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MT DATABASE
Wednesday, 24 January 2018
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Two New Trades

Cochlear (COH) - Need I say more - quality stock 12% off its year high, solid growth, high ROE, finally given an RSI buy signal. All the brokers are sellers - plenty of room for upgraded recommendations. It will only take one to kick it off.

QBE - The stock is up 4.8% today. Yesterday they announced a record annual loss of 1.2 billion thanks to Californian fires, Australian storms and Hurricane Maria. It was the second profit downgrade since October when they announced a $600 million pre-tax charge. They are also taking a $700 million charge against the goodwill value of their North American business. The stock fell 4.7% yesterday on the announcement although it closed 0.6% lower at 1043c. It is now 1096c, which means it is actually up since the profit downgrade. The results run are on February 26th. They have a share buyback in process.

The interpretation

QBE is a trade on a rising US interest rates because they hold huge US bond holdings and as yields rise it translates straight through to profit upgrades. This chart tells the story. QBE is the red line and the US 10 year bond yield is blue. You can see that very high correlation which has broken down recently implying either US bond yields need to fall or QBE needs to rise.

Here is the chart - happy to take a trade, not sure I'd be an investor:

Here are the numbers - they are not terribly attractive showing inconsistency in earnings and on that basis I’ve only ever considered this to be a trading stock. The yield is certainly nothing to get excited about. Return on equity is more like a utility. It is a stock to trade in the good times and ignore in the long-term.

Broker comments - there is plenty of research out this morning after the announcement yesterday - the mgeneral theme is that these write-downs are a one-off and any share price fall is a buying opportunity. The stock has also de-risked its results with this 'confession':

Morgans have cut their target price by 3.1% to 1110c. The share price is at 1096c. Macquarie have cut their target price by 5.1% to 1110c but raised their recommendation to OUTPERFORM from NEUTRAL. Morgan Stanley have cut their target price to 1190c from 1260c.

This is the share register - not a lot to go on here - more buyers than sellers in the Top 10.

 

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