SPECCY STOCK – IIL

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Innate Immunotherapies (IIL) – Shares have been on a tear rising close to 1000% in a year. The company is a medical biotechnology company with offices in Sydney and Auckland. It designs and manufactures a unique immunomodulator microparticle technology. This technology can be used to induce the human immune system to fight certain cancers and infections, or modulate certain immune mechanisms implicated in autoimmune diseases such as Multiple Sclerosis. The same technology can be used in the design of better vaccines to potentially treat or prevent diseases such as influenza, cancer, malaria, or tuberculosis. Last June the company raised $5.4m to complete a Phase 2B clinical trial to test the safety and efficacy of MIS416 for patients with secondary Progressive Multiple Sclerosis. The results were better than expected with 70% of patients reporting significant improvements in their health following the drug. It’s a big tick of approval which is on the road to success with a few big pharma companies watching the trial and the outcome very closely. Whilst the company is a small cap unknown bitotech with no approved drugs, it’s got some very powerful US backers. Republican of New York Chris Collins is IIL biggest shareholder and sits on the board. Tom Price who is the representative of Georgia is also a shareholder. And the list goes on. Strangely enough Price has been buying shares in IIL at the same time when negotiations were underway for the 21st Century Cures Act. This is a bill designed to fast track drug approvals. He introduced the legislation days after the purchase. So it’s interesting as to why these heavy backers including the man who is likely to become the next health secretary, are all investing in a company with only one experimental multiple sclerosis drug. Whilst it could just be coincidence or something suspicious, the stock is worth looking at as a trade, especially if IIL is successful and sold off to a big pharma. On the chart, IIL has gone on a stellar run and is most definitely overbought on the RSI and MACD. But it’s rising with bullish momentum and making higher highs. We would advise this stock suitable for traders only wishing to buy on the momentum and exit as soon as that momentum turns. 

X Factor Stocks – 2 stocks that might be affected by the failed Trans Pacific Partnership deal – TWE & AAC

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In this section we look at two stocks that we think have investors should add to their portfolio. The upside risks are far greater than the downsideand the story reads well. We will look at both company’s fundamentals, technicals and thematics to explain why we have selected the two stocks.

News is out that Trump has all but canned the TPP deal. He has said all along that he would kill the deal once in office, so it wasn’t a surprise. The Trans-Pacific Partnership was a free trade deal with the US, Singapore, Brunei, New Zealand, Chile, Peru, Vietnam, Malaysia, Mexico, Canada and Japan. Its failure is a major blow to the Australian government but won’t have any negative effects to the economy. It’s business as usual. The opportunity cost was reduced tariffs and cost savings on agricultural and food products which Australian exporters send to the US. Here are two stocks that stood to benefit the most from any TPP deal. For agriculture, the TPP would have eliminated tariffs on more than $4.3bn of Australia’s dutiable exports of agricultural goods. Here are the main products that would have seen significant tariff reductions: Beef, Sugar, Rice, Dairy, Cereals, Wine, Seafood. Iron ore, copper and nickel to Peru. Iron and Steel products to Canada and Vietnam. Paper to Peru. Automotive parts to Vietnam. In summary – the biggest loser from a failed TPP would have been the sugar industry. Most of the economic gains from free trade have been accounted for with existing FTA’s. Therefore the TPP is unlikely to see any massive growth in GDP. Keep in mind, we didn’t require a Chinese FTA to bring on the mining boom.

