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Firstly, a mea-culpa from me.

I have had one of those weeks, and by default, that means many of your portfolio’s have too.

It is a humbling exercise to write this week’s update, but one we must face.

This earnings season has been a minefield, and sadly this week we stepped on one in the form of Computershare (CPU).

What makes this all the more annoying is that it has been a torrid week and month for Australian equity markets, so this misstep only compounds what, to my mind, has been a pretty disappointing period for portfolio returns.

Furthermore, several of our other favourites copped a hiding from the market in spite of results we felt were fine.

I have a lot to discuss this week as it has been awfully busy, but I wanted to be upfront and acknowledge the disappointment with that recommendation and to re-commit to you all our desire to repair the underperformance in as short a time period as possible.

THE WEEK THAT WAS… EARNINGS SEASON –

Good riddance. That’s really all that comes to mind.

For much of the last few years we have been nimble enough to scoot too many disappointments, but this week I can’t help but feeling like we got on our due.

And it’s not enjoyable.

The market on the whole was down a little over 1%, making the losses for the ASX200 this August well north of 5%.

The Chinese devaluation was certainly a major macro focus this week (see ‘International News’), as was confirmation of the Commonwealth Bank’s (CBA) $5.1bn accelerated rights issue (1 for 23 shares at $71.50). But in truth, the real value add or loss to portfolio’s came in the ability to navigate through the delivery of 2015 profit results. On the whole it was pretty trying stuff.

There is a lot to cover, but I will endeavor to check through the major earnings releases as I see them:

• COMPUTERSHARE (CPU) – disappointing. Lowered 2016 expectations, as leverage to higher interest rates and elevated corporate activity has failed to emerge. The stock is down 15% this week, and positions are underwater.

My inclination is to stick it out since:

a) the stock is now extremely cheap on 13x and pays a genuine 4% dividend yield,

b) the falling Australian dollar actually cushions much of the downgrade,

c) the very reasons for our optimism still remain in reach – ongoing corporate activity and a rise in US interest rates.
This is a genuine disappointment to us, and we will be vigilant with our recommendation here, but for now we feel the best thing is to HOLD the line.

• CARSALES (CAR) – the stock reaction is more annoying than concerning to me. Having been a very strong outperformer, the market sold CAR down 7% post its results on the suggestion that it didn’t deliver strong enough results to justify its 20x P/E rating.

I think this is a somewhat churlish market response, since the focus of concern (private ads) is only a modest part of the business. Beyond this division, the company is rapidly repairing relationships with its car-dealer client base post the acquisition of Stratton Finance (direct competitor in auto-finance), and its international assets (Korea & Brazil) are performing very well.
I would be buying more.

• CROWN RESORTS (CWN) – also annoying. The headline numbers looked light simply because the group took a ‘greater than theoretical loss’ in one business, but normalizing for this (as you should, as the odds always normalize when you’re the house!), the figures were absolutely fine.

• CWN fell 5% on the week, but had been good prior. Like CAR, this stock is and remains a core recommendation and one we would be adding to.

• TELSTRA (TLS) – posted figures that for the most part were fine and consistent with recent trends in that mobile was again the workhorse, and fixed and data weak.

• TLS offered 2016 earnings guidance that, if pushed, may have been slightly soft. The reality in TLS still, is that they are undoubtedly facing tougher headwinds as mobile competition picks up (TLS mobile bundles tend to be ~15% more expensive than Optus/Vodafone), but that in a low interest rate market where earnings stability is valued there is still a place for significant weights to TLS (as much as I am still looking for further outperformance to lighten positioning).

• COMMONWEALTH BANK (CBA) – my least favourite bank as I have said until blue in the face, simply because it is so richly valued. They came with the $5bn+ right issue, and announced full year profits that were emblematic of the sector – higher expense growth, still benign credit loss and modest margin attrition.
  The stock will recommence trading on Monday at/around $78.00 based upon what I am hearing from the institutional market, which is 5% lower than its close on Tuesday. I would suggest that post-dividend ($2.22 ex-dividend next Tuesday), the stock will end up down very near to the rights issue price of $71.50, at which point, for the first time in over three years, I could safely say ‘CBA is fair value’ – fair, not cheap.

• We are highly unlikely to recommend clients take up their 1 for 23 rights simply because we don’t see any room for more banks in client portfolios just yet. Most portfolio’s, despite our caution, retain significantly overweight bank ownership.

