Views at a Glance / Income Report; What can we sell to increase cash? (NCK, HVN, TLS, PPT, NXT, NAB)

By Market Matters 10 January 18

Income Report; What can we sell to increase cash? (NCK, HVN, TLS, PPT, NXT, NAB)

Market Matters Income Update 10th January 2018

The market has continued to power on with the ASX 200 hitting a 6150 high in trade this morning – it’s highest level since January 2008 and bullishness is clearly building. In our last report on the 20th December we wrote ‘we’re comfortable with the portfolio however we are looking to increase cash from our equity allocation into strength ~6150 on the index’ – and this morning that level has been achieved. Given our cash levels are low (2.5%) and we like to have flexibility into any market weakness, today we need to sharpen our pencils and think hard about a few current positions – more on that later.

ASX 200 Daily Chart

ASX 200 Monthly Chart

In terms of the MM Income Portfolio since December 20, it has added +0.85% with most of the heavy lifting being done by Woodside and Harvey Norman, while our stable of Income Securities have also been doing exactly what they are tasked with, adding capital stability and a higher return than simply sitting in cash. Overall, the portfolio has gained 8.68% since inception (5th July 17) with an average exposure to equities of around 55%.

Avoiding the ‘yield trade’ in an Income Portfolio!

This morning we wrote ‘Higher interest rates was one of our strongest opinions for both 2017 and 2018 forming the key reason why we currently have no interest in holding “yield play” style stocks’. Obviously that view makes it more difficult to run an Income Portfolio however there’s no point curve fitting a view to suit the type of portfolio that we’re running! To that end, we’ve been very conscious of positioning the portfolio into areas that are not a sensitive to higher interest rates, and actually benefit (in terms of income) when rates go up. The hybrids we hold are floating + MCP has floating exposures. In terms of stocks, we’ve  focussed on companies that either benefit from higher rates (NAB, SUN, CBA), have been sold too hard by the market for a particular reason rendering them cheap (HVN, PPT, ALF, VCX, TLS, NCK), or have some specific tailwind (WPL). That approach has been working well and the portfolio has been tracking above our target (cash rate +4%)  

However, given the strong run up in the market and the current exuberance, we are now looking to increase cash.

US 10 Year Bond Yields – up ~0.50% since September and going higher

Looking to increase cash

Nick Scali Limited (NCK) – This was the primary candidate to sell as outlined in our last update. We suggested that…We’re up ~14% on the position and although the earnings trends on NCK are strong, and the stock remains reasonable value, we’re conscious that the stock tends to get sold hard on instances of slight earnings hiccups, but is not experiencing the same upside on the recent earnings upgrade. This suggests that the stock is well owned by those that ‘believe’ in it , but marginal new buyers are more difficult to come by. 

Since then, the stock has seen some strong buying which allays some of the above mentioned concerns. This is a holding that goes against our broader macro views with rising interest rates having a bearing on consumer spending, however, rates in Australia are unlikely to go up soon and NCK has a strong track record as an exceptional retailer – driving earnings growth in most environments.  We’re holding for now meaning we need to look elsewhere for some $$

Nick Scali Daily Chart

Harvey Norman Holdings Limited (HVN) – We outlined Harvey Norman as a sell around $4.50 in our last update and it traded around ~$4.40 yesterday. We continue to think that fund managers are very underweight retail and ultimately the Amazon effect will be a long time coming. Simply, the risk of a ‘melt up’ in retail is a strong possibility so at this stage, we want to retain our overweight exposure vs the index (index weight of 5.2% - our weight is 8%).

Harvey Norman (HVN) Daily Chart

Telstra Corporation Limited (TLS) – Almost reached $3.80 yesterday however we’ll remain patient for now and retain our $3.85 target as outlined in the last Income Report.

Telstra (TLS) Daily Chart

Perpetual Limited (PPT) – This is a reasonably new position for the Income Portfolio having bought stock at $48.40 with a 4% weighting. In the last update we suggestedwe need to see a move above $49 for this chart to become bullish and we may upweight this position if that plays out.

We’ve now seen the stock break up through $49 with some conviction and we are still looking to upweight this holding, so clearly we are not sellers of this one but are not yet buyers given our cash constraints and view on the mkt.  

Perpetual (PPT) Daily Chart

MCP Master Income Trust (MXT) – we are long here from $2.00 with a 5.00% holding and the listed trust has just paid a near 2c distribution (unfranked). The security this morning traded up to $2.12 and at time of writing it’s trading at $2.10. Scarcity of this type of listed exposure is driving the moves and with limited sell volume available (most would buy and hold this), market orders entered by some uneducated investors can see the price spike at times. As it stands, the NTA of this fund is $2.005 meaning that it’s trading above the value of its underlying assets. As we suggested in the last update, a move to $2.15 and this is a SELL.  

MCP (MXT) Daily Chart

NAB (NAB) – we previously wrote that we intend to reduce our holding ~$32 with the stock trading today at $29.62 – some way below our target, however given our overall market views and large position in NAB (12%), we are trimming this position now by 4.5% taking our holding to 7.5% and increasing cash to 7%, which feels about right given our exposures in more defensive Hybrids. Reduce NAB by 4.5% around $29.60

National Australia Bank (NAB) Daily Chart

Conclusion (s)

We are reducing our holding in NAB by 4.5%
We are looking to sell HVN on further strength
We are looking to increase our weighting in PPT into weakness.   

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 Wednesday, or after the session when positions are traded.

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