Easter egg hunt – opportunities galore
EASTER EGG HUNT - OPPORTUNITIES GALORE
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The Damage so far - worst first. Our market is down 26.7% from the top having been down 38.8%. It is 19.8% off the bottom. The US market is down 21.63% having been down 35.4%. It is 21.3% off the bottom. The worst sectors include the Energy sector still down 44.9% from the top, Banks down 38.1% from the top, REITs down 35.9% from the top.
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Sectors – Worst first - Obvious observations the winners: Healthcare, Food, Utilities, Telecoms, Gold. Obvious losers: Energy, Hotels, Restaurants, Media, Real Estate, Banks, REITs, Infrastructure (Transport), Consumer Discretionary (Retailers), IT & Software (Growth stocks).
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GETTING BACK TO NORMAL
These are the COVID-19 charts out of the Financial Times. This crisis is clearly NOT endless. The debate now is when it ends and the stock market conundrum is what economic and corporate damage it did. At this point, whilst there are still some Super Bears the stock market is happy to look on the brighter side and stock market sentiment shows every sign of getting back to normal on some timeframe. At ‘peak fear’ this crisis was endless. Now the end is visible.
Sidenote: Emma and I are now hoping for “Peak Nirvana” – can’t go back to work, but the golf course opens. Wouldn’t that be terrible! No-one in Victoria is terribly happy with Dan Andrews (the Premier) – he is a golfer and whilst the other States are happily golfing, he’s banned it. Come on Dan! Its Easter….
Daily confirmed cases:
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Daily confirmed deaths:
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The message from the charts is obvious, curves are flattening, particularly in the high profile European countries that led us into the crisis, most notably Italy France Spain and Germany where the number of new cases are now in decline following in China’s footsteps. Whilst the death tolls are still climbing in the US and UK, there are signs that they are going to hit 'peak virus' at any moment. Meanwhile Australia doesn’t even rate a mention which explains why Morrison’s approval rating is the highest for any Prime Minister in a decade. And in a bit of good news, Boris is sitting up in bed and improving this morning. No longer on a ventilator.
It’s Easter weekend (our market is closed tomorrow and Monday, the US market is open on Monday but closed tomorrow) and whilst I’m not sure Trump has quite got his wish of people crowding churches in the United States at Easter, there’s no doubt we are heading back towards “normal”. When we get there is another question, but all the signs are pointing the right way at the moment.
They include:
- A significant technical bottoming in all major stock markets. See the charts below of our market, the US market and the Italian market. The Italian market was always a bit of a lead indicator for the other markets.
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- Recovery momentum - Wall Street up another 3.4% in a night (not normal). The market recovery retains momentum and whilst it is punctuated by sharp reversals intraday the uptrend is intact.
- Volatility has undoubtedly peaked. See the VIX volatility chart below. And it continues to head down. The stock market is undermined by volatility, it eats confidence. Confidence takes three times as long to build as it does to destroy. It will not build unless the volatility dissipates. It is.
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- Bond yields basing – A reflection of an improving economic expectations.
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- The Aussie dollar bottoming – a barometer of economic sentiment which is obviously improving.
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STRATEGY SUMMARY
Still happy to be fully invested but let’s make this clear, we are not wedded to that position. We are being careful not to join the herd, the new more positive herd, just because we are fully invested and it suits our book. We remain Spock like, of no set view, and prepared to reconsider as events unfold on a daily basis. For now, on this morning’s information, we have no reason to doubt the “All in” position.
STOCK PICKING OPPORTUNITIES
With the asset allocation decision made, and the volatility dying down, we are now getting back to stock selection. On stock selection there are a few themes we began to highlight yesterday.
The market has been running scared of a financial crisis, a credit crunch. APRA fed that fear yesterday with its ‘over prudential’ instruction to the banks to materially reduce dividends. We think, based on the CV-19 curve flattening, that the financial crisis fear is overdone which has provided buying opportunities in the banks and companies with high levels of debt. This include REITs and infrastructure stocks. It also includes banks. And there are a few non REIT and non Infrastructure stocks that are being sold because of their high debt levels – BLD form instance.
Note: We have added columns to our ALL ORDS SPREADSHEET that monitor debt to equity, debt, cash, net debt and a debt to market cap ratio - over 1x is a worry. You can use that sheet to identify other companies with debt issues…that may now be an opportunity. CLICK HERE the MARCUS TODAY ALL ORDINARIES SPREADSHEET.
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BANKS – Sector still down 38% - Fears overdone, fed by APRA. We should welcome today’s paranoia. In the GFC this sector fell 56% then bounced 115% in just over a year. It is getting oversold again. We are checking the broker research this morning after the APRA letter yesterday – all brokers are re-assessing. The likelihood is that the next dividend for all the majors will be missed, they are priced for that. Any better outcome than that and sentiment will improve.
