Australian Investment Blog

Sydney’s deluge of rain appeared to help the ASX200 put in a very lacklustre performance yesterday finally closing down less than -0.1% on noticeably low turnover. Not a great deal caught our eye with the best sector on the day again the high growth information & technology sector while the materials / resources continued to drag the chain with sector heavyweights BHP, RIO and S32 all closing well in the red.

Asia was far happier with the Nikkei, Hang Seng and China’s Shanghai Composite all rallying over 1% as optimism around this week’s G20 meeting appears to be slowly taking hold. Will Trump want to avoid an all-out US – China trade war after a poor showing in the US mid-terms - we believe yes otherwise the increasing impacts on US soil will make it very hard for him to win the next election BUT as we all know predicting politicians is up there with the weather, particularly when Trump is involved.

MM remains bullish the ASX200 short-term targeting a “Christmas rally” towards the 5900-6000 area.

It’s worth noting that our target of ~5950 for the local market by the end of December remains very undemanding from a statistical perspective with only an average gain of 11-points per day required to satisfy the forecast.

US stocks soared overnight with the Dow finishing up 617-points / 2.5% following a very dovish tone by the US Fed Chair Jerome Powell. In a speech at 4am our time this morning he implied that the Fed is closer than originally thought to pausing on rate hikes which sent stocks soaring, US bond yields lower along with the $US and most commodities higher. The SPI is calling the ASX200 to open up around 34-points helped by BHP which is up more than 1.5% in the US.

Today’s report is again going to look at the retail stocks following Gerry Harveys volatile comments at Harvey Norman’s (ASX: HVN) recent AGM including a declaration that critics of the retailer were “totally friggen mad”.

ASX200 Chart

Update: Potential switch into resources

We have recently discussed switching from Newcrest (ASX: NCM) and or our Emerging Markets ETF position (ASX: IEM) into 1 or 2 stocks in the battered resources sector.

Since we last outlined the potential plan the relevant stocks / positions have moved as below:

Potential Buys

BHP (ASX: BHP) +0.6%, Sandfire Resources (ASX: SFR) -2.7% and Iluka (ASX: ILU) -0.6%.

Potential sells

Emerging Markets ETF (ASX: IEM) +1.4% and Newcrest Mining (ASX: NCM) -3%.

Not massively exciting but one of our existing holdings in the resources sector RIO has been smacked 13% in the last 3-weeks – unlucky for some, including ourselves.

However we still like RIO actually preferring it to BHP at current prices, we now may also consider “topping up” this holding if the IEM pops up over 3% while the resources remain suppressed.

Emerging Markets ETF (IEM) 56.19

MM has held a 5% allocation to the Emerging Markets in its Growth Portfolio since September via the iShares ETF (IEM) - the position is currently showing a small loss.

Technically we are targeting a 3-4% bounce from the US version from current levels which equates to ~59 for the IEM.

MM is considering selling its IEM holding to fund purchases in the traditional resources space if this elastic band continues to stretch.

iShares Emerging markets US ETF Chart

RIO Tinto (ASX: RIO) Chart

Australian Retail, is now the time?

The concerns around the levels of Australian household debt is now a well-trodden path which has helped apply pressure on our retailing stocks. The sector as a whole has fallen over 25% since mid-2016 while the broad market was rallying strongly.

The performance of some household names over 3-months also makes for un pleasant reading e.g. Harvey Norman (ASX: HVN) -15.4%, Webjet (ASX: WEB) -29.8% and Super Retail Group (ASX: SUL) -25% raising the common question at present – “is it time to be brave and buy this falling knife?”.

Today I have looked at 5 “battered” stocks within the sector looking for value.

Australian Retail Sector Chart

It’s unfortunately a sad story when we compare the Australian retailing sector to that of the whole world which has simply soared since the GFC. However, recently we may have seen a 20% correction as investors have focused on a potential US recession in 2019 / 2020 but technically we would now be buyers for at least a 10% bounce.

The comments overnight by Jerome Powell can be interpreted in 2 ways; either classic glass half full or half empty stuff!

1 – A slowing of interest rate hikes in the US should help retail as consumers have more $$ in their pocket + importantly there’s less chance the US will be pushed into a recession in 2019/ 2020.

or,

2 – The Fed is also becoming concerned around the US economy moving forward and a recession may well be on the horizon.

MSCI World Retailing Index Chart

1 Harvey Norman (ASX: HVN) $3.09

HVN has been under pressure recently for a number of reasons but simply as housing prices fall and people move less often the demand to spend on household goods and appliances falls away i.e. Harvey Normans bread and butter. They also hold $3.6bn worthy of property on their balance sheet which has fallen in value in recent times.

While we believe this trend has further to unfold stocks generally travel at least 6-months ahead of fundamentals so we question if HVN is now too cheap – Gerry certainly thinks so!

