3 stocks from the herd – CTD, ASB, CCL

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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.

Corporate Travel Management – Current Price $22.93 – Is a provider of travel management solutions to the corporate market and has offices throughout Australia & New Zealand, the USA and Asia. The company is a member of the GlobalStar network of 70 travel management companies which allows the provision of international service for clients. CTD is the ten times winner of the AFTA award for Australia’s Best Corporate Travel Management Company. It is also the travel management company of choice for over 20 companies listed on the ASX 200. From its humble beginnings of having just two people, the company has grown to become one of Australia’s largest travel management companies. It now employs over 2,200 people and provides services in more than 70 countries.

Broker View: UBS (NEUTRAL $23.90) – The broker has initiated coverage with a Neutral recommendation. The broker has quite a positive review following 15 acquisitions since listing and has an impressive track record of being able to integrate these businesses and extract significant value.

Unconventional View: We are more bullish than UBS. CTD has been a market darling achieving +70% in capital growth over the year. Since its listing in 2015 at 20c the stock is up a phenomenal 11,700% and we think it’s will continue. If you haven’t noticed already, the tourism industry is booming. As a result stocks such as WEB, SYD, FLT and CTD have gone on a tear. As one boom ends another one begins. The tourism boom has been fuelled by a lower A$ and cashed-up overseas visitors looking to travel here for leisure. It’s the opposite of the mining boom. During the mining boom times people were cashed up and were travelling overseas, foreigners stayed away from Australia because the dollar was too high and it was expensive. That’s all reversed. The dollar has flipped and more people are travelling here than ever, especially the Chinese. It has led Australians to travel domestically rather than overseas because it’s cheaper. Australians are more likely now to take a holiday in Byron Bay than in Spain. The same goes for corporate travel. More corporates are travelling to and from work within Australia, not just for holidays but also for work and study. There are travel trends that we see continuing over the next decade. Chinese tourists will continue to travel to Australia for leisure in record numbers. As long as our dollar stays low, tourism will continue to boom. And finally Millennials love to travel and they represent one of the largest travel markets. For that reason, we believe this underlying thematic will continue to thrive. Sydney Airport continues to post record traffic numbers so there is no indication that this thematic is slowing. For that reason, we think CTD is the perfect stock to jump on. Sure it’s expensive, it trades on a PE of 50x. But its ROE is high and its EPS growth is 20%. As long as it can continue to deliver, the share price will rise. As with any high PE stock, the downside risk of a sudden fall is higher. For that reason we advise those buying to set a 10% stop loss. On the chart the stock is in a solid uptrend making higher highs. We adviser to buy on this bullish uptrend.

 

Austal – Current Price $1.84 – Is an Australian ship manufacturer based in Alamaba USA. It designs and manufactures defence and commercial ships for Governments, Navies and Ferry operators around the world. Business units comprise ships, systems, and support. Its prized ship is the Littoral Combat Ship built for the US Navy and military high speed vessels for transport and humanitarian relief, such as the Joint High Speed Vessel (JHSV) and High Speed Support Vessel (HSSV) for the Royal Navy of Oman. Austal also makes the Cape Class Patrol Boat Program for Australian Customs and Border Protection.

Broker View: Macquarie (OUTPERFORM $2.09) – The broker has a bullish view on the stock after it won its 14th contract to build another Littoral Combat ship for the US Navy for US$584m. Macquarie sees the upside potential from this opportunity to build more vessels in the near future.

Unconventional View: We agree with Macquarie. It’s been a rocky road for Austal but the ship maker is regarded as the best inthe world. It has consistently built world class high speed vessels for the US Navy and is dubbed the ‘corvette of the seas’ . The Littoral Combat Ship is a work of art and is the envy of almost every navy. The problem with Austal however is that it is a very capital intensive business. Building ships isn’t cheap. The company generates +$1 billion in revenue yet it only produces a NPAT of $44 million. And that’s fine. The problem however occurs when contractual requirements change. Back in 2016, the Pentagon and US Naval Sea Systems Control imposed a new set of building standards. The cost of modifying the Littoral Combat Ship to meet the shock rating change and US Navy rules was a lot more than the company estimates. To be exact it was $115m. During Obama’s tenure, the Pentagon took deep budget cuts. That involved delaying the purchase of two ships which hit Austal’s bottom line. The Obama administration wasn’t too keen on building expensive warships saying they lacked firepower and survivability. However things have changed since Trump came into power. Austal may prosper from Trump’s presidency after he flagged plans to build up military hardware. Trump’s campaign committed to expanding the US Navy’s fleet from a current level of about 286 vessels to 350 and Austal is in prime position to benefit. But this makes Austal heavily reliant on the US Navy. So there is a flip side. Austal is deeply exposed to policy changes, delays and cancellations by the US Government. We know that Austal can deliver and manufactures state of the art ships, but it can’t prevent factors out of its control. That’s a worry. For the moment though, things are going well and are very positive to the business. The recent contract win is a massive leg up for the company. ASB even expects another 26 Independence class ships to land on its order sheet soon. Austal has delivered five vessels already, with a sixth soon to be handed over. On the chart the stock look attractive. ASB is in a short term uptrend and looks to be making higher highs. Investors should be buying at these levels. But as mentioned before, ASB is a volatile stock, there are many factors outside its control that can change its fortunes overnight.

 

Coca-Cola (CCL) – Current Price $9.13 – Has launched its fourth sugar-free or low sugar version of the Coca-Cola beverage. This time the company is claiming to have cracked the elusive taste of the original without using sugar. In-fact its labelled “Coke No Sugar”. The new beverage will replace the Coke Zero product. The big difference this time around is that Coke No Sugar tastes just like Coke should that’s the heavily sugar-laden version based on a 130-year-old recipe. So far the original taste has never been perfected without using a stack of sugar.

