Invast Insights
Week Commencing August 26, 2013
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In this report we run through some names of smaller and emerging
companies which we think every portfolio investors should at least read
through. We don't necessarily rate these all as buys nor do we think it is
adequate buying all of them as a diversified strategy. Instead, our aim is to get
these on your watch-list and see if they fall within your overall scan.
Our scan was built on a few different variables. First we thought stocks
between $20m-$100m are well placed to benefit from the next bull market
rally which has probably emerged and will last around a decade. The exact
timing is debatable but many will agree that the index representing smaller
companies is now near record low levels when compared to the broader
market and many smaller stocks will become beneficiaries of bull market
behaviour when the big names become too expensive or grow less. With
record low interest rates in Australia, an upcoming federal election and an
economy which is still healthy by developed world standards, we felt that a
$20m-$100m business should be well placed to benefit from a turnaround.
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Types of stocks we screened for & why
We then excluded mining & energy stocks intentionally - the Australian
market is very heavily focused on this space and we just feel that there are
plenty of other avenues to find emerging mining stocks. More importantly
though, most mining stocks have run out of cash and so any rally in
commodity prices will probably see a huge flood of capital raisings from
ordinary shareholders which will make upside potential a little more
complicated. We stuck to businesses that are growing their revenue and have
the prospects of putting together some nice earnings.
The real types of businesses we wanted to find were those with a competitive
advantage – a niche, something different to the rest of the market - not just
another prospective gold/iron ore/nickel mine or oil/gas prospect that needs
hundreds of millions in drilling expenditure and billions in infrastructure
spending before it starts to produce. Because of this, we then added some
other stocks with this niche aspect.
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IMF is an example of a stock which we added to the list even though its
market capitlisation is greater than $100m. To be extra cheeky, we also added
a stock with a market capitalisation above $300m but that's because we like
to break the rules, even when we set them. Investments are all about
flexibility.
Back to IMF. The firm is a specialist provider of litigation funding - it buys the
right to large court claims, usually class actions which ordinary people will
find difficult to fund, then puts together its resources to generate a return for
all those involved in the case. There is a little more to the whole process but
that is just a basic description of why we think IMF has a nice niche.
IMF also has a solid track record - some 142 cases commenced and completed
since listing which have generated $815m to clients and $422m to IMF. Of that
amount, it has spent around $140m fighting the cases through legal costs and
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the remaining $282m has been delivered to IMF's coughers. The gross return
on investment has been 304%. It isn't a perfect business, future growth
requires many stars to align, but a simple idea many years ago is today a large
business. Its lost/unsuccessful cases reflect only 1.5% of revenue generated so
far by the group and of the cases it has withdrawn from, these represent less
than 1% of total revenue generated to date. Not a bad set of numbers.
The trick is to be different
So how has an investment in IMF fared over that time frame when taking
dividends into account? Total shareholder returns for 1, 3, 5 and 10 years have
been 39.9%, 18.3%, 28.8% and 14.6% respectively. Keep in mind this is an
annual rate of return, so over the past 5 years an investment in IMF when
including dividends would have generated 28.8% per annum. If we compare
that with Fortescue Metals for example - a stock which dominates headlines,
chat forums, broker reports, the nightly news etc. - Fortescue over that same
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timeframe has generated a negative annualised return of 11.4% even when adjusting for dividends. So while IMF has been generating 28.8% annually (on average), Fortescue during the same period has been losing 11.4% annually.
I bet if 9 out of 10 people reading this report right now would probably have never heard of IMF but around the same amount of people would all have heard of Fortescue. Why is it that many hidden gems, as we have called them in this report, aren't well known businesses?
Here are some reasons:
• Most of the hidden gems that we are about to show you are smaller businesses and so won't get the same attention as larger stocks like Fortescue - which is completely understandable.
• Most mining stocks need shareholders to bankroll their expansion, which means raising money by capital raisings. Brokers know this and because brokers and investment banks are usually the ones that undertake these
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capital raisings and make a lot of money out of them, they will usually focus
researching stocks which they can generate future business from.