Treasury Wine Estates (TWE) – When the TPP was first announced Australian winemakers celebrated and cheered on the new deal after years of intense negotiations. The deal represented a strategic growth opportunity for wine producers to export to these member nations via reduced tariffs. It was a way for wine producers to become more competitive overseas and gain access to markets that have largely been untouched. TWE welcomed the deal and was looking forward to reduced tariffs in Mexico, Vietnam, Malaysia, Canada and Peru. It would have been a huge opportunity for TWE to expand its products into these markets. It basically allowed Australian wine producers to compete on a level playing field in these member nations. Do we think it will affect TWE negatively? Probably not. The Winemakers Federation of Australia says the US were the least important party to the TPP. Whilst it would have presented great upside potential, nothing will be lost as a result of the failed deal. It’s business as usual. TWE conducts 80% of its business overseas (30% from Asia, 14% Europe, 40% America). Therefore its share price is driven by overseas demand for Aussie wines such as Wolf Blass, Penfolds and Blossom Hill. We think there is far greater blue sky potential with China than with the US. TWE has only just scratched the surface. There is a shift from beer to wine and Australian wine is rising in popularity among the Chinese consumers. There is also a lack of availability of Australian wine which creates a double whammy effect. On the chart, TWE has gone on a bumper run since mid-2015. It has pulled back a touch and is trading on its uptrend support line. We think this is an opportune time for investors to pick TWE. Yes it’s sitting on a high PE (44.65x) but that’s ok as its ROE is steadily rising.

 Australian Agricultural Co (AAC) – The TPP was to see significant reductions and elimination of tariffs on beef and beef products into Japan, elimination of tariffs on beef and beef products into Mexico and Canada over 10 years and elimination of the AUSFTA beef safeguard into the US. Exports to the US were $2.5bn in 2015-2016. The agreement would have provided a boost to companies that export red meat and livestock. It was estimated that the agreement would have added an extra $3.67bn to exports in this sector which farmers receiving the biggest gain. TPP members already account for 52% of Australia’s beef, sheep meat and offal trade. What would have been the removal of tariffs would have had a positive impact on the profitability of Australian cattle and sheep producers, processors and exporters. Despite the TPP being a positive for beef exports, it’s just means business is as usual. Our largest beef export partners are – Indonesia, China, Vietnam, Malaysia and Philippines. The National Farmers Federation said the biggest gains would come as a result of freer trade with Japan, Mexico, Argentina and Canada. 50% of beef and 33% lamb was already exported to TPP countries. So it doesn’t mean this will be halted. It just means the opportunity is significantly reduced. AAC has changed the way it does business. It have moved away from being just a pastoral business towards becoming an integrated meat producer. It posted a HY profit of $47.9m which was down slightly on the pcp. Branded beef sales continue to rise which means its transition towards the global luxury beef segment is starting to pay off. On the chart, the stock isn’t overly attractive. AAC looks to be stuck in a pennant flag. You’d really need to see a clear upside break out before buying. We recommend investors sit this one out.

FUND REVIEW – Katana Australian Equity Fund

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The Katana fund is an all opportunity / broad-cap fund that is benchmark agnostic investing in Aussie equities with no barriers or restrictions. Their sole mission is to look for opportunities across the entire ASX. We quite like this mantra as it allows the fund to capitalise on opportunities as they arise without restrictions unlike so many other funds. Mandates The team have 5 key investment disciplines: 1 Value Investing. 2 Fundamental Analysis. 3 Growth Investing. 4 Technical Analysis and 5. Market Dislocation and Reversion to Mean. While the top 3 disciplines are stock standard across most funds, we like the fact that the fund uses technical analysis to time their entry and exits. The fund can also go from fully invested to over 50% cash with its core focus being capital preservation and generating the best risk adjusted returns for investors; not just getting the best possible returns.

Other characteristics

  • It is a long only fund.
  • ASX listed stocks
  • Doesn’t have restrictions on size and weightings
  • Each investment is assessed on its own merit
  • The fund isn’t about fitting into a category.
  • Has around 45-60 positions
  • Average size can be anywhere from 1%-5%
  • Cash position anywhere from 0%-80%. Typically 15%-35% through the cycle.
  • Significant value added from stocks outside the ASX 100.
  • Uses a thematic approach to stocks in ASX 100 but bottom up analysis of stocks outside ex-100.
  • No gearing or derivatives.

Here is the top 10 stocks as at the end of December. 

  The funds motto is “Performance. Process. People. Passion” and the Katana team look to “Invest Differently”. Whilst it sounds sexy and differentiates from other funds, the big question is: what is its performance like? Looking at the charts below, the fund has done remarkably well since inception and on a 3 year basis but last quarter the fund returned lower than the All Ords Index, which was disappointing; leading to a YoY number of underperformance. The Manager notes that it is a combination of the higher cash weighting leading into the volatility at the end of last year and some more contrarian stock calls yet to be appreciated by the market. Despite this, we like that the fund operates without restrictions and boundaries and the stocks that are in the portfolio. Whilst the team didn’t outperform last year, we believe this year they will especially if oil and gold hold up.

