The Four Horseman of the Apocalypse: 16 November 2016
According to the authors Carmen Reinhart and Kenneth Rogoff, the study of eight centuries of financial crises reveals a standard and repeating set of leading indicators to a financial crisis.
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.
Tim
:
Great insights Roger. Cash, long/short or market neutral funds are definitely attractive options given the current economic climate. What fundamental changes in regards to the 4 factors discussed would you be looking for as triggers to return to investing in primarily long equities?
Roger Montgomery
:
much cheaper prices.
Peter Acton
:
Greetings Roger
I really appreciated your Four Horseman of the Apocalypse insight. The only point I would make is in regard to your comment on Sydney and Auckland Airports.
Many economists view airports as natural monopolies so they may exhibit superior pricing power. I am not familiar with the regulatory framework of airports but I would image that the market power of airports is something to consider when making an investment decision.
All the best
Roger Montgomery
:
Hi peter, but the other airports around the world share many of the same pricing powers and yet AIA and SYD were the most expensive.
Tim
:
Roger,
As a professional who works in the finance industry I couldn’t agree with you more. For every accident there is a chain of events that leads up to it, which you have succinctly outlined. We have had the chain of events, its just a matter of time when the accident occurs.
You mentioned the economic woes of WA, as someone who is currently living in Perth, I was astounded at the level of residential development 18 months ago when I got here, now I am almost lost for words as to what has continued since. The over supply has not yet abated, if anything it is increasing.
Denial and complacency is also everywhere. It will get better, the worst is over, never been a better time to buy.
As someone who was around in the early 90’s I remember when WBC nearly went to the wall with ANZ very close behind it, I know that things can get very ugly, very quickly.
Best summed in the words of Bachman Turner Overdrive, “You ain’t seen nothing yet”
Roger Montgomery
:
Thanks for sharing Tim.
Joel Williams
:
Hi Roger,
I’ve gone with two of your recommendations this year in ISD and OFX. Both of them have been subject to shock downgrades, both dropping more than 30% since I bought them. That would make them two of the worst performing shares on the ASX this year, which is up 9% since January.
Every single other share in my portfolio has gone up nicely. Feeling nauseous at the worth of this money I’ve worked so hard for just disappearing before my eyes.
Any reassurance?
Roger Montgomery
:
Hi Joel,
We don’t “recommend” stocks. We discuss them and share what we think. Ozforex hasn’t been written about here at the blog since 2013.
Joel Williams
:
Hi Roger,
On 26 July 2016 you noted about ISentia that “At the current share price of circa $3.20, we see considerable upside to our base case.” I’m certainly hoping you’re right!
Roger Montgomery
:
Isentia recently caused the market price for its shares to stumble by more than 25 per cent.
Isentia expanded sideways last year buying an online content business called King Content. At that time Isentia told media & marketing website Mumbrella: “For quite some time now, Isentia has been looking at how we can work across owned, earned and paid media. Our clients are already getting a lot of information from us in this space, but they are also asking us to help with their strategy…King Content are the market leader” adding, “we still see a real growing need from major brands to connect with their audiences through content marketing.”
The deal, with vendors – to be paid out over a five-years – would total $48 million if all targets are hit.
On the 17th of November, Isentia held its AGM and provided a trading update. In short Content Marketing will report an EBITDA loss of $2 million for 1H17 however management expects a positive contribution for the 2017 financial year after a restructuring. This will result in ISD’s Group 1H17 EBITDA to be below the prior corresponding period.
The announcement of the half-year loss of $2 million in the content business triggered a $175 million reduction in the Group’s market capitalization. This seems, at first blush disproportionately large given
The group’s Australia and New Zealand Software-as-a-Service and Value Added Services amount to 93 per cent of EBITDA for 2016 and are performing in line with management’s previous guidance. Nevertheless prior Group guidance was for revenue and EBITDA growth of between 11-15%, guidance for revenue and EBITDA growth has now been revised lower to high single digits.
The drivers of the downgrade appear temporary, the restructure will include the implementation of a new organizational structure & CEO for King Content as well as merging the ISD & King Content sales teams.
It’s worth noting that King Content represents <10% of our valuation for ISD, hence even a permanent impairment of the division’s prospects would not be significant. In this contant, you can see why we view the 27 per cent decline in Isentia’s share price as an overreaction.
The primary driver of our valuation is growth in the company’s SaaS/VAS divisions. The most recent updated guidance confirms that these business units are operating in line with management’s expectations and therefore there is little impact on our valuation/recommendations for ISD.
