Forum Topics Top Picks For '18 '19
Bear77
6 years ago

Just on that topic - of the FANGs (Facebook, Amazon, Netflix & Google), or FAANGs (with Apple added), or FAAAN stocks - if you use Google's actual company name, which is Alphabet...

I saw this in a recent TGG report (Templeton Global Growth LIC Investment Management Report, released as an ASX announcement for TGG on August 9th - 5 days ago):

That shows that almost half of the S&P500's 16.2% gain over the 12 months to July 31st was due to just 9 stocks, referred to here as the Nifty Nine.  Without those nine companies, the S&P500 would have returned only 8.5%.

Another interesting thing is that the two companies that screen as the most expensive (on P/E or P/B ratios) are clearly Amazon (PE=106.2, PB=20.5) and Netflix (PE=125.3, PB=28.3), however those two have also provided the best returns to shareholders over the past 12 months, with their share prices rising +79.9% and +85.8% respectively.  

It's been a hard year for value investors, and a pretty good year again for growth stocks.  I'm still mostly in the value camp.  Our time will come.  Amazon is probably in a class of their own, and FB & Apple don't look overly stretched in relation to their continued growth trajectory.  Even Alphabet (Google) looks reasonably priced for their future growth.  Some of those others do look to me like they've gotten ahead of themselves, but I'm no expert in tech companies, so my opinion here is pretty meaningless.  The risk, clearly, is that in a bear market, or just a decent correction (or a crash), companies that have a lot of future growth priced in already (very high PE companies) are going to be hit particularly hard.  In that scenario, the S&P looks relatively vulnerable, particularly as their performance is so reliant on such a small number of companies, many of whom look quite expensive right now.

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Strawman
6 years ago

Makes some Australian IT companies look even more expensive. Wisetech is on a higher PE than Amazon! AfterPay is on 245x forecast earnings!

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RogueTrader
6 years ago

Aurelia Metals (AMI) is rapidly becoming a top mineral explorer and developer, still very undervalued and just starting to get on the radar screen of big funds.  Great chart too, just keeps trending higher.  Latest 68.5c.

G8 Education (GEM) is a great short :)  A childcare rollup in serious decline, with a good chance of plummeting on their next report due 27th August.

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Bear77
6 years ago

Here are my ideas, for what they're worth:

Positive Market Reaction to August Report:  RCR Tomlinson (RCR)

Stocks to end FY19 higher than where they are right now (today being 29th July 2018):

RCR, OSL, DCN, NST, SXY, IGO, CLQ, HRR, MAH.

Context:

RCR, as long as Dr. Dalgleish is still running the company (hasn't left to turn around another company).

OSL, as long as they achieve their CE Marking for their OncoSil device/procedure for pancreatic cancer in the EU (which I expect to occur within the next couple of months from now).

DCN and NST are gold stocks.  If the price of gold tanks, so will their share prices.  NST (Northern Star) is the best run established Australian-listed gold producer but are expensive at current levels.  I expect they will rise over 12 months regardless of that.  DCN (Dacian Gold) is one of the up-and-comers, who have just started producing.  They will gain prominence over the next 11 months (to June 30th) and will enjoy positive market re-ratings as they increase production and find more gold via their aggresive exploration program (in my humble opinion).

SXY is an energy play, which should do well as they move from a couple of bad years into a couple of very good years.  Senex is very well positioned to capitalise from good domestic east-coast gas prices.

IGO (Independence Group) is a diversified miner (nickel, copper, gold, cobalt, zinc) who should do well as long as we don't get a global recession.

CLQ (Clean TeQ) is the most speculative, and could still go to zero.  However, I think the odds are they could easily double or more from here, and possibly triple if they get the funding sorted and actually start construction of their Sunrise Nickel/Cobalt/Scandium mine in NSW.  Their water business is a slow burner, but could also provide additional upside.  They are either going to be a lot higher or a lot lower than current levels in 12 months, in my opinion.

HRR (Heron Resources) will be producing zinc and copper at Woodlawn (between Canberra and Goulburn in NSW) early in 2019 (or late this year).  I'm bullish on zinc.  The trajectory of Dr Copper will increase or decrease in line with global growth, so I'm OK with copper, but it will depend on what Trump does, what China does, and if we get a global recession.  As long as global growth is at least as good then as it is now, Heron would have to stuff things up in a big way to be trading at current levels or lower in 11 months' time.

Macmahon (MAH) is a mining services company that is Forager's largest holding in their Australian Shares Fund (FOR).  Steve Johnson still sees upside in MAH, and I do too.  MAH's largest contract is in Indonesia and they have a profit sharing arrangement where they can't lose money, but they could make no profit (only cover their costs) if they underperform.  The upside is pretty good however if they can hit their targets.  Their new CEO, Mick Finnegan, has loads of experience in Indonesia and PNG and knows the main players and the industry very well.  The Indonesian company who own the mine (MAH's largest mining services contract) also own 44.3% of MAH, so it's in everybody's interests that MAH do well there.  MAH also have a number of good mining contracts in Australia, including the long-life, high-grade & low-cost Tropicana Gold Mine that is 70% owned (and operated) by AngloGold Ashanti (AGG) and 30% owned by IGO.  MAH have had a couple of problematic contracts in recent years, the worst being the Telfer contract for Newcrest (NCM).  That is set to return to profit for MAH this half.  MAH should continue to be positively re-rated by the market.