Broker View: Credit Suisse (OUTPERFORM $10.30) – The broker has upgraded to Outperform from Neutral and doesn’t believe CCL is in trouble or that this downgrade is evidence of a structural decline for Coca-Cola. The broker think it’s merely a temporary headwind. CCL will still be able to achieve stable margins and slightly higher prices boosted by a second $100m cost reduction program.  

Unconventional View: We disagree with Credit Suisse. Either the analyst is a heavy Coca-Cola drinker or is not in touch with reality. It’s pretty obvious what’s happening here. No one drinks Coca-Cola anymore and I doubt anyone will drink Coke No Sugar either. The geniuses at Coke say they’ve finally cracked the code by launching a brilliant ground breaking new sugar free coke, unfortunately they’ve done this a few times before. Remember Coke Zero, Diet Coke and Coke Life? Weren’t they all sugar free? What’s happened here is Coke have simply rebranded Coke Zero to Coke No Sugar. Pure genius. I wonder how much they paid their marketing team to come up that ridiculous idea. First there was diet, then zero and then came a stevia sweetened bevvy hit the shelves. I wonder what mysterious sugar replacement Coke No Sugar has in it. I delved a little deeper to find out that Coke has the same artificial sweeteners that’s inside Coke Zero. The only difference is that Coca-Cola No Sugar tastes the same as the original Coke. So it contains aspartame and acesulfame potassium. Right. So in other words instead of getting fat you’re now exposing yourself to chemicals that can cause Alzheimer’s disease, birth defects, diabetes, ADD and Parkinsons disease. Here’s the other problem: People who love the taste of Coke Zero are now left disappointed with this new replacement. They actually preferred the taste of Coke Zero.

Either way, we just can’t get excited by this stock. The fizz is gone and it’s not coming back. Wethink the drink company is caught in a structurally declining sector. The reality is consumers are shifting away from full sugar soft drinks. The impact will continue to be felt as the demand in products such as bottled water rise. CCL has debt of $992.8m and a debt to equity ratio of 118% which makes this stock quite risky. Trading on a PE of 28x. The chart isn’t pretty. CCL has broken its short term uptrend support line and looks to be heading lower. We recommend investors avoid.

 

Two stocks that are in full swing – IAG & FLT

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In this section, we will look at two stocks investors can add to their portfolio to generate positive returns. These two stocks are in full swing and have caught our attention due to their upside potential. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.

Insurance Group Australia (IAG) – Is one of Australia’s largest general insurance companies with operations in not only Australia but in New Zealand and Asia. It provides its clients with personal and commercial insurance products, primarily motor vehicle and home insurance. IAG also has interest in general insurance joint ventures in Malaysia, India and China. The company also owns brands: NRMA Insurance in NSW, ACT, Queensland and Tasmania, The SGIO brand in Western Australia, The SGIC brand in South Australia; The RACV brand in Victoria, The Coles Insurance brand nationally, and The CGU brand through affinity and financial institutionpartnerships and broker and agent channels. Shares in IAG rallied this week following this week’s profit upgrade. The insurance company has upped its margin guidance after recording a stunning turnaround. Compulsory third-party liability, professional risks and worker’s compensation claims all come in lower than it had budgeted for. These are all long tail insurance claims, ones that appear years later, unlike home and car claims that appear after an incident. It now expects FY margin guidance to be 13.5%-15.5% up from 10.5%-12.5%. IAG also said it will release reserves, which would expand profit margins for this financial year. It can now release 5% of net earned premium over its guidance of 2%. It’s a huge relief after the company cut its insurance margin to 10.5%-12.5% in April due to $140m in claims from Tropical Cyclone Debbie and a Sydney hail storm. The market welcomed the much lower claim costs and sent shares rallying by 6% and drove analysts to raise their earnings forecasts by 25%. Another tailwind is low rates of wage growth and a rise in interest rates. Whilst this is largely a one off, if wage growth continues to be soft there could be more releases. Low wage growth means the insurer pays out less for workers’ compensation. Higher interest rates mean higher returns from IAG’s bond portfolio. On fundamentals the company looks OK. On the StockOmeter it ranks in at 56, which is satisfactory. It’s not a screaming buy though. One of the reasons is because its ROE and EPS are forecast to dip slightly. It may be that the new earnings forecasts aren’t factored in. Besides that the yield is high and debt low. On the chart the stock looks particularly attractive. IAG has broken out on the upside and has formed a new short term uptrend. This upside break out could see the stock travel higher for some time. We advise buying on this break out, but to use a stop loss in the event IAG falls back to its support line at $5.50.

Flight Centre (FLT) – Is a bricks and clicks travel agency business. It provides a complete travel service for leisure and business travellers in Australia, New Zealand, the United States, Canada, the United Kingdom, Africa, Middle East, Asia, New Zealand, and Europe. FLT consists of more than 30 brands with four categories of brands which are Leisure, Corporate, Wholesale and other. The flagship brand is Flight Centre leisure brand.

You may recall an article written on the 16 December titled 2 stocks you wouldn’t touch with a barge pole. We’ve never really liked FLT. It’s a clunky business that’s based on old fashioned clicks and bricks stores. When was the last time you walked into a Flight Centre store to book your trip overseas? I can quite confidently say, probably 10 years ago. We much prefer Webject (WEB). At the time of that article FLT was trading at $30.31 and WEB as $9.52. FLT is trading at $39.72 and is up 31%. WEB is trading at $12.67 and is up 33%. So it looks like WEB is in front and our call was right. We still like WEB so why write about FLT now? Somethings changed that’s why. FLT has snuggled up with Airbnb and inked a deal to gain more corporate customers with Airbnb hosts across Australia. The deal means customer booking stay through FLT’s corporate brands, including Corporate Traveller and Campus Travel but will have access to Airbnb for Business. FLT’s corporate clients will now have access to more than three million listings worldwide, an unrivalled accommodation pool. Travel agents will be able to view the trip details, make changes to the reservation and message the Airbnb host if they have questions about the listing. The relationship makes perfect sense. It allows travellers to charge stays to their company directly rather than go through their own Airbnb account. I think it’s a win for both companies. Airbnb says business travel is a fast growing sector and makes up 10% of all bookings. People these days aren’t just looking to stay at hotels, many want to experience something different and stay in an Airbnb.