• Most analysts are equally too lazy to spend time on small companies
which are barely making money and could blow up, so a red line is often
drawn at the top 200 stocks whereby many smaller opportunities get
neglected, particularly during a challenging market as has been the case
since the GFC.
• Many fund managers who invest in smaller companies have limitations
around the size of company they invest in. This is because they often
have large sums of money and if they are trying to buy into a small
company, the limited amount of shares on issue will complicate them
going in and out of the stock. This is called liquidity. Luckily, ordinary
shareholders managing their own wealth don't really have this problem
and so an opportunity opens up.
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• Because the market is dumb. That's right, many investors particularly those who start out in investing take the advice of brokers and analysts as gospel but that is just plain wrong. Many analysts try their best to build a comprehensive framework around their recommendations. Many brokers try their best to find money making opportunities for their clients.
But everybody in markets has their limitations and so your own individual circumstances & preferences are more important than what a certain analyst or broker thinks at that point in time. There is a common saying that the financial services industry is the only profession where people riding the bus or train to work are the ones advising those who drive a Rolls Royce on how to invest their money.
Show me the list!
The above is important to get through before we show you the list, just in case you are wondering why we have chosen the stocks here. So with all that in mind, here are our hidden gems.
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As you can see our list is wide and diverse, there are no mining and energy
stocks. Our initial list was in excess of 200 stocks and so we think these are the
most exciting small cap opportunities in the market at the moment. They are
all generating revenue growth with the exception of NEU which we
intentionally added into the list because we feel that it has the greatest
potential of changing people's lives. NEU is working on developing therapies
and medical applications to help cure brain injuries.
It has the potential to change many lives and the technology is good enough
to get the eye of the US Military which is funding a very generous trail
program for NEU which limits the amount of cash the company needs to
spend of its own. Just as Cochlear has helped many people globally hear for
the very first time and Sirtex is helping with liver cancer, we also think NEU
has the potential to help many lives and families whom suffer with their daily
lives in addressing brain injuries.
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Register for the webinar to hear our detailed analysis
Take some time to study the list above. We are currently holding a more detail
webinar around the above stocks and where we think each company
becomes attractive to buy and sell. You can view the full list of upcoming
webinars by going here: www.invast.com.au/resources/webinars.
The webinar will also give attendees the opportunity to ask questions about
the above companies and hear our comments. Over the next few months we
will from time to time also talk to the management of the companies listed
above and translate their comments to clients exclusively.
To find out more about registering to these webinars contact an Invast
account manager and they will sort it out for you.
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Last week's market commentary snapshots
The Invast website is updated daily and below is a small review of market action from last week. The link to the blog section can be found under the resources tab on our site or by going to blog.invast.com.au
Woodside Petroleum - Not all about the earnings 21.08.13
While most in the market will be looking directly at Woodside's earnings, our focus is more around the confidence of the business and its investment intentions. Woodside is the premier oil and gas exposure on the Australia market and its investment intentions - what it says and does - will reverberate across the whole mining industry and those businesses who support it. The actual midyear earnings number of US$852m is probably a touch short of expectations and so too is the 83 cents per share dividend, but not enough to see major change in full year earnings estimates in itself but there is also a mild downgrade down to production guidance, from 85-89MMboe from 88-94MMboe, so that could see some earnings numbers clipped back.
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Woodside's gearing levels are now down to a manageable and comfortable
13% - it has options to choose its growth path very cautiously and pay up
where it sees opportunity. It also sends a signal to the market that in the
absence of growth opportunities, Woodside has the fire power to continue
paying out cash from its existing operations, obviously leveraged to rising
energy prices.
Bottom line:
The biggest point for us in the announcement was Woodside saying it has
"shifted from an emphasis on mature basins with a predominant focus on
Australia, to a balance between mature, emerging and frontier basis in
Australia and also internationally" To us that means less big spending on large
expensive Australian projects and potentially more hunting around the globe
for opportunistic deals - like the Mediterranean and South East Asia.
