QAV 506 Club

Cameron  00:06

Welcome back to QAV, TK. Episode 506. We’re recording on the 15th of February, 2022. Happy Valentine’s Day for yesterday, Tony.

Tony  00:18

Thank you, Cam. Happy Valentine’s Day to you. I’m in a separate state to my wife so I sent her some cupcakes.

Cameron  00:25

Oh right. You guys recognise Valentine’s Day? We don’t, we’re like “meh”.

Tony  00:29

We don’t know either normally but because we’re apart, I thought oh, I better send something. But I was thinking of just sending up something nice anyway because we’re apart but then I thought oh, Valentine’s day, most of the stuff you’re buying, well that I could buy, was for Valentine’s Day so I just took the opportunity.

Cameron  00:42

I’d be thinking, seeing as you forgot your wedding anniversary a couple of weeks ago, you’d be taking any opportunity to lay it on thick.

Tony  00:49

Yeah, well I did, I did send some flowers after that.

Cameron  00:52

Spreading it on thick like vegemite on hot buttered toast.

Tony  00:57

Ooh, and hot cross buns.

Cameron  00:59

Off air we were talking about the Super bowl ads and I thought we should do this on the show. It’s the only – Chrissy and I laugh about this – its the only television advertising we see all year, are the Super bowl ads, because we don’t have a TV. So, we never see ads.

Tony  01:13

You don’t see them in Australia, anyway. It’s only for the North American market. Even in Canada we didn’t see them, like they charged by region.

Cameron  01:20

But we don’t see any ads all year, I’m saying, we never see an ad.

Tony  01:25

Okay, but I watched the Super bowl last night on TV and the ads are Australian ads because its shown here. You don’t see the US ads.

Cameron  01:31

Oh, yeah. Okay, so we watch them on YouTube. I’m not going to watch the actual game, I don’t care about the football. I care about the halftime concert, which was awesome. And I know you wouldn’t have appreciated it.

Tony  01:41

I hated it.

Cameron  01:43

Yeah, yeah, you would. It was awesome. I seriously teared up. To me, it was… just to see Dr Dre and Snoop, and mostly Em. I remember when those guys, like particularly Dre and Snoop, were considered the downfall of America thirty years ago. Tipper Gore was putting parental advisory stickers on their albums because “oh,” you know, “it’s the African Americans. They’ve got a platform now, be careful. They’re talking about smoking weed, and that’s never going to be legal. Oh, whoops.” And to see them be so mainstream now that they’re doing the Super bowl halftime game, so inoffensive to your average white American that they can do the Super Bowl. I thought it was really great.  I was gonna tell you about the Larry David ad. So, it’s like, it’s Larry as characters throughout history. First guy shows him the first wheel, he goes “what’s that?” It’s the wheel. He goes “Eh. I don’t know. I don’t like it.” But it rolls. He goes “Yeah, so does a bagel. I don’t care. It’s not good.” And then they were inventing the toile, h e doesn’t like that, ad the fork, he doesn’t like that. All of these major achievements, and it ends up with a guy at the end talking to Larry about crypto as an investment. Larry’s like, “eh, I don’t think so. It’s never, I’m never wrong about these things. I don’t think so.” And we were talking about that in reference to the fact that somebody said they should, they wanted to advertise a crypto fund on our show and I turned him down instinctively, I go like “yeah, it’s it’s never gonna happen. We’re never gonna do that.” And then I thought maybe we should just take their money and we can just do a piss take ad and everyone would know we were joking.

Tony  03:18

Like the old Graham Kennedy ads on Melbourne Tonight.

Cameron  03:21

Yes, yes. Well, next time. Next time, I’ll think about that. What else? Copper’s a buy again, Tony, I think. Did you check the chart?

Tony  03:31

I did. I checked it this morning. Yep, no, it’s a buy again, absolutely. Been sort of skirting around the buy, it was only a small sell and then it came back again. So, yeah, it’s definitely back into buy territory now.

Cameron  03:42

That’s good. So, who does that put back? There’s BHP

Tony  03:45

BHP, Sandfire, Aurelia Metals. Yeah, those three come to mind straightaway.

Cameron  03:52

Good. Now, there was in our buy list we put out yesterday, we had taken VUK, Virgin UK, off because we thought it had a qualified audit. You had another look at it and said, “yeah, no, it doesn’t qualify as a qualified audit.” It’s a non-qualified, qualified audit.

Tony  04:13

Yeah, the auditors were happy with the company. To be fair, the confusion is around, it’s a very unusual audit statement for Australians because it’s, it’s a UK based company and so the format of the audit report is different. The auditors, I think probably by legislation, called out quite a bit of detail about whether the company was a going concern or not so they listed -a bit like a key audit matter – they listed all the things they investigated to see if the company was a going concern. And then at the end said, “yeah, it’s fine. It’s a going concern, at least for the next 12 months.” So, I think if you just glanced at it you might draw the other conclusion that they were highlighting the fact that the company may not be a going concern, but no, it’s fine, just a different format.

Cameron  04:56

So, for QAV club members that are looking at the full buy list, you can take off the qualified audit for VUK. ASX CEO Dominic Stevens announced a bit of a surprise retirement recently.

