Dow Jones – Top 30 Video Report
A quick roll through the charts of the Dow Jones and the top 30 stocks that make up the index.
This is a great way to see the investment trends of some of the world’s largest companies.
BHP & RIO
We’ve sold $27 call options over BHP into April and quit all other metals exposure. Our preference for BHP over other resource names is based on our assumption that energy prices will remain supported in the near term.
Three factors will likely support energy prices short term: The Trump administration’s policy will likely be bullish for energy, OPEC and Saudi production cuts and the Saudi Aramco IPO early next year (biggest IPO in history). The IPO will be better received in a supportive energy environment.
For this reason we’ve kept BHP, and sold at the money call options to boost cash flow to 10 – 12%.
We’re not overweight the stock since we see risks building for the market, in general, and Iron Ore prices, specifically.
Chart – BHP
XJO – Chart Update
We’ve been cautious of the resource names rolling over from the recent highs and the potential negative impact on the overall XJO index. It appears that the broader Australian market may be in the early stages of a price correction.
Also, the Australian banks appear fully valued given the low revenue and profit growth outlook across the next 12 to 18 months.
XJO & Dow Jones – Chart Update
The XJO remains near recent resistance as more than 50% of top 200 companies have reported their earnings. Average reported revenue is up 3.4% on the same time last year and underlying average profits are up 6%.
The Dow Jones chart shows the index breaking to the upside of the recent 20,000 consolidation range.
We remain cautious of the extended share price valuations and moderate underlying earnings growth.
For this reason we continue to tilt client portfolio’s towards defensive assets. We prefer reducing exposure to resource and banking stocks across the next quarter and increasing exposure to healthcare and consumer staples.
Our tight covered call overlay is boosting cash flow to 10 – 12% per year.
Coca Cola – How we’re generating 10%+ P/A
Coca Cola delivered solid 2016 earnings result (+6.2%), which met market expectations. The announcement of a $350 million share buyback was a positive surprise.
Structural pressures from shrinking CSD consumption will need to be off-set by continued cost out programs, such as the announced closure of the SA bottling plant.
A positive trend remains the growth in Indonesia/PNG, which delivered double-digit earnings over the past 12 months.
Looking into 2017, we expect revenue of $5.2billion, EBITDA $980m, EPS $0.58 and DPS of $0.48 placing the stock on a forward yield of 4.8%.
We own CCL in client portfolios and we’ve been selling tight covered call options to boost the cash flow to 10 – 12%+ on an annualised basis.
BXB – EBIT Should’ve Been Over $1 Billion
While BXB’s 1H17 result overall was below market expectations, the outlook for flat earnings growth in FY17 was much weaker than expected. FY17F EBIT was down 6% to US$950m.
The market was looking for stable EPS growth supporting an EBIT range of $1b – 1.1B over the next 12 to 24 months. The $950 million figure is a substantial miss and the new consolidating share price range for BXB is now $9.25 to $11.00.
Setting the covered call strategy at a more aggressive level will help to drive returns here, we look to lower the call strike and see $10.25 calls as an effective level.
ASX- Valuation Review
Following the recent 1H17 earnings update, we will take a look at establishing fair value for the ASX.
1H17 NPAT of A$219m represented 3% underlying earnings growth. Moderate revenue growth occurred across most major ASX activities.
Here is the issue: the stock trades at 22x forward earnings on a 3.9% dividend yield. The earnings are stable but the stock is expensive. And whilst ASX delivered 3% revenue growth in 1H17, this is down on the 6% average level achieved over the last 3 years.
Our conclusion on fair value is; buy ASX on a pullback to $47 or a 4.5% dividend yield.
Australian Jobs Growth Data
Full-time jobs growth has slowed since 2013.
Slowing in full-time jobs growth is primarily due to job losses in the mining and manufacturing sectors with full-time job losses concentrated in the mining-dominated states of WA and Qld.
More recently though, full-time jobs growth has also reportedly stalled in NSW.
The latest employment data reported a loss of 44.8k full-time jobs in January, offset by a 58.3k rise in part-time jobs.
China & Our “Risk” Scenario
Chinese foreign exchange reserves dropped below $3 trillion in January for the first time almost 6 years. That’s down from $4 trillion in 2014. The drop is largely caused by the Chinese central bank intervening in the FX market as they buy yuan to prop-up the currency against the US dollar.
Overseas direct investment from China fell by 35% in January, compared to a year ago & Chinese investment in overseas property dropped by 84%.
Over-inflated Chinese property prices and the risk of their property bubble bursting, is a concern. We’re tracking resale data in the major cities and there’s evidence of price declines emerging since November of last year.
These are trends we’re watching closely as they form the basis of our “risk” scenario for global equities, especially given the gap between forward PE valuations and probable 2017 earnings growth.
Boral – Chart Review
Boral has created a negative pricing structure following the stock making a lower low and then a lower high at $6.35 in last week’s trading.
With our general concerns around both domestic and US housing construction trends, combined with Boral’s high valuation and moderate underlying earnings growth, we think this is worth keeping on your “short signal” list.
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