3 stocks from the herd – BXB, BSL, RMD

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In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.

Brambles (TWE) – Current Price $10.62 – Has downgraded its profit forecast which wiped $3.1bn off the market capitalisation of the company this week. Shares fell 16%. The company now expects revenue growth of 5% in the six months ended December 31 and underlying profit growth of approximately 3%. FY results will fall below revenue guidance range of 7%-9% and underlying profit range of 9%-11%.

Broker View: Morgan Stanley (OVERWEIGHT $12.30) – The broker believes the 16% share price sell-off is a massive overreaction given strength of BXB’s growth outlook. It’s all short term stuff in the broker’s eyes rather than something more cynical. A PE of 17x is below its five-year average of 18.5x. This makes the stock a strong buying opportunity with the company expected to post a solid 2H.  

Unconventional View: We disagree with the broker report titled ‘Overreaction brings opportunity’. The recent share price fall is justified and we think there is more to come. Brambles has slashed its profit forecasts because of a sharp drop-off in demand in its US pallets business in December. This has dented investor confidence and put the company on a back foot. What once was a defensive safe stock is now on the nose. The moment a high PE stock is unable to deliver, the market tends to lose interest very quickly and offload the stock. ROE isn’t looking too flash either. Forecasts are for its ROE to fall in the years ahead, with profitability falling. We suggest investors do the same. BXB is facing higher costs as US retailers either delay buying new stock or lower the amount of stock ordered which means pallets are being returned. It could be that the election of Trump has caused a shift in consumer behaviour. On the chart, BXB has broken its long running uptrend support. This is a bearish sell signal. Until a bottom is formed, we don’t recommend investors buy just yet. But there will be an opportune time when you’ll be able to pick this stock up at a rock bottom price. But not yet. The share price could have further to fall.

Bluescope Steel (BSL) – Current Price $11.06 – Shares have been on a tear up 8% this week and up nearly 40% over the last 3 months. The recent rise comes on the back of a profit upgrade driven by strong steel prices, tax breaks and pay freezes. This has led the company to forecast a profit of $600m for the December half above the November forecast of $510m.

Broker View: Cit (BUY $13.34) – The broker is positive on Bluescope’s outlook following this profit upgrade. The good news keeps rolling says the broker with analysts pointing out that BSL remains a quality stock with low financial leverage. All in all, the company is on track to bust past the $1bn EBIT mark this financial year.

Unconventional View: We agree with Citi. The profit upgrade is a positive announcement and readies the market for asolid result when it reports soon. The profit upgrade comes on the back of a massive surge in steel prices. Despite a massive run in the share price, we think there is still more to go. Momentum is bullish and the valuation is compelling. Macquarie even says the stock is at a discount to global peer basis. BSL is however a traders stock. It has run hard and on the RSI it’s looking a touch toppy. But that’s ok. It’s trading with bullish momentum and making higher highs. If you’re tempted to buy it, set a tight rolling stop loss in the event that it pulls back.

ResMed (RMD) – Current Price $9.13 – This week posted a 17% rise in 2Q revenue to US$530.4m. Whilst the result came in better than expected it was the company’s approach to the Trump administration that grabbed market attention. RMD says it’s ready to adapt to new US policies.  

Broker View: Credit Suisse (BUY $9.45) – The broker has released a positive note on the company post its results. Earnings were above consensus forecasts and show a recovery in organic earnings growth. Potential catalysts include launch of the AirFit P20 mask and resolution of AirFit F20/N20 mask supply constraints.

Unconventional View: We agree with Credit Suisse. This week’s profit result was a big beat on consensus forecasts which only further highlights a great set of numbers. But the main takeaway was the company’s upbeat assessment of the Trump administration and willingness to adapt to any policies. As new policies begin to be introduced, the company is prepared and wanting to be ahead of the curve. This means the good times are set to continue. RMD has received high demand for its two masks AirFit F20 and AirFit N20. The successful launch of these two products will help it stay a step ahead of its competitor Fisher & Paykel (FPH). On the chart, RMD has broken out on the upside of its uptrend channel. This is bullish buy indicator however shares are up some 10% this week. We suggest waiting for a dip before buying. Overall though the RMD chart is attractive with the stock continuing to push higher.

