Stock Picking | Slack Investor

After a relationship breakup – When is the right time to start dating again?

Coco Chanel in 1920 ( ) – From bestlifeonline.com

Lets just get this out there … Slack Investor knows just the bare minimum on human relationships and isn’t qualified to give advice on matters of the heart. The only piece of useful knowledge that I can pass on is from, designer and business woman, Coco Chanel.

“As long as you know most men are like children, you know everything.” — Coco Chanel (1883-1971) from source

It has been a torrid last couple of months in the share market and Slack Investor has had to say goodbye to some of his old friends (Stocks that I have had a relationship with!) Last post I briefly looked at when its time to break up with individual stocks – this is something Slack Investor always finds a hard thing to do as I have to overcome the “confirmation bias” that tells me that I did the right thing in picking them in the first place – and, taking a loss sometimes is never pleasant. However, I steel myself with the conviction that it is the overall result that counts and to do that, you must associate with some winners

Let’s have a look at the overall Australian market. The economy is running along fine and the All Ordinaries is close to its long-term average value PE Ratio of 15 (15.6 Australian Financial Review 16/11/18). The US pundits are starting to talk about a possible recession in couple of years time – but this is now – and Slack Investor still whiffs (but does not know!) that the current downturn is an ordinary correction in the charts due to a change in sentiment. In the UK, things look a bit of a Brexit mess – so expect more bad news there.

I start with a watchlist of 15-20 companies that I like – or have been recommended in the press or internet. I then go to the most excellent site marketscreener.com where you can access a variety of analyst data on world stocks by free registration – entering your stock symbol and then going to the financials tab. The thing I love about this site is the predictive data for the next couple of years. These figures are just forecasts as they are based upon the companies sales predictions for itself … but a good company won’t try to “gild the lily” too much on its predictions of earnings.

For each company, I write down their future PE’s, yield and Return on Equity (ROE). ROE is really important and should be 15 or more. A company must have increasing sales, an increasing history of dividends and manageable debt. I setup a group of companies that have reasonable numbers and put them in a table (… like below!)

Company	Symbol	Future PE	Future Yield %	Future ROE	Sales Inc	Divdnd Inc	Debt	Chart Momtm
		2019/2020	2019/2020	2019/2020	EPS	History		Chge(Wk)
Costa Group	CGC	23/20	2.4/2.7	18/19	YES	YES	OK	YES
Macquarie Group	MQG	14/14	4.7/4.9	17/17	YES	YES	OK	YES
Service Stream	SSM	13/11	5.1/5.7	23/24	YES	YES	OK	YES
Amcor	AMC	15/12	5.0/5.3	67/71	YES	YES	OK	YES
Reece	REH	20/19	2.2/2.3	15/14	YES	YES	OK	YES

That is the” fundamental” part of my analysis … and then I wait patiently, watching the weekly charts until there is a change in momentum on a stock – this is the “technical” part of the analysis. I will try to buy the company as soon as I can after this momentum change … but set a stop loss just In case I am wrong!

There are many chart indicators that show a change in momentum. I like using the 11-week Directional Movement Index (ADX) on a weekly chart – or a breakthrough of a downward trend line. Examples of changes in momentum are shown below on the weekly charts of Amcor (AMC) and Costa Group (CGC)

This is not advice … But I have recently bought these companies and will report back in a year as to how things have worked out.

I have also admired the US Technology Index (NASDAQ) from afar for a long time – but never had a chance to buy it. It is available in Australia as a Beta Shares ETF (NDQ). However, NDQ is still moving south and has yet to break out of its downward trend.

Technically speaking, maybe it nearly is time to start dating again!

Financial Year 2018 – Slack Portfolio Review

As Slack Investor is a student of the financial arts and a lover of measurement, the end of the financial year is a great time to review and see how the Slack Investments performed. The Index funds were reviewed last post. Index funds are a great way to start investing in shares – as you are spreading your risk over at least a hundred companies.

The next step, as you become more familiar with investing and can start running a critical eye over individual companies, is to invest in individual stocks.

Over 75% of Slack Investor’s share investments are in individual stocks. See Portfolio

Most of my holdings are in growth stocks. These stocks usually have a high Return on Equity (ROE>15%) – with a track record of increasing dividends. By their nature, they have a relatively high PE ratio and are usually punished in the markets during reporting season if there is any bad news affecting future earnings. This I accept.

Slack Investor Stinkers – FY 2018

Each year I expect a few stinkers and dont beat myself up about them when they occur. If they breach the monthly stop loss – I usually sell at the start of the next month.

-24%

A special mention for IPH. Although some investors have done well with this stock. this company has a prawn heads in the bin on a hot day type of stink for me. Slack Investor likes the idea of the company -and it seems to be making a bit of a recovery since I sold it! However, I have had difficulty trading it successfully as it would go into long periods of declining price immediately after my buys. I should have learned my lesson years ago with Slater and Gordon – Never trust Lawyers!

-22%

HSO has got caught up with a tightening on government health spending and a decline in private health care admissions.

-21%
RHC is also in the healthcare sector and has the same challenges as HSO. But, it is a well managed company and Slack Investor will look for an opportunity to get back in this stock.

Slack Investor Gold Nuggets – FY 2018

The wonderful thing about owning growth companies is that sometimes they surprise on the upside and grow faster than expected. Altium is the “Welcome Stranger” of gold nuggets.

