The Experts

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Julia Lee
Expert
+ About Julia Lee

Julia Lee is an Equities Analyst with Bell Direct. She is also the Head Media Presenter at Desktop Broker, providing financial commentary to SKY News, SKY Business Channel, Bloomberg, ABC radio and on the internet.   

Julia has over 10 years of experience in financial markets and previously was Head of Fundamental Analysis for a leading sharemarket educator as well as running investor education for an Australian bank.

You can see Julia hosting the Tuesday shares session of 'Your Money, Your Call' on the SKY Business Channel every Tuesday from 8pm-9pm where she takes live calls from traders and investors.

She is also a regular contributor to industry publications and is a frequent speaker at the ASX Investor Hours, Australian Technical Analysts Association and CPA Australia conference

4 companies with good yield

Thursday, May 02, 2019

Franking describes tax credits and the system is called dividend imputation. Companies get franking credits to distribute when they pay tax in Australia. Most companies that do not have franking credits have a substantial part of its revenue derived from outside of Australia. Given the proposed changes to the cash refund of imputation credits, here are 4 companies that offer an attractive yield with no, or reduced, franking credits.

1. Amcor (AMC)

Yield: 4.9%

Amcor is a global packaging company and the packaging business is all about scale. Its recent merger with Bermis will be company changing. The New Amcor will have a market cap of $17 billion, making it one of the largest paper and packaging producers. The market cap will mean that it should be included in the S&P 500 index. There is potential upside if synergies from the merger are greater than expected. There’s also an opportunity to boost sales, given different product portfolios and geographic footprints. Shareholder vote on the merger is scheduled for 2 May with expected completion 15 May.

2. Spark Infrastructure Group (SKI)

Expected dividend yield: 6.8%

SKI holds an interest in three electricity distribution assets in South Australia & Victoria: Victoria Power, SA Power and Transgrid. It is considered a bond proxy so a fall in interest rates is positive for the share price.

3. Macquarie Group (MQG)

Expected dividend yield: 4.8%

While the domestically-focused banks are struggling to find profit growth, Macquarie has indicated that growth should be 15% for the company. The company has a track record in being about to move quickly to take advantage of market conditions. The company has a strong balance sheet and should continue to find growth opportunities despite softening conditions domestically.

4. Boral (BLD)

Expected dividend yield: 5.7%

Boral is a building products company with large trading exposure to Australia, US and Asia. It is a cyclical business and is dealing with a residential housing slow down in Australia. While the company issued a profit warning earlier in the year, expectations are for a rebound in the 2nd half of the financial year. The company blamed weaker results on the weather, especially in the US. While the dividend is attractive, the company could see an uplift in share price if the rebound in the 2nd half occurs and as confidence in management is restored.

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My stock picks

Thursday, April 18, 2019

With the economic cycle in the US and globally closer to the peak rather than the bottom, is the bottom about to fall out of the share market?

Share market and economic cycles are normal. There’s even an investment clock that charts the boom to bust cycle that can often characterise the peak and bottom of these cycles. While the US stock market is closer to its peak than the bottom of the economic and earnings cycles, it’s important to remember that other markets are at a different part of its cycle and can present opportunities.

Even with the US stock market, near all-time record highs, there are still opportunities for the nimble investor. Time frames for investing closer to the peak become shorter, especially if chasing growth.

Here in Australia, with the domestic economy slowing, the opportunities are in stable cashflow companies and global leaders, which should benefit as the $A falls.

US earning peaking

From a global perspective, China’s market could present some opportunities in 2019, with its cycle diametrically opposite to the US equity cycle. While US earnings growth and margins appear to be peaking, China’s share market looks to be close to a bottom and could therefore be worth considering for investors seeking global exposure.

We also like Japan as a turnaround story. On a macro level, the long period of deflation looks to have come to an end, productivity is improving and from a fundamental viewpoint, improved returns on equity are on offer for investors.

Individual stock picking in foreign markets can be difficult, so for investors a simple option to gain broad market exposure can be via ETFs or mFunds. Our ETF Filter and mFund Filter can help sort through the array of options by asset class, sector, issuer and fees. 

Australian retail, housing and banks to suffer

Looking closer to home, Australia’s retail sector is already weak and there are indicators showing it’s unlikely to improve any time soon, with lower motor vehicle sales growth, falling house prices and money supply growth at a 26-year low.