 

2 stocks that are in the fast lane – KGN & IGL

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In this section we look at two stocks that we think have investors should add to their portfolio. The upside risks are far greater than the downside and the story reads well. We will look at both company’s fundamentals, technicals and thematics to explain why we have selected the two stocks.

Kogan (KGN) – Ruslan comes through with the goods. We’ve been a supporter of Ruslan’s Kogan for some time and wrote about the stock back in June when it first listed. The stock has been a bit of a disappointment since listing at $1.80 for those that bought in, shares plunged more than 16% on its debut. It fell to a low of $1.32 in December 2016. But for those looking to buy now, the stock is roaring back. Many said the share price fall didn’t make sense given its strong institutional demand and strong sales. Ruslan even said he wasn’t concerned about the fall and knew he had a very strong business. He was confident in the company’s forecasts and its future. Well this week he proved the naysayers wrong and signalled another profit upgrade driven by strong 2Q sales from the Christmas trading period. If lifted its prospectus forecast for pro-forma FY2017 profit at its AGM in November and this week went one step further by advising the market that it has beaten even those expectations. Looks like he’s doing something right by recording better than expected sales of TVs, drones, gadgets and power tools. Whilst he hasn’t formally upgraded guidance, it’s on the cards. KGN says earnings could be between $8m-$9m up from $6.9m. Pretty bullish stuff. An upgrade won’t be formalised until its auditors review of the HY comes in.

Picture from Sydney Morning Herald KGN shares are now trading at $1.65 up a whopping 25% at a time when all its competitors are struggling. Its decision to pick up Dick Smith’s online retail business was the right decision. It’s helped prop up the bottom line and beat prospectus forecasts.

All in all, we like the Kogan business. It’s a positive announcement for a company that started in Ruslan’s garage selling just TVs. The CEO has time and time again taken on the likes of the big boys such as JB Hi-Fi and won. We think Kogan’s success will only continue. At the moment shares are trading at a discount to the pre-IPO price and areattractive. KGN has $26.5m in the kitty and it’s hitting its prospectus profit forecasts with ease. The chart says Buy. The stock has recently broken out on the upside and has reversal in trend. Traders should looking to buy on this bullish break out.

IVE Group (IGL) – For those that don’t know, IGL is a diversified print company which includes Australia’s largest sheetfed printer Blue Star. IVE has evolved from a family-owned print production business in 1921 to a leading marketing and print communications provider in Australia. The company listed late 2015 and was one of the most anticipated floats of the year. The IPO raised $75.6m for 42.5%. The remainder is held by Wolseley private equity and the Selig family. The Company’s principal activities include the conceptual and creative design across print, mobile and interactive media, printing of magazines, catalogues, marketing and corporate communications materials and stationery. IGL basically helps its customers to communicate more effectively with their customers by creating, managing, producing and distributing content across multiple channels. Its proprietary brands are Kalido, Blue Star Group, Pareto Group and IVEO. Kalido – creative & digital agency. Blue Star Group – diversified manufacturing and production services group. Pareto Group – strategy development and execution of direct fundraising programs for the not for profit sector and IVEO – integrated marketing services supply chain solutions.

 The company has revenues in excess of $370m. It recently purchased two businesses Franklin Web for $100m and AIW Printing for $16m. Both acquisitions represent an expansion into the large format web offset sector making IGL a leading player. This sector is an attractive and complementary space for the company. IGL raised $40m at $2 per share to fund the acquisitions. IGL recently announced a contract win with Coles to conduct its catalogue printing services via Franklin Webb. It’s another big win for the company that has begun to start kicking goals. On the chart the stock looks particularly attractive. IGL has broken out on the upside and looks to be making higher highs, effectively reversed trend. Traders would be looking to buy on this break out, but might want to wait for a dip.