Monday 01 July 2019 Losers on the comeback trail

[Pages:16]Losers on the comeback trail

Monday 01 July 2019

Buried among data recently sent to me was a list of the ASX Top 100 biggest losers for 2018-19. I thought it would be intriguing to see if the analysts/experts think these losers could become winners in 2019-20. And the answer is a resounding "Yes"! So my article today gives you a list of 24 former losers that could be poised for glory!

And it's that time of the month when Paul Rickard checks our model portfolios. The fall in interest rates pushed the Australian stock market higher in June, the sixth consecutive up month. With defensive stocks in keen demand, our model income portfolio has returned almost 20% in 2019. Paul's article is a good read.

Sincerely,

Peter Switzer

Inside this Issue

Switzer's list of 24 losers tipped to be winners by Peter Switzer

02

02 Switzer's list of 24 losers tipped to be winners 24 losers on the winners trail by Peter Switzer

05 Income portfolio up almost 20% Income portfolio up almost 20% by Paul Rickard

08 4 beaten-up resources bargains to consider Beaten-up resources bargains by James Dunn

11 Buy, Hold, Sell ? What the Brokers Say 19 downgrades, 13 upgrades by Rudi Filapek-Vandyck

16 My Hot Stock ? Treasury Wine Estates (TWE) I like Treasury Wine Estates by Maureen Jordan

Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 Level 4, 10 Spring Street, Sydney, NSW, 2000 T: 1300 794 893 F: (02) 9222 1456

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Switzer's list of 24 losers tipped to be winners

by Peter Switzer

Buried in data I was recently trawling was a list of the ASX Top 100 biggest losers for 2018-19. I thought it would be intriguing to see if the analysts/experts think these losers could become winners in 2019-20. The answer? A resounding "Yes" to 24 of them!

Thanks to a great half year in 2019, our S&P/ASX 200 Index was up 6.49% for the financial year, closing at 6618.8. Morgan's Raymond Chan calculated that the trading range was a huge 1,281 points (or 20%) with a high of 6691 on 27 June and a low of 5410 on 24 December.

Ray did a few more data collections to tell us that iron ore was up 71%, due to Chinese demand and problems for Vale in Brazil, after a tailings dam disaster. Meanwhile, gold was up 13% on central bank easing, recession fears and Trump versus Iran concerns.

Coal was down 37% and oil was off about 15%, despite rising, with Iran geopolitical curve balls the prime cause.

Buried among his data drop was the list of the ASX Top 100 biggest losers for 2018-19. I thought it would be intriguing to see if the analysts/experts think these losers could become winners in 2019-20. And the answer is a resounding "Yes"!

In fact, only one, Scentre Group, which lost 8% last financial year, is expected to lose 0.2% this year. But in the world of rubbery figures, I'd call it flat.

Based on what these 24 losers shed in 2018-19 and looking at what's tipped for the year ahead, a company such as Whitehaven Coal (WHC) could have a 65% turnaround, with the analysts surveyed by FN Arena expecting a 35.1% rise in share price after a 30% slump this year!

Even a bigger turnaround story is the Clydesdale & Yorkshire Banking Group or CYB, which was down 38% but is expected to rebound by 29.7% this year. That would be a 67.7% change in share price for the better! Clearly, a Brexit solution and a new PM inclined to pump up the UK economy (which frontrunner candidate Boris Johnson is advocating), would be a plus for the stock.

The short term could still prove tricky for CYB but over a 3-4 year period, the current share price could prove to be cheap.

AMP is another. It lost 37% last year and the tip is for a 0.2% gain this year. I think the company, now chaired by my mate David Murray, will need a fair bit of time to rebuild that brand and share price.

Among some of the big potential gainers are some companies that have been quality performers in the past, so taking a longer view on them might pay dividends. These include Challenger (CGF), which dropped 41% last year but is expected to pick up 9.6% this year. Link Administration Holdings, with a 39.9% upside forecast, could gain from a better Brexit outcome under Johnson, but that's something we can only guess.