With State and Federal elections slated over the next six months, investors will need to keep a close eye on consumer confidence, which tends to be timid ahead of major elections. Falling consumer confidence, tighter lending standards and the Reserve Bank of Australia’s reluctance to cut interest rates further, mean we are also likely to see house prices continue to fall nationally in 2019. Investors may therefore wish to consider remaining underweight housing stocks and banks.

Defensive stocks likely to see gains

The 2018 drought across Australia has seen many agricultural stocks fall. While a rebound in crop volumes is not likely to hit until 2020, 2019 will be the year to pick up some agricultural stocks at the bottom of the cycle.

In times of volatility, other defensive sectors to consider are telecoms, utilities, healthcare and staples.

My pick this week

Death volumes are the most significant driver of activity in the funeral industry. While morbid, early indications are that it’s going to be a big flu season this year. March 2019 numbers show over 10,000 reported incidents of influenza. This is three times higher than the same time last year. Propel (PFP) has a strong track record as the second largest funeral service provider in Australia. While much of the growth is through acquisitions and consolidating the market, it has a good track record of cash flow generation.

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My top picks post the Federal Budget

Wednesday, April 10, 2019

Since the budget was delivered on Tuesday 2 April, the Australian share market is down 0.5%. All sectors have traded lower except for the materials sector. So is this an indication of pessimism from voters or simply normal market gyrations?

Firstly, elections have seen greater unpredictability in the last few years. From Brexit to Trump, pollsters have struggled to predict outcomes. Post-election, one of the most powerful stimulants has been tax cuts. This has helped propel the US stock market go to record highs.

So, what does the budget mean for Australian shares and the share market?

The proposals in the 2019 budget haven’t yet passed legislation and may differ if they become law. Tax cuts are a mild positive for consumer companies. However, most of this is not until 2022-2023, which means investors will likely discount this news.

Domestic healthcare should benefit from the $1.1 billion rise in primary care funding and a $309 million boost to imaging. Diagnostic imaging companies such as Capital Health Ltd (CAJ), Integral Diagnostics Ltd (IDX), Sonic Healthcare Limited (SHL) and Healius Limited (HLS).

Find out Julia Lee's top picks by taking a free trial to the Switzer Report.

 

Winners + losers in the retail space

Thursday, March 14, 2019

In retail, the winning combination is increasing comparable sales together with the opening of new stores. This combination increases total sales and the valuation of the stock. This is more typical of a newer business that’s growing strongly than a mature business that has saturated its market. When it comes to a mature business with little growth prospects, the strategic options can be risky and usually involve a move offshore to find growth. This has been a hit or miss for Australian companies. Companies such as Domino’s Pizza Enterprises Ltd (DMP), Premier Investments Limited and (PMV) have done it well. Companies such as Wesfarmers Ltd (WES)/Bunnings have seen failure when it comes to overseas expansion.

One stock that’s on a win

The move for shoppers away from bricks and mortar retailers to online platforms has introduced competitive pressures, margin compression and the need to innovate and adjust. This means that shopping centres have tried to evolve utilising the smaller footprint that many retailers are now moving towards.

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Check out a company’s culture before you invest

Friday, March 01, 2019

Q. The Royal Commission has highlighted how bad culture can KO a company’s share price. How do you bring culture into your stock picking?

Environment, Social and Governance or ESG is part of the investment process rather than an asset class. We’ve recently seen through the Royal Commission into financial services the wealth destruction that can come when strong ESG principles are lacking. There is an increasing body of evidence that high ESG scores perform better than low ESG scores. Not only is about screening for ESG about managing risk and avoiding catastrophes in portfolios but it also provides better performing, more stable investments over time.

Data providers are increasing issuing ESG scores making it easier for investors to include ESG into the investment process. Here is a breakdown of Thomson Reuters ESG Score model.

Source: Thompson Reuters ESG scores methodology

Q. We know how culture can detract from performance. Give us an example of how culture can help performance.

Culture impacts on a number of areas including staff turnover, productivity and performance. IAG recently has started to encourage customers to the early lodgement of claims, following a disaster event. After the recent Sydney hailstorms at the end of 2018, the company sent text messages. Some of the benefits of doing this (beside helping the customer) were:

• Reduced fraud with early claims lodgement.

