DONT BUY THE INDEX
After the widespread selling in March some stocks have rallied and pushed through their old highs. Afterpay has gone from $8 - $40 and while it’s in the ASX100 now you won’t get that type of return buying the index. When you own the index, you are going to get exposure to a lot of businesses that have no certainty over their earnings.
It’s a stock pickers market, though it’s a difficult task for any stock picker in this market. Looking for the companies that won’t go broke, that ideally won’t have to downgrade and making sure at the same time you don’t pay too much for those that are travelling well as the trades become crowded.
The point I’m trying to make is that the volatility has been huge, anyone who sold shares in a panic has seen most of their stocks rebound to some extent. Many of the high growth no earnings tech companies we were worried about, have rallied trading back at levels they were at in mid 2019.
I'm sure some of the rebound has been driven by retail investors punting the market. ASIC reported that with the closure of casino’s there have been record numbers of new broking and CFD accounts being opened. Unfortunately ,ASIC also reported that most of these new accounts had lost money gambling on the market.
"What worries us is that people chasing quick profits and playing the market has been shown generally not to be a particularly effective strategy," Greg Yanco, ASIC's executive director of markets, said.
"Certainly in the period we looked at where there was quite a bit of volatility, retail investors on a net basis seemed to be mistiming the market."
Earning Season
Our view is that investors are getting too optimistic about the future prospects of companies. Most companies have withdrawn their earnings forecast and for good reason. Some companies that have benefited from the current situation, online shopping is booming, Kogan, Temple and Webster, Afterpay and Zip Money are all beneficiaries of this trend. It’s a lot less clear for many other companies. With guidance withdrawn it’s a complete guess as to how these businesses will be impacted.
We are cautious about the reporting season and what numbers will come through for those businesses where its not readily apparent what the business will actually report in terms of cash earnings. That is our rationale for keeping cash levels high, with the view of preserving capital and trying to avoid companies where share prices are reflecting too much optimism about future business conditions.
So where to from here…
There is value in the market, but there are also value traps and pockets of overvaluation. The dilemma is working out what businesses will earn on a go forward basis, if they will need to raise capital, adjusting valuations for increased number of shares on issue and the corresponding reduction in EPS and rebasing valuations on these new assumptions. A difficult task when you don’t know what the E in EPS is going to be.
So in this environment we are happy maintaining high cash levels and positioning the portfolio away from potential downgrades and picking up exposure to companies with certainty of earnings
Have a great weekend
Michael
