3 stocks from the herd – A2M, ANZ, BHP

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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.

A2 Milk (A2M) – Current Price $3.10 – An article in the AFR says the milk producer is looking like an attractive takeover target amid an earnings upgrade following a strong start to the 2H. Demand for a2 Platinum infant formula has exceeded expectations. The company is now expecting infant formula sales for 2H17 to exceed sales achieved in first half FY17. As a result, Group revenue for the 2017 financial year is forecast to be NZ$525 million. Everything is going right for the company with sales in China booming and retail outlets running out of stock. Looks like A2 has taken over from where Bellamy’s left off. Broker View: Citi (NEUTRAL $3.10) – The broker has released a Neutral review of the company saying the March Q update was strong but it’s of no real surprise especially because the share price has run rather hard since early March. Citi has however lifted guidance.

Unconventional View: We agree with Citi but take a much more bullish stance. If you’ve been following our recommendations flick back to March 24 (click here) when we wrote up quite a positive review on A2. We said back then that Chinese consumers and daigou have all switched to A2 Platinum to the point where they believe it is a far superior product leaving Bellamy’s behind. For that reason, we think it’s blue skies for A2M. We wrote about A2M on November 11 when the stock was at $2.04. Back then we said “You could buy A2M for a trade but we recommend investors sit this one out until there is clearer confirmation surrounding the Chinese baby formula market.” There is now enough confirmation that strict regulations have been delayed indefinitely, so it’s a green light from us. Had you bought on March 24 at $2.61 you’d be up 26%. Not bad. The question is – would we buy now?

The answer is Yes. We love the A2 Milk story and have been followers for some time. We think there is a load of value left in the stock. The March update was particularly strong and A2 is leading the Chinese Milk race. The milk bubble is far from over for A2M. It generated sales of $388m in the nine months ended March 31, with third-quarter infant formula sales exceeding expectations. Demand is soaring again in not only China but Australia too. The company is now working with its partner Synlait Milk to increase supply to meet demand. A2 has an 8.2% stake in Synlait. We have confidence in the company being able to deliver 22k tonnes of infant formula sales in FY18 and 25k in FY19. Brokers across the board are upgrading their forecasts to reflect the new figures. Credit Suisse have upped their forecasts by 15%-33% for FY17-19. The other big ticket is a possible takeover approach. Think back to 2015 when Dean Foods and Freedom Foods lobbed an expression of interest into A2. It amounted to nothing and was knocked back because it wasn’t compelling. But it means that the company remains an attractive take-over target.

On fundamentals, A2M looks expensive but it’s easily justifiable on a ROE of 31.80% which is forecast to rise to 44.69% the next year. That means the company is highly profitable but we know how quickly the infant formula space can change when new Chinese regulations are introduced. For that reason we recommend setting a tight stop loss of around 8%-10%. Just in-case there is a sudden change. On the chart – the stock has broken out on the upside and triggered a bullish buy indicator. We recommend investors buy on this trigger despite RSI looking a touch high. MACD is positive.  

 ANZ – Current Price $32.75 – This week ANZ increased its interest rate on investor home loans. It follows CBA, NAB and WBC who both upped rates on owner occupier and investor loans. The RBA will meet next Tuesday and is tipped to keep rates on hold. Interest-only loan rates will rise by as much as 0.40%. ANZ are due to post their earnings results on 2 May next week. Broker View: Morgan Stanley (OVERWEIGHT $30.50) – The broker has a bullish view on ANZ. It believes the bank will meet next week’s earnings expectations. It says to look out for robust earnings and an improvement in loan losses. There could also be a share buyback next year. Unconventional View: We agree with Morgan Stanley. ANZ is looking great and has had bumper run. Shares are up some 35% since this time last year. The question is whether it can continue on this momentum. We think so. The bank’s December trading update was quite positive. The core businesses in Australia and New Zealand performed well. Retail was a strong contributor in particular in the home lending segment. Initiatives including ApplePay and AndroidPay which are driving ongoing net customer acquisition gains in Australian Retail Transaction Banking. ANZ posted a cash NPAT of $2bn up 31%. We also think that the bank’s NIM is on the rise following several interest rate rises which bodes well for the upcoming result. In the short term brokers seem to be suggesting that there could be possible share price upside supported by resilience in revenue and an improvement in loan losses. There is also the potential for ANZ to issue a $5bn share buyback next year.

On fundamentals, ANZ looks great. The stock is trading on a PE of 16.58x but again is justified by an increasing ROE of 10.75%. The dividend yield is OK and trend looks great. If we had to choose out of the 4 big banks, you’d probably go NAB on fundamentals. It’s the cheapest yet has a high and increasing ROE. Nevertheless, on the chart the stock looks attractive. ANZ is making higher highs and formed a golden cross some time ago. It’s clearly in an uptrend formation and trading with bullish momentum. We think investors should be adding ANZ to their portfolio.

