Australian Investment Blog

A weaker open to kick things off this morning however a strong quarterly trading update from CBA helped the market recover from early losses to close slightly higher on the session. Yesterday we saw BHP with the weight of the mkt behind it, contributing +11 index points to the ASX 200 while today it was CBA’s turn, interestingly enough adding +11 index points . We actually used todays strength to reduce our overweight holding in CBA / the banking sector generally by 4.5% for the MM Growth Portfolio. That wasn’t a call on CBA specifically given the result was strong + we retained a 3% weighting, however it was a move to tweak our overweight exposure in the Growth Portfolio into what’s typically a weak seasonal period for the banks coming into the middle of November.

NAB goes ex-dividend tomorrow and we have a 10% exposure in the MM Growth Portfolio, while Westpac goes ex on the 13^th and we also have a 10% allocation there – while we’ve also got BOQ, CBA and SUN to round out the sector. Clearly a large allocation and trimming some CBA into strength today made sense. Elsewhere, we bought A2 Milk (A2M) this morning and they recovered strongly while in the Income Portfolio we trimmed Centuria (CNI) and used the funds to establish a new position in Vicinity Centres (VCX). More on these stocks below.

Overall, the Financials did best today adding +0.64% while the Material stocks gave back some of yesterday’s gains, dropping by -0.98% – a range today of +/- 26 points, a high of 6022, a low of 5996 and a close of 6016, up +1pt or +0.03%.

ASX 200 Intra-Day Chart

ASX 200 Daily Chart

Commonwealth Bank (CBA) – Analysts turned negative on CBA in recent months after the ASTRAC scandal + others and ripped the PE premium out of the stock sending it down to a low of $73.20 in September, however today CBA came back with a vengeance delivering a strong quarterly earnings result and the stock popped – closing up +2.65% to $80.27. Interesting to read some analyst rationale in recent times with one today saying Change in CEO, potential fines, and cultural change risk keep us on the side line for now…not sure what cultural change risk is but it seems negative!

Also interesting to have a look (pre-upgrades that will flow through tomorrow) what two of the better ranked analysts thought of the stock recently. Credit Suisse cut hard on the AUSTRAC issue and went bearish throwing a $75 price target at the stock however in fairness their track record is not great from 2012, chasing the stock higher with their SELL calls (red dots).

TS Lim from Bells has called this stock well, and didn’t get caught up in the scandal putting a buy on it at lower levels – only going to a HOLD recently post rally but maintained $82.10 target. Good call TS.

In terms of our read of the stock, we wrote about it in the income report last week saying;

Commonwealth Bank (CBA); The decline in share price recently following reputational issues is all about a PE re-rate, not the reduced outlook in terms of earnings as the chart shows. In fact, CBA should be earning more now than they did when they were trading at $96. This simply means that market sentiment has changed, which caused a drop in the stock and we should take advantage of it. We have 7.5% of the Income Portfolio in CBA.

Commonwealth Bank (CBA) monthly chart versus Earnings Expectations

Drilling down in today’s update, we saw cash profit of $2.65bn, bad debt charge of $198m, margins up, revenue +4%, costs +4% and the bad debt charge down -20%. We’ll see analysts begrudgingly upgrade CBA on the back of this result however the buying today was strong pre-empting that. That said, we maintain a 3% holding in the stock for the Growth Portfolio and a 7.5% holding in the Income Portfolio looking for higher levels over time. Interestingly, analysts now saying the stock is 4-5% cheap versus their long term PE, however when the stock was on the nose, CBA was classed as too expensive versus the banking sector generally. This is commonly known as curve fitting rhetoric!

CBA Daily Chart

Elsewhere, we added Vicinity Centres (VCX) to the income portfolio today, after reducing our exposure to Centuria (CNI) – taking a nice 18% profit in the process. We covered this in the Income Report today.

We also took a position in A2 Milk (A2M) into weakness this morning – a stock we’ve flagged on numerous occasions of late as a shorter term growth play into weakness. We bought below $6.50 this morning for the Growth Portfolio with the stock recovering nicely to close at $6.73. This will continue to be volatile and a move below $6 and we will likely add to the position to take it to a ~6-7% holding, conversely a strong recovery and we’re likely sellers into strength. Volume today was BIG with 2.4 x the 20 day average.

A2 Milk (A2M) Daily Chart

Have a great night

The Market Matters Team

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