+166% ALU makes software for the designing of integrated circuit boards that are used widely in a range of technology products. Some analysts fear that the stock is overpriced. Its PE ratio is currently an eye-watering 74 – but this is rapidly reducing with projected earnings over the next few years. I am still holding as we go into the reporting season – the optimist in me thinks that there may be more good news on future earnings. There are even rumours of a takeover by larger company. But if not, my end of month stop loss is $19.61.

+71% A2M’s brand relies on a patented process that makes milk with only the A2 protein. A2M has been the subject of a previous post, and it is true that I’m yet to be convinced of the health benefits attributed to A2 Milk – But their marketing is very good and the trend is more powerful than logic in my book! Slack Investor was stop-lossed out of this stock earlier this year, but has bought in again -and hope for good news this reporting season.

Honourable mentions for Slack Investor portfolio stocks that increased more than 30% in this remarkable financial year. These nuggets include APX, CSL, MQG, NCK (no longer held), PMC, REA, SEK and WOR.

Slack Investor SMSF performance – FY 2018

I have written extensively on calculating Portfolio returns. I run a few separate portfolios but only quote the SMSF annual returns as this portfolio is externally audited. All percentage earnings quoted include brokerage and portfolio costs. Both raw and franked dividends are included as income. So essentially, the percentage returns include costs but are before tax. This raw figure can then be compared with other investment returns.

In what can only be described as a high-water mark for Slack Investor’s SMSF portfolio investing prowess. (and the luck of holding ALU inside it), Portfolio return FY18 was 37.6%.

One-year high returns are welcome but Slack Investor puts more weight on multi-year performance. The past 5-yr progress of the Slack Portfolio is 23.6%, 2.6%(whoops!), 14.2%, 19.5%, and 37.6%. This gives a compounding annual 5-yr return for the Slack Investor SMSF portfolio of 18.9%. The benchmark ASX 200 Accumulation Index (Including dividends) 1-yr and 5-yr compounding annual returns are 12.7% and 9.9% , respectively.

“Good luck is a residue of preparation.”

– Jack Youngblood – Hall of Fame American Footballer

Slack Investor readily acknowledges the luck factor in the stock selection process and realises that this FY18 as an extraordinary year for the portfolio (I expect more moderate returns!). I have found that a disciplined stop loss process, a bit of effort and research on stock selection, and following of trends on share charts (technical analysis) can yield very good results.

Over the next year I will post on how to start investing and the specific techniques that Slack Investor uses – It is not difficult … Empower Yourself!

Chance would be a fine thing

One of the great things about England is the turn of phrase that the locals enjoy. “Chance would be a fine thing” is a good example of language that is perplexing to the new arrivals. It is the sort of saying that sometimes crops up in the UK that has a meaning that is not entirely obvious.

In context, someone in England would utter this phrase in response to a comment from another that sets up a desirable scenario – but the retort “Chance would be a fine thing” is said to indicate that it is not likely to happen! Further context can be found in the great tribute by David Mitchell to insecure managers in the short but very fine Peep Show “Chance” sketch at this link. Youtube Autoplay will reward the brave with another great character from the show -“Alan Johnson”, the crude and aggressive management guru in the following Youtube clip – But Language Warning with Alan – I Digress! (… but still giggling!)

I like the “chance” phrase, it reminds me of the enormous part that luck plays in the building of a share portfolio – but it is the very opposite of how I think when I buy a stock! I do not buy stocks often and a buy is usually at the end of some good research where I have convinced myself that the stock is growing and is just about to take off when the rest of the market catches up to my brilliant thinking. Bitter experience and keeping good records over 25 years has shown my abilities in picking winners at around the 55 -60 % mark.

At first glance this looks a pretty poor record of stock judgement – However, by keeping my losses relatively small (through monthly stop losses), owning a diverse range of companies (see Portfolio Page), and letting my rising shares rise, and luck, the Slack Investor has done alright – Five year compounded average growth rate (CAGR) for my audited SMSF portfolio of 16.9% p.a..

The luck of stock selection has always been acknowledged by Slack Investor, but it was brought home to me when my son asked, in December 2017, for advice on where to put $5000 in the share market. You would think that this would be an easy thing for Slack Investor who has spent almost 30 years studying the vagaries of the market. 15 months ago I went into a lather and researched very hard and came up with two growth stocks that I thought were not overpriced and had reasonable growth prospects – but I still had a bit of trepidation as, he is my son, and this was his hard earned savings from a part time job -and, I wanted him to continue with the allusion that his Dad knew what he was talking about!

With the usual combination of research and luck, the two stocks that I presented him with were stocks that I already owned – Fisher and Paykel Healthcare (FPH) and Altium (ALU). I gave him the choice after a brief overview of each company (… spread the risk … give him ownership!). The former are world leaders in surgical instrumentation and pumps. and Altium has something to do with printed circuit board design and the “internet of things”. With the wisdom of youth, he picked Altium to put his savings into. I am relieved to say that both stocks have done extremely well in the past 15 months but the weekly charts tell a story – with my son’s choice, ALU, the clear winner (+177%).

Fisher and Paykel Healthcare (FPH) Weekly Chart – From Incredible Charts

Altium (ALU) Weekly Chart – From Incredible Charts

Do you think Slack Investor could come up with another Altium as a choice for share investment the next time my son asks me for advice?

Chance would be a fine thing!