QAV Club 509

Cameron  00:00

Here we go. Welcome to QAV episode 509, TK. Where are you on this lovely Tuesday 8th of March 2022?

Tony  00:16

I’m in southwest Sydney, Cam.

Cameron  00:18

Southwest Sydney?

Tony  00:20

Otherwise known as Wagga.

Cameron  00:23

Wagga Wagga Wagga.

Tony  00:24

Wagga Wagga Wagga, yeah.

Cameron  00:26

How’s the weather in Wagga? Are you getting the Sydney rain there?

Tony  00:29

No, Wagga’s beautiful. It’s a bit overcast today, but we’ve had 30-degree days, sunny days for the last week. It’s been good.

Cameron  00:38

Well, that’s good. Golfing and you’re heading back to Sydney.

Tony  00:43

Tomorrow.

Cameron  00:44

Tomorrow, right?

Tony  00:45

Yeah. Yep. Back tomorrow night. While I’m here, it’s been good to be away. It’s been so wet.

Cameron  00:52

Yeah.

Tony  00:53

Fourteen days of straight rain. 140 mils today, I think they were saying. It’s just incredible.

Cameron  01:01

Lots of damage like there was up here?

Tony  01:02

From what I can… maybe not as bad. I don’t think there’s been as-the flooding hasn’t been as heavy like it is around the Brisbane River, but there’s been evacuations from Hawkesbury and down south — the Georges, I think. So, yeah, there’s certainly been something. Probably not as bad as Brisbane, though.

Cameron  01:19

Hmm. Well, we send all of our best wishes to everyone in Sydney. Hope you’re all dry and safe, staying out of it. Well, it’s been a big week in the markets, Tony, yet again, with all of the stuff going on in Ukraine and all of the other stuff that we were still coping with before that. On the, I guess the positive side of it, if it’s positive, is oil prices are up; gold is up. I read this article in the Financial Review saying that platinum was going to rise, “Return of war reignites demand for precious metals.” Did you see that story?

Tony  01:57

I did, yeah. Yeah, it’s got to do with how much Russia supplies the world and whether the world actually cuts it off or not. I understand what’s happening with oil, but it’s a bit of an overreaction I think, too. I think oil will come back down a bit because Russia does have 7% of the world’s supply, but not everyone is obeying the sanctions. But that seems to be the hypocritical part of all this. If you’re Germany and you still need gas you’re still taking gas from Russia, even though you’re supplying arms to the Ukraine. It’s a bit circular. So, I think that’s still the case, though. Even though Russia supplies the world was 7%, it’s probably not all of 7% that’s been cut off. And, with the oil price rising, I mean, it’s probably in that article, actually, the old saying that the best way to lower oil prices is to raise all prices, because as soon as it becomes such an attractive thing to sell all the marginal producers come back into the market. That’s particularly happening in the US where the shale oil producers have just been sitting in care and maintenance, and they’re all now fired up again. I think I read last week that the US has become a net exporter of oil again, since the Ukraine war. So, that, I mean, those couple of things will probably start to bring the oil price down again, but it’s going to be sensitive towards the news. So, anything that happens in Europe that wasn’t forecast or looks bad is probably going to drive the price up again.

Cameron  03:33

Wow. So, they managed to get Russia to invade Ukraine and now the American oil producers are doing well. Wow. Cui bono, Tony, cui bono.

Tony  03:46

I don’t think it’s that well-orchestrated, but who knows? And as for the other ones, platinum and I think nickel is another one, some of the minerals that are used for producing chips, etc., Russia is a big producer of those. So, their prices are sky rocketing.

Cameron  04:03

I read Ukraine is a big producer of those sorts of things. Chip, stuff that gets used in chip manufacturing. So, yeah, prices of all those things are gonna go up they’re saying; platinum, etc. So, Zimplats, our gold companies, our oil companies. How’s Santos doing this week? Oh, no, they’re down. Down 3.5% today, Santos. But, they had a good run.

