value companies in the forward period with such volatile growth rates? I.e. Kogan sales are up 110% on the same time last year, surely we can't expect a similar performance over the next 12 months, or can we?
- Sustainably higher AUD - no longer a tailwinds
- Iron ore price - high but expected to fall. Isn't falling yet though.
All this leads to investors starting to question valuation - what am I getting for my investment dollar over the next 12/24 months? Am I going to be adequately compensated for the risk I bare?
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This all considered, there's been some positive commentary. Retail suprised many... a few highlights pointed out by Baillieu's Research below.
- JB Hi-Fi (JBH) July same-store sales up more than 40% YoY, with strong sales continuing in August;
- Super Retail Group (SUL) first seven weeks like-for-like sales up 32% YoY; and
- Woolworths’ (WOW) first eight weeks sales up 12.4% YoY, with more than 20% growth at Endeavour Drinks and Big W.
And to be honest, aside from Casino's, Travel and Tourism, the only real negatives were fairly easy to call - media. Which in my mind is being structural and permenantly disrupted by social media/the internet. Similarly, I think Seek is permenantly cooked by LinkedIn, Glassdoor et al.
- Nine Entertainment (NEC) free-to-air revenue down 15% YoY
- Seek (SEK) July Australian revenues down 30% YoY
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For me, it's clear that the primary driver going forward is the equity risk premium. That is, the difference between the earnings yield on the market and bond yield, or, how much we want to get paid for investing our money in the risky equity markets vs the risk free investment of loaning the government money for 10 years. Here's a 10 year chart on ASX 300:
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Given our 10 year government bond is pretty safely bubbling along around 0.91%
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and Australia (ex-Victoria) is arguably in better economic shape than many other parts of the world - probably best shown below which is the AUD against major currencies (US, China, UK, Europe, Japan) over last 6 months
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It's pretty logical to think that our bond yield isn't going anywhere materially higher. So you've gotta ask yourself, can you see an equity risk premium on 3.5%, as we did in 2015-2018 post the GFC recovery? If so, the math works like this:
PE on ASX300 = [ 1 / (10yr Government Bond + ERP) ] *100
or in this case [1 / (0.91% + 3.5%)] * 100 = 22.7x
And earnings are estimated to be $300 so, $300 x 6800 on the ASX 300... it capped out at 7099 in Feb pre-COVID. And that's assuming no earnings downgrades/upgrades.
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However, this doesn't mean that every stock goes up. Lower for longer bond yields hurts the banks. Here's a chart of Australian 10 year government bond vs Aus Financials-ex REITs index relative to ASX200.
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Though we have already picked up 5% alpha by buying ANZ, WBC and NAB and selling CBA. This is total return so adjusted for dividends... Just getting started....
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And this also doesn't mean there won't be short term, technical pullbacks. I think we all heard about the extreme levels of call buying during August on the NASDAQ, but most of this weeks sell off was in names that have run up exceptionally over last 12 months. In fact, of the top 10 declines for the week, those stocks are up and average of 136% over the past 12 months. Even excluding Tesla (TSLA) as an outlier, the average is over 75%.
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I still reckon there is a lot of upside in some of these technology names. Years of structurally supported growth, leveraging their monopoly on talent and unparrelled access to cheap credit (by combining inspirational leaders/founders with SaaS-style financials).
Anywhere, here's some of our favourite NASDAQ stocks with their week and year returns as well. We think Australian investors are MASSIVELY underexposed to the best businesses from around the world. So while your broker is trying to pitch you the next "something-shit-pay", you should be talking to me about the only real "pay" stock that matters, PAYPAL.
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Speaking of Buy Now Pay Later (BNPL), everyone asking me if now is the right time to buy Z1P. For those not paying attention, all the BNPL stocks have been belted this past 2 weeks. Another wannabe also got listed (LayBuy, LBY) in that period as well.
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The reason for the sell off is PayPal (PYPL) launching "Pay in 4", which is essentially the Afterpay offer but Paypal's comes with no merchant fee (Afterpay charge like 3.9%) and is free for customers who pay on time.
For those who don't know, PayPal makes any of these BNPL stocks look like ants. 346m monthly active users, over 26m merchanges, US$790Bn in transaction value in the last 12 months.
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UBS wrote a really interesting note, but essentially they've got 3 scenarios.. all of which see merchant fees falling from 4% to sub 3% over the next 5 years. Here's Afterpay's projected marchant margin...
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I won't cut and paste every chart for each business but you get the idea. Afterpay loses 55-75% of its net profit after tax, and return on equity (ROE) falls from 35% to 14-20%. Zip loses 20-40% in net profit, and ROE falls from 33% to 29-31%.
So, would I buy Z1P. Sure. Happy to pickup some stock sub $6.00. But it's got risk. Competition risk. Execution Risks. Acquisition Risks. I've learnt not to doubt the Zip team but they are facing their biggest test.
As for the rest of them... pretenders. Aftepay included (above modelling highlights the sensitivity of their business model to a 1% decline in their merchant margin..... #vulnerable)
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Movers & Shakers
Right, that's enough for one week. Nice to see IPH get back a few percent. I don't understand why that's not a $8.50-$9.00 stock to be honest. I've checked with a handful of fundies and brokers, just to make sure I wasn't missing something, we all agree its cheap as chips.
Elsewhere, Whitehaven (WHC) bounced, New Hope (NHC) didn't... but I think its above time to get stuck into coal.
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Nearmap (NEA) announced a $70m capital raise despite telling the market in August it had no intention to raise money. I didn't like it, raises questions about management credibility going forward. If they get the ACV acceleration from the "growth iniatives" it will likely be a smart decision. If they don't, its 2018 all over again.
Non-bank financials took a hit this week. EML, CCP, LNK, CGF, IFL, JHG, AMP all on the list. Energy the other real loser (ORG, BPT, OSH)
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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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