Tony  05:09

Yeah, sorry, and just before we leave VUK, it’s back on the buy list too once you put that qualified audit back in. So, it’s a good high ADT stock for anyone who needs that. Yeah, so Dominic Stevens, head of the ASX retired, and the day it happened I just happened to be about to log into the AFR website and they have, at the bottom of the page, they have all the headlines and I went, “oh, shit. ASX CEO, leaves.” And I thought, “oh, okay, that could be bad news.” But, then after I probably had 24 hours to read the stories in detail, I think it’s okay. He’s announced his retirement, he announced it on the same day as the results came out and perhaps he did that so that it would all be on the same day and there wouldn’t be an overshadowing of one or the other. But he did say he’s staying on until they find a replacement, and he’s been there for seven years. I think he’s been there for nine years in total, and quite a few as CEO. The only thing that I’m a little bit, I don’t know, it’s a bit of a caution in my mind is that the ASX for a long time have been trying to replace their big IT system which is called the Chest System, which is the system which tracks everyone’s ownership of their share portfolio or their pieces of stock in shares. And it’s an old system, it’s behind the times and people will know that because they get printouts every quarter of their shareholdings and the transactions that have taken place whereas in this day and age, you think you’d get it by email at least. But the ASX under a previous CEO decided to, sort of, leapfrog one cycle of the technology revolution and go straight to a blockchain solution. That was starting, was I think it was due last year, and it has been pushed back two years. There’s been an awful lot of pushback from market participants, particularly the stock brokers who’re just saying, “look, why are we the first country anywhere to be using Blockchain for such an important piece of infrastructure?” So, it’s a bit of a caution in my mind that Dominic Stevens has seen the writing on the wall and doesn’t want to be CEO of the ASX when the chess system moves to blockchain, but I could be drawing a long bow there. I’m not sure. And they’ve still got a year or two now to get it all sorted out. But I think it’s okay. I think he’s flagged that he’s going, it’s for a reasonable reason; he just wants to retire, he’s been there for a long time and he’s going to hang on until someone replaces him. So, it’s a bit of non-event for me.

Cameron  07:27

“‘Stevens exit may cause some concern, although it is not completely unexpected’ according to Citi Group analyst Nigel Pittaway, adding that ‘the company’s first half result was a small beat to consensus expectations.'” Not sure if it’s related, but the market doesn’t seem to have handled it very well. They’re down about 5%, I think, since he announced it last week.

Tony  07:50

Yes. And, it was our, it was my pick for stock of the week last week. So, the Kynaston kiss of death is alive and well.

Cameron  07:57

Well that’s why. I heard, I got an email from Dominic Stevens saying that he wanted to go out on top. He said, “well if Tony’s picked us as the stock of the week, this is when it’s time to, you know, can’t do any better than that.” Yeah. “Job is done,” you know, “mission accomplished.” Petrol prices are up, Tony. I filled my tank yesterday and it was like close enough to two bucks a litre, and I was like, “that’s, that’s expensive, what the hell’s going on?” And then I did read a story about it, I think it was in the Financial Review today or yesterday, talking about some of the reasons why petrol prices are up, blah, blah, blah, Russia, Ukraine, Russian oil, blah, blah, blah, if the US put sanctions on them what’s going to happen, World War Three, etc, etc. But, also just talking about the trickle through impacts to the economy of petrol prices going up. They also said it had something to do with oil’s not back to its all-time high but the Aussie dollar is low. So, the combination of oil going up, the Aussie dollar going down means the petrol is expensive here and that has trickle on impacts through the economy. Have you had any thoughts about what that means? Do you care? Probably not.

Tony  09:16

Well, I mean, I care in the wider context. I think it’s bad for the economy, because I’ve spoken about this before, I think there’s three important things to middle-class Australia in terms of their wallet. One is petrol prices, because that’s a thing they do every, well, from my Shell experience, every ten days you fill your tank, and if it’s now costing twice as much as it did a little while ago that’s got to hurt from a budgeting point of view. The second one is interest rates rising, probably the biggest cost for every household is their mortgage interest and mortgage repayments every month. So, if they start to go up, which they are, then that’s another blow to people’s spending abilities. The third one is the Australian dollar and it’s a bit of an each way bet, that one, because a low dollar hurts people’s bank balances again because, or their spending again, because we import most of our clothes, white goods, black goods, all those things come from overseas, we have almost no manufacturing base here ourselves. So, we pay more for refrigerators, TVs, clothes, when the Australian dollar is low. That’s the bad side of the Australian dollar being low. The good side, though, is that it’s good for unemployment, or good for employment, because what we do do well in Australia is we export raw commodities. So, it does create more work in the mining industry and the agricultural industry. Both of those are doing really well at the moment, and so they’re employing people. A low dollar, I think, is a net positive for the Australian economy but it does, it does hurt people’s chequebooks. So, yeah, I think we’re not there yet, but we’re starting to get pretty quickly into a world of pain for middle-class Australia and that will hurt our economy.

Cameron  10:48

Good for people like me that earn a big chunk of their income in US dollars. I’m always super happy, except the fact that Chrissy and I are planning on going to the US in a few months. So, we won’t be so happy when we get over there, but, if we buy stuff with the Australian dollars.

Tony  11:04

Yeah, that’s right, the Pacific peso. Other thing to be aware of is the oil price is going up, as you said before, largely driven by geopolitical events, particularly by the threat of war in the Ukraine. Whether it happens or not, just the fact that it’s a threat is driving up the price of oil predominantly because Russia is a big oil exporter and if sanctions are put in place then that’s less oil in the market, and the oil price goes up. And so, this is a bit of, the markets kind of pricing that in at the moment in terms of their probabilities of there being a war. The thing is, though, that’s got to happen and the oil price may have already factored in that happening. So, I think the only thing I’d say is that people need to be quite aware of what happens with the oil price, because it may slip quite quickly. So, have your alerts set if you’re a shareholder of Santos or Beach Energy in particular. They may well come off if Russia pulls back or the sanctions don’t hold, because I noticed too last week that the, or just a couple of days ago, the Chancellor of Germany was in talking with the Ukraine about it all because at this stage I think Germany hasn’t yet bought into the idea of sanctions because they’re a huge importer of Russian oil and gas. So, there’s no guarantee that the sanctions even if there is a war will actually have any sort of practical impact in terms of oil, because Germany will still need it.

Cameron  12:23

Be fun times if the US tells them they can’t buy it and they buy it anyway.

Tony  12:30

Yeah, who knows what’ll happen, but I guess I’m highlighting the fact that this could change quickly and the oil price could drop back again. So, just have your alerts set. Most of our oil and gas stocks are way above their three-point trendlines anyway, so it shouldn’t be a problem but if someone’s bought in recently watch your rule 1s.