 BHP Billiton (BHP) – Current Price $23.63 – Recently completed an operational review forthe nine months ended 31 March. BHP record production at WA Iron Ore (WAIO) and five Queensland Coal mines. Following 44 days of industrial action at Escondida, copper production guidance reduced to between 1.33 and 1.36 Mt. As a result of damage to third party rail infrastructure caused by Cyclone Debbie, metallurgical coal production guidance reduced to between 39 and 41 Mt. Full year production guidance maintained for petroleum and energy coal. WAIO production guidance narrowed to between 268 and 272 Mt. BHP is also considering the divestment of non-core Onshore US acreage with the sales process well advanced for up to 50,000 acres of the southern Hawkville. Broker View: Macquarie (OUTPERFORM $29.00) – The broker has issued a positive outlook on BHP. It says the March Q production report was in line with expectations. Cuts to copper and coking coal guidance were expected. Despite all this the broker says that recent falls in iron ore and coking coal prices have reduced the upside to the broker forecast.   Unconventional View: We disagree with Macquarie. Whilst the broker see upside we don’t. BHP has had a great run from its $15 bottom to $23.60 now. That’s a good 57% share price gain. We think now is the time to lock in profits and walk away. The iron ore price has gone into a nose dive and will take a big bite out of the miners in the months to come. BMI Research is even saying this is the beginning of a multi-year slump in iron ore. The glory days are gone at least for now. Even the price of oil doesn’t seem to be going anywhere soon. According to the research arm of Fitch Group iron ore will drop to $US70 a tonne this year, $US55 in 2018, and $US46 by 2021. The current price is US$66.06. It doesn’t bode well for BHP. Both BHP and Fortescue Metals (FMG) have lost on average about 15% since their February peak. We think this will continue.

On fundamentals BHP is trading on quite a high PE of 38.8x which makes it still quite expensive. On the chart BHP has broken its uptrend formation. This downside break out is a bearish indicator and you could very well see the stock start to drift lower. We think investors should be selling on this downside break out.

 

Could these two stocks rebound?

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 In this section we look at two beaten up stocks that are about to rebound. For one reason or another both stocks have caught our attention and we think the upside looks attractive. When assessing them we look at the story behind the rise and we list a few stocks that investors can purchase to gain exposure to these sectors. As with all stock, these too do carry risk which we urge you, as always, to consider. Brambles (BXB) – This week the pallets company posted a positive 3Q trading update. It reaffirmed its FY guidance that suggests a flat comparison to fiscal 2016. BXB revealed a 4% increase in sales revenue in the nine months to March 31, from continuing operations to a reading of $4.09bn. Stripping out the FX impact it rose 5%. The company said “Overall, our businesses delivered a solid performance in the third quarter despite ongoing macroeconomic uncertainty, softer FMCG demand in Southern Europe and the US, and robust competition in most markets.” Growth in the pallets business in Europe and Latin America is progressing well and the US business has secured a number of new contracts in the quarter. The positive impact would not be realised until fiscal 2018.

It’s a positive announcement at a time when shares are down some 22% due to its previous lacklustre performance. Back in January the company slashed its profit forecasts because of a sharp drop-off in demand in its US pallets business in December. The company was also hit with the Amazon effect following concerns that the rise of e-commerce giant might dampen demand and cause a shift in the way goods are transported to end customers. This dented investor confidence and put the company on a back foot. What once was a defensive safe stock went 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 wasn’t looking too flash either. But now that the share price has fallen all of this seems to be factored in. Brambles has secured a handful of new contract wins in the March quarter despite competition remaining fierce which is a good sign. Shares have risen almost 8% as the market responds to the new contract wins and signs that there will be no further deterioration in the United States.

 The StockOmeter has given a reading of 64 which isn’t bad. The company trades on a PE of 26.93x and its ROE is around 22% which is high. Short term trend is looking good. Back in January we said “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.” We think this bottom has formed and now is a great time to buy. On the chart the stock has clearly bounced off its support line and is back on the road to recovery. We think investors should be buying at these levels. Brambles is a solid business and its looking attractive at these levels.

 Vocus (VOC) – We’ve all heard about last week’s TPG Telecom (TPM) move into mobile and the subsequent sell off in both Telstra (TLS) and TPM. The thing is Vocus was caught up in the whole saga and sold off rather unfairly. Vocus shares have already copped a violent sell off back in September last year over concerns than NBN’s high access charges will dent earnings. At its February results the company actually beat expectations, albeit lower expectations, and booked a HY profit of $47.2m on revenue of $888.2m. Underlying NPAT was up 235.6% to $91.85m. The company has also completed its NextGen acquisition. With 1H results in line, organic growth returning across all of the telco’s divisions and guidance and targets for FY17 reaffirmed, this sell-off is overdone. Vocus is still a quality telco that has acquired Nextgen Networks and the North West Cable System and Australia Singapore Cable. The deal is high-single digit earnings per share accretive in FY2017 and is substantial to the company’s overall strategy. UBS says the headwinds faced by the industry are abating and the 2H should be a lot better. Upside risks really depend on new contract wins that have been flagged in the 1H.