Whilst we continue to like WEB, no issues there, FLT has flipped back on the watchlist. This recent acquisition changes the game and we think there is huge upside potential with the Airbnb deal. Corporate travel is expected to boom for the forseeable future. It’s choice to partner with FLT opens a whole window of opportunity. With this announcement, FLT has now broken out on the upside and out of its downtrend. That’s a bullish buy indicator. We advise buying on this break out.

The Eightfold Investment Path

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The Unconventional Wisdom Journal uses an Eightfold Investment Path as a guide when picking stocks. It’s a summary of the path that investors should take towards successful investing. It consists of 8 practices or core principles that we use to identify good from bad stocks. A stock that will continue to deliver over one that will fail to deliver. These 8 practices will also help you become a better investor and will help you filter out the bombs. It will also help cultivate good discipline and practice. You could even call these Axioms or Truths that can be used when making stock investment decisions. Here they are:

Number 1 – No one can predict the future. The world is an unpredictable and a fluid place that is changing every second. Unforeseen events occur, industries change and disruption alters the playing field. Companies that were once market darlings can disappear overnight. Broker forecasts, estimates and tips should all be taken with a grain of salt. They are a good indicator of future earnings but by no means a guarantee. You should be weary of valuations and intrinsic values because they are based on assumptions and forecasts that are from the past and can be completely wrong. This is especially true with stocks that are reliant on commodity prices. Some brokers get them wrong consistently. For this reason you have to be careful when trusting management as well because their figures can be either too rosy or can hide nasty news such as write-downs or profit warnings i.e. Dick Smith and recently QBE. Use forecasts as a guide but nothing is ever concrete. If analysts at broking firms who have quantitative models, visit management regularly, spend countless hours locked away researching the firm from top to bottom, aren’t able to forecast these massive falls based on their fundamental research, what chance have you got?

Number 2 – Don’t think you’re Warren Buffett because you’re not. Trying to be a Buffett Wannabe using his famous “buy into a company because you want to own it, not because you want the stock to go up” can be a dangerous trap. Gone are the days when you can buy a company, fall in love with it and own it because it’s a great business. Companies are being disrupted all the time. Don’t be emotional. Be honest and make rational investment decisions. If just following Buffett was that easy, we’d all be rich. The truth is, attempting to invest like Buffett is hard. The biggest problem with his philosophy is that his holding period is forever. He has the money to hold on forever, whereas you and I don’t. Secondly, volatility makes us emotional and we sell irrationally. Whereas Buffett has the privilege of ignoring this volatility and using it to his advantage. Berkshire Hathaway generates most of its profits from buying and owning entire companies. By trying to mirror his strategy, most come to the party too late and bid up prices as they compete against each other to buy the same stock in his portfolio. You also don’t have billions to swoop in and buy companies at rock bottom prices. Sure Buffett is a legendary investor but it’s a well-known fact that his tested formula is outdated. He sticks to what he knows. Well guess what? What he knows isn’t tech, disruption, internet of things or cloud computing. He hates cryptocurrencies when they’ve generated some 5,000% in returns in under a year and he won’t touch tech stocks despite their market dominance. He doesn’t have much regard for Amazon either. The days of buying soda, insurance and carpet stocks are long gone.

Number 3 – Don’t be scared of a high PE, it won’t bite. We’ve entered a new era where you’ll find some of the best performing companies trade on astronomical PEs. Is a high PE bad or good and does it mean a stock is expensive? The PE ratio simply compares the current reported earnings to the current price. It has nothing to do with future projected earnings. Forecast PEs are more valuable for high growth companies than historical PEs. What matters most is whether the company has the ability to make returns in hard cash going forward. If so, then the high PE is justified. CSL trades on a PE of 36.83x. It is expensive but so what? That doesn’t mean its share price won’t continue to rise. Its EPS and ROE are growing hence the big multiple is justified. PE ratios of companies in stable mature industries usually have moderate growth potential and therefore have a lower PE ratio than young and fast growingcompanies such as tech stocks with more robust future potential. So when you compare PE ratios, compare companies from the same industry with similar characteristics. In turn a company with high PE ratio doesn’t mean it can’t turn out to be a good investment. Some of the best stock market returns can be achieved with high PE stocks such as Amazon and Apple. If these stocks continue to deliver, it’s a win win. Domino’s Pizza has traded on a PE of +50x since its share price was $30. It’s trading at $52 and its PE is still 50x. But as with everything, when a high PE stock disappoints, expect a pullback. The key here – a high PE is fine as long the company can continue to deliver.

Number 4 – Always lock in profits and use stop losses. Buying is easy. Selling on the other hand is hard. One of the biggest mistakes is being greedy and not locking in profits or holding onto a stock that is falling. How many times have you backed a winner and rode the stock all the way to the top to then see it fall all the way back down again and sell at a loss? It happens all the time. If you’re a Buffett Wannabe then listen to his No.1 rule “Never lose money”. A good way to ensure you don’t lose money is to set a trailing or rolling stop loss using the 2x average true range. Or even set a rolling stop loss at 10% of the stock’s daily high. That way if there is a profit downgrade and the stock crashes, you’ve locked in profits or cut losses. You’re out and ready to re-invest. Buy back later when the stock has bottomed. Here’s a simple example: In 1 July 2005 NAB was trading at $33.75. 16 years later NAB is trading at $29.15. Had you held on, you’d be down 14% (ignoring dividends). NAB hit a high of $42.62 on 14 Nov 2007. The stop loss at that day would have been set to $38.40. Using the rolling stop loss method you would have been stopped out 23 Nov. That’s a profit of 14% with the cash ready to re-invest. If you had held onto NAB, it fell all the way back to $15.23. So run your profits, cut your losses.