Cameron  12:47

Okay, moving on. I had a look at our portfolio, the QAV portfolio yesterday. It’s dropped back a little bit versus the ASX 200 from last week. I think we were doing three, for the financial year that is, I think we were doing three times the ASX 200 for the financial year last week. This week, we’re about two times. So, it’s caught up to us a little bit but we’re still three times the ASX 200 since inception, so it’s on track. It’s doing good.

Tony  13:15

No exactly, and I think we had a good week last week, too. I got the Navexa email which says that our top three performing stocks were ZGL, Zicom Group, up 12.5%; IGL, the IVE Group Limited, up 10%; and KSC, K&S Transport up nearly 8%. So, a lot of good stuff happening.

Cameron  13:34

ZGL finally went up? What? Oh, IGL or ZGL?

Tony  13:40

Both. ZGL went up 12.5%.

Cameron  13:42

What the hell? It was, it’s done nothing for a long time. Oh, look, it’s spiked. Wow. I wonder what that was all about.

Tony  13:51

I couldn’t find anything when I had to look, but I’ve got to expect this because of the results that are about to get announced would be my guess. Certainly, it was for KSC, they came out with a trading update a week or two ago – actually sorry, a little bit more than that, three weeks ago – saying their profit was going to be about 25% up on last year.

Cameron  14:08

I did notice that one of our stock tips last week, I think OEL was last week along with the ANZ, I think OEL was our small cap.

Tony  14:15

Otto Energy, yeah.

Cameron  14:17

It went up 0.01 of a cent which means it jumped like 30% or something like that. Actually, Google Finance was telling me it was up 100%, but I don’t think that’s right. When we recommended it was 1 cent. Oh no, it was 100%. When we were recommending it, it was 1 cent, it jumped up to 2 cents. There you go, 100% on your money if you got in and out of OEL.

Tony  14:44

The other news for the week as well along with oil going up is gold’s going up too. Just being seen as a safe haven in case there is a problem in Europe, and with Bitcoin being so volatile I think people are probably starting to see gold as more of a safe haven than Bitcoin. So, it’s up to, I think it’s, the last time I had a look it was about $1850 US dollars. So, its, yeah, getting back up there again.

Cameron  15:04

Good stuff. What else did you want to talk about? SGF?

Tony  15:08

Yeah, so someone asked a question a couple of shows ago about whether it was worthwhile actually checking for qualified audits in 200 ASX stocks, I think they suggested. And I did notice in the latest buy list that SGF, which is the Star Entertainment Group, so they run the casino in Sydney, they have a qualified audit this time around. And that’s a top 150 stock, so it can happen to big companies.

Cameron  15:30

Hold on, isn’t SGF SG Fleet group?

Tony  15:34

Oh okay, giving you the wrong code, have I? Its Star Entertainment Group is the one I’m thinking of. SGR, my mistake.

Cameron  15:40

SGR. Okay, thanks.

Tony  15:43

Yeah, so the auditors have just – kind of the reverse of the UK – they’ve raised a going concern issue largely because of COVID and the impact it’s had on Star Entertainment Group and their casinos and the, you know, social distancing regulations and all that. So, it’s got a qualified audit. Whether or not that’s realistic given that things are getting back to normal, but who knows what will happen if there’s another variant, but I guess that’s what the auditor is saying is that this business has been through the wars in terms of being shut down and social distancing rules reducing its turnover. And if it happens again, it might be a bad thing for the company.

Cameron  16:18

Well, Crown Casinos, Crown Resorts has just agreed to a $9 billion takeover bid by an American private equity firm, maybe that’s in the future for Star as well.

Tony  16:30

Yeah, quite possibly. In fact, I think at one stage Star actually lobbed a bid for crown. So yeah, there’s certainly room for consolidation in the in the gaming industry in Australia. There are lots of regulation issues. There’s some talk the takeover of Crown may not go ahead for regulatory reasons, it still has to get all the probity checks done and signed off from three state governments. So, it’ll probably go through but it’s by no means a complete 100% certainty at the moment. But yeah, Star Entertainment Group could be next as well.

Cameron  16:58

Well, what else have we got? MAM? Were you saying you don’t know why MAM sorts to the top of the buy list? But it wasn’t at the top of the buy list as far as people are aware, because I sorted it manually down, so.

Tony  17:09

Yeah, okay. I’m using my version of the spreadsheet. Is it happening in the Flitman model? I think you use that, don’t you?

Cameron  17:15

Yeah, I haven’t done the Flitman model this week, so I don’t know.

Tony  17:19

Okay. Yeah, I don’t know, I haven’t been able to fix it. So, Alex who did the download this week highlighted the fact that MAM with a QAV score of 0.10 was coming to the top of our buy list during a sort, and I had a look at it and couldn’t solve it. So, typically when that happens it’s because there’s some kind of formatting issue, and it’s sorting, you know, space 0.10 ahead of 0.10, or whatever the detail is, I’m not sure. So, I haven’t been able to work it out. I’ll keep looking and try and do it, but if anybody out there is better with Excel than I am and they can look at the spreadsheet and know what the problem is, it’d be great to hear. Maybe Brett can give us a hand.

Cameron  17:56

Alright, so if you see MAM turn up at the top of your list when it shouldn’t let us know, particularly if you can work out why. All right, what do you got for your stock of the week, Tony?

Tony  18:06

Yeah, Nufarm, the crop protection and seed business. I spoke about it towards the end of last year in terms of what its underlying commodity chart was turning up. So, it was a buy because of glycophosphate or something similar. But it’s popped up on the buy list again. So, it was on the buy list I think last year, it came off and now it’s turned up again and it’s back on the buy list. It does have a September reporting date, so we’re not getting recent figures at the moment, so the turnarounds largely because of share price which is why it’s come back onto our buy list. But I thought I’d run through it as, as a pulled pork today.