Tony  04:32

Yeah, a lot of stocks have come off. Yeah. Yeah, I think the oil price did come off a little bit overnight, and you know, the echo chamber’s taking over a little bit in the US where they’re trying to forecast whether a rising oil price will make interest rates rise or make interest rates fall, and what’s going to happen in terms of the economy? Is it going to be a good thing or a bad thing? Is it going to be a recession? So, there’s a lot of volatility going on at the moment, too.

Cameron  05:00

Well, as QAV subscribers know, we just play it day by day. We’re reactive, right? We’re not trying to forecast.

Tony  05:09

Yeah. And that’s, that’s a good point. I mean, I was thinking about that just recently. I was listening to some article or listening to a TV commentator or a podcast, I can’t recall where it was, about how this is the right time to buy into gold when the world’s uncertain and the VIX indicator is up. And there’s a, you know, uncertainty about when the Ukraine war will finish. That’s not how we invest, though; like, we’re not in gold because we forecast those things were going to happen, we’re in gold because it was unloved and the price was really low on the gold producers. And we just wait for the regression to the mean, we just wait for things to happen which focus a light back onto the sector that we’re invested in. So, it’s got nothing to do with the war in Ukraine that we bought gold. We bought it a year ago or longer. It just so happens that we, you know, well perhaps unfortunately, we benefit from it, but — because of the reasons for the benefit — but we benefit.

Cameron  06:03

So, we profited from the war.

Tony  06:05

Yeah.

Cameron  06:07

I wondered about all those trips you’ve been doing to Russia lately, what that was all about. Cape Schanck, he said. He said Moscow, Cape Schanck, Moscow’s where he’s been. Yeah, we don’t buy things because we think they’re going to go up, we buy things because they’re unloved and just wait for the market to come back around.

Tony  06:28

Yeah, exactly. Well, we do think they’re gonna go up on average, but we we don’t predict when or what’s gonna cause it.

Cameron  06:34

Yeah.

Tony  06:34

And I certainly wouldn’t reposition the portfolio because of some macro forecast. It’s just, yeah, the system just churns on.

Cameron  06:41

Yeah, we believe that if it’s a profitable, well run business and it’s undervalued, there’ll be regression to the mean and we’ll take advantage of that.

Tony  06:50

Correct.

Cameron  06:51

Okay, so speaking of, I don’t know, something not going well. I got this one stock in my portfolio, MaxiPARTS, MXI, trip the sell alert in Stock Doctor yesterday, Monday. Brettelator said the sell price was $2.51 when I checked, and the price was $2.33 at the time. I think now it’s down to $2.20 when I looked earlier today, it’s kept falling-or $2.16 now, it’s down 11.5% today. As is Lindsay, oh my god, it is blood on the streets today. It’s still up, well it was yesterday, up 40% since I bought it, but they paid a dividend or a cash sort of thing — 62.5 cents per share back in December, fully franked. But I wasn’t sure, do I take that off the sell price? And is my sell price really then $1.88, or should I be selling? I’m not exactly sure how long I keep factoring that dividend or whatever it is back into it.

Tony  07:59

Yeah. So, from memory that was a special dividend that happened because they sold off a part of their business, and then they returned part of the capital at least to the shareholders. So, that’s why that happened. But, I treat it like any other dividend, and certainly there are lots of companies at the moment in my portfolio which have gone ex-dividend and the shares have dropped. So, it’s the same thing. So, basically, my rule of thumb is that if a share price has crossed the line –a three-point sell line or a rule one price — I’ll look to see if it’s ex-dividend and then I look to see whether the dividends been received-or paid, as they say. But in between, I’ll add the grossed-up value of that dividend back to the share price, which usually puts it above the sell line. I’m not sure about Maxi, but in MaxiPARTS’ case that special dividend was paid on Christmas Eve, from memory, the 24th of December. So, it’s no longer part of your thinking. Once it’s paid, it’s out. I mean, the way I look at it is that if I was a new investor in MaxiPARTS, I wouldn’t take the fact that there was a sale of a business unit last year and then a return of capital to the currently invested at the time into account. I’m looking at MaxiPARTS now and going forward. And so, once I’ve received the value of that return of capital, then I sort of flip over to being of the viewpoint of a new investor; on buying the shares based on their current valuation while taking into account returns that happened in the past.