In the same Brexit-affected and also Royal Commission impacted way is the Pendal Group Limited. This is the old BT Financial Group but it has a substantial exposure to the UK.

Another UK-Brexit affected stock is URW or Unibail-Rodamco Westfield but the analysts still see a 13.2% upside. Sticking to the Brexit-troubled stocks and Treasury Wine Estates has copped a bit of the backwash, however, again, the experts think an 18.9% pick up in share price is on the cards. (And in today's What I like article below, Michael McCarthy

Monday 01 July 2019

02

has tipped this one as a favourite.)

While Donald Trump and his trade war dominates the front pages of the Wall Street Journal and , for those investing in the above companies, Brexit and the UK leadership battle should be your chief concerns.

Sticking to the potential big winners, Reliance Worldwide (RWC) (with a predicted 34.7% gain), James Hardie (JHX) up 15.4%, Worley Parsons 25.7%, Boral (BLD) up 12.7%, Lendlease (LLC) up 19.7% and Star Entertainment Group (SGR) 17.9% are all good companies but have issues, which could be worked through over time. Many of these challenges are related to an unexpected slowdown in the US and global economies, though there are also some company specific issues too. But with rate cuts coming and probably a trade deal, forecasted earnings could pick up over time.

With this group, I can't get too excited but they're not bad long-term holders for those who are patient.

Others on the list such as Domino's Pizza (DMP) 12.1%, NINE (NEC) 9.6%, Computershare (CPU) 5.5% and Caltex (CTX) 1.4% are all ownable, with good reasons to support them but they all have question marks over their immediate future.

QANTAS (QAN) 9.4% is a good company but I remain nervous about airlines, especially after a good run. And Flight Centre, with a 32% fall last year and a 9% rise expected this year, is always a hard company to call. That said, its founer and CEO, Graham Turner, has a happy knack of turning around this company when you least expect it.

Running my eye over these 24 stocks, you could easily put them into a loser-to-winner portfolio. I wouldn't be surprised to see these collection of companies deliver decent returns over the next couple of years.

So here's my list of last year's losers that could be winners this financial year:

In the material space, I tipped Bluescope a month ago and it saluted, as the chart shows below:

Source: au.finance.

The company now only has 4% predicted upside, so I'll pass on BLS now.

In the material and energy space, Origin (ORG) 13.2% and Oil Search (OSH) 16.1% are both good companies that wouldn't be out of place in a collection portfolio of losers that could be poised to be winners.

Monday 01 July 2019

03

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Monday 01 July 2019

04

Income portfolio up almost 20%

by Paul Rickard

The fall in interest rates pushed the Australian stock market higher in June, the sixth consecutive up month. With defensive stocks in keen demand, our model income portfolio has returned almost 20% in 2019.

In the sixth review for 2019, we look at how our model income and growth portfolios performed in June.

The purpose of these portfolios is to demonstrate an approach to portfolio construction. As the rule sets applied are of critical importance, we provide a quick recap on these.

Portfolio recap

In January, we made some adjustments to our Australian share `Income Portfolio' and `Growth Portfolio' (see ios-for-2019/ )

The construction rules for the portfolios are:

we use a `top down approach' looking at the prospects for each of the industry sectors; for the income portfolio, we introduce biases that favour lower PE, higher yielding sectors; so that we are not overly exposed to a market move, in the major sectors (financials and materials), our sector biases will not be more than 33% away from index. For example, the weighting of the `materials' sector on the S&P/ASX 200 is currently 18.9%, and under this rule, our possible portfolio weighting is in the range from 12.6% to 25.2% (i.e. plus or minus one third or 6.3%); we require 15 to 20 stocks (less than 10 is insufficient diversification, over 25 it is too

hard to monitor), and have set a minimum stock investment size of $3,000; our stock universe is confined to the ASX 100. This has important implications for the growth portfolio, because the stocks with the best medium term growth prospects will often come from outside this group (the so called `small' caps); we avoid stocks from industries where there is a high level of exogenous risk, such as airlines; for the income portfolio, we prioritise stocks that pay fully franked dividends and have a consistent record of paying dividends; and within a sector, the stocks are broadly weighted to their respective index weights, although there are some biases.