• Watch this space next week for our official thoughts however.

Elsewhere, the market was busy.

Cochlear (COH) posted results that were sound, but offered up anemic 2016 earnings guidance, which saw the stock take a modest 5% fall from its lofty heights. Magellan (MFG), another of our former holdings, struck sound profit figures and jumped 7% on the week.

AGL Energy (AGL) in which we recently advocated to take-profit, pushed on after posting in-line profit figures. AGL is clearly in a sweet-spot for investor sentiment right now, due to its ‘cost-out’ story and leverage to improving power prices (our original thesis for buying the name last year), but we feel it looks increasingly priced in as discussed.

In the energy space, the entire sector copped a drubbing as oil prices remained weak. Seemingly there is strong suggestion SANTOS (STO) could raise as much as $3bn at its results next week, in a much-needed move to shore up its leaky balance sheet. Sadly, given the enormity of this raising, it’s likely that each of Oil Search (OSH) and Woodside (WPL) remain pressured until the market digests this.

We love Oil Search here under $7.00 for the medium-term investor (like us).

KEY DIRECTION CHANGE FOR THE ASX200 …

As per the chart below, the ASX200 did in fact break under its 3-year uptrend signifying a more gradual shift towards the side-ways market we have seen in much of the last 12 months. The ASX move is a reflection of the slower economy and a recognition of the absent domestic earnings growth.

I’m pretty convinced this is simply a moderation in the market, and more broadly reflective of a new sideways range between 5050 and 5600 for the remainder of the year.

Slower earnings growth, the enormous capital raised by banks, and the impending rise in US interest rates (September 18 meeting) will all act to cap the upside.

ASX200 Daily Chart

EARNINGS TO COME NEXT WEEK …

I hate to say it given the torrid week had, but there is another deluge of results next week.

Of particular relevance to us, Adelaide Brighton Cement (ABC), Wesfarmers (WES), Woodside (WPL) and Insurance Australia Group (IAG) will all report. Beyond these names, other important results will be shared by the likes of Challenger (CGF), SEEK (SEK) and Platinum Funds Management (PTM), some of whom are stocks we have under active consideration for fresh investment.

Watch this space.

IN SUMMARY …

A pretty disappointing week in the sense that markets were poor, and several of our key recommendations similarly tawdry.

It is regrettable and humbling, but something we intend to shake off and overcome. To repeat, Computershare (CPU) is the only name that has genuinely caused us to re-think matters, and even now we think the disappointment is more than adequately priced. So we stay the course and make changes when appropriate.

On the market as a whole, this is sadly a new, less optimistic phase. Arguably we have been in this sideways range for much of the last 2 years, however I think it is becoming more apparent to participants that the bank sector has hit an earnings peak, and that there is little elsewhere in the market to take the reins of market leadership from them – remember fair value and cheap are distinct.

Simply put, this just means that the trading range is now moderately lower than it has been (as above 5050-5600 for remainder of 2015, and into 2016).

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We do sincerely hope this new site provides you another avenue to easily see our views and thoughts. As a reminder the site is at –

Thanks & have a great weekend.

Fingers crossed for a more fruitful week.

Key Dates: Australian Companies

Mon 17th Aug
Earnings: Westpac (WBC) Q3 trading statement, Newcrest (NCM), Aurizon (AZJ)
Dividend Ex-Date: Telstra (TLS)
Tue 18th Aug
Earnings: Asciano (AIO), Challenger (CGF), QBE Insurance (QBE), Sonic Healthcare (SHL), Sydney Airport (SYD)
Dividend Ex-Date: Commonwealth Bank (CBA), Computershare (CPU)
Wed 19th Aug
Earnings: Ardent Leisure (AAD), Alumina (AWC), SEEK (SEK), Stockland (SGP), Treasury Wine (TWE), Woodside (WPL)
Dividend Ex-Date: Magellan Financial (MFG)
Thu 20th Aug
Earnings: Adelaide Brighton (ABC), AMP (AMP), ASX (ASX), Brambles (BXB), Fortescue (FMG), Origin (ORG), Platinum (PTM), QANTAS (QAN), QUBE Holdings (QUB), Tattersalls (TTS), Wesfarmers (WES)
Fri 21st Aug
Earnings: Coca Cola Amatil (CCL), DUET (DUE), Insurance Australia (IAG), SANTOS (STO), Super Cheap Auto (SUL)