Cameron  09:35

Right, so I should sell it then.

Tony  09:37

Yeah, you should.

Cameron  09:38

So, let me ask you about ANZ, then, because I sent you an email last night: I got a sell alert for ANZ, which is in the QAV portfolio, and you sent me a reply saying they’ve gone ex-dividend but as far as I can tell in Stock Doctor, they went ex-div on the 8th of November and paid it on the 16th.

Tony  09:59

Oh, okay. Sorry. There were two stocks you sent through, I just checked the first one. What was the other one?

Cameron  10:04

CGF was the other one. CGF I think isn’t paid yet.

Tony  10:08

Right, yeah. So, I looked at-to be honest, when you sent through that question, I looked at the Navexa portfolio and they were both above their rule 1 sell lines. I knew CGF had gone ex-dividend, so if ANZ paid at the end of last year, you wouldn’t take it into account, but for CGF you do.

Cameron  10:24

So, the rule then is once it’s been paid we can stop grossing it up.

Tony  10:30

Yeah. So, do you want me to walkthrough it? Is that helpful?

Cameron  10:33

Yeah, we’ve done it before, but it’s always good. I find it, for some reason, this doesn’t stick in my brain very well. And I know we had a couple of questions about it on the Facebook group this week, too, so I know I’m not the only one.

Tony  10:42

Yeah, okay. Well, let’s look at Challenger, CGF. So, current price of $6.32, which is the 8th of March, and I’m using Stock Doctor to look at this. So, if you look at the tabs across the top, so the ones that sort of run in the second row, so, there’s the nine golden rules, the financial statements, health ratios, etc., the corporate details and shareholders. Next to shareholders is DIV, divs, and I open that, and I just scroll down to the table of when dividends were issued and paid. So, in this case, Challenger had an interim dividend that went ex. So, 24th of February 2022 was the last date that you can become a shareholder and still be entitled to that dividend. So, anyone who bought 25th of February and after don’t get the dividend payment, but if you’re a shareholder before you do, and they pay that dividend on the 22nd of March, so it takes roughly a month in this case to receive the funds. So, I can continue to count that back into the share price; so, in this case, the dividend per share was 11.5 cents, and I normally gross it up. You can see in Stock Doctor, again, that this was franked, so that means that we can add back the tax that’s been paid by the company. And to do that, we just divide by 0.7 because the company’s tax rate is 30%. And it doesn’t work it out for you in Stock Doctor, unfortunately, but you can just gross it up quickly. So, 11.5, so I’m getting a gross value of 16.42 cents. So, that’s the value to me if I can claim the franking credit. If you can’t claim the franking credit, for example overseas investors can’t claim Australian franking credits, in some cases a family trust can’t claim a franking credit, so there’s a couple of cases where they don’t but most people can take that as a credit off their tax return. So, I’m adding the 16 odd cents back to the current share price, and then I’m seeing if that is above the three-point sell line. And I do that until I get the money into my account on the 22nd of March this year.

Cameron  12:56

Right. Thanks. I’m gonna have to get the transcription of that next week and put it into the Bible so I don’t have to ask you another time. All right. Moving right along. Tech pipe dreams. Oh, I like this story. So, all those tech stocks that over the last couple of years, all of the analysts out there have been saying “no, look, here’s how you, here’s how you work out the value of a tech stock. It’s based on this fancy hyped up internet metric or that fancy hyped up internet metric….” Then I read in the Financial Review this week “Aussie investors no longer buying tech pipe dreams.” Say what? Pipe dreams? I thought this was based around really clever thinking that no one could explain to us in terms that we can understand. Pipe Dreams now. Oh, I’m shocked, shocked to find pipe dreams going on in this establishment, Tony.