Overlaying these processes were our predominant investment themes for 2019, which we expected to be:

Economic growth to slow in the USA, Europe, China and Japan but not into recession territory; The US Fed moving to a more neutral stance on US interest rates. If not pausing, only one or two more hikes in 2019 (but no expectation of rate decreases); Interest rates in Australia to remain at historically low levels, with the RBA unlikely to move rates higher (but again, no expectation of rate decreases); The Aussie dollar around 0.75 US cents, but with risk of breaking down if the US dollar firms; Oil price remaining well supported around US$50 per barrel. Base metal and iron ore prices to soften; A positive lead from the US markets;

Monday 01 July 2019

05

Growth in Australia to ease to around 2.5%, with no real pick-up in domestic inflation; Housing prices in Australia to ease moderately but not collapse.

Performance

The income portfolio is up by 19.71% and the growth-oriented portfolio by 15.76% (see tables at the end). Compared to the benchmark S&P/ASX 200 Accumulation Index (which adds back income from dividends), the income portfolio has matched the index and the growth-oriented portfolio has underperformed by 3.97%.

Materials lead in June

In a month where all but one sector finished with a positive return, the materials sector was the standout. Surging iron ore and gold prices, the former due to supply disruption and the latter due to falling interest rates, helped the sector post a return of 6.4%. In 2019, the sector is the second best performing with a gain of 26.6%.

Consumer discretionary was the only sector to deliver a negative return in the month, a loss of 1.5%. Selling in the retailers, including Wesfarmers, weighed on the sector.

The best performing sector this year, largely due to the performance of Telstra, is communication services with a return of 31.8%. The worst performing sector is consumer staples with a return of 11.4%. The largest sector by market capitalization, financials, which has a weighting in the S&P/ASX 200 of 32%, is up by 17.5%.

All industry sectors are positive for the year. By historical standards, the gap between the best performing sector and the worst performing is relatively narrow. Returns for the 11 industry sectors in June and calendar 2019, plus their respecting weighting as part of the ASX 200, are shown in the table below.

Income portfolio

On a sector basis, the income portfolio is moderately overweight financials and utilities, and underweight materials and health care (where there are no medium or high yielding stocks in the ASX 100). Otherwise, the sector biases are reasonably minor.

On paper, it is roughly index weight in industrials. However, this exposure is being taken through toll road operator Transurban which is not your typical industrial stock.

In the expectation that interest rates in Australia are staying at record low levels, it has a defensive orientation and a bias to yield style stocks. In a bull market, we expect that the income portfolio will underperform relative to the broader market due to the underweight position in the more growth oriented sectors and the stock selection being more defensive, and conversely in a bear market, it should moderately outperform.

The portfolio is forecast to yield 5.78%, franked to 82.3%. The forecast yield is higher than would normally be expected due to the payment by BHP of a special dividend of $1.42 per share. When this is excluded, the yield drops back to 5.49%.

In June, the income portfolio returned 3.26% for a relative under-performance of 0.44%. Year to date, it has returned 19.71% and matched the accumulation index.

The return includes both capital and income. On the income side, the return (which takes into account dividends that the portfolio is contractually entitled to) is currently 3.38%, franked at 85.6%.

Monday 01 July 2019

06

Helping in June was the strong performance of the "interest rate " defensives Transurban and APA. Offsetting this was the performance of Link, which fell by another 17% in June.

No changes to the portfolio are contemplated at this point in time. We have decided to keep the position in Link, notwithstanding that there could be some more short term pain.

The income-biased portfolio per $100,000 invested (using prices as at the close of business on 28 June 2019) is as follows:

keep these stocks in the short term.

The changes made to the portfolio in May (cutting the position in Challenger, taking profit on Aristocrat and replacing with Bluescope, NAB and CSL) have been largely successful, although Aristocrat has continued to move higher and NAB has lagged the other banks.