Number 5 – Trend is your friend until the end when it bends. A lot of investors ignore long term trends despite its usefulness in investing. When a stock exhibits a strong trend, it’s usually a good sign that the stock is either kicking goals (uptrend) or doing badly (downtrend). A good example of a stock with a strong trend is Challenger Group (CGF). As you can see the stock continues to make higher highs and track along its uptrend support line.  This uptrend line started in 2013.

  

Trend is first hand evidence of what the market thinks of a stock. The market is emotional and irrational and at times it moves without reason. Shareprices are based on supply and demand. Investors buy and sell for various reasons regardless of fundamentals which means the market isn’t efficient. People trade emotionally and sometimes follow the herd. In a bull market people catch the dreaded “fear of missing out” syndrome and buy like crazy. The same can be said for a stock market crash, where people sell like madness. So the message here is – don’t fight the trend. When a stock is in uptrend, confirm its fundamentals are good and buy it. There is a higher probability that the stock will continue along this uptrend than miraculously turn around. Ride the train and hop off once the train stops. When there is a break in trend and stock enters a downtrend, get out. Don’t wait and think “she’ll be right, I’m a long term investor”. Once the stock changes trend, it can fall and fall.

Number 6 – Earnings growth is all that matters. The greater the earnings growth, the better. EPS Growth and ROE are the two metrics we use to analyse and measure companies based on their earnings. ROE measures how profitable a company is and EPS Growth shows the growth of earnings per share over time. Growth in EPS is important because it shows how much money the company is making for shareholders. EPS growth of 25% means its products or services are in strong demand. A ROE of 17% or 18% is very good, 20% excellent, and 25% and above amazing. But what you really want to see is a rising ROE and EPS growth. A general rules is to buy companies that are rising in profitability, because the shareprice is sure to follow. If a company’s ROE is high and rising, then it is using shareholders’ money efficiently. Another metric to use is the PEG ration (price/earnings / EPS Growth Rate). It determines the trade-off between the price of a stock, the earnings generated per share (EPS), and the company’s expected growth. A PEG ratio of less than 1 suggests a good investment while a ratio over 1 suggests less of a good deal.

Number 7 – There is no such thing as buy and hold. Gone are the days when you could set and forget a stock for the next 10 years. Long-term investing in a short-term world has changed the game. Some companies that were around 15 years ago don’t even exist anymore. This is the age of technological disruption. Today’s market darlings can easily be tomorrow’s penny dreadfuls. To make matters worse, shareprice movements tend to be a lot more volatile than they were a decade ago. A profit downgrade would see a savage 30%-40% shareprice fall. A decade ago it was more like 4%-5%. One of the reasons is shorters. These vultures are always lurking around waiting for their next prey. Even blue chips aren’t immune. Stocks that have been hit recently are Brambles (BXB), Bellamys (BAL), Servcorp (SRV), Pro-Pac Packaging (PPG), Oroton (ORL), Vocus Communications (VOC), TPG Telecom (TPM) the list goes on. The reality is, equity markets carry a higher level of risk. If you’re uncomfortable with a stock falling 20% then you shouldn’t be in the market. Buy and Hold simply doesn’t work anymore. According to Dr.Lo who is the director of MIT’s Lab for Financial Engineering he said “Buy-and-hold doesn’t work anymore. The volatility is too significant. Almost any asset can suddenly become more risky. Buying into a mutual fund and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature offinancial markets and how complex it’s gotten.”

Number 8 – Don’t catch a falling bus, you’ll get flattened. When stocks disappoint these days either by announcing a profit downgrade or a write-down, the market doesn’t take to it too kindly. In-fact markets hate being disappointed. We saw what happened with Bellamy’s. It tumbled from $12 to $3.73. Following its profit downgrade, the stock appeared to have bottom at around $6.29. Without hindsight, many investors would have thought the 50% share price fall was well overdone and bought in at $6.29. This is a trap. It’s called a dead cat bounce. Don’t be sucked in. Trying to catch a falling bus is dangerous. Usually when a stock issues a profit downgrade, there’s more to follow. Be patient and wait. There will be ample time for the stock to fully bottom. Once it has bottomed and you can see a sustained new short term uptrend, that’s when you buy. In the case of Bellamy’s, you will have seen this uptrend forming around $5-$6. The hardest thing is to pick a bottom. Hindsight is a lovely thing and it’s easy to stand back and say “I would have sold out before the Bellamy’s downgrade, the warning signs were there.” But at the time, no one knew. It’s not that easy. Many analysts were caught out and they have insights into the company that we do not. But that’s the beauty of the market. Fundamentals tell one side of the story and charts help with the other. Investing requires rules and discipline, but amongst all it requires patience. You may or may not agree with the above rules, but what they provide is structure and a control. They try and eliminate the emotional side of investing. Many investors fail to see the forest for the trees and lose perspective. At the end of the day you are investing to grow your money. Pure and simple. Using the above rules isn’t a guarantee but it can help steer you on a more focused path through the market’s perilous fluctuations.