Cameron  18:40

It’s had a great run recently, it was $4.30 on the 24th of January. Currently at $5.51.

Tony  18:48

Yeah, unfortunately, as I said that it went off the buy list during part of that so it’s just come back on now. But I think the thematics are there. It’s a bit of a turnaround stock, this one, and it can be volatile because those underlying chemicals can be volatile. But at the moment it’s supplying to the agricultural sector which is doing really well, both from exports and from local sales, so I think it’s set for a run. But to run through the numbers, you’ll see why I’m saying it’s a rebound. It’s PE is trading at 34 times at the moment, so it’s quite high, but it’s PropCaf, its price to operating cash flow was only around five times. So, it’s obviously, it’s generating lots of cash but it’s not flowing through to the bottom line. But, as we’ve seen with other companies if that top line continues then the bottom line will improve as well, which I think it probably will given that the agricultural sector is so bullish. As I said, it’s a crop protection business, so it makes pesticides, herbicides, that kind of thing. Think Round Up that people may have used in their own their own homes. It also diversified a while ago into a seed business, so it’s also supporting the agricultural industry from sort of cradle to grave is what they’re trying to do. So, that’s the sort of essence of the business. It’s a large company, so it’s ADT is nearly $5 million per day, so that’s going to suit everybody, I think, who is listening to this. Its price is still slightly below its consensus target, so it scores for that, however it’s not a Star Stock at the moment and I imagine that’s because of its low ROE and low earnings it won’t qualify. But, if they do rebound I wouldn’t be surprised if this becomes highly rated by Stock Doctor which improves the score, and that can boost the share price as well as that catches on. The financial health, however, is satisfactory and steady. It gets a point for that. It’s, the price, however, is above IV1 and 2, and I’m using a price of $5.54 which was the price on the weekend when the download was done. I think it’s slightly below that today, but not by much. But it is less than, it’s around about its price to book but definitely less than price to book plus 30%, so it gets a point for that. It is forecast to grow, so by 33%, but with the PE ratio being so high the growth over the PE isn’t scoring above 1.5, so we’re not getting a score point for that. Directors hold 5% of the company which is good, but not 10% which we look for. So, we’re not getting a score for that. On the manual entries, on the manual dollar front, it’s a record low PE from the last three years so it gets a two for that. And it’s also a new upturn since its last results, so it gets a score for that. Equity is a bit bumpy, so it’s not getting a score for continuously increasing equity. Sum all those things up and we get a quality score of 67% and a QAV score of 0.13. So, it’s on the buy list, I think it’s worth a look, and I wouldn’t be surprised given the strength in the agricultural sector if it rebounds from here.

Cameron  21:40

Wow. Well, it’s had a good run of late. I’m just looking at it in Stock Doctor. Okay, it’s been up as high as $10 going back to 2017. Okay.

Tony  21:56

And I think a reason for that is it is very commodity driven, so, and the glycophosphate, the whole suite of those chemicals can be quite volatile. And not just, obviously it’s driven by supply and demand, but it can also be driven by how much is stockpiled as well. So, if a company like Nufarm starts to buy up and fill its warehouses doesn’t matter what happens with the price of glycophosphate if it’s got lots of stock to sell, that’s the price. So, there’s a few variables there, and they’ve been high before but they have come down quickly. So, just be aware.

Cameron  22:27

You know, this one looks like a bit of a falling knife to me over the last three or four years. Sort of been, it’s been sliding downwards since April 2017. Had a nice spike just in the last month, kicked it back up. But, you know, would you buy this with a chart like that?

Tony  22:46

Yes, I would definitely. Again, I kind of think of the three-point trendlines as a range, and if you can see it kind of traded down in a range that had troughs running through, say, from January 18 through maybe October 18, down to about May 19. But it also had a peak to that range as well, you sort of look at May 18 going down through maybe January 19, and then July 19. So, you can see a sort of trough running down and then it went sideways for a bit, and now I think it’s on the up phase again. So, yeah, no I think it’s a classic rebounding sort of graph.

Cameron  23:28

Right. But if we look at sort of, if we go down to its first real big trough May 19 it then rebounded up through to, sort of, October 19 a bit like it’s done recently. But then it, yeah, went sideways as you said, then it came back down and it went up, down up. It sort of seems to be climbing its way back upwards though, doesn’t it, since October 2020?

Tony  23:53

It does, yeah. I think so. But again, you know, no guarantees, it could turn down again. But, it’s a very cyclical business and I think given that the commodity is strong and the sector that it serves is strong I think it should get set up for a rebound.

Cameron  24:06

Interestingly, it doesn’t have a COVID cough. Comes a bit late. But if you look around March 2020 when nearly every other stock I look at completely bottomed out, it didn’t. It actually went up between March 2020 and May 2020, then it dropped after that when we went into lockdowns.

Tony  24:25

Yeah, right. Just thinking about, would wonder if there’s a lag in the ag industry, perhaps.

Cameron  24:31

A lag in the ag.

Tony  24:32

Yeah, it would have been I guess. Oh, I don’t know, did exports continue on unabated during the COVID cough and that year? Probably did?

Cameron  24:40

No idea.

Tony  24:41

Yeah, no idea either.

Cameron  24:43

All right. Thank you for taking us through Nufarm, NUF. Anything else before we get into the Q&A, Tony?

Tony  24:50

Nope, that’s me done. Thank you.

Cameron  24:52

All right. This first question comes from Dave: “hi Cam, question for TK. Say, hypothetically, Tony had inherited some shares in a newish tech stock – let’s call it Afterzip – after the passing of his great-great aunt.” That’d be difficult for you, wouldn’t it, Tony? “At the time he inherited them the shares were just $6, but since then they have rocketed over to $100. The stock is highly regarded in certain circles, even though it has regular capital raisings and has yet to turn a profit. The stocks have not had any QAV Bible reasons to sell since Tony inherited them. Would Tony still be holding them?”