The current market condition however is to hammer the shares of companies that miss a beat. For value investors it is often when that which is considered temporary is treated as permanent that opportunities are presented.
James Cork
:
While you’re no doubt correct in that response, Roger, your team has published bullish pieces on its blog regarding ISD on numerous occasions, most recently on July 15 where it was said: “At the current share price of circa $3.20, we see considerable upside to our base case valuation”, and it was flagged in the piece that ISD is a holding of the group’s funds. In addition to ISD, your team has recently published bullish blog pieces on some other stocks that have recently encountered operational difficulties, such as Vita Group.
I find this blog an invaluable source of opinion and information, generally, so thanks to you and your team for keeping it up; that said, if i were to provide one piece of constructive advice to your team, it’s that on this blog there isn’t enough discussion/analysis of mistakes made by the funds. I invest with other value and growth-oriented discretionary managers and it’s a precondition for my investment that these managers are very forthcoming with their mistakes when they happen, and show a willingness to share these with their investors so that, in turn, we all learn from them.
Best
James
Roger Montgomery
:
Hi james, Everything you say is 100% correct. And here at the blog I can be quoted as saying many times that ‘by the time we are done, we will have made every mistake’. We spend a great deal of contemplating time on our errors and refining how we can improve our responses and processes. So rest assured your comments regarding learning more from mistakes than from confusion are well understood. As you can probably understand we aren’t able to write about how we are responding if that response involves trading around the same time. It is likely however that you will hear from us about the events some time after they have transpired. With respect to ISD:
Isentia recently caused the market price for its shares to stumble by more than 25 per cent.
Isentia expanded sideways last year buying an online content business called King Content. At that time Isentia told media & marketing website Mumbrella: “For quite some time now, Isentia has been looking at how we can work across owned, earned and paid media. Our clients are already getting a lot of information from us in this space, but they are also asking us to help with their strategy…King Content are the market leader” adding, “we still see a real growing need from major brands to connect with their audiences through content marketing.”
The deal, with vendors – to be paid out over a five-years – would total $48 million if all targets are hit.
On the 17th of November, Isentia held its AGM and provided a trading update. In short Content Marketing will report an EBITDA loss of $2 million for 1H17 however management expects a positive contribution for the 2017 financial year after a restructuring. This will result in ISD’s Group 1H17 EBITDA to be below the prior corresponding period.
The announcement of the half-year loss of $2 million in the content business triggered a $175 million reduction in the Group’s market capitalization. This seems, at first blush disproportionately large given
The group’s Australia and New Zealand Software-as-a-Service and Value Added Services amount to 93 per cent of EBITDA for 2016 and are performing in line with management’s previous guidance. Nevertheless prior Group guidance was for revenue and EBITDA growth of between 11-15%, guidance for revenue and EBITDA growth has now been revised lower to high single digits.
The drivers of the downgrade appear temporary, the restructure will include the implementation of a new organizational structure & CEO for King Content as well as merging the ISD & King Content sales teams.
It’s worth noting that King Content represents <10% of our valuation for ISD, hence even a permanent impairment of the division’s prospects would not be significant. In this contant, you can see why we view the 27 per cent decline in Isentia’s share price as an overreaction.
The primary driver of our valuation is growth in the company’s SaaS/VAS divisions. The most recent updated guidance confirms that these business units are operating in line with management’s expectations and therefore there is little impact on our valuation/recommendations for ISD.
The current market condition however is to hammer the shares of companies that miss a beat. For value investors it is often when that which is considered temporary is treated as permanent that opportunities are presented.
Joel Williams
:
Hi Roger,
Thanks for your insights regarding ISentia. Certainly hoping the market agrees with you, as it’s continued to fall over the past week.
You and Chris Batchelor spoke about OzForex in positive terms in the 21 June 2016 Skaffold Webinar about growth stocks. You specifically stated:
“It was actually a company started by a guy I used to work with at BT… We pay about $300,000 a year in foreign currency invoices… we would normally spend about $3,000 through the banks transferring currency out of that amount of money. Through OzForex it’s literally a couple of hundred dollars. And the banks are caught between a rock and a hard place because they can’t compete, because if they compete it damages their much larger business so they prefer to just do nothing and see how much market share these sorts of companies can grab, so there really is a good long runway for a company like OzForex if they can grab market share. No-one’s really going to upset the apple cart.”
Roger Montgomery
:
Yes Joel. And note the statement “If they can grab market share”. The most recent announcement by the company confirms that market share growth hasn’t.
kumar
:
Excellent Summary Roger.
I appreciate the clarity in the message for a not very experienced investor like me.