Our growth-oriented portfolio per $100,000 invested (using prices as at the close of business on 28 June 2019) is as follows:

?Does not include the tax benefit of accepting the Woolworths off-market share buyback

Growth portfolio

The growth portfolio is moderately overweight financials and energy, and underweight materials, consumer staples and real estate. Overall, the sector biases are not strong.

? Aristocrat ($4,000) purchased 1/1/19 @ $21.84, sold 31/5/19 @ $29.12 for profit of $1,333 ? Challenger ($4,000) purchased 1/1/19 @ $9.49, sold 31/5/19 @ $8.07 for loss of $599 ? Following sale of Aristocrat and Challenger, proceeds re-invested on 31/5/19 into $3,734 NAB @ $26.49, $2,000 CSL @ $205.49 and $3,000 Bluescope @ $10.54.

The stock selection is marginally biased to companies that will benefit from a falling Australian dollar ? either because they earn a major share of their revenue offshore and/or report their earnings in US dollars.

In June, the portfolio returned 2.06% for a relative underperformance of 1.64%. Year-to-date, it has returned 15.76% for an underperformance of 3.97%.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

Most of the underperformance in 2019 is due to 3 stocks ? Link, Reliance and TPG. Each is "out of favour" with the market and it may be a little while before the situation changes. We have decided to

Monday 01 July 2019

07

4 beaten-up resources bargains to consider

by James Dunn

Price falls are not a pleasant experience on the stock market ? but they can serve to open up value for newer investors.

Resources has always been an area of inherent volatility on the market, but there are also situations where stock-specific (or project-specific) news unnerves investors, and the stock gets crushed. But many retail investors are alert to these situations, and are more than prepared to buy into stocks where they feel that the bad news is all in the price.

Here are 3 such situations of contrarian plays from the resources lists ? and another beaten-up miner where the presence of a fully franked dividend adds to investors' confidence.

1. Pilbara Minerals (PLS, 54.5 cents) Market capitalisation: $1 billion 12-month total return: ?37% FY20 projected yield: no dividend Analysts' consensus price target: 92 cents (Thomson Reuters), 90 cents (FN Arena)

Lithium miner Pilbara Minerals brought the world-class Pilgangoora lithium-tantalum project in Western Australia into production last year, shipping its first load of spodumene (lithium ore) concentrate to its offtake partners in north Asia in October ? less than four years after its first drill hole on the deposit.

But Pilbara Minerals' ambition to vault to being one of the top-three lithium raw materials producers in the world by 2020 ? supplying into the coming electric-vehicle revolution ? has come under pressure lately, as it has had to slow production at Pilgangoora because of delays in the commissioning of chemical conversion capacity by two of its Chinese customers. These processing issues in China have flowed through to weaker lithium prices. Pilbara Minerals has

given two of its customers, General Lithium Corporation and Ganfeng Lithium, some relief for their off-take agreements while they work on processing facilities.

This comes at a time when Pilbara Minerals is exploring the possibility of selling up to a 49% stake in Pilgangoora. The Pilgangoora operation could, based on reserves, and similar deals in the lithium space, be worth somewhere in the range of $1.78 billion?$2.79 billion, according to broker Credit Suisse.

By the end of the current quarter, Pilbara will make a final investment decision on its joint-venture option with steelmaker POSCO to build a lithium plant in South Korea, with capacity to produce the equivalent of 40,000 tonnes a year of lithium carbonate using spodumene concentrate from Pilgangoora.

From $1.18 in January 2018, PLS has declined to 54.5 cents, and brokers report punters buying-in at these levels. With profitability expected in FY20, these investors are using the lithium market difficulties to buy what they see as a cheap situation.

2. Dacian Gold (DCN, 53 cents) Market capitalisation: $120 million 12-month total return: ?80.7% FY20 projected yield: no dividend Analysts' consensus price target: $1.00 (Thomson Reuters), $1.52 (FN Arena)

With the Australian-dollar gold price pushing to record highs above $2,000 an ounce ? it is sitting at $2,006.12 an ounce ? local gold producers should be in clover, given that they incur nearly all of their costs in Australian dollars, before selling their product in US dollars.

Monday 01 July 2019

08

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download