Income Report / Income Report: Stepping up and fading the recent move in bond yields – includes portfolio buy-sell alerts (SKI, TCL, FLT, WHC, EHE)

By Market Matters 18 September 19

Income Report: Stepping up and fading the recent move in bond yields – includes portfolio buy-sell alerts (SKI, TCL, FLT, WHC, EHE)

Market Matters Income Report 18th September 2019

The market opened flat this morning following a reasonable session yesterday, although it does feel stocks are tiring somewhat. The energy sector is under pressure following a large decline in crude overnight after the Saudi’s surprised the market with the speed at which they’ll resume production. Woodside (WPL) which sits in the MM Income Portfolio is trading down -2.43% to $32.52 at time of writing – not a bad effort considering the 7% decline in Oil overnight.

Elsewhere, the property stocks are in focus today with Centuria Metropolitian REIT (CMA) launching a $273m equity raise to fund the purchase of two properties in Sydney and Perth, the raise being priced at $2.86 versus last trade at $3.00. Centuria Capital (CNI), the largest holder in CMA has also launched an offer to raise $100m through to fund their take-up of the offer – this is priced at $2.10 v last traded price of $2.18.

In the property space, we’ve recently added Abacus (ABP) into the MM income portfolio and we’re seeing strong volume through that stock today.

Overall, the ASX 200 is currently trading down -5pts or -0.09% to 6689. 

ASX 200 Chart

The Income Portfolio was up +0.89% on the shortened week from Thursday to Tuesday however it was just our oil exposure in Woodside (WPL) that managed to put on more than 3% in the period (ahead of today’s move)  while Whitehaven (WHC) and Estia (EHE) fell -3.71% and -4.62% respectively - IVE Group (IGL) and Flight Centre (FLT) both traded ex some big fully franked dividends. The portfolio is now up +2.49% financial year to date, versus its absolute return benchmark of +1.07%. Since inception the portfolio is up +19.44% vs the benchmark of +11.99%, which equates to 8.40% pa since inception with significantly less volatility than the underlying equity market.   

For those interested in investing for income in a low rate environment, Market Matters manages the investments for the Market Matters Active Income portfolio offered under Praemium SMA which is open for investment. The portfolio is based on the MM Income Portfolio. The SMA has now passed its first anniversary and performance has remained sound.  The August update can be viewed – Click Here

Stepping up and fading the recent move in bond yields

Today we’re stepping up and fading the recent move in bond yields on the expectation that the current downtrend remains intact – for now at least, buying Spark Infrastructure (SKI) and Transurban (TCL) while  also increasing cash by taking a ~19% profit in Flight Centre (FLT) and cutting two underperformers in Whitehaven Coal (WHC) & Estia Healthcare (EHE)  – some meaningful changes to a portfolio that we’ll explain in today’s note.

As we wrote in the AM note today,  Bond yields and especially the US 10-year’s are currently having a larger influence on equities than usual as we’ve seen a sharp 2-week countertrend bounce lead to massive sector rotation putting pressure on traditional yield stocks. While the bounce has been an aggressive one – the largest we’ve witnessed so far in 2019 we don’t yet think this is a change of trend.

While we think the bear market in bond yields is very mature usually this sort of entrenched trend needs a significant event to complete its journey, like a recession for example.

At this stage we continue to believe the US 10-years have started to “look for a low” but ongoing choppy price action back towards 1.5% would not surprise, implying upside in yield stocks from recent weakness.

US 10-year bond yields Chart

BUYS

1 Spark Infrastructure (SKI) $2.16

We covered this regulated utility and infrastructure company last week concluding that MM was becoming more bullish nearer $2. Over the past week, bond yields continued to rally however SKI has found support around current levels. Holding firm into trends that should be theoretically negative is a sign of strength.

MM is now bullish SKI adding it to the MM Income Portfolio today with a 4% weighting, slightly above our $2 target.

Spark Infrastructure (SKI) Chart

2 Transurban (TCL) $14.43

Similar to Spark Infrastructure above, Transurban seems to be pre-empting a top in bond yields, rallying ~2% over the past week despite the rally in bond yields. This is a bullish sign for TCL after correcting ~12% from the recent peak.

MM is now bullish TCL adding it to the MM Income Portfolio today with a 3% allocation, slightly above our $13.50-$14 targeted range

Transurban (TCL) Chart

SELLS

3 Flight Centre (FLT) $47.01

We bought FLT towards the end of May as a value play however since then the stock has run as value names have come back into favour. While FLT talked about strength in sales  to start the year, ultimately the share price rally has all been about P/E expansion at this stage.

Now on a yield of just 3.40% fully franked, we are using FLT as a funding vehicle, taking a nice profit along the way.

Flight Centre (FLT) Chart

4 Whitehaven Coal (WHC) $3.26

While WHC are producing strong free cash flow falling coal prices are putting pressure on the stock. 

The position is in the red by ~13% and we’re cutting it to re-allocate elsewhere.

Whitehaven Coal (WHC) Chart

5 Estia Healthcare (EHE) $2.47

The yield on this aged care stock remains attractive at 6.3% fully franked however with earnings expected to decline in FY20 putting it on a forward P/E of 18.5x makes it expensive, better opportunities exist elsewhere. 

We are cutting the position for a ~7% loss. 

Estia Healthcare (EHE) Chart

Conclusion

We buying SKI & TCL

We are selling FLT, WHC, EHE, increasing cash slightly as a result  

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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