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.
OZ Forex (OFX) – Current Price $1.325 – Had a shocker this week with its shares being smashed by 24%. The company issued a profit downgrade largely stemming from the UK after the Brexit vote resulted in less large value discretionary transactions and a 35% decline in revenues per transaction. OFX also announced that it had appointed John Alexander Malcolm as CEO. Broker View: Macquarie (OVERWEIGHT $1.65) – The broker has an Overweight recommendation on the stock and says three downgrades in 18 months highlight execution issues. This suggests the reason the board has decided to change CEOs. OFX now expects FY17 pre-tax earnings to be around $27.5-$28.5m and NPAT around $19m. That means a downgrade of around 10% on previous estimates. All in all, the broker is still supportive of the stock and says ‘it’s still good’. There’s a lot of work to be done but it can be done.
Unconventional View: We disagree with Macquarie. We wrote about OFX on September 23 and we said “OFX doesn’t look good…You can also see a death cross – this is when the 40 day moving average crosses below the 150 day moving average, triggering a Sell indicator. Traders and investors both should wait for the stock to bottom and reverse in trend before considering a position in OFX.” Surprisingly Macquarie still has an Overweight on the stock despite three profit downgrades. Maybe after the fourth profit they might drop their recommendation? Note – Macquarie were behind the OFX IPO. Either way three downgrades in 18 months more than suggests there are a few problems in the works. A new CEO has been appointed so expect some deck clearing and write-downs. Mr Malcolm has an enviable background and strong leadership skills coupled with substantial experience but even then it’s a long windy road before this ship turns around. The company’s market strategy has been shot to pieces and there has been a material reduction in average transaction values from individuals in UK. The pound devaluation caused by Brexit resulted in a 35% decline in revenues per transaction. For that reason, we simply can’t get excited about Oz Forex. We suggest those wanting to buy, at least wait until the company reports on the so that you have some idea of how bad things are. Buying now is like catching a falling knife. Gone are +$3 a share days driven by the Western Union takeover bid. For those that own the stock already and have held on, it’s too late to sell now. You’ve only got one option but to hold and hope the new CEO turns its around. Hopefully he will help the company deliver on its ambitions.
Downer EDI (DOW) – Current Price $7.07 – Shares have lifted following a positive earnings report. Shares soared by 13% after the company delivered an 8.5% rise in HY profit to $78.2m and increased its profit guidance by 7% to $175m from $163m for the FY. The increase was supported by two rail contracts – Melbourne high capacity Metro trains project and Sydney’s suburban train contract. Broker View: Macquarie (OUTPERFORM $7.45) – The broker is bullish on the Downer result. 1H of $78m beat their forecasts and the FY17 profit guidance increase of 7% to $175m was icing on the cake. The main revelation was in technology & communication services, driven by the ramp up in the NBN, and work for Telstra (TLS). Overall a strong result.
Unconventional View: We agree with Macquarie on this one. It’s been a long and windy path for Downer. If you remember about five years back, Downer ran into some serious problems. Profits were tumbling, no dividends and its troubled Waratah train project was throwing up costly delays and write downs. Downer was in a world of worries and it was a stock you wouldn’t have touched. It was 2011 and Downer reported a 1H loss of $103m due to massive $250m write down. Shareholders jumped ship and the stock was all but forgotten. Shares fell from a 2010 high of $9 to a rock bottom low of $2.75-$2.95 in February 2016. That’s a near 70% fall. Painful indeed. But since then the stock has staged a remarkable turnaround. A turnaround that has gone largely unnoticed. You’d be surprised to hear that since February 2016 the stock is up a whopping 133% at around $6.88. The company turned around its fortunes and started winning contracts again. A $1.7bn contract to supply 24 new double decker passenger trains to the NSW government was won back in December 2016, sending shares soaring to a 6 year high. It also was awarded a $190m solar farm contract in North QLD and a $2bn contract to build 65 brand spanking new trains for Victoria. This week Downer posted a ripping result with NPAT of $78.2m above an expected $69.5m. It will also pay an interim dividend of 12c and went one step further and raised its FY guidance to $175m from $163m. You have say the company’s outlook is looking a lot better highlighted by its guidance upgrade. On the chart, DOW is looking very attractive. The stock has broken out on the upside and pushing higher with bullish momentum. Investors should be buying on this trend. Downer has risen some 14% but it’s not overbought with the RSI at around 65. You might want to wait till the stock subsides a little. But overall, it’s a Buy.
Woolworths (WOW) – Current Price $25.48 – It’s been a rough few years for Woolies, but after a new CEO and a lot of deck clearing things seem to be looking a lot rosier. Anaysts are becoming less negative on the grocery retailer and some are forecasting a positive result this reporting season. Industry margins have bottomed. The last 3 years have been difficult for WOW, as they reshuffled the board, made difficult decisions in for the BIG W and grocery businesses and began the long process of regaining competitiveness. The decision to ‘invest in price’ or effectively reduce margins to increase volume, appears to be paying off and have finally outperformed Coles in same store sales growth after 27 consecutive quarters of underperformance. Broker View: UBS (BUY $27.30) – The broker has a bullish view on Woolies. It is less negative on the stock and the Australian grocery market as a whole. It believes ‘industry margins start to bottom while a more rational pricing backdrop is developing.’ As a result the broker has upgraded to Buy from Sell on an improved outlook.
Unconventional View: We agree with UBS. Woolies is looking a lot better and looks to have successfully turned its fortunes around. The 2016 sell-off was well overdone. We wrote about Woolies back in July and have had a positive view on the stock ever since. Back then we said “With Banducci at the helm, new directive and vision could give Woolies a ‘fresh’ start. Pardon the pun. If you are looking to Buy – Not just yet. Wait for the turn around and upside break in trend. There will time to buy when a recovery is in play and mood has changed. At the moment Woolworths is stuck in a sentiment hole but any positive news could see the stock re-rate.” We think NOW is the time to Buy. The sentiment is about the change and the turn around has occurred. Woolworths still has the largest and finest distribution network in the country. Management have identified the problems that plagued the retailer last year and have successfully improved the business. The choice to sell off Master’s chain was a positive and stemmed the bleeding. The recent move to sell off 527 fuel sites and 16 development sites to global giant BP will reap a cool $1.785bn and will be another catalyst. It’s all positive news. On the chart, Woolies couldn’t look any better. The stock is in a clear recovery and has formed a new short termuptrend. We advise investors to jump on board prior to the Woolworths profit result.