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Super Retail & The Reject Shop - Initial impressions 21.08.13
Super Retail is the larger and more diversified of the two groups. Net earnings
after adjustments are $114m which, on face value, seems slightly soft when
compared to market expectations.
The stock has been priced for perfection and the sales numbers are excellent,
but we are just not sure if they are as good as what the market was expecting.
Sales are in line with the trends reported in May.
There will be some disappointment in the Leisure segment of the group while
Sports and Auto retailing remain very strong. The most important point in the
result is guidance, comparable sales so far in 2014 financial year are still rising
nicely but the rate of growth is broadly in line with market earnings estimates
- Auto 3%, Leisure 6% and Sports 9%
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The Reject Shop's $20m underlying earnings number might also slightly
disappoint some optimists in the market but it is in line with broader market
expectations. Comparable sales continue to rise but the rate of growth was
1.4% in the second half compared to 2.1% in the first half so it shows that the
slowdown in the economy is having some mild impact, particularly as we
head into an election. The business raised a large amount of equity in April
and continues with an aggressive store roll-out program. With around 320
stores contributing to earnings by this time next year, the business is well
placed for a turnaround in sentiment. That seems to be the hope, there is
some guidance around costs but not too much around comparable sales
growth.
Bottom line:
Some might see disappointment in Super Retail's excellent numbers and
broadly in line guidance. Let's not mistake the fact that this is still an excellent
achievement in light of the broader economic challenge.
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For The Reject Shop, management is taking a massive punt that the consumer
will re-engage at some point and flow through to its rapidly expanding store
base. Both businesses show that retailers are at least finally starting to see the
impacts of lowering interest rates on their businesses, but both have also had
large rallies in their share prices which might come under pressure ! from
profit taking.
ANZ needed a good trading update to maintain momentum 16.08.13
ANZ's last few quarterly trading updates have lacked the positive surprise
that its peers have shown and so today's update was very important in terms
of maintaining any positive share price momentum. For the third quarter, ANZ
has booked cash earnings of $1.6bn which is in line with the run-rate of the
second quarter, ahead of the reasonable first quarter number. ANZ now needs
to book around the same type of run rate of $1.6bn in the fourth quarter to
meet market expectations and consensus earnings numbers for the year. But
can it do it?
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While the headlines might sound pretty, the market is still focused on the
ability for earnings to grow. Invast has been cautious around the pricing in
the residential mortgage space and our note on CBA two days ago expressed
a view that margins may have peaked. Income has only grown by 5% for ANZ
in the first nine months of the financial year and cost cutting has helped
earnings growth. Net interest margins have actually started to decline, down
2% when compared to the prior quarter and 3% lower when excluding Global
Markets division. The direction here is the most important point for us.
Bottom line:
It's a good set of earnings numbers and the market will probably maintain
consensus but there is nothing here to suggest there will be upgrades. We are
still of the cautious camp and note ANZ is talking up the medium term - i.e.
don't expect anything flash in the fourth quarter or early in the new financial
year.
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We wrote for CBA that the biggest risk is a race to the bottom in terms of
residential mortgage pricing for the majors and this remains the case for ANZ
too. Like CBA, asset quality is strong which sees bad debt charges falling. ANZ
luckily has an international diversification strategy which needs to ramp up in
the fourth quarter to offset any domestic earnings pressure. On balance a
neutral result.
In addition to Peter’s market reports and
analysis, I will be contributing from a
technical perspective of what is happening in
the global market.
Regular weekly reports will include:
• An upcoming economic calendar including the market consensus on the
high impact, market moving economic data releases.
Peter Esho
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• A quick review of last week’s movement and what impact it has this week.