Tony  25:34

Yes, I would. And you’re right, I don’t have any great-great aunts, and I think I’m probably the only person who own shares in my family. So, I’m not expecting any inheritances, unexpected inheritances with people who have share portfolios anytime soon. But to Dave’s point, yes, I would hold it, and I’d just use three-point trendlines to trade it. I’d probably draw a rule 1 at the price when I obtained it – and I’m assuming there’s no tax issues here. Sounds like he’s just using this as an example so we don’t take tax into account, but it can be an issue with inheritances. But yeah. So, yeah, no. And the reason, my logic for that is, if it’s not a three point sell and it’s not a rule one, it’s going up. So, I would just hang on for the ride until it was time to sell and then put that money back into QAV. Because, bear in mind, if the other alternative is that if Dave sold that stock, Afterzip or whatever he called it, there’s a 60% chance you get one that goes up, but there’s a 40% chance you get one that goes down. So, I do have a bit of a bias to holding things, you know, making cases to hold things for as long as possible. I’m still pretty ruthless when it comes time to sell. But as described, I would hold it until it became a rule 1 or three-point trendline sell.

Cameron  26:44

If you inherited it, why is there a rule one?

Tony  26:48

Well, I guess it’s a bit of a, an emotional rule 1. Like, if you, I don’t know, let’s say we put a number on it; say he inherited $100,000 worth of AfterZip. You don’t really want it to go down to 80,000/70,000 or as Afterpay did, all the way down to 30 or 40,000. So, I’m going to rule 1 it based on the price that I received it at and just protect the capital.

Cameron  27:09

Just a line in the sand. Dave continues, “I use this to highlight a broader point. As I see it, there are three things in your control in investing: what to buy, assessed by quality, when to buy, i.e. the buy price, assessed by value, and when to sell, i.e. the sell price assessed by sentiment. What and when to buy is very well served by the QAV checklist system, however, when to sell is nearly entirely sentiment driven. Much like growth investing, and red flags aside, there’s no assessment of whether the company has maintained quality or value. Has Tony ever considered a reverse checklist for selling? Something that identifies that the company is of poor quality or value? Or does the stairs up, lift down analogy mean sentiment is all you should worry about when selling?”

Tony  27:57

First of all, it’s a really good summary of the process, but it’s also a really good question. And I have tried to find another methodology for selling, and listeners to the show might remember I did go all the way to a live test of looking for stocks in my portfolio that had a QAV score that had reduced to 0.05. So, we buy things above 0.10, and so effectively, they were half the hurdle rate for buying something. I ran that for, I don’t know, six months, nine months maybe? And it just didn’t work. It was marginally worse generally than them running with a three-point trendline sentiment, but then it got to the stage where I sold one stock which then went on to have a great run, and I just went “no, let’s just, it’s not worth pursuing.” This was also a question that’s been asked before around, you know, we looked at putting a QAV portfolio into Strawman, and one of the questions Strawman at the time was asking was what do you think the value is, or what’s the target price for this stock? And I really have no idea. I’ve played around with regression to the mean, there’s got to be some kind of regression to the mean involved in selling a stock. Whether it’s what you think is the IV and then if, while it trades below the IV you buy it, and when it trades above it you sell it, that might be the answer. But I’ve known plenty of examples where I’ve bought something and then it just gets bigger and bigger as it climbs up the indexes, as it gets onto more and more fund managers screens, and they’re happily paying prices way above what I’d be paying as a value investor, but they’re just not value investors. They might be index investors, they might be long term buy-and-holds, or whatever. So, there’s a whole broad church of reasons why people buy stocks, and I’ve always struggled to find any sort of logic to when to sell and always found that my assessments of IV have been grey at best, that the market doesn’t work like a spreadsheet when it comes to that and it’s more like a pendulum. So, we’re trying to get on the pendulum when it swings too far to the value end, but, you know, it’s pretty hard to time when it gets too far to the growth end because every time I try to do that it keeps going. Or, you’ve just missed it and it swings all the way back. So, I appreciate the question but I haven’t come up with the answer to that yet, but happy to discuss it further if anyone’s got any ideas.

Cameron  30:07

You know, I guess what Dave seems to be suggesting is that if you identified that the company had gone from high quality, we won’t buy it usually if it ranks poor quality. I have seen a couple of times when stocks had a low-ish quality score but still gets a good QAV score, but it doesn’t seem to happen that often. But, assuming that we bought a company that had a high-quality score and then for some reason it ended up with a poor quality score, if the share price is still going up, we’re not going to sell it, right?

Tony  30:40

Yeah, exactly. So, why would you if it’s still going up? That’s the beauty of sentiment. If once it breaks sentiment, sure, sell it, but that tells you its gonna stop going up by definition.

Cameron  30:49

At the end of the day, we buy a company because it’s passed our metrics, but we sell it based on when we have to.

Tony  30:58

That’s right, too. That’s the other element, is we want to try and hold it for as long as we can, you know, helps maximise-or minimise capital gains tax if that’s more than twelve months. But yeah, ideally, I’d love to have a portfolio which you just set and forget because it’s so far above its sell line.

Cameron  31:13

Yeah, we don’t want to sell, really. Thanks, Dave. Next question is from Mark, “could you please ask Tony why there is no cut off for low quality scores like there is for high price to cash ratios? For example, on the buy list,” he’s talking 7th of Feb, “there are five companies with quality scores less than 60% and one – the ASX – with a quality score of 38%. That’s the one I was thinking of, recently. “My understanding has been that the point of the quality score is to avoid value traps, shares that are cheap for a reason, i.e. they’re shit. A quality score of 38% sounds pretty shit to me. Thanks, Mark.” Then he sent me another email going, “oh my god, I just saw you picked it as your stock of the week!”

