By Paul Rickard

If you had told me at the start go the year that Qantas would finish 2015 almost 60% higher than where it started, while Primary Health Care would shed 50% in value, I would have said that you were crazy. 

An airline with uncontrollable exogenous risk, versus the relative safety of a business running GP practices, radiology and pathology services, with what should be predictable cash flows, paying an attractive dividend yield and in a sector with such strong demographic tailwinds. No chance. 

But this real example does show how easy it is to be wrong about stocks - and if you forget some pretty basic rules, like I did, then you can pay a pretty horrible price.

Qantas soars

Qantas shares have soared from $2.40 at the end of 2014 to close yesterday at $3.80. And I have to confess, I have missed all of it. In fact, as a long suffering shareholder, I sold out in June 2014 at around $1.45.



Source: Yahoo

I hated owning Qantas shares because it broke all the rules. An industry with abysmal long term returns, sovereign investors playing to a different rule set to commercial investors, some others investing primarily due to ego, and where a single accident such as a plane crash could  absolutely decimate the value of your investment.

So I was glad to eventually crystalise the tax loss and get out.  What I didn’t appreciate was that Qantas really had turned the corner.

While CEO Alan Joyce may be basking today in the glory, good luck and timing have certainly played a key role in the turnaround. The collapse in oil prices has been a major factor, and even in 2015, we have seen this continue, with the benchmark oil price finishing the year at around USD 37 a barrel compared to USD 54 at the start. But they say you make your own luck in business.

More importantly, he did four other things. Firstly, he abandoned his own market share policy that saw Qantas and Jetstar trying to defend a two thirds share of the domestic airline market - the so called “line in the sand”. This madness had caused both Qantas and Virgin to increase capacity and then discount fares heavily to fill seats with passengers. As soon as the capacity war ended, domestic airfare prices went up - and so did profits. Great for shareholders, a terrible outcome for passengers.

He also cut costs through a transformation program, executed an alliance with Emirates which allowed some loss making overseas routes to be abandoned, and worked hard on improving staff morale and Qantas’s service proposition. However, it is hardly a growth story - with passenger numbers this financial year only up 2.4% on the comparable period.  

But profits are up. From an underlying loss of $252m in the first half of FY14, to a profit of $367m for the first half FY15, to an expected $875m to $925m for the first six months of FY16. And shareholders are lapping it up!

Primary Health Care

Primary shares have just touched a 10 year low. Starting the year at $4.71, they fell as low as $2.06 yesterday before closing at $2.33 - still down 50% this year.


Primary Health Care 

Source: Yahoo

2015 for Primary reads as follows: a Board restructure in February with the exit of the Bateman family (founder Dr Edmund Bateman died in September after battling illness for some months); the appointment of a new CEO with no industry experience; a strategic review from the new CEO; an underwhelming full year profit result in August with underlying EBITDA flat on 2014; an earnings downgrade in November with underlying EBITDA in FY16 now expected to fall by 5% on FY15;  and finally, Tuesday’s MYEFO announcement from the Government that foreshadowed a cut of $650.4m (over 3 years from 1/7/16) for bulk-billing incentives paid for pathology and diagnostic imaging services. Annus horribilis!

The shorters haven’t been slow to spot a company doing it tough and take an axe to the share price. Although down from higher levels, the latest ASIC figures yesterday show that 8.45% of Primary’s ordinary shares (or 44m shares) are short sold.

What does this tale tell?

Apart from the old adage of diversification through a portfolio of stocks to minimize specific stock risk (50% plus movements, up or down, are outcomes well outside the expected range), there are three other key takes.

Firstly, cut your losses.  So easy to say, so hard to do because questions about how much pain to take, and for how long, are so hard to answer. Fretting about losses can also impact confidence, and potentially, stops you from seizing other opportunities.

It is an unfortunate fact of life that the market’s position on individual companies goes in cycles. When a company is out of favour, it stays out of favour for some time, and it takes a long, long time to rebuild credibility. 

Next, as I keep reminding subscribers to the Switzer Super Report, ignore the shorters at your peril. They don’t get every stock right, but they are market professionals who seem to have material firepower at hand. It is almost like they smell the rotting corpse. They are also very patient.

Finally, the Qantas example reminds us of the old adage to “let your profits run”. It doesn’t mean that you shouldn’t occasionally take some off the table and bank some of the profit, but a little like companies doing it tough seem to keep surprising on the downside, companies doing well seem to keep surprising on the upside. Maybe it is good management, maybe it is timing or good luck - my sense is that it is usually a bit of all three.