Woolworths – Valuation Review

Posted on | by Leon Hinde | Leave a Comment on Woolworths – Valuation Review

Woolworths has recently sold their petrol business to BP for $1.8b which helps to underpin the groups balance sheet. As a result, we’re likely to see Woolworths accelerate their store refurbishment program.

In late February we’ll see the earnings update from Woolworths and based on consensus numbers we expect $58b in revenue, EBIT of $2.5b with reported profit around $1.5b.

On a forward basis the underlying earnings growth should track around 4% with FY18 EPS of $1.30 and DPS $0.88, this will place the stock on 3.7% yield.

Any rally in the share price following the Feb result, we feel adding a covered call at or near $25 – 26.50 offers a suitable risk reward payoff.

Chart – WOW

 

 

 

ASX – Earnings Review

Posted on | by Leon Hinde | Leave a Comment on ASX – Earnings Review

Shares in ASX have performed well since the Algo buy signal in early November.  If we look out 12 months, ASX should deliver revenue in FY18 of $850m and EBIT of $600m. The business is growing at around 5% p/a and management are remaining disciplined on cost control.

From an earnings per shares basis,  FY18 EPS will increase from $2.30 in FY17 to $2.45 in FY18, and DPS will increase from $2.10 in FY17 to $2.20 in FY18. This places ASX on a forward yield of 4.3%.

We think ASX shares are trading at the top end of the valuation range given the compressed yield and moderate EPS growth. The upside still remains the potential of a take-over bid as global exchanges look to consolidate.

Chart – ASX

 

 

Export Surge – First Trade Surplus in 3 Years

Posted on | by Leon Hinde | Leave a Comment on Export Surge – First Trade Surplus in 3 Years

Last Friday, Australia posted its first trade surplus in nearly three years.

The surplus of international goods and services was $1.2 billion for the month of November, which was much better than the market forecast of a $500 million deficit.

The Australian Bureau of Statistics said exports surged 8% in November, while imports were flat. The main drivers for the gain in exports were iron ore and coal, which rose 11% and 25%, respectively.

This is positive for the fundamental picture in the Aussie Dollar. We see solid support in the .7290 area with the scope for a move up to the .7430 level in the near-term 

Chart – AUD

Chart – XJO

Healthcare Algo Buy Signals

Posted on | by Leon Hinde | Leave a Comment on Healthcare Algo Buy Signals

At this point in the market we prefer healthcare names as a sector allocation for new money. Here are the recent buy signals generated by our Algo Engine.

With SHL, CSL and ANN we’ve added covered calls to boost the annualised cash flow to over 10%, whilst still allowing for capital growth if exercised at the strike price of the sold call.

 

Chart – SHL
Chart – COH
Chart – RHC
Chart – ANN
Chart – CSL

Dow Jones Index – This Warrants A Closer Look

Posted on | by Leon Hinde | 1 Comment on Dow Jones Index – This Warrants A Closer Look

We’re interested in the large pickup in traded volume over the past few weeks in the Dow Jones Index. By any measure the volume is abnormal, even compared to prior end of year volume traded.

The conclusion we draw from this is: whilst ETF’s are helping to accelerate index volumes, it seems a reasonable conclusion that it could be part of a series of indicators which are helping to suggest that we’re near an exhaustion point in the US equity rally. We’ve seen market tops coincide with big volume distribution patterns like this before.

Chart – Dow Jones

 

 

 

Dow Jones – Where is Fair Value?

Posted on | by Leon Hinde | Leave a Comment on Dow Jones – Where is Fair Value?

Both the Dow Jones 30 and SP 500 finished the first week of 2017 in positive territory gaining 1% and 1.5%, respectively.

Many market commentators are suggesting the potential for overbought conditions as the major US stock indexes have added about $2 trillion in share value over the last 8 weeks.

There’s no question that the Bulls are currently in charge. However, with earnings season just a few weeks away, investors need to be cognizant of the index earnings required to maintain these lofty price valuations.

Earnings over the last three years have been in a tight range between $116.50 and $118.00. Based on our calculations, if US companies don’t post EPS growth of 10% and only deliver a flat $120.00 of average annualised EPS, the Dow Jones 30 is worth 16,500 points with 10-year bond yields at 2%.

Although energy and commodity companies should help to lift the average from the prior 12 months, bank earnings should also be up in the fourth quarter. With this in mind, the middle ground may result in 5% average EPS growth ($125 per share), which then supports the Dow Jones Index trading at or near 18,000 points.

Dow Jones

 

Update on the Yield Trade

Posted on | by Leon Hinde | Leave a Comment on Update on the Yield Trade

In late 2016 we began highlighting yield names which were oversold and were likely to bounce back coming into the year end. Our preferred names in the yield basket were WFD, SCG, GPT, SYD and TCL. On average, these names have rallied over 10% from their November low.

The consolidation of US yields, (bond prices no longer falling & yields no longer moving higher), along with the oversold condition in our domestic yield sensitive companies, were enough to generate the rally.

From here we feel  these names will remain supported, especially if volatility picks up in the broader market during the Jan – March period. With this in mind, we continue to hold our yield basket and overlay covered calls to boost the cash flow to 10%+ on an annualised basis.

Chart – SCG
Chart – WFD
Chart – TCL
Chart – TCL
Chart – GPT
Chart – US10YR

 

 

Tabcorp – Low Risk Income Play

Posted on | by Leon Hinde | Leave a Comment on Tabcorp – Low Risk Income Play

Following TABCORP’s successful bid for Tatts Group, the next 12 months should provide a low risk opportunity to generate 10 t0 12% annualised cash flow from TAH.

The Algo Engine generated a buy signal early in November at $4.50. We remain positive on the stock and continue to acquire shares and sell the May call options with a view towards collecting the February dividend as well.

Chart – TABCORP

 

 

Telstra – Counter Trend Rally

Posted on | by Leon Hinde | Leave a Comment on Telstra – Counter Trend Rally

We’ve been buyers of Telstra from the recent lows and see the possibility of the stock trading into the $5.40 to $5.70 range in the weeks ahead. We are undecided if we sell covered calls over TLS and will likely wait until the February earnings result, to see what the underlying EPS growth trends look like.

We have TLS on a 6% yield and delivering around 4 – 6% EPS growth into 2017.

Chart – TLS

Resmed – Stay Alert

Posted on | by Leon Hinde | Leave a Comment on Resmed – Stay Alert

Resmed has rallied from $7.50 in November to $8.70 and appears to be pulling back from the recent high. It’s likely the Algo engine will trigger a buy signal in the coming weeks if the current retracement sees prices remain in the range of $8.00 to $8.40.

We think the fourth quarter earnings in RMD will reassure investors and support buying ahead of the result on a dip in price should create a solid entry level into 2017.

Chart – Resmed