Tony  31:57

And it’s down 5%, so Mark’s right. I looked up ASX today, it is a little bit higher than that since its results came out. Now around 46 I think, and I just got an email from Stock Doctor saying they were upgrading its Star Stock rating so it’ll be slightly higher than that. But that aside, I take Mark’s point. We’ve talked about this before but it doesn’t mean we can’t talk about it again, but yeah, generally if you go top-down on the buy list most of the stocks at the top have really good quality scores. It’s only when you get down towards the bottom that you’re getting into smaller quality scores. I’m just looking at the buy list, the latest one. So, for example, at the bottom of the list with a QAV score of 0.10 is MXI, Maxi Parts, which has a quality score of 31%. Even though there are other ones with that same score that have as high as 67%, generally at the bottom you’re getting lower quality scores. If I go to the top of the list and have a look, we’ve got Zicom Group with 64, but then Medusa Mining with 92, GWR Group with 100% quality score, Phoenix Resources 82, Axiom Properties has come on with 108%, Grange Resources 110, etc., etc. So, they generally do sort of fall, the better-quality scores fall to the top of the list. I think that, you know, without trying to force it and put a cut off score, and I used to use a cut off score of 75% for quality but I did find that I was missing out on the value stocks who had lower quality scores but were still being really good investments because they were going up because they were cheap. So, it’s where you draw the line. Now, if we drew the line, like the QAV score of 0.10 was really just a sort of wet finger in the air in terms of my experience. I could easily have said let’s make the QAV score cut off 0.15, in which case you’re probably going to have more, you’re going to have stocks with higher quality scores in the bottom of the list. So, I think that’s the reason. I have played with putting a threshold on the quality score before but then I was always kicking myself that one that fell just below that was doing really well, so that’s why I haven’t done it. It’s a good question, it’s probably something I can flick to Dylan and see if he can come up with a cut off score for quality that maximises our return over the last ten years. Good question.

Cameron  34:06

The way I think of it is that, you know, we’re looking for that combination of quality and value, and you’ve fudged together a way of measuring the combination of those two things but it’s a guesstimate. Is that the right word? No. Like, it’s you’ve drawn a line in the sand somewhere based on all of the data that we throw in. And ASX was only our large cap stock of the week last week because we had already picked everything else that was above it, we had to go right down to the bottom of the list to find something we hadn’t recommended yet.

Tony  34:39

Yeah, and last week the problem was everything was a Josephine and ASX was about the only thing that wasn’t a Josephine.

Cameron  34:44

That’s right. Yeah. Thanks, Mark. James asks, “has TK done any analysis of his average holding period using the QAV method, or broader analysis of how often his portfolio gets turned over? Trying to get a sense of what is normal,” I told James I think we’ve spoken about this a few times, and I think from memory you’ve said that you turn over roughly about 60% of your portfolio on an average year. Is that right?

Tony  35:12

Yeah, that’s right. I’m pretty sure it’s probably average. I did pull out a year’s worth of transactions a year or two ago once we started QAV and it was 60% turnover in a year. So, I think that was probably about right.

Cameron  35:24

And your average holding period?

Tony  35:26

Haven’t worked that out, but I’m guessing if you’re turning over 60% it’s probably going to be six-twelve months. Yeah, you’re turning half over every year, roughly. So, yeah, I’d say, again, I tend to try and hold on to things. So yeah, I’d say probably nine months, but that’s just a bit of a guess. Try and get to twelve because we get CGT relief when that happens, so that’s always in the back of my mind.

Cameron  35:49

So, about 60% on average a year, and most of that happens around reporting season in a normal year?

Tony  35:58

Yeah, definitely. This and September are probably the two most volatile times for us during the year.

Cameron  36:04

Outside of things like the GFC or the COVID cough, all that kind of stuff.

Tony  36:10

Exactly.

Cameron  36:11

Which happen on average, what, every couple of years? Major crisis?

Tony  36:16

Yep. So, well, well, the COVID cough probably every five years when you get a 30% or more correction, but you do get 10% corrections every, probably, eighteen months to two years. But they usually aren’t enough to trigger any sort of massive turnover in the portfolio.

Cameron  36:32

Hope that helps, James. Next question is from Andrew: “I would love TK’s take on how I implement rule 1. When I buy a share I automatically put in a stop loss of 10% that stays in place for thirty days. After that, I have a trailing stop loss based on closing prices only of 10% if higher than the original stop loss. As it is trailing, the SL [stop loss] can only move up. Once the share is a 10% profit, that means the stop losses break even. My stop loss does not go higher than that. My exits are then either breakeven or one of the other TK rules; 3PTL, falling knife, bad news. My approach is easy to implement as my customised spreadsheet,” that’s the AF spreadsheet, this is AF who’s asking this question, “flags which stop losses to adjust and by how much. Of course, my spreadsheet has the thirty days and 10% as parameters rather than being hard coded. Is this in keeping with how TK believes rule 1 should work? Are thirty days and 10% sensible? Cheers, AF.”

Tony  37:38

That’s slightly different to how I do it, I just note and raise an alert in Stock Doctor for what the price is that’s 10% below what I paid for the stock. And then, yeah, just set and forget. I don’t try and adjusted back to break even over time. But, it’s an interesting point Andrew makes, that if the stock does go up do your raise your stop loss? I’d be interested in his results and see how it goes and compares to what I do. The rule 1 alert I put in is there just to give me some wriggle room if the share price goes up and comes back, but stops me from losing more than 90% of my original investment which protects capital. Interesting comment, interesting point, though. I know Colin Nicholson used to do that, he used the raise his stop losses all the time as the share price went up. So, he was always protecting not only his original investment, but, you know, what he’d made in profits. But then you get into that sort of discussion we had last week about do you use a long term, three-point trendline even if the price is way above it, or do you sort of use a hug line and try and hug the upward slope to protect profits? I think if you raise the stop loss too much – and Andrew isn’t suggesting that, he’s just saying bring it back to break even after the share price rises 10% – I think the higher you make that stop loss, the more volatile your portfolio is going to be.

Cameron  38:54

And we’ve talked about this a lot in recent shows.