On the StockOmeter the reading is 63 which is also neither good nor bad but the stock is quite expensive on a PE of 18.75x compared to Telstra and TPG. It has a low ROE of 6% which is forecast to fall. Its fundamentals don’t compare too favourably to its rivals and that’s a concern. On the chart – Vocus has had a mammoth fall all the way from $9.29 to $3.36. It currently sitting on its long term support line. The question remains – could it rebound from here? It may well do, but it’s way too early to tell. At the moment the fundamentals are horrible and the sector is challenging. There are too many headwinds in a low margin business. There will be ample time to jump into VOC when it rebounds. We like the company and the business and at these levels it’s a real bargain but until these challenges abate we think it’s best to sit this one out. Back in February following the company’s results, we had a positive view of the company and thought the worst was behind. We were wrong. The stock continued to drift south and hasn’t stopped. Investors should wait a touch longer for confirmation of a rebound before jumping in. Until then it’s an avoid.

 

2 speculative stocks worth a look

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 In this section we look at two speculative high risk stocks that we think are worth a look. That’s not to say we’d buy them, but the story is compelling and these two should be placed on your watchlist. They are definitely worth a look and have been making in-roads. When assessing these stocks, we take into account the downside and upside risks and see whether both are worth adding to your portfolio. We also look at company’s fundamentals, technicals and thematics. Zelda Therapeutics (ZLD) – Is a Perth-based biotechnology company that has secured access to a set of human data related to medicinal cannabis based formulations and treatment protocols. The company has been granted licenses to data, related systems, formulations and treatment protocols. It can use this information to design a series of human clinical trials and has a pre-clinical research portfolio targeting cancer. It has partnered with cancer cannabis researchers at Complutense University Madrid in Spain to conduct certain pre-clinical work testing cannabis-based formulations. Yes it’s another cannabis stock. So it’s much the same as our favourite MMJ Phytotech (MMJ). It jumped this week on plans to expand its clinical trial programme in Chile. The company’s clinical trials will now include insomnia, eczema, and autism. It will partner with Chilean non-profit group Fundación Daya to further expand its Chilean clinical trial programme. The global market for autism diagnosis and treatments is expected to grow to US$412.7 million in 2019Chile has a robust regulatory environment and provides a very cost effective location to conduct clinical trials. The legal framework in Chile recognises the importance of medical cannabis, allowing its production under strict regulatory controls for the treatment of medical conditions. Furthermore, Zelda through its relationship with AusCann GroupHoldings (AC8) can leverage Auscann’s Chilean joint-venture DayaCann to supply high quality medical cannabis for the autism trial. Zelda’s recent capital raising ensures it has enough cash to capitalise on new opportunities. Zelda expects the trial will commence in the second half of 2017 with trial protocols already being developed. The Company expects the trial to be conducted over a period of 3-6 months. Everything banks on these trials. Successful results will see significant upside in the share price and will allow the commencement of the product registration process to sell clinically approved products in the Chilean market. This provides a clear pathway to potential revenue generation from Chile and other South American markets as early as 2018.
We think Zelda’s worth a punt. It is quite a binary outcome, but if trials prove successful it will be quite rewarding. This stock isn’t for the faint hearted. It carries significant risk. It’s a win or lose stock.
  ZipTel (ZIP) – Is the former Skywards. The company is a telecommunication service provider in Australia. Its major products are AussieSim and RoamEzy. The company also provides international roaming and calling solutions to the consumer. ZipT is a mobile based VOIP communication application that allows consumers to SMS and make international calls from their mobile, at some of the world’s lowest rates. ZipT has the ability to deliver crystal clear sound quality in lower data usage environments. ZipT allows consumers to retain their existing phone number, service provider and SIM card, with no lock-in contracts. ZipT does not require a sim card and can be installed on any smartphone. ZipT uses less data than similar products already available on the market, and is compatible with WIFI or any other mobile network. AussieSim is the perfect solution for those travelling overseas who want to use their mobile but avoid the dreaded bill shock. The last time I took my Telstra mobile overseas I was hit with a $500 bill. AussieSim is a prepaid travel sim card that fits into your mobile offering discounted roaming rates for talk, text and data usage of up to 95% when compared to other Australian telecommunications providers. Over the past two and a half years AussieSim has developed a fully integrated retail and online trading solution for the travel sim marketplace. This includes, infrastructure, such as SMS based top up technology, along with a call forwarding platform, which enables customers to receive international calls on their Australian mobiles while travelling overseas. AussieSim has direct partnerships with a number of international telecommunications networks. It has also developed an online trading platform which is scalable, can be rebranded, and is capable of being deployed offshore with domestic currency and different languages. This week ZIP confirmed that it had received a Certificate for Overseas Finding. That means the Company will bank a R&D Program tax rebate to the value of $632,643 in due course. Whilst the company has had a challenging past, this rebate means that it won’t need to tap retail shareholders for more capital diluting them in the process. Is it worth investing?
Probably not. There has been no activity for the past few years until now. The company once listed at 20c and roared to the mid 80c range and was even high as $1.24. Now it’s trading at 6c. Something is brewing in the background. If you think about it, there are more than a thousand data apps such as What’s App that perform a similar task. Sure they’re not the same thing, but its competing in the same space as Skype, Viber and Whatsapp. These three have already cashes in on the soaring growth of global online communications. Both the AussieSim and ZipT haven’t really caught on. If you go to Zip Tel’s facebook page, there are only 447 people that have liked the page and the last post was on the February 2, 2015. If that’s not a sign, I don’t know what is. All in all, we think this stock should be left alone. It’s too risky.
   