• Weekly technical outlook of the following currency majors including:
o EUR/USD
o GBP/USD
o USD/JPY
o AUD/USD
• Weekly technical outlook of the major indices
o ASX 200
o Nikkei 225
o Dow Jones Industrial Average
o FTSE 100
o German Dax
o S&P500
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• Weekly technical outlook of the Gold, Silver and Crude Oil
• Technical outlook on Australian equities (if there are major new/move –
ments in the equities market)
I will employ a simple method to look at the market which will include the
use of chart patterns, divergences, aunique trend identifying method
(Ichimoku kinko Hyo), pivot levels and fibonacci levels. Explanation will be
given in the appendix of the reports so it is accessible to traders from all
levelsof trading experience.
But to kick off our report, we’ll take a look at the impact of potential fed
tapering (should it happen) and what the outlook is for the 4th Quarter. This
report will look at the Major FX pairs plus theASX 200 and Gold.
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Remember to check out my blog posts on the Invast website (blog.invast.com.au), these are updated daily with a technical outlook as well as daily pivot levels to help you throughout your trading day.
Invast Insight Q4 Global Market Outlook
Fed tapering of bond buyback program and its impact on the global market
Federal Open Market Committee (FOMC) policy meeting minutes gives us an insight on the likelihood of the much talked about tapering to happen in the next quarter. Traders and investors alike have put the 17th-18th September 2013 FOMC’s meeting as the date when the tapering will be announced.
65% of economist surveyed (source: Bloomberg) estimate a cut of US$10 billion will be announced, this will reduce bond buying to $75 billion/month. FOMC also announced that rates are to remain low until unemployment in the US falls below 6.5%, provided that inflation level remains low.
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The impact of tapering is seen as a positive for the US Dollar, but negative to
US Equities and could potentially trigger a global risk aversion. Emerging
markets such as India and Indonesia are already feeling the impact of the
market pricing in such possibility, but the same cannot be said about
developed economic nations.
The European nation and the United Kingdom are on the same path of
recovery as the United States, with both the EURO and GBP exhibiting
resilience towards the imminent tapering from the US.
AUD/USD will likely continue its journey south with RBA’s dovish comment of
further rate cut a possibility if needed in the next quarter adding to it the RBA
feels that the AUD/USD while lower is still high, and Australia’s economy could
benefit from a lower AUD. The combination from FOMC and RBA’s comment is
likely to see the AUD/USD tread lower potentially to low 80s or high 70s by
year-end.
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Technical Outlook EUR/USD
The Euro gained an impressive 1165 pip (9.49%) since June and recent data
has indicated the Euro zone has come out of the recession; this opens up the
possibility for further gains to the upside, towards 1.3600 and 1.3750. The
Fed’s tapering in September however, could see the pair retreat slightly
towards support at 1.3200 and 1.3000.
Ichimoku Cloud suggests a change in trend to the upside since early July. For
as long as the two supports mentioned above hold, we see a potential
bounce and for the uptrend to remain intact for the remainder of the year.
As at time of writing the market is easing off the overbought conditions from
the rally in Q3.
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Figure 1 EUR/USD Daily (source Invast MT4)
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GBP/USD
Radical changes were made by the Bank of England, with Governor Carney
(previously Bank of Canada) replacing Mervyn King, steering UK’s monetary
policy ahead of the curve in a similar fashion to the US Fed. Interest rate
decisions are now pegged to the unemployment rate with a target of 7%. This
mean interest rates are to remain low until unemployment falls below 7%.
July’s unemployment claims dropped significantly, paving the way for a
speedier economic recovery in the UK. The market is currently optimistic
about the UK’s economy and the GBP/USD has seen 525 pip (3.26%) gain in
the last quarter. Note that the pair lost 5.94% from its high at 1.5748 in June
and has since recovered almost all of the losses in Q3.
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A strong upside momentum is likely to remain in Q4 as long as the 1.5300 key
level holds. A more immediate support comes from the rising trend line and
this put an estimate around 1.5500 in the next few weeks as the key support
to watch out for. A close below 1.5500 could see an eventual return to the
1.5300 support level before we see more buyers coming in to support the pair.
Should the uptrend hold in Q4 there is a potential for massive gains towards
1.5900 and 1.6000.