The GEN-Y YOLO portfolio

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I’ve written a few GEN-Y (millennial) articles such as “We’re raising a generation of dimwits” and “Gen Y and the Property Market”. Unfortunately being a GEN-Y man myself, I sometimes get quite upset when people lump me into the prepubescent YOLO stereo type. Yes the “You only live once” dimwit phrase that is used by countless dimwits as an excuse to do something utterly stupid without thinking of the painful consequences. An example of YOLO is what someone says to encourage a friend to mindlessly jump off of a bridge. Or when a Gen-Y spends all their hard earned money on big night out on the town coupled with a hefty fine to retrieve their car after it’s been towed for parking in a No-Standing zone. “YOLO” you say and move on, no big deal right? You don’t feel like studying and know you’re going to fail…”YOLO”. Personally I think anyone who uses YOLO in defence of their stupidity should be hanged. Harsh I know, but it’s breeding a generation of dimwits. Shrugging off a difficult situation by rolling your eyes and yelling YOLO is all very easy but it comes with it a mountain of regret when you realise you’re bank account is empty come Monday morning. Sound all too familiar? The urge to push aside commitments and responsibility is happening way too often. Part of the YOLO problem stems from a change in attitude and culture.

The great Aussie dream of home ownership is out of the question for many millennials and that’s caused a dampening effect on morale and responsibility. But something incredible has happened that has changed my outlook on millennials. It’s given me hope. I was reading an article in the AFR last week that was based on a new Commsec report. Figures from the bank’s share trading platform show that more than 50% of all new customers are now under 35 years of age. Gen Y’s are ditching the idea of owning a house and are actively investing in shares. Wow this is brilliant. It seems an entire tech savvy generation are building wealth from the sharemarket rather than investing in property. Millennials now make up 28% of all active Commsec customers and this figure is tipped to skyrocket. The number of 18-24 year olds rose 10%-20%. The number of 25-34 year olds sits on 35% of all customers up from 20% five years ago. According to APN Newsdesk only 55% of Gen Y preferred property over shares, compared to 71% of Gen X and the Boomers. This is a dramatic shift and shows that the YOLO generation has matured and is taking responsibility. By embracing online share investing, it means they are taking control of their finances and investing for their future. Whether it’s investing to travel, move out of home or rent it doesn’t matter. Getting into the habit of saving and taking control of ones finances is the key.

The Commsec report even went as far as revealing the top holdings in millennial portfolios. They were tech stocks such as Xero and Wisetech and global shares such as Apple, Alphabet and Amazon. Not surprising but Gen-Y are more interested in growth stocks. There is also a growing presence of ETFs and LICs that are being used by them to diversify their portfolio. Commsec has recently halved its brokerage fees for trades under $1k to encourage more trading from millennials. Some are even building wealth via the sharemarket to get a foot into the property ladder. With interest rates at rock bottom lows, it’s ludicrous to keep your money in a bank account. You’ll receive virtually nothing in terms of intersest and the temptation is still there to spend it all. So not use the sharemarket to build savings over the medium term? The upside potential is huge. Yes there are risks but there are equally as many risks in property too. It’s managing those risks that drives success. The emergence of younger investors can be largely attributed to the online broking which has streamlined the buying and selling process and made the market more accessible and affordable. Research has shown that online investors (60%) use a mobile device to trade shares and watch the market. So with this in mind, I’ve devised the perfect Gen-Y rockstar portfolio that’s simple and easy to replicate.

  • Step 1 – Open a Commsec Account. Go to commsec.com.au and click on the ‘Join Now’ button or click here. You can apply using your Netbank ID as an existing CBA customer or you can apply as a new customer.
  • Step 2 – Complete the online application form with relevant ID.
  • Step 3 – Transfer appropriate funds into your linked cash account.
  • Step 4 –Once the account is open, you’re ready to go.
  • Step 5 – Buy shares by using the ‘place order’.
  • Step 6 – Ensure you have sufficient funds to cover the order.

GEN-Y Portfolio For simplicity let’s assume you can build your savings by investing $1,000 at a time each monthly pay cycle. A good trick is to get your HR department to automatically credit your CBA cash management account every pay. We’ve selected ten stocks that we think are perfect for a GEN-Y portfolio primed for growth, income, diversification and serious upside potential.

You’ll notice that the portfolio is a little tech heavy, we’ve done that purposely because millennials are comfortable with technology companies and don’t mind a little bit of risk. Most of these stocks are high ROE, high growth and in a sold uptrend. Whilst institutions dominate our sharemarket, Gen-Y investors are growing fast. One other reason is that they’ve grown up with the likes of Google, Apple, Facebook, Amazon and locally REA Group, Carsales and Xero. So they understand the nature of these companies and can relate to them. But the biggest driver of Gen-Y is technology. 41% of Gen-Y trade on a smartphone vs only 33% over 35s. Using mobile phone apps and monitoring investments has helped Gen-Y’s engage with the sharemarket on a much higher level than any other generation. This makes trading on the sharemarket like a computer game. Investors can transact in an instant via their smartphone and can receive up to date news the second it’s released. Gen-Y still requires advice but the difference is they want it now and delivered to their smartphone. In other words they’d rather read a digital newsletter such as UWJ than see a stockbroker for stock advice. And that’s fair enough. Recent technological advances have also led to the development of popular apps such Acorns which invests your spare change automatically from everyday purchases into a diversified portfolio. It also allows you to make voluntary contributions to qualifying superannuation funds.

The Acorns app is very popular with the younger generation and is a great way to save. Thanks to the advancement in mobile technology, it’s become really easy to invest in shares and save your hard earned pennies via your smartphone. We only expect this trend to continue and the percentage of millennials in the market to increase. Our advice to millennials is to start now and invest in the sharemarket as soon as possible. It’s fun, easy and rewarding. By investing in shares, you’re investing in a business that makes money and has many moving parts. These businesses employ people and utilise capital productively. Instead of tying up money in property, investing in businesses spurs economic development and innovation. The sharemarket is liquid and you can sell when required. But more importantly, there are shares that are market neutral that won’t be affected if there is a property collapse. Investing in shares not only starts you off on the right foot, but before you know it you’ll have put away a nice little deposit to set you up for your future.

