Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

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Growth isn’t Dead Yet. Value’s outperformance in the past couple of months is relatively small compared to past periods and we think the September-October correction has created opportunities for those investors not giving up on Growth outperformance or struggling to find attractive Value names.  Stay long Growth.</li>
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Not All Growth Stocks Have Fallen off the Cliff. By our estimates, only 7 of 29 Growth stocks have managed to outperform since September and 2 of these are declared takeover targets.  The other 5 (TAH, TCL, CPU, TME, and TNE) seem to have relatively defendable earnings.  CPU, TME, and TNE are genuine outperformers – they outperformed the benchmark both before and during the correction.  The worst performing stock during the correction has been WTC, closely followed by WEB, APX, and TWE. </li>
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Valuations now better Aligned to Earnings Growth. The correction has bought a significant improvement in valuation for Growth stocks and when we screen consensus EPS growth estimates, past earnings performance and valuation we find WEB, A2M, APX, CAR, and WTC look most attractive.  The least attractive stocks are NXT, XRO, and NAN.  NVT ranks low as well, due to weak EPS growth expectations for FY19 and stretched valuations.  It scores well based on past earnings performance.  We included it in our model portfolio in September and it has rallied strongly since then after receiving a takeover offer.</li>
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Capex Can be a Tipping Point for Longer-term earnings Growth. The high valuation multiples attached to Growth stocks means that not only is earnings performance relative to 12-month forward consensus important, but also longer-term earnings growth.  Often this depends upon Capex targeted at existing assets or acquisition.  When we analyse our universe of Growth stocks to see whether the Capex outlook is a headwind or tailwind for earnings, we find CSL, TNE, and TWE are in a sweet spot.  They have relatively modest asset depreciation balanced with relatively modest Capex, and this seems to be a key feature of these stocks delivering sustained and strong earnings growth.  Of these stocks, TWE is most attractive based on its earnings outlook, earnings performance, and valuation.  Valuation is still a hurdle for TNE and CSL.</li>
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Growth isn’t Dead Yet. Value’s outperformance in the past couple of months is relatively small compared to past periods and we think the September-October correction has created opportunities for those investors not giving up on Growth outperformance or struggling to find attractive Value names.  Stay long Growth.

Not All Growth Stocks Have Fallen off the Cliff. By our estimates, only 7 of 29 Growth stocks have managed to outperform since September and 2 of these are declared takeover targets.  The other 5 (TAH, TCL, CPU, TME, and TNE) seem to have relatively defendable earnings.  CPU, TME, and TNE are genuine outperformers – they outperformed the benchmark both before and during the correction.  The worst performing stock during the correction has been WTC, closely followed by WEB, APX, and TWE. 

Valuations now better Aligned to Earnings Growth. The correction has bought a significant improvement in valuation for Growth stocks and when we screen consensus EPS growth estimates, past earnings performance and valuation we find WEB, A2M, APX, CAR, and WTC look most attractive.  The least attractive stocks are NXT, XRO, and NAN.  NVT ranks low as well, due to weak EPS growth expectations for FY19 and stretched valuations.  It scores well based on past earnings performance.  We included it in our model portfolio in September and it has rallied strongly since then after receiving a takeover offer.

Capex Can be a Tipping Point for Longer-term earnings Growth. The high valuation multiples attached to Growth stocks means that not only is earnings performance relative to 12-month forward consensus important, but also longer-term earnings growth.  Often this depends upon Capex targeted at existing assets or acquisition.  When we analyse our universe of Growth stocks to see whether the Capex outlook is a headwind or tailwind for earnings, we find CSL, TNE, and TWE are in a sweet spot.  They have relatively modest asset depreciation balanced with relatively modest Capex, and this seems to be a key feature of these stocks delivering sustained and strong earnings growth.  Of these stocks, TWE is most attractive based on its earnings outlook, earnings performance, and valuation.  Valuation is still a hurdle for TNE and CSL.


Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Macroeconomics

Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian dollar was trading below fair value. &nbsp;After what had been a strong period of out-performance from US dollar earners, I concluded that without the tailwind of A$ over-valuation - which prevailed through most of 2014 - their returns in the near term would be capped. In this post, I show that recent currency appreciation has eliminated the modest under-valuation and been associated with under-performance from US$ earners. The basket is trading on a median 12 mth forward PE of 20x, which represents a 25% premium to the median estimate for the ASX100, slightly higher than historical norms. The premium reflects the fact that offshore earners have strong growth expectations and low betas, thanks to their defensive business models. I highlight that the stocks suffering from the highest level of analyst bearishness remain Cochlear, Treasury Wine Estates and Westfield, which each attract less than 20% of buy recommendations from analysts.&nbsp;

Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian dollar was trading below fair value. &nbsp;After what had been a strong period of out-performance from US dollar earners, I concluded that without the tailwind of A$ over-valuation - which prevailed through most of 2014 - their returns in the near term would be capped. In this post, I show that recent currency appreciation has eliminated the modest under-valuation and been associated with under-performance from US$ earners. The basket is trading on a median 12 mth forward PE of 20x, which represents a 25% premium to the median estimate for the ASX100, slightly higher than historical norms. The premium reflects the fact that offshore earners have strong growth expectations and low betas, thanks to their defensive business models. I highlight that the stocks suffering from the highest level of analyst bearishness remain Cochlear, Treasury Wine Estates and Westfield, which each attract less than 20% of buy recommendations from analysts.&nbsp;

A new narrative for the Australian dollar (update)

Australia

Appen Ltd is a language, search, and social technology company. The Company provides solutions to improve internalization of products, management of data, and project management for companies.

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Appen Ltd (APX AU)

Low Tide on Aussie Growth Stocks

Growth isn’t Dead Yet. Value’s outperformance in the past couple of months is relatively small compared to past periods and we think the...

Shane Lee

A new narrative for the Australian dollar (update)

Two months ago, Evidente published a report which suggested that contrary to the RBA's view that the currency remained over-valued, the Australian...

Sam Ferraro

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