This month our editor Richard Hemming wrote for NAB Trade. Here is his article.
Making money is not just about picking winners. It’s about taking profits to generate big gains. You need to recognise value because the market is a pendulum and you need to benefit from excess optimism as well as pessimism.
At Under the Radar Report, we’re not about making bets on the market. That is a losing strategy in our view. What we are about is recognising value. Our case study below on McPherson’s (MCP) showcases this primarily because if you’ve seen me, you would instantly know that I’m no connoisseur when it comes to beauty products, let alone face masks.
What we’re looking for are stocks where sentiment has taken over because investors are in love with the product, the management or most likely both. Sentiment is good to take advantage of, but any seasoned player will tell you, it can disappear very quickly. Just ask McPherson’s previous CEO.
We’re not saying these aren’t good companies. In fact they are. What we are saying is that we think it’s time to take some risk of the table. I can never say it enough, but the most important contributor to your returns is the price you pay. You could also add to this that you can’t live off paper profits (which I’m sure Lex Greensill knows all too well).
Seven West Media (SWM)
Having recommended the stock twice around 8 cents last April and May 2020, we looked at the stock as a debt laden group that had potential because of a new CEO in James Warburton who was not attached to decisions such as inhouse television production.
The stock is now trading at 55 cents and we have been taking profits along the way. In the wake of the recovery from the depths of COVID, the risks of a distressed balance sheet kept many institutional investors away.
In the current quarter (3Q21) TV advertising revenue may be up to 10% higher, and 4Q21 has a very soft comparative. Operating leverage should continue to work in favour of an improving earnings pattern, although some of the easier gains have been realised. The company also announced a deal with Google, described as a partnership, in relation to Google’s use of its news output.
There could be more cream but SWM is a complicated beast which has done its job. It’s time to eat cake.
We’re on a hold in the online retailer right now but it’s a good stock to trade because sentiment is such a big part of the stock’s movements.
Kogan has performed fantastically since we were speculative buyers below $3 in the middle of 2017, as well as our bottom defining call to buy at $3.50 in Issue 387 on 19 March 2020, a price which turned out to be the COVID bottom. Since then, as subscribers will know, the stock has rocketed, until it recently began to roll over just after breaching $25 in October.
We’ve been taking profits into the strength because some of the benefits of COVID may prove to be ephemeral and the online retail world changes very quickly.
Kogan is continuing to scale its business in response to structural change and as a disruptor. While growth is expected to continue, the rate of growth will slow as its market share increases and competition intensifies.
Nick Scali (NCK)
This is a stock we have loved for some time but when you look at the big beneficiaries of COVID, you can’t go past this company. Many Australians have been looking after their bottoms with a new couch, but how many couches do you need? How often do you change a couch?
We have had some success with Nick Scali over the years, picking it up initially at as low as $1.40 years ago, riding the premium furniture manufacturer/retailer all the way up, taking profits, upgrading again at lower prices, and then taking profits again finally before the pandemic hit. We upgraded to hold during the pandemic and have maintained that position since, as Nick Scali has produced stellar results despite our concerns about its exposure to the pointy end of discretionary consumer expenditure.
We like the vertically integrated business model which removes risks of distressed inventory. But high double-digit sales growth cannot continue in the medium term, and there is room for consolidation, although this is a well-managed company and should pay a substantial dividend.
Macquarie Telecom (MAQ)
This company is one that I have been in love with for some time. But like many things that I’ve loved, I’ve had to let it go, or at least half my holding.
I remember the struggle I had with this company to start with when it was below $10. The Tudehope brothers’ vision was not being matched by any sort of investor love. I played my part, but obviously it wasn’t enough. At least not for a while.
The stock has taken off on increasing demand for their data centres as well the niche the group has in the provision of government related IT services.
The data centre owner’s numbers were in line and its guidance for FY21 hasn’t changed from an investor event in December. What has is the obvious pressure senior management is under to grow the business, in the knowledge that its biggest ever capital spend of about $125m on one project has already achieved 90% occupancy. Much of the expected growth therefore is in the current price.
AVA Risk (AVA)
When we took profits on this stock at 63 cents late last year, we said that we couldn’t look past the fact that it had more than tripled since we first tipped it five months prior.
Sometimes when a stock climbs to nose bleed levels very quickly you are obliged to cash in. You can’t let your emotions get the better of you!
Late last year we said that its technology applications looked more interesting and indeed the company had matured. But let’s face it, how much maturing can you do in 5 months.
It’s trading at 10 cents low now and we’ll have another look at it. Who knows, we could come back and buy in again. It’s one that we’ll always keep a close eye on.