Category: Sell signal

What’s that smell? … Banks!

With great thanks and acknowledgement to the insightful and talented Randy Glasbergen

KPMG have just reported that banks are starting to lose their shine and the big 4 banks in Australia have reached a “turning point”. Slack Investor would argue that, after a pretty good recovery post the GFC, Australian Banks have been in decline since early 2015. NAB is the last to confess this reporting season … They are all businesses that will find growth difficult.

With its full-year profit of $4.8 billion, down 13.6 per cent, it joined ANZ, Commonwealth and Westpac in announcing a big decline in earnings.

From abc news
The ASX Bank Index since 2000. Except for the GFC 2008/9, the banks have performed well – as well as paying high dividends. Things changed in March 2015 where, despite temporary recoveries, there has been a general decline in share price. From Investing.com

Self Managed Super Funds are a great place to park your super money for the hands-on investor. But, they are not for everyone. You really need to have a real interest in investing and at least $200 000 in your super savings. According to ATO Data, at 31 December 2017, the most commonly held SMSF share investments (by investment size) are below: There are a lot of banks!

Commonwealth Bank
Westpac Banking Corporation
National Australia Bank
Magellan Global Fund
BHP Billiton Limited
Platinum International Fund
ANZ Limited
Telstra Corporation
CSL
Wesfarmers

Not a bad portfolio for the past 10 years … but, the tide for the banks has already turned with low interest rates affecting margins, increased competition from the more nimble digital banks, the Hayne Royal commission “blowback” forcing the banks to separate from their profitable wealth management businesses, and recent dividend cuts announced. A closer look at the top 5 SMSF shares with financial statistics from the excellent marketscreener.com. The 1-yr returns over the past year for each stock are lifted from marketindex.com.au .

SMSF 2017 Top 5 Shares P/E 2020Yield %ROE %1-yr Ret %
Commonwealth BankCBA155.51312.4
Westpac BankWBC145.911-3.7
National BankNAB1261216.7
BHP BillitonBHP125.32210.9
ANZ ANZ12612-3.9
Average 135.7146.5

Slack Investor can understand the lure of juicy bank dividends for SMSF funds. But, if the dividend is coming with a reducing share price due to the bank business shrinking – then this is not a good deal – and perhaps look to higher yield industrial shares or industrial/office REITs for that cherished income rather than banks.

Sing the praises for Return on Equity (ROE) and Earnings per Share (EPS) Growth

This is one of the first financial statistics that I look at when deciding on a company to buy. Return on Equity is a company’s Net Profit ÷ Average Shareholder Equity. If a company had a net worth of $10 million and made a profit of $2 million, its ROE would be 2/10 x 100 = 20%.

High ROE companies generate a lot of cash – this cash they can then use to grow their business. If they also have a good increase in their Earnings Per Share (EPS) – Slack Investor would classify them as “Growth” Companies.

CSL Earnings per Share- and projected EPS for 2022 -2024

Generally, companies with a ROE of >15% get Slack Investor’s attention but some businesses require lot of infrastructure before they can generate profit. For this reason ROE is best used to compare companies in the same industry. For contrast with the 2017 SMSF, let’s have a look at Slack Investor’s Top 5 stocks from the Portfolio page (This is not advice!). Data gathered from marketscreener.com and marketindex.com.au .

Slack Investor Top 5 Shares P/E 2020Yield %ROE %1-yr Ret %
CSL LtdCSL381.23538.3
Altium LtdALU461.63144.9
Cochlear LtdCOH411.73826
Macquarie Group LtdMQG164.41611.5
REA Group LtdREA401.33527.9
Average 362.03129.7

The average ROE for the Slack Portfolio is much higher than for the 2017 SMSF top 5 (31% vs 14%) . They also all have a projected increasing Earnings per Share (EPS) – and this indicates the Slack preference for growth companies.

However, with growth comes volatility and the Slack Investor top 5 would not suit those who rely on their investments for income. The Slack portfolio would probably suit an investor with a longer term view and a separate income. If you are still working and want to grow your wealth through shares … then the ROE should be one of your guiding lights for company selection.

Terrible Things

Yes, … there are some images that stick in Slack Investor’s head … and this is one of them! The average ceramic toilet should last 50 years. The relentless view from a toilet’s perspective must be pretty confronting – and the cumulative exposure must be horrific! Apart from now treating each toilet that I encounter with great respect … and giving acknowledgement for past suffering – this image has made me think of the terrible things I’ve seen.


Residents of Idalia, Townsville survey the damage. Picture: Michael Chambers – Courier Mail

Firstly, a shout out to those in Townsville (Where Slack Investor has a house). A massive flood event has occurred on the Ross River and affected many homes. The mud, the silt, the mould, the smell, and the destruction as water has invaded homes is horrific … and definitely qualifies as a terrible thing. As one who has had flood water in his home, fortunately not in the main living areas, my thoughts are with those badly affected as the town moves toward recovery.

Terrible things of a far lesser order

We are now in the “confession season” where Australian companies must report to the market. Slack Investor is predominantly invested in “growth” companies – and there is inevitably always some bad news with some of these stocks where the companies sales do not meet expectations – for whatever reason. As news breaks there is usually a rapid sell-off and the price drops dramatically.

Daily chart for Costa Group (CGC) – From incrediblecharts.com
Daily chart for Challenger (CGF) – From incrediblecharts.com

Now the nature of Slack Investors slackness is that he doesn’t get involved in the daily ructions of a stock price – but he is confronted with these sorry charts at the end of each week (and month) when he does his portfolio reviews – He must decide what to do next! A good start is to read the press for any information on why these stocks have fallen – Is it a panic sell … or is there something fundamentally wrong with the prospects for this company at this time.

The top chart is of Costa Group (CGC), a food producer with interests in mushrooms, blueberries, raspberries, tomatoes and avocados. A profit downgrade led to the big price drop, but consensus seems to be that the sell-off was overdone due to the seasonal nature of fresh food supply. The long term prospects for sustainable growth in Australia and internationally look good and Slack Investor is a remainer in CGC. More useful advice to millenials (But this actually makes sense!)– as well as eating the odd “smashed avacodo“, aspire to owning a company that produces them!

I originally liked the story behind Challenger (CGF), an annuity provider that should be able to tap into the retiring “baby boomer ” market. There are a few articles on Challenger that discuss the recent 8% profit downgrade that led to this slump – blame is apportioned to the Hayne Enquiry, recent poor investment returns and politics. CGF was one of my defensive big picture stocks (on a good dividend 4.7%) that I was sure would come right – but the downward trend on the chart would suggest that I have hung on for too long. The stock price might bounce back – but it seems that there are enough headwinds to inhibit growth in the near term. I will be looking for a chance to rotate out of CGF and into another company such as Treasury Wine Estates (TWE) over the next few weeks. TWE had some cash flow problems this reporting season, but is projected to grow sales and revenue with a good return on equity in the next few years (14.1% in 2020).

  • Treasury Wine Estates (TWE) – Projected sales growth to 2021 – from marketscreener.com