Creating wealth with managed funds

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 As an ex stockbroker I’ve always had a bias towards direct shares, nothing beats having real transparency in your portfolio where you decide what you buy and sell. If your portfolio has a bad investment, turf it. If it’s doing well then keep it. Managed funds at best huge an index. But you can probably argue that it’s obvious I’d be biased because stockbrokers are paid on commission on a per transaction basis. So there’s no real benefit for a stockbroker to put a client in a managed fund unless it’s a Listed Investment Company. This is why stockbrokers sell you out of NAB and put you back into CBA. To collect the ticket. But there is some truth behind my stance on managed funds. Here is an interesting fact posted in the Sydney Morning Herald last year “Almost two-thirds of Australia’s large-cap funds fail to hit or exceed the benchmark for returns, stoking the active versus passive debate and intensifying the pressure to justify their management fees.” Think about that for a moment. Of some 450-500 managed funds only 36.25% were able to outperform the index over one year. That’s a disgrace. You would have been better off buying the ASX 200 (XJO) index on market than buying a ‘large cap’ blue chip managed fund. You pay a $20 brokerage fee and that’s it. Why bother with a large-cap managed fund that is likely to hug the index? As a stockbroker our job was to make the client money. Pretty straight forward. If a client invested $10k, it was our job to see it grow. Try explaining to a client that you beat the index yet the index return was negative. It doesn’t go down well. You can’t really dress that up. Now I’m not bagging out managed funds there is off-course significant upside in the 36.25% of managed funds that to do exceptionally well. So in this article I’ll try and distinguish how to find the 36.25% of managed funds that outperform and they have in common that allows them to return exponential growth. First some basics. What is a managed fund? According to the ASX, a managed fund is a pool of money brought together by individual investors. The combined capital is invested by a fund manager across a range of assets such as shares, property, cash, bonds and infrastructure. They are widely popular with investors because they’re an easy way to buy and gain exposure to sectors that they otherwise may not have been able to. An investment manager then buys sells shares or other assets on your behalf. You are usually paid income or ‘distributions’ periodically. The value of your investment will rise or fall with the value of the underlying assets. The investment manager may be called a ‘fund manager’.

Advantages

  • Helps gain exposure to sectors that would otherwise be difficult to invest in or tough to gain exposure to without significant capital.
  • Offers diversification to a portfolio via different asset classes, companies, industries, commodities, long, short, sectors and countries.
  • Allow you to make regular contributions.
  • Allows you to short.
  • Managed by a professional fund manager with years of experience and has access to information, research and robust investment processes not easily available to individuals.
  • Set up a regular investment plan.
  • Funds can provide exceptionally high returns that otherwise can be hard to replicate through direct shares.
  • Is an easy way to for an investor to grow wealth without the need to research individual companies for direct share investing.
  • As an investor, you buy units in a fund rather than individual shares.

Disadvantages

  • No transparency for mum and dad investors. Underlying investments are not known until the end of the month or quarter.
  • There is the risk that the fund’s investments may underperform or decline in value and nothing can be done about it because the fund manager is in control. Investors rely on the skills of other people and have no control over their investments.
  • Managed funds can charge fees for the management of the fund. There can also be performance fees.
  • Certain asset classes that managed funds hold may carry their own risks.
  • Investors pay tax on distributions at individual marginal tax rates.Net capital gains made by a managed fund when assets are sold, are distributed to investors.
  • Managed funds cannot be sold like as easily as a share or LIC. Funds need to be redeemed. Open ended funds maintain cash reserves to meet redemptions.
  • Open-end funds typically provide more security, whereas closed-end funds often provide a bigger return.
  • When redeeming funds the fund may have to sell assets to make money available. The liquidity of a managed fund is dependent on the type of underlying assets it invests in. 
  • There are tax impacts. Managed funds don’t take into account the individual circumstances of investors with respect to any tax implications of a fund.

