Morning Report / Subscribers questions (LYL, MSB, SVW, QBE, MTA CN, IMF, WAM)

By Market Matters 23 December 19

Subscribers questions (LYL, MSB, SVW, QBE, MTA CN, IMF, WAM)

Market Matters Morning Report 23rd December 2019

The ASX200 stormed higher this time last week before consolidating the gains in a similar manner to its 5-day “rest” earlier in the month. Most people’s minds are understandably not focused on markets this time of year, but this can on occasion lead to opportunities for the prepared i.e.  low volumes can often create exaggerated moves in stocks / indices providing such opportunities for buyers and sellers alike. 

1 – MM is still considering taking $$ on 1 or 2 positions into strength.

2 – MM is also considering re-entering the BBOZ Bearish ETF basis the ASX200 making fresh highs above 6900.

MM is short-term bullish the ASX200 while it can hold above 6750.

On Saturday morning the SPI futures were pointing to an opening down almost -0.5% this morning even though US stocks rallied to fresh all-time highs, the $A rallying back above 69c appears to be an ongoing headwind for local stocks.

Thanks again for the questions, I’m delighted by the volume / interest only a few days before Christmas, 2-days and counting!

ASX200 Index Chart

Many investors have missed out on 2019’ excellent year for equities which has been spearheaded by the US but in hindsight it shouldn’t be hard to comprehend, just consider the below simple numbers:

1 – At the start of 2019 US 10-year bonds were trading around 3.3%, today they’re well under 2% at ~1.9%, when bond yields fall by over 40% it creates a huge tailwind for stocks.

2 - In 2019 buybacks in the US will come in above $US700bn, another huge supportive factor for American stocks.

We are mindful that since early October bonds have declined (rates up) while stocks have maintained their ascent, a short-term concern for MM.

MM remains mildly bullish US stocks.

USS&P500 Index v 10-year Bonds Chart

Question 1

“Firstly, many thanks for your informative service over the year, and all the best for Christmas and the New Year - may it be fruitful for us all! Can I sneak in a cheeky two questions for Monday? First - if we assume as an exercise interest rate have bottomed and may rise from here, what stocks do well in that environment? Secondly, what does your analysis tell you about LYL? I am looking at this stock for income. All the best!” – Karl B.

Hi Karl,

Thanks for the kind words to everyone, I have obviously split your question in 2 halves this morning:

1 During times of rising bond yields investors generally want to be exposed to Value Stocks like the Resources & Banks while avoiding the Growth, yield sensitive and high valuation stocks e.g. Utilities and IT stocks. Stocks with higher debt do worse as do those seen as a quasi-bond.

2 Lycopodium (LYL) is an engineering consulting firm with a market cap of over $200m. The stock’s had a great few years but it still only trades on an Est P/E for 2020 of 12.4x while yielding 5.7% fully franked. This is cheap relative to the market however generally this is a sector that trades at some discount given the cyclicality of earnings. i.e. we hold NWH in the sector which is also cheap.  While this is not a stock MM has invested in the past but on the surface both technically and fundamentally it looks excellent buying between $4 and $4.50.

Lycopodium (LYL) Chart

Question 2

“Hi James and team, another educational query. I hold Mesoblast (MSB) shares but I don’t know about their ADRs or how to purchase. They came up in your report this afternoon, could you please explain?” - Kind Regards, Peter H.

Hi Peter,

Along with being listed on the ASX, Mesoblast (MSB) has now been listed as an American Depository Receipt (ADR) in the US allowing US investors to buy it in their local currency. The only reason an Australian investor would buy MSB via the ADR is if they wanted to own the stock in $US terms. There are many examples of ASX listed companies that also list as ADR’s overseas, essentially to make it easier for overseas investors to buy in.

MM likes MSB as an aggressive play but stops need to be under $1.60.

Mesoblast (MSB) Chart

Question 3

“Hi James, thanks for an invaluable daily read. In regard SVW, at what point, or TP would you consider selling IF you were a holder?” – David J.

Hi David,

Seven Group Holdings (SVW) is a stock we’ve discussed a few times over recent weeks with a definite bullish bias. Currently we would be running stops below $18.20 which offers solid risk /  reward in our opinion.

MM likes SVW with stops under $18.20.

Seven Group Holdings (SVW) Chart

Question 4

“James, I typically stay well clear of Insurance stocks as I just don't trust their earnings capability and I think QBE sits in the box seat with that one.  In the article below they state they are receiving increased premiums, I don't know what might be occurring out there in the corporate world in relation to Insurance premiums but for individuals such as me if I see a large increase in premium on any insurance I hold I will immediately shop around and go elsewhere.  Case in point, many years ago we held insurance with QBE until they started raising premiums heavily, we shopped around and went elsewhere and to this day we have never gone back even when of late I've checked their premiums against others and they are still too expensive for me.  I really can't see how they can sustain themselves by increasing premiums, if you're on the ball and check insurance elsewhere most people will walk away, and I personally know people who have done exactly that in relation to QBE.   Quite frankly I wouldn't buy an insurance stock if it were the last stock listed on the stock exchange and I certainly wouldn't touch QBE unless things drastically change for the better.  I'm with Brett, I think they've got big hurdles to get over.” – Thanks Steve S.