So next time you feel the need to spend now and worry later that fine. Yell “YOLO” at the top of your lungs but think of it as You’re Obviously Loving Online-trading.

BetaShares WisdomTree Europe ETF

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The word on the street right now is that Europe is fast becoming the place to be. As it starts to freeze in Australia’s east coast, you start to think to yourself where would I rather be? On a white sandy beach on the coast of Spain soaking in the rays or in cold and wintery Melbourne watching the sunset at 5pm? It seems a bit irrelevant to the investment world, but is it? While most are thinking of Europe as a holiday destination, the destination is largely underappreciated and oversold following a near Grexit and Brexit. GDP and Manufacturing PMI’s in countries across the EU are rising. We think now is a great time for investors to gain exposure to sector that has been hammered and is showing early signs of recovery.

Tell me about the fund Looking at the two BNP Paribas charts you can easily see that both GDP and PMIs in the Eurozone are rising. There is significant acceleration in Europe that with growth in 2017 expected to be 1.6% and above trend. The BetaShares WisdomTree Europe ETF (HEUR.AWX) is the ideal investment for those wanting exposure to Europe without the hassle of direct equity investing on overseas exchanges. Exchange traded funds are a low-cost way to get exposure and investment returns similar to a share index. An ETF can be bought and sold on the ASX and tracks a market index. This ETF aims to track the performance of the Wisdom Tree Europe Hedged Equity Index which provides diversified exposure to globally competitive European companies, hedged into Australian dollars. However the one problem with this ETF it that it provides exposure to the largest dividend paying companies that are listed in the Eurozone. Exposure to the biggest companies means that you are getting exposure to global companies that have their earnings offshore and not really in the country it’s listed in. For example Toyota Motor Corp generates more of its revenue from North America than Japan. Although Europe has struggled over the past year and equity markets have pulled back, the medium term outlook remains positive. The ECB is likely to remain supportive and will continue to provide monetary stimulus to countries in the EU. That’s positive for EU stocks and the currency. The EU appears to offer good value to that of Australia and the US.

The investment process
The fund aims to provide capital growth over the long-term through searching out undervalued listed and unlisted investments in companies in the European region. The fund hedges exposure to fluctuations between the Aussie dollar and the Euro. It also provides a purer exposure to the EU equity market without the worry of currency movements. It seeks investments in globally competitive dividend paying companies. It also offers distinct sector exposures that wouldn’t find by investing in our local market. For example the fund has less exposure to financials but is geared more towards consumer, industrial and technology sectors. The index which the ETF tracks uses one main rule for its stock selection – the stock must be large and dividend paying whilst no more than 50% of its revenue can be generated outside the Euro. Whilst the fund says this allows it to gain exposure to globally competitive European companies, we think this figure is too high. For example a company that earnings 50% of its remaining earnings in the US, doesn’t give pure European exposure. It’s exposed to the US thematic. That’s the only downside.

Here are a few benefits from the investing in the fund

  • Access – The fund offers simple way to access a diversified portfolio of EU shares
  • Reduced currency risk – Euro currency exposure is hedged to the Australian dollar
  • Diversification – It’s easy for clients to diversify their portfolio via a single trade. The ETF exposes a portfolio to Europe and a number of sectors that are under-represented in the Australian sharemarket.
  • Cost effective – The cost of buying the ETF is lower than the cost of buying European equities directly through a broker.
  • Reduced administration – No completing W8-BEN forms, the fund is Australian domiciled.
  • Liquidity – The fund is quite liquid so you can easily get out when it’s time to sell.
  • Transparent – The fund’s NAV per unit is available daily on Betashares website.

Top 5 shareholdings
 

Unconventional View – We quite like this ETF. The fund offers clients a cheap yet effective way to gain exposure to the Europe without the hassle of buying equities directly. It is also currency hedged. Following a near Grexit and a Brexit, Eurozone stocks were heavily sold off. But after a long period of nothingness, stocks are finally starting to recover. European Purchasing Managers Indices are in expansion mode and rising, fundamentals are great and there is positive growth in countries such as Ireland, Spain, Netherlands and Greece. Whilst it’s not blistering, it’s a good sign. The only downside is the political landscape with a number of elections on the horizon. The ECB has also announced that it will extend QE until 2019. The ECB’s president Mario Draghi said on Thursday that it would be willing to extend its QE strategy, both in duration and budget, if required. To some degree we think a hard Brexit is now priced in. The rest of the world has lost interest in Brexit and has moved on and is done with it. Italy is the basket case. There is the odd chance that it or another periphery could leave the EU, but that’s highly unlikely. All in all, we think this ETF captures European equities that are currently priced at good value. Whether you chose an ETF or Managed Fund, we think it’s a good time to reassess your portfolio allocation strategy and redeploy in Europe where it’s starting to heat up.

3 stocks from the herd – BHP, LVH, QBE

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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. 

BHP – Current Price $22.42 – Shares fell by 3.75% on Wednesday sending the share price down to $22.10. The main reason for the fall was due to weakness in the global oil market and further softness in the iron ore price. Oil is hitting record lows after Libya increased supply adding to the growing glut of oil in the market. WTI has now fallen 21% from US$54.45 to US$46.02 since Feb and US oil rigs are at their highest since April 2015.

Broker View: Citi (BUY $26.50) – The broker has released a positive view of BHP following the replacement of Jaq Nassar as chairman. Ken MacKenzie is the replacement and take over 1 September. He was previously MD and CEO of Amcor from 2005 to 2015 and spent 23 years at the company in various positions. In these roles he executed over 30 mergers and acquisitions. Given his background at Amcor, and having no legacy of being on the board for the US Shale acquisition that the other front running candidates had, the broker thinks there could potential for a disposal of these assets. This could unlock value in the portfolio. Hence the Buy.