HVN has a large 8.8% short position telling us professional investors believe the stock has further to fall. HVN is cheap, trading on an Est. PE for 2019 of 10x while yielding almost 10% fully franked which is attractive but HVN has been a classic “yield trap” of late as the stock has fallen significantly in 2018. Also worth noting they have a huge franking credit balance that Gerry will want to do something with before Bill Shorten moves into the Lodge.

MM is now neutral to slightly positive HVN with the stock slowly becoming tempting for our Income Portfolio once again

Harvey Norman (ASX: HVN) Chart

2 Premier Investments (ASX: PMV) $16.79

Interestingly PMV looks a lot like much of the ASX200 to MM i.e. bullish short-term for a bounce but bearish in the bigger picture, in this case with an eventual target under $13.

PMV has been in the press a lot recently as major shareholder Soloman Lew agitates for change at embattled department store Myer. PMV owns ~88.5m shares, more than 10% of MYR - definitely not a good investment at this point in time showing a paper loss of more than 50%.

We can see PMV making a play for MYR at some stage but then the hard work begins, turning that tanker around will be no easy feat. Interestingly, Geoff Wilson’s WAM owns ~44.8m shares in MYR having paid 50c for them in September.

MM is mildly positive PMV in the short-term targeting the $17.25 area but bearish into 2019 / 2020.

Premier Investments (ASX: PMV) Chart

Myer Holdings (ASX: MYR) Chart

3 Webjet (ASX: WEB) $11.97

MM has enjoyed some solid success with WEB having realised an almost 40% profit selling our holding back in June well above $13 – it felt premature in August but looks correct today.

The stock came under pressure earlier this month following managements earnings guidance for 2019, not what many wanted / expected!

Plenty of investors will be long WEB from $11.50 where it raised capital to help fund the company’s acquisition of Destinations of the World (DOTW). Time will tell if the costs savings from this takeover unfold as WEB hope but risks clearly remain as the online business strives to maintain exciting levels of growth.

MM remains bearish WEB eventually targeting sub $10.

Webjet (ASX: WEB) Chart

4 JB HIFI (ASX: JBH) $23.15

JBH has chopped around the $25 area in a volatile manner for the last few years as the market continues to second guess what comes next for the retailer.

The stock is now the most heavily shorted on the ASX with almost 20% of its shares “sold short”, almost double Myer which now ’only’ has a 11.2% short position – we rarely like trading against professional traders as their very existence tells you they get its right more than wrong.

This is a large negative position considering the business is performing well with consistent profits / dividend growth. We assume the “shorts” are betting the electronic & white goods retailer will see its margins and market share decline due to competition from online overseas rivals like Amazon.

MM remains neutral JBH.

JBH HIFI (ASX: JBH) Chart

5 Automotive Holdings Group (ASX: AHG) $1.72

MM recently answered the below question on AHG in a Monday report:

“Hi James and MM team, what is your analysis saying about Automotive Holdings Group (AHG)? The stock has been down lately, however PE and fully franked div yields look reasonably good. Any red flags or fundamentally sound?” - Thanks Brendon L.

To which we responded:

“I think it’s fair to say that the valuation and yield looks amazing, but obviously the market doesn’t believe it will continue. At the end of October Morgan Stanley downgraded the stock to a sell, targeting $1.55 - over 15% lower. Basically they are saying the decline in house prices will lead to a meaningful decline in vehicle sales – this logic feels sound.

We see no reason to catch this falling knife until Australian household debt levels start to fall and housing prices find a base.”

The stock has since declined another 9% from $1.89 but our feelings remain the same.

MM still sees no reason to buy AHG.

Automotive Holdings Group (ASX: AHG) Chart

Conclusion

MM found nothing compelling in the stocks discussed above

From an income perspective, we remain comfortable holders of Nick Scali (ASX:NCK) & Super Retail (ASX:SUL)

Overseas Indices

US stocks enjoyed a great night following comments from Jerome Powell with the Dow up over 500-points at 630am.

We are still bullish US stocks into Christmas / 2019, targeting the 2850 area i.e. now only 7% higher.

US S&P500 Chart

European indices remain neutral with the German DAX hitting our target area which has been in play since January. To turn us bullish we still need to see strength above 11,800.

German DAX Chart

Overnight Market Matters Wrap

· The US equity markets rallied further, following US Fed Chairman, Powell noting that rates are just below normal, signalling that monetary policy may become more dovish in regards to future interest rate rises.

· Caution remains with the current US- China trade war as the G-20 summit kicks off this week and Trump scheduled for dinner with Chinese President Xi Jinping.

· The December SPI Futures is indicating the ASX 200 to open 34 points higher this morning, towards the 5760 level with November equity options expiry today.

Have a great day!

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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