Tony  38:57

Yeah. Probably the last month or so has been a good example of what I do and how it works. Like, for example, ASX is only like a buck or two above my original purchase price so if it goes much lower I’ll be selling, but I would have sold out a little bit higher, well 9% higher, I guess, if I use the Andrew Flitman stop loss procedure, because the price went up and has come back. But, I find it does give you just a little bit more wiggle room to let things settle and recover again if you make it 10% below your purchase price.

Cameron  39:26

But Andrew is suggesting that after the share price goes up, he just has breakeven as his stop loss rather than buy price less 10%.

Tony  39:33

Yeah, let’s see how it goes, Andrew. If it works, great, we can change what I do.

Cameron  39:37

Run it for six months and report back, Andrew, please.

Tony  39:40

Yeah, thanks.

Cameron  39:41

Finally, the most important question came in from Luke The Gibonator: “what brand of golf balls does Tony prefer to use? I’m a bit of a Srixon soft feel guy myself.” Oh, and what kind of golf balls do you use, Luke? Boom, boom. I have no idea what a Srixon is.

Tony  40:01

It’s a brand of golf ball.

Cameron  40:03

Seeing as the QAV, official QAV, golf balls are the Callaway number ones, I’m hoping you say that.

Tony  40:09

Yeah, no it is. I generally use Callaway, so either chrome soft or super soft, and occasionally Titleist Pro V1s – generally they’re given to me as presents, but that’s fine. They’re the probably three I use the most. I have used Srixon’s soft feel before and they’re, they’re pretty good too. Just depends on how I’m playing and what the conditions are. So, the super softs and the Srixon soft feels I find work better in the wind and then the sort of harder, more sort of pro golfer like balls like your Titleist Pro V1s and Callaway chrome softs spin a lot more. So, if you’re playing well, and there’s not too much when they generally work better because they spin more around the greens. But if you’re, like I do a lot, playing in high winds they’re going to spin sideways more than they spin forward. So, you lose a lot. Yeah, Callaway’s for me.

Cameron  40:58

And speaking of golf, I understand you took Taylor out, my son Taylor out for a hit yesterday.

Tony  41:05

Yeah. So, Taylor and I are involved in Charity Exchange, our raffle business, and one of the charities we support, Sporting Chance, had a golf day at Metropolitan yesterday which is one of the, I guess, top ten, maybe even top five courses in Australia. And it was a lovely day. And Taylor came out and played left handed beginner golf with us. Good fun.

Cameron  41:26

What was his score?

Tony  41:27

Oh, we didn’t score. We were playing what was called an Ambrose, so you always took the best shot and played from there. But it was good. Good day, good fun. Good to have the boys down, that was good fun, and catch up on their gossip and what they were up to in the big city. They were having fun, mostly at night, not so much during the day. But yeah, it was great. Really good, thanks.

Cameron  41:45

Sleeping during the day and partying every night.

Tony  41:48

Yeah. But thanks very much, Luke, for a golf question. That’s great. And of course, the classic – Luke will appreciate this – the classic answer to a question of what golf balls you’d like to play is a box of provisional balls, because they always seem to go better than the first shot. But you can’t buy those, of course.

Cameron  42:04

Alright, well, that’s all the questions for this week. So, it’s a shorter show than it has been recently, which means we can talk about TV. I watched the documentary a couple of days ago, over the weekend, Django & Django. It’s an Italian documentary, it’s just come out, I think it’s on Netflix. Basically, it’s Quentin Tarantino talking about the spaghetti westerns of Sergio Corbucci, who in Once Upon a Time in Hollywood is the director that Leonardo DiCaprio’s character Rick, when his careers sort of on the downslope, Al Pacino organises for him to go to Italy and make some films with Sergio Corbucci. So, yeah, Tarantino did this big documentary on the films of Sergio Corbucci, and if you love spaghetti westerns, or if you just love hearing Tarantino talk about film, which I do – I could listen to Tarantino talk about movies all day long. Highly enjoyable, highly enjoyable documentary, highly recommended.

Tony  43:07

Oh, cool. Well I’ll look it up. Can you name any of the movies of Sergio Corbucci that people might know?

Cameron  43:14

Well, the most famous one is there in the title: Django. The original Django, 1966, starring Franco Nero, which was sort of you know, Tarantino named his film based on that. And Franco Nero actually has a cameo with Jamie Foxx in Django – whatever his film was called – Django…

Cameron  43:33

Unchained.

Cameron  43:34

Unchained? I was going to go Unbent. He also did The Great Silence, La Grande Silenzio, and he did a bunch of, like, Bud Spencer Terence Hill films.

Tony  43:46

Oh, they’re my favourite.

Cameron  43:48

Yeah, I downloaded a couple of those to rewatch. I haven’t seen those – my dad used to take me to the driving in the 70s and early 80s as a kid and we’d see those.

Tony  43:56

Me too. The Trinity movies. They were great.

Cameron  43:59

Yeah, “they call me Trinity.” Yeah, Trinity Rides Again or something.

Tony  44:03

Is Still My Name, yeah.

Cameron  44:05

Yeah, I think we used to see them on double bills at the drive-in in Bundaberg with a Bruce Lee or a Chuck Norris film or something like that. But I didn’t realise until I looked him up again this week that they were actually Italians, those guys. Because as a kid, I mean, it was all subtitled probably or dubbed or whatever and I didn’t pick it up. Dubbed.

Tony  44:24

It was terribly, terribly dubbed.

Cameron  44:26

I didn’t realise they were Italians and he just said, “oh, you need English sounding names.” So, anyway, check that out. What have you been, what have you been watching lately, Tony, that’s good?

Tony  44:37

I’ve been addicted to The Book of Boba Fett. It’s fantastic. On Disney+. It’s only seven episodes.

Cameron  44:45

Really surprised that you’re into The Book of Boba Fett.

Tony  44:48

Are you being sarcastic, are you?

Cameron  44:50

No, I’m surprised.