Unconventional View: We disagree with Citi. Their case for buying is based on a ‘what if’ scenario. There is no indication that BHP are looking to offload their shale assets and even if they did, offloading shale assets when the oil price is at rock bottom lows is a bit silly. Wouldn’t BHP want to sell when prices are high? BHP would be selling right at the bottom and that will mean accepting a cheap valuation. We don’t see BHP offloading assets anytime soon and definitely not at these prices. We have a bearish view on the oil and iron ore prices. Both are coming off their cyclical highs have entered bearish territory. It really is like a double edged sword. BHP gets sliced in half the moment both commodities start to fall. 20% of its earnings are from oil. With the glut of oil in the market, OPEC cutting production whilst the shale frackers raise, the oil price will stay stuck between US$40-US$50 a barrel. The funny thing is that Citi expects iron ore to hit bear market territory soon. It expects spot prices to fall to $48/ton by 4Q 2017 and to $46 by 1Q 2018 as due to expanding global iron ore supply and slowing Chinese demand. Global supply is tipped to increase with a 100-million-ton surplus in 2017 on top of more than 60 million tons of extra supply in 2016. Citi’s message iron ore will head even lower, so why buy BHP? Makes no sense. Either way, the BHP chart is horrible. The stock has broken its uptrend channel and has formed a new bearish short term downtrend. The stock is making lower lows. The MACD is neutral but RSI is looking oversold. You can see just how closely correlated BHP is with oil (yellow). Oil leads and BHP follows. It looks like oil has just started to free fall. We see no reason to be in BHP until there is either a turnaround in the oil or iron ore prices.

Livehire (LVH) – Current Price $0.61 – Is a digital disruptor focused on recruiting employees through its platform. The company also recently announced a $12.5m capital raising to accelerate growth. Shares were placed at $0.44 each and are now trading at 60c.

Broker View: Morgans (ADD $0.68) – The broker has released a positive review of the company following the signing of its second healthcare client in recent months. It has a mandate form the QLD Health to create a new talent community for regional nurses and midwives. If it can successfully implement this, the upside potential is huge.

Unconventional View: We agree with Morgans. We’ve been keen followers of LVH for some time, we bought it for the Ferrari portfolio back in March when it was trading at 55c. Unfortunately the stock dropped and hit our stop loss so we turfed it out at 48c making a 13% loss. Ouch. Rules are rules. Since then the stock has rebounded to 61c. Although it dropped, it never broke its uptrend support line and has continued to track along it. Nonetheless, we still like the LVH story and we should have gone with our instincts. The company is a digital disruptor and is making inroads in recruiting employees through its platform. It can be described as the Airbnb of recruitment in that it provides an interface between talent and employers. The stock does bear a high level of risk as there is no guarantee at this stage that the company will become viable which is why the StockOmeter rating is so low. EPS growth is NULL. However, its high growth potential could mean that investors that are happy to harbour the risk and catch this stock early may be rewarded with high returns over the next few years. We think it’s a brilliant business that is set to disrupt the HR industry and has huge potential. Its recent contract win with QLD Health gives us confidence that the company is kicking goals and landing some big contracts. It’s really not a matter of if, it’s a matter of when it will hit mainstream. When it does, it’s can be done globally. This is the reason why we think the company has so much promise and traders should be buying at its current level. The business is kicking goals and has positive momentum. But – we recommend only to invest in LVH only for those willing to take on a high level of risk. On the chart, the stock is attractive. It’s continued to march along its uptrend support line. We recommend buying on this momentum.

QBE – Current Price $0.61 – Shares suffered an +8% fall after the insurer warned that its emerging markets division will be unprofitable, which will drag down the expected bottom line of the entire company. Its emerging-markets division had experienced “significantly higher” claims in the first five months of its financial year.

Broker View: Citi (NEUTRAL $12.75) – The broker has downgraded its recommendation from Buy to Neutral following this week’s profit downgrade. 1H insurance margins are now expected to be lower than previously thought. The downgrade was caused by the rise in the frequency of medium-sized claims in Asia. Citi does however say that the share price fall was probably a bit severe in comparison to the magnitude of the downgrade.Citi reduces estimates for earnings per share in FY17 by -7% and FY18 by -5%.

Unconventional View: We agree with Citi but are more bearish than the broker. The profit downgrade was a big blow to investor confidence and management credibility. From a company that has a shady track record this is yet again another balls up. I mean didn’t they have their AGM last month. At the AGM the company said “Our Emerging Markets business operates in 22 of the world’s emerging economies in Asia and Latin America, and continues to contribute positively to the group. We are confident in our ability to meet the performance targets we have set out for 2017 and importantly, our ability to continue to improve our business through the medium term.” Ouch. How can you seriously trust management now? QBE has been trying to regain investor confidence after a series of downgrades a few years back and it almost succeeded. The emerging markets business accounts for only 10% of earnings, so it’s not huge but the losing investor confidence is far worse. No one knows when QBE will have another nasty hiccup. At least they’ve lived up to their 20-year track record of missing numbers and stuffing up. Unfortunately they’ll probably continue doing this for the next 20 years. We’re disappointed in QBE. We wrote about QBE back in March after what was a great profit result and upbeat guidance statement. We said “now is the perfect time to be buying QBE. With financial markets taking in a US rate rise and two more rises this year insurance companies will soon feel the relief of rising bond yields which have started to take off.” We were wrong. Sure rates have risen, but bond yields haven’t risen by all that much. This means the market isn’t confident that there will be another rate rise anytime soon. QBE generates about a third of its revenue from the US via its US bond portfolio. Higher bond yields means higher returns. Historically the company’s share price has risen in line with rising US bond yields. So tanking bond yields drag QBE lower. The chart isn’t pretty either. QBE looks to have bounced off its resistance line and is heading back down. It could fall all the way to sub $10. We advise those that hold to sell.