Different types of managed funds

  • Actively managed funds – A fund that actively buys & sells investments with the aim to outperform an index.
  • Passively managed funds – A fund that buys a portfolio of assets to replicate an index or benchmark. The return tracks the index.
  • Single asset class fund– A fund that invests in one asset class such as shares, cash, fixed interest and bonds, mortgages, shares or property.
  • Multi-sector fund – A fund that invests in a mix of different asset classes not unlike the Balanced fund below
  • Multi-manager funds – A fund the fund invests into a selection of other managed funds.
  • Income funds – Funds that focus on generating income be it through fixed interest investments or shares.
  • Growth funds – Funds that focus on generating growth rather than income. Growth funds typically have a higher weighting towards shares (up to 90%) and property.
  • Balanced funds – As their name suggests, intended to provide a balanced between safety, income and growth via a combination of cash, fixed interest, shares and property. A typical balanced fund might have a weighting of 60% equity and 40% fixed income.
  • Conservative fund – Typically holds a smaller allocation of shares and property to lower the risk of the fund. Usually around 20%-30% is held in shares or property and the remainder is in cash or fixed interest.
  • Cash or money market fund – Usually this fund deposits 100% in cash and short term fixed interest products.
  • Targeted or Absolute Return funds – Funds that aim to deliver returns in all markets via a variety of non-correlated strategies with the primary objective being to produce a positive return every year.
  • Ethical funds – Socially responsible investing, also known as ‘ethical investing’, is about actively exercising choice about the kinds of companies you will or will not invest in based on your own values and beliefs.

  With such a large number of ‘large-cap blue chip’ managed funds failing to beat the index, the real alpha is in the small-micro cap funds. This space is a lot less efficient so there is a higher chance of outperforming. According to Morningstar, 37.75% of actively managed small-cap Australian share funds outperformed the ASX Small Ordinaries Accumulation Index over the year to August 31 2016. But over three years this figure rises to 82.08% and to 96.75% over five years. Going by research firm Mercer, Deep value fund manager Allan Gray was the top performing equity fund in 2016. It returned a whopping 38.1% ahead of quantitative fund Dimensional Advisors 32.6% and Lazard Equities 27.6%. The median Australian equity fund returned 11.4% in 2016 where as the ASX300 Index returned 11.8% in 2016. Here are the funds that outperformed last year:

  • Top performing equity fund – Allan Gray with 38.1%.
  • Top performing Australian long short fund – Macquarie Alpha Plus which returned 24.9% in 2016.

We’ve put together a check list for you to use to ensure you are picking a winner not a loser.

  • Avoid funds with high fees. Fund managers charge fees which range from 0.7% to 2.0%. This adds up over a long time. For example $100k invested for 30 years earning 9%. A 2% fee will give $761,000 compared to $1.1m if the fee had been only 0.7%. That’s a 30% difference in retirement savings.
  • Fundies are more worried about losing investors than losing your money. If the market is down 10% and your fund is down 10% they’re in the clear because they haven’t underperformed. But you’re down 10%. Fund managers will often hug the index to make sure they don’t underperform. Problem is, you’re paying higher fees. Solution: Have a look at the holdings in the fund. If they’re just the stock standard ASX 50, open a Commsec account and do it on your own.
  • Avoidfund managers that buy other managed funds. These managed funds tend to become a myriad of holdings that replicate the index anyway.
  • Past performance – Look at the funds history. Whilst it’s no guide to future earnings, it will paint a picture of how it has performed and may continue to perform. Investors should consider how a fund has performed in all market conditions. You can should compare the performance against an index or similarly themed funds to see if it is outperforming or underperforming.
  • Management team – This one is important. What you’re really investing in, is the people that manage your money. So it’s important to know who you’re investing with and their track record. For example investing in the Wilson Asset Management funds, you’re investing in Geoff Wilson and his team.
  • Investment style – Each fund manager will have a specific style of investing that they will use to gain a competitive advantage and outperform. Here are a few investment styles each has their merits: Deep value investing, Quant funds, Top down investing, Bottom-up investing, Fundamental analysis, Technical analysis, Long / Short funds, Contrarian investing and Absolute Return.

The main message here is NOT to invest in a managed fund willy nilly. Conduct proper research. See what the portfolio manager’s track record is like and delve into their investment style and what assets they cover. There is a common perception that because managed funds are professionally managed they will perform well. Only 36.25% of larger cap managed funds were able to beat the index this year, so this perception is distorted. Look for funds that cover the small-micro cap space because they’ve got a higher chance of returning super growth. Investing in a well diversified portfolio that has shares, property, cash and bonds, is still the best way of reducing your risk and smoothing out investment returns. Use comparison websites like Morningstar and Investsmart will help you gauge how well the fund ranks. For example funds may be ranked by 1 year returns however as managed funds are usually a longer term investment it may be more appropriate for you to consider the 3 year and 5 year returns. Also check the fees. Small changes in fees can have a huge effect on your returns. And finally speak to your financial adviser.