• Lock down supply labour and hence labour costs.

• Staff turnover (voluntary) improved from 15.2% in FY17 to 12.9% in FY18.

Managing staff turnover can provide a competitive advantage compared to peers and high staff turnover is an extra financial burden on the business. In addition, Human Capital Management (HCM) scores can be allocated to stocks. Positive HCM has outperformed lower scores over the past 10 years.

Q. Investors have known for a long time that there can be a correlation between what management does and the performance of a stock. Tell us more.

Investors have known for a while that insider buying or selling can be a harbinger of good or bad times for the business. While one director selling a substantial chunk of shares may be a slight negative for sentiment, two or more directors selling substantial shares can be a red flag for a period of underperformance.  Over the last few years, there have been many examples of where insider selling has impacted negatively on share price. Bellamy’s saw its then CEO and chairperson sell shares in August 2016, only to record a net loss for that particular calendar year.

Q. So where have we seen insiders recently buying or selling stock?

1.     Tassal Group Limited (TGR): Tassal chief Mark Ryan DUMPED half his stake. He had 360,378 shares before 18 February and then SOLD 200,000.

2.     Evolution Mining Ltd (EVN): Jake Klein SOLD $9.45million shares late last year.

3.     Computer Share Limited (CPU): Christopher Morris SOLD $8.1million shares

4.     Link (LNK) John McMurtrie BOUGHT another $1 million shares.

5.     Nine Entertainment Co Holdings Ltd (NEC): Birkrtu (Bruce Gordon) 8.9% to 14.1% in January.

6.     Adairs Ltd (ADH) Brett Blendy 12.3% to 15.3%.

Q. So what stocks should investors consider or avoid from an ESG perspective?

Given insider buying at NEC and LNK, both of those stocks should be on the radar of investors as well as IAG, which is seeing an improvement in staff turnover and some other initiatives to improve culture. As always, an ESG overlay should be included with other performance measures and incorporating future expectations.

This article was first published in The Switzer Report. Click here to take a free 21-day trial.

 

Stocks that have impressed + my favourite

Thursday, February 14, 2019

Why is reporting season important?

Reporting season is important because it can highlight continuing positive and negative trends. Outperformers tend to continue to outperform and underperformers continue to underperform. Take the 3 best and worst performers in August 2018 in the ASX 200.

Top in August 2018: Appen (APX) up 41%, Altium (ALU) up 37%, Bravura Solutions (BVS) up 31%

Bottom in August 2018: Speedcast International (SDA) down 32%, Sims Metal Management (SGM) down 27%, Pact Group Holdings (PGH) down 24%

The top 3 performers have managed to gain another 8% on average since the end of August, whereas the bottom performers have lost another 16% in that timeframe.

Most things in life are cyclical and when it comes to stocks, the same usually applies. Cycles makepredicting the growth or contraction cycles of companies easier to forecast. This means that companies that are accelerating earnings growth are likely to continue to grow. Conversely, companies stuck in a downgrade cycle are also likely to continue to see decelerating earnings growth.

Click here to take a free 21-day trial to the Switzer Report and find out which stocks have impressed so far, as well as Julia's favourite.

 

My 4 tips

Thursday, February 07, 2019

Last year, CSL returned 32% and BHP managed a gain 21%. Both of these companies are in the top 20 largest companies on the ASX. If you are looking for a blue chip with double digit gains, you are looking for a company which is increasing its revenues and profits.

Here are my 4 tips:

1. My top 20 pick:  Insurance Australia Group (IAG)

The strength of IAG’s Australia and New Zealand businesses, together with better-than-industry insurance margin and capital efficiency, should underpin IAG’s share price performance. The kicker will come from capital management with a 19.5 cent capital return approved at the AGM and the potential for more, if AIG divests its remaining Asian interests.

To read the rest of Julia Lee's tips, click here to take a free 21-day trial to the Switzer Report.

 

My tip on property affected stocks

Thursday, January 24, 2019

While there’s abundant negativity on the Australian housing market, activity levels look OK. Building approvals are at 205,000 vs peak 250,000 vs the long-term average 160,000 and importantly, unemployment is exceptionally low.