 

Two stocks to supercharge your portfolio

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In this section, we will look at two stocks any investor can add to their portfolio to generate positive returns. We’ve been keen followers of these two companies and for one reason or another both have caught our attention. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.

Cochlear (COH) – Based in Sydney the company is a world leader in the design and production of hearing implants. It designs, manufactures and supplies the Nucleus cochlear implant, the Hybrid electro-acoustic implant and the Baha bone conduction implant. COH holds over two-thirds of the worldwide hearing implant market and was named Australia’s most innovative company companies by Forbes in 2011. The company had a flawless record until it recalled the Nucleus 5 implant in 2011. The recall was voluntary and was due to adverse results in less than 1% of products issued. Management’s decision recall preserved the company’s reliably high standards and customer goodwill, despite the temporarily headwind and hit to market sentiment. Following the recall shares were dumped, but it didn’t take long for COH to bounce back and regained momentum. This reflects a solid and stable business with robust fundamentals. We like the Cochlear story and consider the stock a great addition to any portfolio. The company is not only a market leader but it’s the one most innovative in its field. Its main product is the Nucleus 6-7implant. The system comes with SmartSound IQ which has range of advanced sound processing technology designed to deliver a hearing experience.

COH also has Wireless Accessories helps to explore audio unbound by the constraints of wires. It operates in a niche area and only a select few can compete in this highly specialised medical science sector. It’s also the reason it can charge a premium for its products. It reinvests roughly 10-15% back into R&D. COH does however come with its risks. The company relies on a small portfolio of products, namely the Nucleus and it charges off the ceiling prices for its implants. A competitor that is able to master the technology and develop a better hearing implant will very easily cause a pricing war and damage COH’s revenue. But this is yet to happen and COH continue to soar higher and higher. It also has enough firepower to acquire any new high potential technologies that it hasn’t developed. Its main competitor is Sonova of Switzerland. The key in this industry is to gain the trust of medical specialists. They’re the ones that prescribe implants to those in need. COH has an impeccable track record which has helped gain the trust and confidence of a loyal specialists, which provides it with a clear competitive advantage despite the recall event which was handled perfectly. On fundamentals the company stacks up well. The StockOmeter reading is at 69 which is a Buy. Its balance sheet is solid with net debt of $117.8m or 43% gearing. It has around $75m. Most would argue that the stock is expensive, which it is trading on a PE of 42x. But that’s ok. COH has always been a high PE stock. With a super high and stable ROE of 47%, it is very profitable. With a strong competitive position and enviable track record of stellar earnings growth and continuous product innovation, we think it will continue to deliver. It recently confirmed its new Nucleus 7 processor after it gained FDA approval. The implant is tipped to be first that will be iPhone ready. When released COH will have first mover advantage, something that we see having significant upside potential. At its investor day presentation COH reiterated its FY guidance range for NPAT to be $210m-$225m up 10%-20% on FY16 supported by strong momentum in unit growth. On the chart the stock has clearly broken out and is making higher highs. Investors should be buying on this bullish break out but be mindful that the stock has had a mammoth run from its $80 level in 2015 to $160 now. As with high PE stocks, if COH disappoints it will pull back quite quick. So we advise those that do buy to incorporate a tight stop loss to protect on the downside.

 

Amcor (AMC) – Amcor is a global packaging company with a massive network of packaging plants. It has operations across Australasia, North America, Latin America, Europe and Asia. AMC offers a range of packaging related products and services, including packaging for beverages, food, healthcare, personal and homecare, tobacco, and industrial applications. The company has three main divisions – rigid plastics, flexibles packaging and Tobacco packaging via its 47.9% holding in AMVIG. The Rigid Plastics containers vary from materials for a range of beverage and food products; including carbonated soft drinks, water, juices, sports drinks, milk-based beverages, spirits and beer, sauces, dressings, spreads, personal care items and plastic caps for a variety of applications.

Amcor earnings are defensive in nature but it’s a growth stock too. It has attractive qualities that make it a perfect stock for any portfolio. It is a solid company with a sound balance sheet. What is attractive is that it’s ROE this year sits on 59.65% which is forecast to grow to 80%. Amcor did complete a US$500m share buy-back which may have distorted its ROE a little. But even still its ROE has been steadily increasing and that’s a good sign. That aside, it’s a global player and is exposed to the global economy. As we mentioned above some 35% of the company’s revenue comes from Europe. We have quite a positive outlook on Europe. The continent is in recovery, most EU nations are rebounding and GDP rising. So, for that reason this will act as a tailwind going forward. Its 3.8% rise in underlying profit to US$308.6m beat analysts’ expectations. FY17 underlying NPAT is expected to come in at US$730m. So, as you can see, it ticks the right boxes. This week AMC conducted a US Investor Tour with an overview of the Amcor Rigid Plastics (ARP) division. Ord Minnett released quite a positive report on AMC saying the key for growth is its focus on R&D. M&A also remains a focus. Ords believe that opportunities are more likely to arise inSpecialty Containers. The downside risk with Amcor – is that unstable geopolitical events or global economic turmoil may cause consumers to stop buying. When consumers stop buying, Amcor suffers. Why? Because fewer goods are being bought, less packaging is required. But because the company is represented in almost every corner of the world, it’s quite diversified and insulated from economic turmoil give its exposure to so many countries. This is why it’s relatively resilient and defensive. One-third of its earnings come from the faster-growing emerging markets. On fundamentals Amcor rates quite high on the StockOmeter with a 76 point reading. It’s share price will climb higher as EPS rises. It does have quite a leveraged balance sheet due to its US$600m bond offering and has some $3bn in debt. So increasing interest rates are a headwind and could be a problem in the future. On the chart, the stock is in a super uptrend that has been going since 2013. It’s a good chart. The stock has just broken out on the upside and investors should look to buy on this bullish break out. All in all, a great stock for any portfolio.