2 stocks that should be on your shopping list

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 In this section we look at two stocks that we think you should have on your watchlist. They are definitely worth a look and have been making in-roads. When assessing these stocks, we take into account the downside and upside risks and see whether both are worth adding to your portfolio. We also look at company’s fundamentals, technicals and thematics.

WorleyParsons (WOR) – We last spoke about Worley back on November 18 when Trump pulled off his epic victory and took home the golden throne. The share price back then was $8.82, it’s now $11.72. That’s a massive 25% gain had you followed our recommendation. Fist pumping in the air. We said “recent recovery in the oil price and what has now been dubbed as the end of the mining collapse may cause a turning point. This has led WOR’s share price to rebound back to $8.68. All positive news for WOR which leverages off oil projects. On the chart the stock has clearly rebounded. Investors should look to buy at these levels.” Despite the 25% share rise, we still think there is further upside to warrant a look into the stock. With all the ruckus going on in the Middle East, the US launching missiles at Syria and neighbouring countries like Iran and Russia getting peeved off, we very well might see a rise in tension and an oil supply disruption. Whilst it’s never a good thing to hope for war, it will be a positive for the oil price and for WorleyParsons. Then there is also talk of a potential takeover from the Dar Group, which tried and failed last month. That was a little disheartening, because it means now that the Dar Group has a blocking stake. On the StockOmeter it reads 45 which means it’s not bad, technical and fundamentals are soft. It loses points because it doesn’t pay a dividend.

 But what does look good is the chart. You can easily see the correlation WOR has with the Oil price (grey line). Both have reversed in trend and look to be in a short term uptrend. The stock has largely been written off and dismissed by the market and analysts hit by a downturn in the oil price and energy sector as its big named clients slashed spending to survive. But the recent recovery in the oil price and what has now been dubbed as the end of the mining collapse is causing a turning point. WOR is a play on energy-sector projects and the oil price. More than 70% of its revenue comes from this sector. With oil prices on the rise because of of global political reasons, we think there is a trade in WOR. Investors should look to buy at these levels.

Corporate Travel Limited (CTD) – Is a provider of travel management solutions to the corporate market with presence currently throughout Australia & New Zealand, the USA and Asia. It’s basically a one-stop-shop for all your corporate travel needs. This can include buying airfares, accommodation, ground transportation, travel insurance, visas and discounted business lounge membership. The company also offers services in resource, event and leisure travel management. Shares in CTD have been flying high boosted by a stellar 1H result. Shares are up almost 16% since its interims. The company posted a NPAT of $22.1m up 28%, Earnings per share of 22.1cps up 24%, Dividend payable 12 cps up 33% and guidance for FY17 EBITDA at top end of guidance or $97m. As you can see quite an impressive result that has ridden the tourism tailwind. Most brokers say the result beat expectations and signals that the company is in control of its future and can smash it regardless of the state of the economy. You can clearly see this with the FY17 guidance upgrade. Some even think this guidance is conservative. CTD recorded organic growth of 29% which was the biggest catalyst for H1 performance ($8.1m of $12.4m). Tourism stocks benefit from a lower Australian dollar attracting corporates from overseas which has caused a tourism boom of sorts. It has been underway for quite some time but there have been only two stocks that have seemed to capture the upside, Corporate Travel Management (CTD) and Webjet (WEB). Both we like. According to the ABS there has been an increasing trend in the number of visitors that are coming to Australia. In-fact there was an 8.5% increase in the number of short-term visitor arrivals into Australia from January 2016-17. With international passengers pouring into the country, we can only see the company growing and continuing along this stellar path.

 On the StockOmeter the stock rates in the Not Bad area with 61. It looks a little pricey trading on a PE of 43x. But you can argue that its ROE is high on 20.24%. It also has little debt but its dividend is skinny. It looks fairly attractive on the chart. The stock is trading midway in an uptrend channel. It is however a tad overbought with a RSI at around 66. We like the story and the stock but we advise investors buy on a dip – say at around $18.

 

Investing – When do we start asking the Questions?

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 It can be daunting becoming an investor. There is so much to take in and so many questions to ask. Sometimes it got to the stage I just wanted to shout ‘Stop the boat so I can get off’, on my investing journey. Being in a safe evnironment while you learn can give you courage to start your self-directed investing choices or the courage to be able to query your financial advisors. Ann interviews an Australian Investors Association (AIA) and Sornem Private Wealth  director, Russell Lees. Have a listen and see if this could be a good fit for you.

Under the Microscope – Catching a falling bus – Telstra

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In this section we place one stock under the microscope and give it the unconventional assessment.

