Cross-posted from Angus Nicholson at IGMarkets.
Post-Brexit speculation over forthcoming global fiscal and monetary stimulus has clearly helped the best performing ASX stocks of the past week. The top fifteen stocks are dominated by commodity stocks linked to the global industrial cycle. This is also the segment of the market that is most stretched in valuation terms, but if we do see major fiscal packages from Japan, UK, China (ongoing) and possibly Europe then earnings estimates will have to be substantially upgraded, which would validate some of these lofty valuations. If we are at a reflation inflection point, then this is not going to be the end of the move for the cyclicals that are already at the top end of the table.
Consensus Price Targets
Global fiscal stimulus has certainly not been factored into the consensus price targets by the analyst community. Resources companies dominate the list of companies that are trading well above their price targets, and price targets for resources stocks are the most ephemeral given how difficult it is to forecast commodity prices.
The list of stocks well below their consensus price targets could be showing up some value buys, or just where the analyst community has got it very wrong.
Materials is clearly the biggest momentum play in the ASX at the moment with the sector gaining 12% over the past month.
But it’s also the sector trading at the biggest premium to its average forward price-to-earnings ratio. It is a little surprising to see that the healthcare sector is trading at the second highest premium to its average, arguably this is just a reflection of the momentum factor performing well in the post-Brexit rebound.
The style factor rotation in the wake of Brexit is also showing an increasing outperformance by small caps and momentum factors, while high yield continues to dominate the as the best performing style factor. Although over the past week it has been small caps and value that have been the best performing.
Value Screens
Since some of the most hated resources exposed cyclicals stocks have been outperforming, I thought it might be worth revisiting some tried and tested value screens. These screens actually picked up a lot of the recent winners (MND, WSA, SHV) about a month or two ago, and both have robust backtested results with 15% or higher average annual returns.
Let’s start with Joel Greenblatt’s “Magic Formula” which is a simple equal-weight of earnings yield (the inverse of the P/E ratio) and return on invested capital (ROIC). I’ve given it a 70/30 weight towards earnings yield to weight “value” higher.
QAN and MND still look reasonable buys if their earnings don’t drop off a cliff.
And a lot of similar names show up in Joel Greenblatt’s “Acquirer’s Multiple”, which is just enterprise value divided by EBITDA minus Capex. Both screens do suggest a good selection of names to look at if we do see fiscal stimulus reflationary cycle return, and a few other names whose business models are slowly crumbling like FLT and MTS who most investors would probably still want to avoid.
Insider Buying
Air New Zealand (AIZ) tops the list of insider buying over the past month, showing that at least some in top management are happy to be contrarian against the general hate of airline stocks globally at the moment. Interestingly, NAB is also showing up in the scan which is certainly an interesting development as we head into earnings season. Fairfax seeing some insider buying alongside being one of the better performing stocks at the moment also indicate there could be some good earnings news ahead.
Short Positions
There has been a big increase in short positions in Mesoblast over the past week, which is quite significant given that it is already the third most shorted stock on the index in short interest ratio terms.
Growthpoint properties, the A-REIT, seems to have seen the biggest drop in short positions over the past week.
Momentum Stock Picks
Note: These momentum stock recommendations are based off backtested results looking at a 3-5 day holding period with a 5% stop loss on every trade.
AST – Buy
AusNet Services looks to be heading higher.
CMW – (BUY)
Cromwell Property Group is also trending nicely higher.
FXJ – (Buy)
Fairfax media is screening up on a range of market measures like insider buying, and it has some good technical momentum behind it.
SYR – (Sell)
Sentiment has really turned on Syrah Resources and a break of support at A$5.40 could see a major selloff.
SKT – (Sell)
Sky Network Television has declined six sessions in a row, and sentiment does not look good as we begin to approach earnings season.