Hi Steve,

QBE has been a vehicle of wealth destruction post the GFC, its collapsed while the markets soared adding definite weight to your argument. I agree that as we become a more digital society price comparisons will play an ever increasing role in consumers decision making process. However, I most definitely would never say never, at MM we believe investors should always remain openminded, most stocks have value at a price. Shaw’s analyst in the sector is an outlier in terms of his calls on many stocks and QBE is certainly one of those. He has a $9 price target and a sell, glaringly different from the ‘streets’ expectations.

QBE Broker Calls

Source: Bloomberg

MM is neutral QBE.

QBE Insurance (QBE) Chart

Question 5

“Hi James and team, Metalla Royalty & Streaming MTA what is your opinion on this type of stock, is it an alternative to buying gold stocks and or physical precious metals.” – Daniel C.

Hi Daniel,

At this stage these precious metal and streaming companies are clearly outperforming the Australian gold sector and we feel they remain bullish. At MM we believe they are an alternative to gold stocks, but their correlation is not as direct to the gold price as other assets mentioned, by definition they will not always outperform the underlying precious metals.

Canadian based MTA only has a market cap of $CAD229m making it small for MM.

MM likes MTA while it remains above $5.80.

Metalla Royalty (MTA CN) Chart

Question 6

“Dear MM, sounds like essential knowledge before undertaking any share transactions but I still have great difficulty in knowing when to sell. IMF Bentham [IMF] is a litigation funder, with class actions much in vogue and it has bounced up recently on favourable court outcomes. Please could you comment on IMF and perhaps use it to illustrate how you might decide whether to sell or hold.” -  Thank you, Paul T

Hi Paul,

There’s a critical saying with both investing and trading – “Plan you trade and trade your plan”. In other words you should always know what you intend  to do if the stock goes up or down before you actually buy it otherwise human emotion is likely to hinder your decision making – “Fear & Greed” rarely adds value to the investor.

By their very nature, litigation funders will be volatile around court outcomes. In essence, they spend their time looking for cases that stack up, outlaying money to put the case together, then they get a ruling that is good or bad. In reality, most cases don’t go to court and are settled beforehand however there is still the unpredictability of the courts.

The bigger litigation funders like IMF had a win recently from what seems to be a tweak to class action law, insofar as members of a class action need to actually opt in rather than simply being part of the action from a negative consent (i.e. in if you don’t opt out). That makes class actions more expensive and it may squeeze out some of the smaller opposition.  

IMF looks good to us while it can remain above $3.80 – this level will hopefully go up over time as the stock price evolves.

IMF Bentham (IMF) Chart 

Question 7

“Hi James and team, If I wanted to short euro bonds say Italy or Greece, is there a cheap way from Australia to do this using a ETF or such like. Thanks Daniel C.

Morning Daniel,

Not that I can’t find at this stage – I’ve taken on notice and will come back to you.

Question 8

“When asked for directions to a certain place, Spike Milligan famously replied "well, I wouldn't start from here!"... So, I am interested in creating my own version of your Income Portfolio. Should I start from here? Clearly it has been created over time but if one were to create it right now would it comprise the exact same items? And if not why and what? Cheers and keep up the good work! Dave B.

Hi David,

There is no right or wrong answer here. I manage wholesale portfolios through Shaw and Partners and we also run SMA Portfolio’s through Market Matters. When a client invests new money with me I typically allocate funds over time as opportunities arise in the positions held. Honestly, this at times works well and at other times it is better to simply invest / replicate the portfolio on day one which is what happens in the SMA structure.  

In terms of the current positions in the MM Income Portfolio, I’m comfortable with most current holdings at this point in time , Genworth (GMA) is the only stock that may be cut soon given is strong rise, but also uptick in bank arrears that were obvious in the last banking updates.

Question 9

“Afternoon All, a question for James. Have MM considered adding columns to the portfolios to identify the target price which can always change dependent upon a stock run and one for a sell price if it goes backwards. I know you can have too many columns in a spread sheet, but these suggested two could help a small investor such as myself to make informed choices! (as the saying goes) on stock disposal. Also, about how many months/ years are your term definitions Short - Medium - long? Thanks for all your fantastic advice this year. I hope all at MM enjoy a very happy Christmas” - Cheers Mike D.

Morning Mike,

Yes, I have considered however the issue is that if we put a target there then amend it, it can create some confusion. We are significantly down the path to a fresh and improved MM offering in Q1 of 2020 which will include some major upgrades to our website, this should help subscribers moving forward. I’ll ponder the target prices some more as I take a break at the start of Jan.

Question 10

“Loving your informative commentary & reading your thoughts on WAM, I presume WGB, WLE & WMI you would view in the same way? Regards Jenni V.

Morning Jenni,

Not necessarily, 2 you listed are trading below their NTA while 1 is trading above.

WGB has post tax NTA of $2.465 v current share prices of $2.33 (below)

WLE has post tax NTA of $1.294 v current share prices of $1.265 (below)

While WMI has post tax NTA of 1.363 v current share prices of $1.485 (above)

If you like the MM approach and don’t want to worry about trading at premiums or discounts to NTA, you could of course consider the MM SMA Portfolios. For details:

WAM Capital (WAM) Chart

Have a great day!

James & the Market Matters Team


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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