Note that in all the tables that follow a stock that is ‘cheap’ will have a negative number in the Price to Intrinsic Value column and the Price to Target column. Negative numbers mean the share price is below the instrinsic value and below the average broker target price.
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Sector performance:
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REITS - Sector still down 35.9% - Whilst we run a growth portfolio and are not naturally interested in REITs we do think there is a significant recovery trade to be had in the sector and are watching the charts for the sector bottoming. Beyond the recovery from financial crisis fears we are less enthusiastic, CV-19 has clearly created real issues for the property sector, Office and Retail in particular.
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Sector performance:
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INFRASTRUCTURE - Sector still down 34.82% - The sector has also seen a sell off on debt concerns that may not materialise. Whilst SYD and AIA will be directly affected by the CV-19 shutdowns, they will present a great recovery trade one as things get back to normal. It is possibly a little early for that, there is danger in every announcement from these companies in the short term, but these are long term assets and we are doubtless going to look back on this dip in the share prices in years to some and say that was a great buying opportunity.
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Of less risk are TCL and APA. Whilst they have doubtless seen traffic numbers crater in the short term, these too are long term assets and are less directly affected than the airline infrastructure.
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Here are the numbers on Infrastructure and Utility stocks:
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Sector performance:
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ENERGY STOCKS - Sector still down 44.9% - There is an obvious opportunity in energy stocks. We have already bought them at the lows and are happy to continue to hold them on the expectations that OPEC+ will muddle through to end the price war. You don’t need to get too smart here, the big ones are fine. WPL, STO, ORG, OSH and we hold WOR which has always provided a fairly geared play to oil price moves.
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Sector performance:
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STOCK MARKET STOCKS - Stocks to play for the stock market rebound include stocks like MFG, MQG, PPT, PTM, ASX maybe. Be quick to sell if we have another downleg but these are geared proxies to a stock market recovery.
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Sector performance:
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GROWTH STOCKS - When CV-19 popped up and the market fell over the first stocks to get nailed were the high PE and no PE (loss-making) growth stocks that had been given the benefit of the doubt in the bull market, but were dropped like a cockroach when the market turned. There are obviously some significant opportunities in the list but it’s the same game as in the bull market, share price performance is based on hope/faith/sentiment rather than earnings and value. Confidence, or over-confidence in some cases, is their main fuel and we’re not quite ready to go there again just yet. It’s a bit early for the far end of the sentimental bell curve to feature in any size in our portfolios. But that won’t stop a lot of you and with limited liquidity in many stocks, if institutions return, these will fly again.
But beware, there is a significant 'announcement risk' with many of them. The risk that they ‘blow up’ at the next announcement is high. Some are more likely to crater than others. On this list (which is the ALL TECH INDEX in market cap order) some of the safer businesses should be – XRO, NXT, KGN, PME, AD8. On the rikier side are businesses like REA, DHG, APT, CAR, WEB, IEL which have clearly been directly affected by the shutdowns. Then there’s a list of others that we will have to assess on their own merits, companies that are well off their highs and were once given the benefiot of the doubt and almost certinaly will be again – all the previous market darlings like WTC, ALU, APX, EML, NEA.
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Stock performances:
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RESOURCES – Sector down 26.8% Not really a big play for recovery. Will do OK on the economic sentiment improvement, you wouldn’t be underweight as a fund manager but its not really the most geared recovery sector.
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Sector performance:
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HEALTHCARE – Sector down only 10.8% and 29% off the bottom - it has seen one of the biggest bounces from the bottom - The first sector we bought back into. Long and happy.
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Sector performance:
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OTHER SURVIVORS - Include stocks like WES, WOW, COL, TLS, A2M, APA, FMG, ASX, FPH, RIO, BXB, AMC, AGL, SPK, AST, TPM, DMP, JBH, MPL, CCL, CEN, CWY - whilst they have all outperformed I have not featured them because they are not going to outperform on the way back up. They might well be great portfolio stocks, great long term stocks, but this article is about exploiting the crisis, not surviving it.
CV-19 DAMAGED STOCKS - Companies like AIA, SYD, QAN, REA, WEB, FLT, CTD, ALL, CWN, SKC, plus some retailers, restaurants, bars, casinos, travel, tourism, hotels, entertainment (you can probably name some more) have seen genuine damage to their businesses from the CV-19 episode. They have become high risk. Whilst they also offer potentially high rewards as well, we do not feel the need to be this aggressive. Every announcement could be a disaster. The full extent of the damage is as yet unknown. The profit and balance sheet uncertainties prevent us from stepping into the line of fire. We do hold some in small size but generally, we are not making a play on recovery in these stocks…yet. They are at the top of the risk/reward profile. We'll play lower down the risk curve for the moment but make no mistake, we have them all on the radar every morning.