I'm less bullish on overpriced growth stocks, especially tech-related growth stocks, because I think that those trading at very high multiples will likely fall the hardest in a market correction or crash, especially those exposed to slowing global growth, if global growth slows.  Every day that passes brings us closer to the next correction or crash.  This bull market is very long in the tooth now, especially in the USA.  

Disclosure:  I hold RCR, OSL, DCN, NST, SXY, IGO, CLQ, HRR, MAH.

 

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Bear77
6 years ago

 

Prices for those 9 stocks as at July 30th close:

RCR - $2.80

OSL - $0.22

DCN - $2.86

NST - $7.13

SXY - $0.41

IGO - $4.47

CLQ - $0.69

HRR - $0.62

MAH - $0.24

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Bear77
6 years ago

RCR went from hero to damn-near zero.  I am completely out of RCR now, selling all of my shares on the day they resumed trading, exercising all of my rights at $1, then selling them all at $1.08 the day after they were issued to me (on the open).  They were (not too long ago) one of my highest conviction stocks, and now I don't own them, and I'm not interested in owning them for at least another 12 months.  The main lesson here is the importance of a diversified portfolio.

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Strawman
6 years ago

I've had plenty of bad luck with timing, but if the broader thesis is still strong it'll come good over time.

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Bear77
5 years ago

That's true Strawman. However, in RCR's case, the thesis was clearly flawed, and they won't come good in time, having now gone into voluntary administration. The main flaw in my investment thesis was not recognising the risks inherent in their fixed-price EPC contracting model where all of the risk resides with the company - and their shareholders - with virtually no risk borne by their clients, combined with RCR moving into a new area (solar farm construction) where they had no previous experience. This risk was magnified by the size of some of these contracts, many being worth over $100m each. Then there is the information that I did not know, that has come out since, including that RCR were prepared to take on work for very slim margins to help break into that new area - of solar farm construction - so were prepared to undercut everyone else on price. It is unsure whether Paul Dalgleish was prepared to lose money to break into this new area - which he saw as a big avenue of growth for the company into the future, but it was clear that profit margins were not his primary concern last year, as they were trying to establish a foothold in the industry and get some experience and establish a track record of successful project delivery. When you combine those factors, and then add in a serious lack of oversight - by management - over individual contracts, and how they were tracking, it ends up being what it is - a death spiral.

There was very little in the way of warning signs that things were going wrong before the first trading halt and suspension (before the $100m cap raising at $1), and by then it was all too late. But there were risks, that I for one did not properly identify or attribute sufficient weight to. I lost plenty on RCR, but it's not terminal, because they were only one position in a diversified portfolio. Years ago, I was involved in Roger Montgomery's blog, not long after he had left Clime, and before he had properly set up his own funds management business or Skaffold.com, and there was a contributor on there who thought Thorn Group (TGA) were the most undervalued and misunderstood company on the ASX. It didn't matter how many profit warnings or missteps they made, it just made them more of a bargain in his eyes. It got to the stage that TGA became the vast majority of his portfolio, and he once mentioned that if he combined his personal holdings with his SMSF holdings, he reckoned he would just scrape into their top 20 shareholders. I never liked TGA, didn't like that industry, and were not invested in them, but my point to him was that no matter how good a company is, or appears to be, things can still come out of left field and blindside you. Diversification is VERY important.

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Bear77
5 years ago

Thanks for that StrongflatWite. I think there is plenty of truth in what you've said there. GR Engineering Services (ASX: GNG) are a good example of a company who do use fixed price EPC contracts for the majority of their work, and they do thrive, because they are very good at what they do, and they stick to what they know. They have been doing it for many years, and they know what they're doing. I am a happy shareholder of GNG.

RCR were however moving into a new industry and I put way too much faith in RCR's management, especially Dr. Paul Dalgleish, who had an exceptional record running UGL's infrastructure division during the time he was there - before moving over to turn RCR around. I failed to attribute sufficient weight to the risks associated with RCR moving into a new area where they had very limited experience. I also failed to appreciate just how much Dalgleish wanted that move to succeed, and the risks he was prepared to take to achieve that success. When it all went pear-shaped, he jumped ship immediately, with a $1m severance package, and hasn't been heard from since.

That's a whole different type of key-man risk. Key man risk is usually associated with a key man leaving a company and taking his good reputation (and possibly a number of clients) with him. In this case I was basing a lot of my investment case around the past reputation of one key man, who, as it turns out, made a number of fatal mistakes. It's quite possible that RCR's board made exactly the same mistake - putting way too much faith in that one man - their MD, and not properly questioning his decisions or demanding proper accountability. When it all went wrong, it seems that Dr. D claims to not know what was going on, and neither did the board. The board certainly claimed to have had no prior knowledge of the failures that led to the massive cost blowouts on the Hayman/Daydream solar farm projects. It seems that was just the tip of the iceberg. My other mistake was just automatically assuming that UBS and the shorters that they were working with just didn't understand RCR. It turns out they had a far more solid handle on RCR than I did.

You are right that we need to always examine out losses to see what lessons can be learned, and that's what I'm trying to do here. I do appreciate that there are plenty of things that I could not reasonably be expected to be aware of, which have now come out. However, there were clearly risks with what RCR were attempting to do, and while I did appreciate most of those risks, I attributed far too little weight to those risks when balancing the risk/reward equation with the investment case for RCR.

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Jimmy
6 years ago

I'd nominate BVS & APX

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