Under the Radar Report

Blue Chip Value Portfolio on a Tear

09 May 2022
Richard Hemming

The outperformance of the Blue Chip Value Portfolio is accelerating as investors hunt for value as uncertainty grips global financial markets. Subsequent to the selloff in mid-December the BCV Portfolio has outperformed just over 10% or 1,000 basis points against the benchmark S&P/ASX 200 Index! The BCV Portfolio is now easily outperforming over all periods, in the past two years generating a return of almost 28% a year. Let’s unpack this.

During turbulent times value can turn around sharply and this is clearly evidenced here as investors hunt for certainty. This highlights how difficult, nigh on impossible, it is to time investing in the market, which is why we advocate an approach of building up a portfolio by buying in small chunks. There was no indicator saying “switch into value now.”

Essentially it comes back to the value philosophy espoused by the likes of Warren Buffett, who says words to the effect of: “show me a great business sure, but I will only buy it at the right price.” Below I go through how our Blue Chip Value Model works in relation to this philosophy and in a practical sense our BCV Portfolio’s buying and selling. It is important to remember one of the inputs is consensus earnings forecasts from analysts.

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Banks:

One of the big bets the BCV Portfolio has made has been being heavily overweight in the banking sector, but there have been some big twists on the road.

At times in 2021 banks were in the doghouse due primarily to their low growth prospects, particularly around the pandemic. This demonstrates the value of being patient with value, if you’ll forgive the expression.

We not only retained our overweight position in banks but increased it and rotated within the sector by concentrating on better value. We sold CBA as it was expensive and purchased more NAB, ANZ & WBC and added the regional bank Bendigo & Adelaide (ASX:BEN), which is covered on page 9 of BCV issue 101.

The Model was telling us, yes, we know the growth prospects are low, but the current market price is discounting even greater earnings weakness.

The key point is that the Model doesn’t penalise stocks simply because they’ve got low growth prospects. It will penalise stocks that have low growth prospects and analyst forecasts are too optimistic. Conversely, the model doesn’t reward companies with high growth prospects unless the market (being the analysts covering the company) is less optimistic about that growth.

It turned out to be the right call. It would have been easy to sell out of the banks because of poor performance last year but the Model was telling us they were good value.

Precisely at those times when there is an overwhelming negative sentiment about a sector, it takes courage to stand against the consensus and remain invested. The payoff has been sharp over the past 3-4 months, but that’s what you’re in it for!

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Mining

Even before Russia’s invasion of the Ukraine in late February, these stocks were looking good value. Obviously, nobody could predict that catastrophic event.

What it does demonstrate is that if you are overweight in these value stocks and if there is news, you’re getting leverage to that news. This is what we discuss in our Commodities Analysison in BCV issue 101, but it’s worth emphasising that for some of these commodities the disruption is not simply temporary.

The challenge is what the miner’s do with the windfall profits. We will be cautious if we don’t see them returning cash in the form of dividends and buybacks, causing us to trim our gains. The market is still burned by what happened a decade ago when BHP (ASX:BHP) and RIO (ASX:RIO) went on buying sprees at the top of the commodities’ cycle.

Consumer Facing Stocks

The BCV Portfolio has a significant exposure to retailers and it is not an easy time for those on the discretionary side, which sell goods that are not necessities. As we are seeing from sales news from David Jones (owned by Woolworths in South Africa) the sector is having a rough time.

But again, the Model does not simply penalise stocks for facing difficult trading conditions. It’s all about expectations, which comes back to value theory espoused by the likes of Buffett. If the PE multiple is too low given the earnings outlook, that stock is cheap and can deliver strong returns.

This is why the BCV Portfolio owns stocks like Origin Energy (ORG) and AGL Energy (AGL), which have been very much on the nose.

Why is Value Good for You

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Unlike fund managers who have to report every three months, individual investors can ride the ups and downs of the market more easily. Moreover, who has the ability to time the market? Nobody.

Utilising the value philosophy enables you to avoid many fads and build a diversified portfolio, which means that many stocks will outperform in difficult times. You are hedging against the market and reducing your risk.

The benefits of Blue Chip Value’s systematic approach also means you don’t have to understand the nuts and bolts of each business. You just have to understand what PE multiple a stock is trading on and whether the earnings forecasts are justified on that basis, which is where Blue Chip Value’s team of analysts and portfolio managers comes in.

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ABOUT THE AUTHOR

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.