1. Big picture: Volatility is the new normal.
The US market remains expensive, interest rates are on the up, and trade tensions are rising, which means that it doesn’t take much to swing the market either way. This is what we are seeing on an almost daily basis.
Good because as I’ve said in the past couple of months, we’re seeing value come back into the market, after the 25% fall in the ASX Emerging Companies index in the past couple of months. This means we’re working hard on bringing more buy recommendations your way.
Volatility is also good for stock pickers because it means that the dispersion between the best and worst stocks is high, or at least, higher than it was. When volatility is low, everything pretty much moves in the same direction, so there is little value stock pickers can add. Higher volatility is associated between a bigger divergence between the winners and losers. Simply buying an index fund or ETF won’t cut it in this environment.
2. Small Cap movers and shakers
Contractors have been hit in the past month, both big and small. RCR Tomlinson (RCR) has gone out of business; Boom Logistics (BOL) and Maca (MLD) got hit by increased labour costs; LendLease (LLC) announced cost blowouts in engineering contracts.
We think that the three companies still standing are buys, obviously for various reasons. The point is that if you have a strong balance sheet and a diversified enough business, you can ride out the rough times and the operating leverage inherent in a business model with a high proportion of fixed costs will kick in. We think there is good money to be made.
Buy: Austal (ASB)
- This is a global business with a market cap of less than $700m, which is too small in our view;
- It’s an important cog in the biggest navy in the world – low price for exposure to this
- American navy increasing orders for its ships; US govt repeat customer
- Commercial orders as well – icing on the cake
Hold: Village Roadshow (VRL)
- Recovered from below $2 to about $2.50
- It’s got its debt under control and operating earnings are improving
- Market sentiment needs to be overcome, which is why after the recent share price improvement we’ve downgraded to Hold.
Sell: Take profits: Freedom Foods (FNP) AND Kogan (KGN)
- It’s important to note that at this point in the market, we’re more interested in buys because of the damage done following a 20% plus market correction.
- Here’s a few stocks where we got ahead of the curve and we’re still taking profits Allergen free food producer Freedom Food (FNP) and online retailer Kogan (KGN).
- But now that markets have fallen we’re really looking for a bottom; the damage has been done.
Allergen Freedom Foods (FNP) whose stock is down 25 per cent in the past three months. A quality small cap that is family controlled and has grown into a mid-cap.
Kogan (KGN) has almost halved in past few months. Strong fundamentals supported by growing sales but I’m not saying Kogan won’t be a volatile stock, but as Australia’s clear number one online retailer, now may be the time to grab it while it’s on a (relative) discount.
4. What’s coming up?
We’ve got a new tip this week and you can expect a steady stream of new tips, which is really exciting. This stock is in the media and delivers a strong dividend yield, and wait for it, it’s growing.
We’ve also got our much anticipated fund managers round table coming up. Participants include Geoff Wilson, Karl Siegling and Chris Prunty from QVG. There are lots of great pieces of advice and we’ve certainly benefited from their advice each year, but now more than ever, considering there is so much change.