Bull or bear case for equities, here are some quality companies
Whether you’re currently on the bear case or the bull case for global and Australian equities, we think investors need to be using this once-in-a-decade sell off to reset portfolios towards quality businesses, like some of the ones we discuss below.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ricky Leong
:
I believe that a political reckoning is coming for big tech.
Twitter recently started “fact checking” the US President’s tweets. YouTube and Facebook have been increasingly censoring “misinformation” related to Coronavirus. This includs numerous doctors who aired views contrary to those of the WHO. Google is also accused of “elevating” liberal news articles in their search results.
Trump believes he is being personally attacked by big tech – so retaliation is likely. I expect his base will support this approach as many in the Republican party view these decisions by big tech as a personal attack on their freedom of speech.
In addition to executive orders, I suspect anti-trust investigations will be initiated and new legislation passed if Trump is regains Congress.
At the stock level, I think Microsoft and Apple will be relatively insulated. Amazon (due to Washington Post ownership), Facebook, Twitter and Google will be prime targets.
Roger Montgomery
:
Nicely articulated Ricky. Thanks for sharing.
Allen
:
Roger – Are you suggesting that at the time of publishing this article, these are companies that you deep undervalued based on the method outlined in your book? (Which I enjoyed very much).
Roger Montgomery
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No Allen, I have made no comment about their valuations. Just a list of companies that at the time of writing we believe are higher quality and therefore worth doing the valuation work on as well as the due diligence about their prospects.
Wynand Viljoen
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Interesting list and I like companies in there, such as JB Hi-Fi and CommonWealth Bank, which according to proper valuation metrics (Value.able) are still trading at a valuation discount. JB Hifi not by much but funny to see some analysts rating it now as too expensive and a sell. I was lucky to get it at $21.40 on the worse day drop in March, and I intend to keep it for a long time.
I am however a bit confused with the hype many people have with companies like NextDC, Xero, Bubs and Nearmap (to name a few), which have a negative return on equity. Is this purely the growth and potential upside play or am I missing something with the valuation?
P.S. Thanks for all the good sensible commentary by the way.
Peter
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Roger,
I believe an appropriate summary of your philosophy as described above would be best described as investing not speculating. Thank you for a timely reminder.
Peter
Roger Montgomery
:
Anytime Peter.
Guy Davis
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I know you are a long time quality investor. I was just referring to your opening comments about this being a chance for other investors to “reset” into quality.
I don’t think a deep value approach has to be compared to trading or fortune-telling. Some of the greatest value investors have been successful using this approach.
I’ve read your book and enjoyed it, my only push back would be that it could make a layman think that identifying and buying quality companies is easier than it is. You do it very well, but one book can be a dangerous amount of knowledge for a novice who only knows to look for a high ROE without a lot of context behind it.
Roger Montgomery
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Indeed Guy, You make a good point and thank you for clarifying. My point is that a lot of university research has been devoted to measuring the performance of ‘categories’ or ‘styles’ of stocks – growth, value, quality etc etc. Measuring the performance of the category is done by examining share prices (rather than the performance of underlying businesses). And its all about ‘stocks’ rather than businesses, hence my comment that its based on the ups and downs rather than business performance. I should add that often the performance period over which the correlation between the style and the performance is measured is too short to be able to attribute anything to the underlying performance of the business. Hence trading v investing. Your last point is another reason the blog comes in handy!
Guy Davis
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Thanks Roger
Guy Davis
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Roger,
In my humble opinion, it is better to be looking at deep value equities here. Quality has had an outstanding decade and outperformed this last month to the point that QQQ is up for the year.
Deep value on the other hand is being given away at valuation spreads nearly as wide as ’99.
Do you think profit margins have reached a permanently high plateaus for these quality companies?
With respect, switching to quality now seems like performance chasing.
Guy
Roger Montgomery
:
We have never ‘switched’ to quality. We have always invested in quality and will always do so. I can’t think of anything that makes less sense than selling out of ‘quality’ to buy something other than quality. Either you treat the stock market as a place to bet on the ups and downs of stocks and fads, or you treat the stock market as a venue at which you can own pieces of outstanding businesses. The AFR Rich list is replete with business owners. The stock market gives you access to own businesses. The AFR Rich List is not replete with stock market traders, economists or fortune tellers. Hope that helps provide an insight into our approach. You may also benefit from reading Value.able, which you can purchase here https://shop.rogermontgomery.com/cart.php.
Havings aid all that Guy, I will add that many of the factor based ETFs have quite norrow definitions for value, growth or quality. We take a much more practical view which means there may be quality companies trading at deep value, or a high quality company included in the growth universe. We simply focus on the business asking whether it 1) is high Quality, 2) has bright prospects and 3) is rationally priced and good value.