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Figure 3 AUD/USD Daily (source Invast MT4)
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USD/JPY
‘Abenomics’ has certainly made an impact on the Japanese Yen, the currency
has weaken by approximately 25% since the beginning of the year, and is
likely to weaken further on the back of Fed’s tapering in September.
There is a repatriation concern though, with recent increase in Fukushima
region’s radiation level. Should the situation worsen and effect people living
in Japan in a more significant way, repatriation could occur and Yen could
gain significantly.
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From a technical standpoint, USD/JPY is currently trapped within a
symmetrical triangle on the daily chart. The pair will only have a clear
direction once this triangle is broken and we see a close either above or
below the triangle.
Key supports are located at 96.00 followed by 94.75, while resistances are
located at 98.75 and the key 100.00 levels. Only a close above 100.00 could see
the pair rally back towards the recent highs around 103.50
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Figure 4 USD/JPY Daily (source Invast MT4)
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USD/CHF
The pair lost 381 pips (3.96%) in the last quarter, and is likely to remain range
bound between 0.9175 and 0.9775 in the fourth quarter. Pivoting around
0.9500-0.9525 levels.
At the time of writing, the pair is currently trading below the Ichimoku Cloud
but close to 0.9175 supports. Fed’s tapering could see gains in the pair
towards 0.9500 regions and should it push beyond we could see a return
towards the high of the range around 0.9775.
Beyond the range supports lie at 0.9000 and 0.8850, while resistances are
located at 0.9900 and parity region.
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Figure 5 USD/CHF Daily (source Invast MT4)
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ASX 200
The current market movement does not paint a pretty picture for the
Australian index. Fed’s tapering could trigger a global risk aversion that has
impacted Australia’s neighbouring countries, such as Indonesia and
Philippines.
Earlier in August the index broke below the support trendline, which has held
the market in Q3. The recent highs made 2 weeks ago seem to confirm the
break, with the price rejected where the trendline support was.
But all hope is not lost, should the condition worsen the index is likely to find
support at 4900, this level was a previous resistance level and it’s where the
Ichimoku Cloud support rests. A bounce from this level will confirm that the
recent losses are simply a correction in the market and not a trend reversal.
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However a close below 4900 could see the benchmark index spiraling
towards 4850 minor supports and beyond that a dive to 4600 lows.
But all hope is not lost, should the condition worsen the index is likely to find
support at 4900, this level was a previous resistance level and it’s where the
Ichimoku Cloud support rests. A bounce from this level will confirm that the
recent losses are simply a correction in the market and not a trend reversal.
However a close below 4900 could see the benchmark index spiraling
towards 4850 minor supports and beyond that a dive to 4600 lows.
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Figure 6 ASX 2000 Daily (source Invast MT4)
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Gold
Gold is at a critical level at time of writing, one that could make or break the
precious metal in Q4. As it stands Gold is currently trading within an up-
channel and so far has failed to clear off the monthly pivot resistance located
at 1381-1400. Rejection from the current level and a break below support
trend line around 1350 will likely see the precious metal resume its
downtrend from earlier this year. Completing its correction that has managed
to ease off the oversold condition.
In such situation we see Gold losing its glimmer in the fourth quarter with
potential losses in the region of 1240 and 1150.
Figure 7 GOLD DAILY (source: www.tradingview.com)
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Disclaimer
Please note that you are receiving this report complimentary from Invast
Financial Services Pty Ltd (AFSL 438283). Invast staff members may from time
to time purchase securities which are included in this or future reports. The
authors of this report may or may not be holding a position
in the securities, currencies or commodities mentioned.
Please note that the information contained in this report and Invast's website
is of a general nature only, and does not take into account your personal
circumstances, financial situation or needs. You are strongly recommended to
seek professional advice before opening an account with us. Trading in FX and
derivatives can be risky and you may incur a loss that is far greater than the
amount you invested. Please read our Risk Disclosure, Financial Services
Guide, Product Disclosure Statement, FX & CFD Terms & Conditions.
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*Distributed with the permission of Invast.com.au