Telstra (TLS) – Is  Australia’s  largest  network  provider,  and  has  worked  with  public  and  private enterprise to present new and competitive offerings to customers over the last 5 years.  Telstra’s  market  leading  position  for  the  technological  boom  in  terms  of  mobile  and computer  devices  puts  them in  a  very  good  position  to  capitalise on  the  high  demand  for such goods in the short- to mid- term. This week however shares were battered following news that TPG Telecom (TPM) had secured spectrum to build its own mobile network shaking up the entire mobile industry. It’s the biggest drop in three years but it really is just a continuation of what started two years ago. So the questions is, is Telstra still an income stock?

Bulls

  • Operates in an oligopoly where fixed line telecommunications products in Australia are primarily delivered by Telstra, Optus and NBN Co. Other brands are virtual network operators. In the mobile market there are now four main operators, Telstra, Optus, Vodafone Hutchison Australia and TPG Telecom.
  • It has 6.8 million fixed voice services and 3.5 million retail fixed broadband services.
  • Telstra has the largest and quickest mobile network with a customer base of 17.4m as at December 2016 including mobile broadband, along with over 500,000 wholesale customers. Optus has around 9.43m.
  • Pays a high dividend. Its recent decline in share price gives it an even higher yield which currently sits around 7.3% with a final dividend of 15.5. It’s a great stock for retirees looking for yield in a low interest rate environment.
  • Divestment  in  Chinese  online  car  sales  business,  Autohome,  resulted  in  $1.8 billion  profit, and the cash is expected to be reused for future acquisitions.
  • Telstra has more “mum and dad” shareholders than any other Australian company. This reduces the chance of short selling, manipulation or big institutions moving share prices.
  • Strong brand reputation. Was voted Australia’s most valuable brand in 2016.
  • $11bn of copper wiring compensation to come from the NBN.

Bears

  • Telstra’s services are regarded as the most expensive in the telco sector but its premium is justified by its wide coverage and high quality service. This competitive advantage is at stake. It could all be lost after Easter when the ACCC hands down its decision on whether all carriers will be forced to share their networks and customer roaming is declared.  The ACCC has the power to force other telco’s to use Telstra’s entire mobile network even in regional and rural areas. That means Telstra’s claim to fame having the best and biggest network, won’t matter anymore. It will be a game changer.
  • TPG Telecom has just entered the mobile space making an aggressive entry to an already competitive sector.
  • Is trying to push into Asia, which is already a flooded market in terms of mobiles and technology. Telstra recently pulled out of a proposed Philippines JV with San Miguel.
  • Fierce  competition  domestically  (from  competitors  such  as  Vodafone, Vocus, TPG Telecom  and  Optus)  will continue to put pressure on profits.
  • When NBN comes into fruition, profit margins will be squeezed.
  • Mobile revenues continue to show strong growth but it is slowing. Telstra needs to find growth options.
  • Recent  drop  outs  in  the  market  have  led  to  widespread  customer  dissatisfaction. Consequent forecasts are  predicting  an  8%  increase  in  customers  changing  their  mobile  service  providers,  up  to 19%.
  • Recent  below  average  trading  volumes  have  driven  prices  downwards  over  the  last  6 months.
  • As Telstra loses its monopoly in fixed infrastructure, there are signs the telco will face concerted pressure from operators like TPG Telecom and Vocus Communicationsin the post-NBN landscape.
  • Regulatory risk and technological change in telecommunications.

Fundamentals

 Telstra trades on a PE of 16x which is below its all-time high of 17.9x but slightly higher than its average of 14x. Its ROE is 25.11% which has come off from 30.1% which may be reflective of growing competition in the mobile market. Gross yield is currently 9.71%. The gearing level is manageable. The telco will receive $2.1bn from the sale of Autohome. Telstra’s balance sheet is OK. 2016 free cash flow was $4.8bn. NBN payments are expected to boost this figure. On the StockOmeter it is ranked at 69 which is a good score. The only downside is its technicals.

Technical Analysis
The chart looks horrible. What we’re seeing here is a falling bus. The stock is in freefall and is making lower lows with no floor in sight. It actually has been in downtrend since early 2015 and has drifted lower ever since then. Sure the RSI says it’s oversold, but with this bearish trend the chart says NO. 

 Broker Views

  • Citi has a Sell recommendation with a target price of $4.00. The broker says this is disappointing for Telstra. TPG are lifting the game and increasing pressure in the mobile space which has been Telstra’s game for quite some time. The task is getting harder and harder for Telstra. Target cut by 9%.

Unconventional View If we’ve ever seen a falling bus, this would be it. The Telstra bus is dropping out of the sky and we’re not about to stand in the way. The telco has been in downtrend since early 2015. It has been plagued with profit downgrades, numerous network disruptions, contracting margins, shrinking subscriber base and now TPG has entered the mobile race. Could it get any worse? Yes it could. Telstra has been long known for its core defensive qualities. It’s a reliable and safe stock for retirees looking for a consistent yield. In-fact that was the only reason mum and day investors bought Telstra, for its sexy dividend. But where’s that sexy dividend now? It’s not that sexy if you’ve lost 30% of your holdings. Let me explain. Let’s say for example you bought Telstra this time last year at $5.16. You will have collected two dividends worth in total 31c. Let’s subtract those two dividends and your cost base is $4.85. The current share price is $4.22. You’re down 13% in a year just to hold a stock that pays a dividend. If you had Telstra early 2015 when it was at $6.67, you’d be down 30%. The idea of holding a falling security just for its dividend is ridiculous.