Tony  13:57

Yeah, it’s incredible how they turn, isn’t it? Like, wasn’t too long ago they were talking about how this time it’s different, everything’s changed. If you get on the buy now, pay later bandwagon, you’re a fool.

Cameron  14:11

Yeah. Its interest rates are always going to be low, nothing’s ever going to change, this is the new world. Hold on, didn’t we, didn’t we have somebody on the show once upon a time that said something like that? Here it is… ”Every time, it’s always different, Tony, it’s never the same.” [Alan Kohler]

Cameron  14:28

Thank you, Alan Kohler. Never get tired of playing that. Then we would always say “I don’t believe those figures. Please explain.” [Pauline Hanson]

Cameron  14:41

And nobody ever could.

Tony  14:43

Well, that’s the thing, isn’t it? I mean, isn’t that just the basic rule of life? If someone’s trying to sell you something that you can’t understand and they can’t explain, why would you buy it?

Cameron  14:56

Well… I mean, like, it’s one of these things where I guess all of us — I don’t know about you, but I think most of us mere mortals — do sometimes feel like, maybe I’m just dumb. I’m not getting this, like there’s all this… Maybe it’s just this thing that I don’t understand. It’s like advanced calculus, I just don’t understand it. I should just do it. All these other people seem convinced, they must be right. Like all the, when all the fundies are talking about — fund managers, that is — and all the tech journalists are talking about it, and Rudy’s talking about it, and everyone’s talking about it, eventually, you know, the pressure is just to capitulate and go, “okay, well, obviously, I’m an idiot.” And that’s one of the reasons I’m so grateful for QAV, is I don’t have to listen to any of that stuff. I go, listen, if it doesn’t fit into the QAV framework, I don’t need to pay attention to it.

Tony  15:45

And it’s not just that, it’s like, it’s all the Kahneman behavioural kicks and quirks that affect us that comes into play; like the fear of missing out, or keeping up with the Joneses and all those kinds of things that go into that as well.

Cameron  15:59

Yeah. So, tech pipe dreams, remember that. Like, I have to laugh, like, you know, I’ve been listening to you on the show for three years now. Every time we talked about tech stocks going, “yeah,” you would always say “yeah, but see,” what do you say? If history doesn’t rhyme-“doesn’t repeat, but it rhymes”, and, “I’ve seen this before,” and “what happens eventually is interest rates go up, inflation goes up, interest rates go up, and then these tech stocks will crash.” And everyone’s like, “no, you’re an idiot.” And here we are, they’re all crashing and everyone’s going, “oh, look, inflation’s going up, interest rates are gonna go up, these tech stocks aren’t any good.”

Tony  16:40

And you know what, I don’t get any schadenfreude from all that because people are losing money and that’s never good. I’d rather, you know, I’d rather see them invest logically and simply and have a system and stay the course and keep their money safe than to basically go to the casino. And on the other hand, I think there’s a room for a lot of these companies in terms of innovation. You know, I love my Apple iPhone, I love my Apple laptop, I use Facebook and all that kind of stuff. But it just gets skewed by human nature, I guess, and people who exploit that human nature…

Cameron  17:17

Yeah.

Tony  17:17

That these things get out of control.

Cameron  17:20

Well, that’s it, right? And we’ve talked about this a lot over the years, but it’s this, there’s a whole industry out there to take money out of the pockets of punters by hyping shit up, right? It’s, they’re the ones that make all the money out of this. It’s the people selling the picks and the shovels, you know, the people selling the, I dunno, the journalists and the brokers and the apps, the FinTech apps, and you know, all of these people that get behind them.

Tony  17:49

No, exactly.

Cameron  17:51

Hype up these things.

