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.
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Chalk up another win for Skaffold members.
Substantial capital losses are difficult to make back and irrespective of whether you are still in accumulation mode, retiring or retired it is essential to avoid major losses. One way to do this of course is to diversify and ensure that losses are mitigated through position sizing. Another technique and the one we will discuss here, is to simply avoid the companies most likely to collapse.
This week Gunns (ASX:GNS), was placed into voluntary administration and happily for Skaffold members it is unlikely that anyone owned shares.
Gunn’s was never investment grade. Anyone who purchased the stock from 2003 onwards were taking a massive risk and Skaffold can explain why.
Skaffold’s Verdict (Figure. 1) is a picture of danger.
Do Sedgman (SMD), Decmil Group (DCG), cochlear (COH), Seek (SEK), IAG (IAG), Resolute Mining (RSG), Magellan Financial Group (MFG), Syrah Resources (SYR), ASG (ASZ), Goodman Group (GMG), Silex Systems (SLX), AMP (AMP) or Service Stream (SSM) achieve Roger’s and Tim’s coveted A1 grade? Watch this edition of Sky Business’ Your Money Your Call broadcast 25 September 2012 program now to find out, and also learn Tim’s insights to the outlook for Cabcharge (CAB). Watch here.
Recently the media cottoned onto the fact that the Australian stock market, as measured by the major indices, has not kept pace with the US market, which is now hitting all time highs (on a total return basis). You can see from Chart 1 that the US market is most certainly outperforming the Aussie market and it seems all the ‘Go Australia’ cries are falling on deaf ears. Indeed, Australia really needs to be shouting ‘Go China’ but more on that in a minute. Since June 2011 the US market has been pulling away. The reports did not go on to explain the reason for the divergence however we have previously explained that with credit growth virtually non existent the banks would not be able to justify sustained substantial gains and with our thesis on iron ore calling for much lower prices, we couldn’t see how the big material stocks were going to rise. Combined the banks and materials stocks account for a significant portion of the index weighting and without those sectors running, there is no way the All Ords can. We also think China has a little to do with it all.
Chart 1
Take a look at Chart 2, which plots the Aussie market against the Chinese Shanghai index. Since about the same time last year, the Chinese market has been falling and given that are large part of our economy is tied to the fortunes of China, it makes sense that the prices of those companies with direct (and indirect through consumer sentiment) exposure and a significant weighting to the index locally, would have an adverse influence on the Australian market.
What is also clear is that our strong Australian dollar is not reflecting foreign demand for our shares. And what does that tell you?
Chart 2
This week David Jones announced their 2012 results and reported a 40% decline in profit. The only positive was that 4th quarter sales fell by just 1% on pcp whereas 1st quarter sales had fallen 11% on pcp. Actually there was another positive; the 35% decline in earnings per share was inline with expectations.
Separately the company also provided an update to its property strategy. Investors should understand that anything DJS does with its properties is simply a takeover defence against private equity (or Premier Investments perhaps) pulling off the same stunt that was done on Myer. That is; launch a takeover, succeed, sell off the property portfolio and get the business cheaper. if DJS shows it is proactive in this area it becomes much harder from Private Equity to argue that they are “adding value”.
DJS intrinsic value (see Fig. 1) has now not increased since 2004 and according to Skaffold.com DJS’s intrinsic value is not expected to rise at all over the next two years.
Do Silex Systems (SLX), Condor Blanco Mines (CDB), Codan (CDA), Webjet (WEB), Tasman Resources (TAS), M2 Telecommunications (MTU), Magellan (MPG), Iluka Resources (ILU), Arrium (ARI), TPG (TPM), ASG Group (ASZ), Incitec Pivot (IPL) and Sirius Resources (SIR) and achieve the Montgomery coveted A1 grade? Watch this edition of Sky Business’ Your Money Your Call broadcast 20 September 2012 now to find out, and also learn David’s insights into the issues facing Australian retail. Watch here.
Notch up another win for investors who use Skaffold. Back in August last year I was asked by a viewer on Sky Business what I thought of MacMahon Holdings (ASX:MAH).
You can watch the video here at 5 mins 20 seconds.
When asked the question, I looked at Skaffold.com and noting the very small change in intrinsic value over many years I said “This business is not going to deliver sustainable long-term outperformance”.
Today’s near-40% share price decline, announcement of a cost blowout, a downgrade to previous earnings guidance and the immediate resignation of the CEO Nick Bowen is a blow to those investors who own the shares of MacMahon and do not own Skaffold.
Roger Montgomery discusses his insights into how to view takeover offers, and in particular he discusses the Sundance Resources (SDL) takeover bid with Ross Greenwood on Radio 2GB. Listen here.
This program was broadcast 19 September 2012.
Some smaller manufacturers have good momentum in a tough market.
The media often portrays Australia’s manufacturing sector as on its knees. The high dollar, rising wage and input costs, and soft demand are clearly taking a toll. But to suggest all manufacturers are struggling is wrong. Some smaller listed manufacturers are performing well.
Transport parts manufacturer Maxitrans Industries almost tripled net profit to $12.3 million in FY2012 and its shares have rallied from 40 cents in January to 79 cents. Another parts manufacturer, Supply Network, said in July it expected full-year earnings before interest and tax (EBIT) to rise $2.2 million to $6 million. Its shares have almost doubled this year to $1.26.
Engineering solutions manufacturer, Legend Corporation, also has good momentum. In August it reported full-year net profit after tax (NPAT) grew 18.2 per cent to $9.4 million, for its fourth consecutive year of profit growth. Legend’s total shareholder return over one year (including dividends) is 8.1 per cent. Over three years, the average annual total shareholder return is 49 per cent.
