FROTH AND BUBBLE

Be under no illusions there is a stock market boom going on. It is just not in the big cap stocks. Small and Mid-Caps is where all the action is. We have written before about what drives share prices. Narrative and Numbers. For the market tough we only get to see what is hiding behind the curtain three times a year. Usually the results and the AGM. Some may update trading results with upgrades and downgrades along the way but it is not a daily or weekly event. Investors like nature abhor a vacuum and so fill in the blanks with their own interpretations, valuations and optimism of pessimism. This is where the narrative bit comes into play. Now when Narrative collides with good numbers it is off to the Spring Carnival. However sometimes the narrative can get away from reality and then we get serious readjustments. This is what happened in the telco sector when the narrative of TPG collided with the reality of the numbers. Currently we have a boom going on. In infant and dairy. The prices of A2M SM1 and now BKL have rocketed. For those following our trading ideas you will be popping champagne corks at the moment with our BKL trade up 40%. However, it may be time to step back from the camp fire stories of riches in feeding China and just take stock. Actually, it may be time to take some profits. We have AGM season coming up and any disappointment in the actual sales and revenue numbers will have a dire consequence. Now the risk of course is that they just keep going. The numbers match the narrative. A2M has a market cap of $5bn. SM1 which supplies the product has a market cap of $1.1bn. BKL has a cap of $2.3bn. Not exactly small anymore. Sure, as they get bigger they attract larger funds but they also attract larger traders and more analysis. Remember that vacuum again. Same thing is happening in the tech space. NXT market cap $1.4bn WTC $2.8bn. The question you have to ask as an investor is are things really that good for these companies or is it just lack of alternatives in the blue chips and large market caps that are driving these extraordinary share price rises? We are going to find out before Xmas. The market loves a good story and more importantly a good story teller. Plenty of them out there. Looking at our new insider’s club shows there are good stories in small caps and the results speak for themselves. Actually, when you look at the insights we get most are actually $1bn plus companies.

UNBLOCK THAT DRAIN

Bellamy’s (BAL) got some good news yesterday. It has settled with ASIC over the allegations of breeches in its continuous disclosure requirements. It admitted no liability and settled for a $66,000 settlement. Clearly this is significant for BAL as it clears the decks and allows them to focus on the business and like the change in leadership at BKL which prompted us to buy the stock (narrative again) this will also be a catalyst for the buyers to continue chasing. It was up strongly 12%. Yesterday after the news.

So, this is a catalyst for that stock but let us suppose the same can be said of CBA. The media loves to throw around massive fine numbers. In the US and the UK, we see huge fines being implemented against financial companies for bad practices and then we imagine the worse for CBA. Billions of dollars in fines. BAL paid $66k remember. It will not even pay for the ASIC Xmas party. Even before the banks have gotten away with small tokenistic fines from regulators are FX and interest rate fixing. ANZ and Macquarie were fined $9m and $6m respectively for cartel conduct. This is Australia not the US where ambulance chasers are a plenty. Our fines are much smaller. NAB and CBA were made to wear a hair shirt and undertake enforceable undertakings in relation to FX traders’ misbehaviour. ASIC accepted an undertaking. Didn’t even get the money for a Xmas bash with that one. Of course, the CBA AUSTRAC thing is far worse. That pesky coding problem and other systemic issues but change is happening at CBA and elsewhere in the banking system. Isn’t it nice not seeing the ’will you accept the $2 fee for my money ‘at the ATM. Every time we withdraw our own money it should bring a small smile to our faces. There is a long way to run in the court case and the class action but just think about BAL and the $66K and not about Wells Fargo. In the US the Xmas parties look a lot more extravagant. And expect BAL to play some catch up with the rest of the sector.

 

ALL ROADS LEAD TO ROME?

Transurban (TCL) is an interesting stock at the moment. In Sydney, there is gridlock everywhere. We have the WestConnex coming which is being sold off by the government with bids for 51% due soon and the winner to be announced next year. There are two risks for TCL. One that it pays way too much for the asset and two that it gets beaten to the asset by an international player and so its cosy cartel is disrupted. With the first scenario there is a subsequent risk that the company will have to raise equity to fund it. There are only three toll roads in Australia that TCL does not run. The Harbour Bridge and Tunnel and Melbourne’s East Link. Now in Sydney this morning the government has announced that no outside tenders to build a crucial and complicated part of the WestConnex were forthcoming so the RMS will build it themselves. Good luck with that. Anyone watch Utopia? The bears point out that TCL could overpay or that competition will hurt them. Well one road network owned by CIM or a consortium with Canadians (they seem to like our roads) would bring competition but only in so far as one small part of the network. TCL knows Sydney and Melbourne roads. It knows how the traffic forecasts work and will be financially disciplined. If someone else wants to pay silly money then that is their problem. We saw it with the Cross City and Lane Cove Tunnels and in Brisbane where the first asset buyer or owner gets it wrong and leaves it to someone else to pick up the pieces and grab a bargain. TCL is in the box seat. Certainly, the attractions of the stock and the sector wane when interest rates rise but the pace is glacial. Even the Fed is sitting on the fence it seems. They will rise but slowly. The cattle cannot be spooked. TCL remains a quality company with discipline and know how. The stock has been rallying recently, maybe the equity issue thing is receding, maybe it will come back? However, it has bounced hard off its lows in July and could continue to drift higher. Was up 2.1% yesterday on good volume. It may be necessary to get the price up a little more with some good news if the company wants to tap shareholders. That is the cynical view anyway.

AMP – EMBRACES TECH

AMP managed $12bn in its listed equities funds. The behemoth is changing its strategy and will move away from trying to pick winners in large cap stocks and will let automated trading do the work of its fund managers. As a result, it has let go some of expensive experienced fund managers. The times are changing at AMP. The Equities team will be beefed up with quant analysts and will rely heavily on automated trading. The fund manager is traditionally quite conservative and this move into more quant based trading is a significant move and will be watched closely by others. It is far cheaper for funds to run this way. Whether this cost saving gets passed on to investors remains to be seen but the fund management industry is changing rapidly. AMP believes that investors are no longer interested in outperformance and stock picking but just achieving average market returns. We would disagree. And let’s face it if all you wanted was index performance why not just buy an ETF.  Culturally, AMP needs change maybe this is the start.

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