Here are the variables:

1. Banking Royal Commission – slowdown in lending.

2. Labor policy on capital gains and negative gearing.

3. Wet weather impact on housing-related stocks.

The key question for share price performance in this space is whether earnings revisions are likely to be positive or negative over the next 12 to 18 months.

To find out what stocks are impacted plus Julia Lee's tip, click here to take a free 21-day trial to the Switzer Report.

 

My top pick

Thursday, January 17, 2019

The Inquiry started on 17 October 2018, and the hearing was on 12 December 2018 with a final report due on 22 Feb 2019.

Stocks that may be affected are: Afterpay (APT), Zip Co (Z1P), Credit Corp (CCP), Cash Converters (CCV), FlexiGroup (FXL), Money3 (MNY) 

To what extent are these companies affected?

In the past three months, most of these shares have been under pressure, with FlexiGroup the worst, down 27%, Money3 down 18%, Cash Converters down 13% and Afterpay down 12%.

Cash Converters, FlexiGroup and Money3 are most likely to be impacted through the Senate Inquiry, due to exposure to either payday lending, short-term loans or consumer leases. These companies also tend to be impacted by the economic cycle and a slowdown in housing would be expected to impact negatively on growth.

What about Zip Co?

Zipmoney is the company’s flagship product that offers interest-free credit for a minimum interest free period of three months. Revenues are generated through interest, merchant fees, establishment fees and late fees. ZipPay & Pocketbook are the other key products. Key is continued large merchant signings, such as Bunnings and Target at the end of last year. Interestingly, Westpac has 17% stake, while financing is through NAB and FIIG. Key risks are around the regulatory environment for some unsecured personal loans. Being consumer related, the company could be impacted by the economic cycle or any shocks to the economic outlook.

Understanding collection agencies, such as Credit Corp

Credit Corp is subject to economic cycles. During soft economic conditions, while there would be a bigger supply of PDLs and impaired loans, the flipside is that it would be harder to collect on the impaired debt. For example, during the GFC, Credit Corp had big falls in profit due to the difficulty in collecting on bought debt. Conversely, the relatively stable economic environment post GFC has been supportive for the debt collection business that Credit Corp runs.

My top pick

While there may be an opportunity to enter the stocks at low levels, there is downside risk from the findings of the Senate Inquiry result in February. Of higher risk are Cash Converters, FlexiGroup and Money3. For companies such as Zip Co and Afterpay, which are lower risk, both consumer spending as well as signing on new merchants are a key driver of growth. My top pick would be Afterpay due to the strong rates of growth from the US in the first six months of operations and the size of the retail market in the US.

 

My 7 favourite stocks

Friday, January 11, 2019

Firstly, 2018 was a difficult one for investors with a fall 6.9% (in price) for the ASX 200.

With the first three and last four months of the year seeing negative monthly performances, it was a tough year. It was also a year that highlighted the difference timing could make. If you take out the negative months and focus on April to August 2018, the ASX 200 was up 10%.

The bigger question is whether the sell off is over or does it spill over into 2019?

On a macro level, global growth looks to be slowing and domestic risks are rising

When looking at a slowdown in growth, the general rule of thumb is to sell before a recession and buy six months into a recession or a slow down. Looking at recent slow downs in 2015 and 2011, the correction in the market lasted two quarters. Given past experience, investors should start to re-evaluate and look for opportunities after the 1st quarter of 2019.

Key events and risks

Domestic conditions are deteriorating. In Australia we’ve seen seven months’ decline in new vehicle sales, residential property weakness and money supply growth at a 26 year low. For the time being, stay away from domestic exposure especially residential housing and retail and remain cautious long term on banks.

What sectors are likely to outperform?

The time to look at buying agricultural stocks is when bad times, such as a drought, hit. Early 2019 is the time to take another look at being overweight agricultural stocks such as NUF and as evidenced by takeover activity and interest in GNC. At the start of the year, continue to focus on defensive sectors such as utilities and property. In property tend towards trusts exposed to Sydney office property.

My 7 favourite stocks

  1. Counter-cyclical: NUF (Nufarm), BSL (Bluescope)
  2. Income: CGF (Challenger)
  3. Defensive: AGL, DXS (Dexus)
  4. Growth: CSL, APT (Afterpay)

 

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