What about now, Telstra is cheap?    

Shares have been absolutely hammered by around 8% which is a bit of an over-reaction. You may even see shares bounce back. But if you look at the chart Telstra has been falling straight for two years now. This decent started early 2015. Things smell foul in the Telstra camp. Back in June 2016 (click here) we said “Telstra has a bit of a problem. Despite being a cashed up and high yielding, where is growth going to come from? The telco recently abandoned its joint venture deal with San Miguel in the Philippines. But ever since the telco walked away, experts are questioning where will they find the next leg of growth?” And that’s the problem. We’ve never really liked Telstra for that reason. We think the days of Telstra being the all-conquering telco giant are coming to an end. Before TPG entered the foray, Telstra’s mobile numbers were on the nose. Now there’s a fourth competitor vying for market share and TPG are hungry. By winning the 700 Mhz mobile spectrum and with the right infrastructure in place, it can provide real cut throat price action to Telstra and Optus.They will launch a cheap bundled package that has a mobile strategy that will be complementary to its fixed-line business. TPG needs 500,000 customers for its mobile network to break even. It has over 2 million broadband subscribers. It’s a task they’ve got their eyes set on achieving and with David Teoh at the helm, they’ll do it. We haven’t even thought about the possibility of Vodafone and TPG merging. They’re pretty good friends apparently. Early this year Telstra dropped a bombshell when it announced a 14% profit drop to $1.8bn well below expectations. Shares have fallen 18% since its February profit result. 1H profit was hit by tough competition, adverse regulatory rulings and restructuring. Telstra added 200k mobile customers, 90k broadband and 300k NBN connections. If Telstra’s profit fell 14% last year because of what Andy Penn says was ‘intense competition on pricing’… it’s going to get a whole lot worse with the NBN coming in and TPG about to launch. Telstra’s EPS is 14.8c versus its 15.5c dividend. I think this is all pointing to one thing: A dividend cut. Sure Telstra has money, but it can’t keep paying out a massive dividend if its margins are getting squeezed. It is also making further investments into its 5G network. It needs to cut the very thing that keeps it popular because its earnings per share is dropping and soon it will have to fight off TPG. Cut the damn dividend and reinvest.

But there’s one more thing that has us concerned. Telstra’s services are regarded as the most expensive in the telco sector but its premium is justified by its wide coverage and high quality service. This competitive advantage is what makes Telstra, well Telstra because I can tell you it sure isn’t their call centre. But it could lose this when the ACCC hands down its decision on whether all carriers will be forced to share their networks and customer roaming is declared. This means the ACCC will allow other telco’s to use Telstra’s entire mobile network even in regional and rural areas. Anyone that lives in rural Australia will know that they can only get coverage if they’re with Telstra and they get absolutely rorted in the process. If roaming is allowed Telstra’s claim to fame for having the best and biggest network, won’t matter anymore. It will be a game changer. Even Telstra admits it will “lose revenue and market share” in both regional and metro areas because roaming will neutralise the coverage advantage that has justified significant investment in infrastructure that is uneconomic on a standalone basis. Goldman Sachs says Telstra stands to lose $546m in earnings as a result, the figure is the rent Telstra earns on its regional coverage. If this goes ahead the ACCC would set a fee that Vodafone, TPG and others would pay Telstra to use their phone towers. Telstra needs cuts its dividend and start reinvesting otherwise it faces margin pressure from intense competition. The NBN once fully operational it’s expected to take a further share of the industry’s profits. Margins will be squeezed. This makes it absolutely vital for Telstra to find other ways of making and mobile is the only answer. For it to remain competitive it needs to invest heavily in 5G. For that reason, we don’t think Telstra’s dividend will be maintained, it’s simply not sustainable. So if you’re buying Telstra because it’s a ‘safe’ high yielding stock, look past the yield and look for growth. It’s not a safe stock anymore. For those wanting to buy Telstra for growth because it’s cheap – Our best advice is not catch a falling bus, you’ll just get squashed. If you’re buying Telstra for a bounce, wait for it to bottom. There’s a long way back up, so you won’t forgo much by waiting for that convincing bounce. Trying to pick a bottom and you risk a dead cat bounce. Our message: Telstra just isn’t the animal it used to be. TPG and Vodafone are buddying up and the NBN is about to hit the streets. Telstra needs to cut its dividend and reinvest so that it can return to its former glory. This is the view of Unconventional Wisdom and not that of Sornem Private Wealth.