Tony  44:51

Oh, really? Oh, it’s brilliant. Oh Temuera Morrison, a great actor anyway. I mean, it’s back in the Star Wars universe that I grew up with and love, you know. If people remember Boba Fett Dies at the end of The Return of the Jedi, or during the return of the Jedi.

Cameron  45:06

Yeah, he’s in the mouth of the Sarlacc when he gets knocked off of Jabba’s ship by Han Solo. How does he survive that?

Tony  45:14

That’s where it starts. So, he wakes up in the belly of the sand worm and fights his way out. The rest of the series is set on Tatooine mainly. So, he gets picked over by the Jawas, gets rescued by the Tusken raiders and gets accepted into their culture, and then they’re destroyed by – what do they call them? Nicko bikers? And it just goes on and on from there, how he sorts of works from being almost naked in a desert and left for dead through to being the biggest crime lord in Mos Eisley. It’s really good, just a great series and well made. It’s a, Jon Favreau wrote it and Robert Rodriguez produces and directs a couple of the episodes. The visuals are great, the soundtracks brilliant, and at the end of every episode it’s worth waiting for the credits because they, they run through all the storyboard paintings. Which is how I remember first coming across the original Star Wars film, was the artwork came out first and it just brings all that back too, it’s just great.

Cameron  46:09

Have you watched the Mandalorian?

Tony  46:11

I watched the first series and didn’t get into it that much. And the Mandalorian crosses over with this one as well.

Cameron  46:16

I saw the episode of this one where they brought back Luke, and it was amazing. I saw the one that his cameo, his appearance in Mandalorian, which was great, but it was also a little bit weird, sort of the CG that they did. But the new one that they did, I know that they hired the guy, the special effects artist on YouTube who did the face-off stuff.

Tony  46:36

Deep fakes.

Cameron  46:37

Deep fake, yeah. Apparently, they hired him to do it. It was much better, it was like stunningly good. And I read somewhere that his voice was done by AI. That’s insane.

Tony  46:47

It is, isn’t it? Given that Mark Hamill’s around and could have done it. And he’s actually in the credits, so I’m not sure, he may have been involved somehow. But yeah, it was a real surprise seeing a young Luke back in the, on the screen again. It was great.

Cameron  46:59

Well, your problem is that Mark Hamill today sounds like this. *uses a gruff voice*

Tony  47:03

True.

Cameron  47:05

He doesn’t sound like twenty-six year old Mark Hamill anymore.

Tony  47:08

Sounds like the Joker on Batman.

Cameron  47:09

Yeah, he does. So yeah, yeah, it was pretty cool seeing Luke back in it again. You’ve got to wonder how far are we from them just being able to do a real sequel to Return of the Jedi, with all of the original actors looking as young as they were, just doing it all CG?

Tony  47:29

Well, exactly. I mean, how far are we from not needing actors?

Cameron  47:32

Yeah.

Tony  47:33

They don’t have to age anymore, do they?

Cameron  47:34

Don’t tell Hunter that.

Tony  47:38

He should practice his deep fake skills, maybe.

Cameron  47:42

He’s practising not talking to his father skills at the moment. He hasn’t spoken to me for a month. Pissed at me. Alright. Well, that’s, that’s the show for this week, Tony. Thank you for your time, as always. Any timeline on when you’re heading home?

Tony  47:57

Yeah, probably in a couple of weeks. So, just waiting to find out, my father in law turns ninety on the third of March, and they’re talking about having a dinner for him the Saturday before, which will be Saturday week. So, after that, I would think.

Cameron  48:10

Good thing the Christmas present I sent you didn’t have a short shelf life.

Tony  48:16

Oh well, thank you. I’m looking forward to getting back there and opening up all those Christmas presents.

Cameron  48:22

Good stuff. Well, I’m looking forward to coming down to Sydney and catching up with the folks down there at some point. We should do that when you get back, maybe, do a bit of a Sydney event after things are back to some semblance of normality.

Tony  48:35

Yeah, hopefully its not too far away.

Cameron  48:37

We’re still wearing masks – Chrissy and I are anyway, everywhere we go here, when we go to Kung Fu. We’re the only people wearing masks, pretty much, but we’re still hardcore about it. Surprisingly, schools been back for a week and a half and we haven’t got COVID yet. I thought we’d get it within the first day. Fox was back at his hippie school where half the families there are anti-vaxxers.

Tony  48:58

Yeah, you’re lucky because there was a bump in the numbers when school went back, but doesn’t seem to have gone anywhere, which is good. But anyway, Taylor asked me yesterday if I was still COVID paranoid. Not really, but if I’ve got the resources to avoid it I’m going to use it. I’m not going to go and dive back into it, so.

Cameron  49:16

I’m COVID paranoid for you. I don’t want you to get it.

Tony  49:20

Well, did you see that there was an article in the Fin today about a new study that came out from the UK, that people are developing heart problems after getting COVID?

Cameron  49:30

One of the long COVID symptoms?

Tony  49:31

Yeah, part of the long tail.

Cameron  49:34

Ah, yeah that’s what I worry about the most. Foggy brain syndrome and who knows what else we’ll end up tracking back to long COVID within a few years.

Tony  49:44

Yeah, exactly. Anyway, so I think a couple of weeks is the short answer. Three at the most.

Cameron  49:50

Alright.

Tony  49:51

Four, maybe four. It’s so nice down here, Cam, you should come down. It’s just brilliant. I’m looking out the window now, clear blue skies, 23 degrees. Just wonderful.

Cameron  50:03

Yeah, well, don’t tempt me. Alright, thanks mate. Cheers.

Tony  50:09

Thanks mate, bye.

Cameron  50:14

The QAV Podcast is a production of space craft publishing propriety limited authorised representative of AFSL 520442 AFS representative number 001292718. Please don’t make any investment decisions based solely on listening to this podcast this is presented as general advice only not personal financial advice. We don’t know your personal financial circumstances. Please see a financial planner before making any investment decisions.