Tony  17:52

Yeah, including-I’m not, I don’t know what Alan Kohler thinks about this really, or if he’s hyping or not, but yeah, he benefits from the “you beaut” stories about people who struck it rich or people who’ve got a great new way of doing something. That’s just grist for the mill. But they are, they’re bloody coat lifters, Cam, they just go around picking topics.

Cameron  18:13

Coat lifters? Yeah, and that’s, you know, we’re part of that thing as well. We talk about this stuff. But, you know, we’re telling people the boring story always on this. It’s like, you’re always like “no, no, no, no, no,” just stick with the tried and true principles that the Godfathers taught us, Buffett and Munger, Ben Graham, basic principles never change. What was that quote I had from Munger on last week’s show? I think: “buying good quality things at a discount is never going to go out of fashion.”

Tony  18:51

Correct, and people do that every day in their normal lives until they get in front of a stock market screen. And then they go crazy. No one goes to Woolworths and says “I’ll pay you ten times that price, that’s too cheap.” They look to try and buy cheaply.

Cameron  19:08

Yeah, they shop around. But you know, I think most of us — for me, and I know, you know, a lot of our QAV club members — until you discover QAV and you learn some fundamentals, all you really have to go on is what you’re hearing about in the media, what you’re reading about, what people are telling you, and it’s all very overwhelming and confusing.

Tony  19:27

And you know, what, Cam? I also think about this too, it’s like, we do take subscription money from our listeners, but it only lasts as long as they make money, and so our system has to stand up. And so, I’m quite comfortable with that. That’s a decent transaction. But it’s all these other people who are out there getting paid to speak, getting paid to hype, getting their fees on transactions, they’re the ones who are stealing from the system, really. Because the hardest thing in the world in the financial industry is to have long term good returns, consistent returns. So, I don’t have a problem charging to teach people this, but that’s the reason why there aren’t many other people doing it, because it’s so bloody hard

Cameron  20:08

Doing it? Yeah.

Tony  20:09

Well, doing what we do.

Cameron  20:10

Yeah. Speaking of hard, for QAV club members out there, don’t forget if you haven’t already to add the new filter to your list of Stock Doctor filter. The new “consensus target date” we have to add to our Stock Doctor filters, it’s been factored in to the AF model already. Thank you to Andrew Flitman, for his wonderful work on that, as always. And I guess you’ll get around to doing it on yours when you get a chance?

Tony  20:42

Yeah, I started doing it today, but I haven’t finished it yet. So, just be careful, people, if you’re using my version of the spreadsheet, I’ll let you know when a consensus target date can be added but up until then use the current filter.

Cameron  20:55

Right. It won’t matter, right? It’ll just put another column of data in the download tab.

Tony  20:59

Yeah, but when you load it in your spreadsheet, it’ll throw the columns out.

Cameron  21:04

Oh, okay. Don’t add it then, until Tony does the update. As we talked about last week, it shouldn’t be dramatically affecting the results in the sheet, but, so it’s nothing to panic about.

Tony  21:18

No. I think Andrew said that, too, didn’t he? When he clicked over on his it didn’t make much difference.

Cameron  21:24

Yeah. But you know, makes us as accurate as possible.

Tony  21:28

Correct. Yeah, we’ll get it fixed up. Just having a bit of the usual problems, or not the usual problems, my lack of Excel knowledge has been tested in terms of subtracting one date from the other in different formats at the moment. So, that’s what’s slowing me down, but I’ll get it worked out.

Cameron  21:42

The last thing I had to talk about in news was, I just wanted to thank everybody that has sent in contributions for Dennis, our editor in Ukraine. I know I’ve given people on the Facebook page an update but I know that not everyone’s on that. So, for people who are listening for the first time, our regular editor for the last six months, this wonderful bloke called Dennis, he’s lived in Kharkiv in Ukraine, the city that’s right next to the Russian border, they’ve been hit pretty hard. He and his family went underground, as did everyone in Kharkiv when the attack started, went into bunkers. Fortunately, they were in bunkers when their house was hit by a missile and destroyed, and they’re now in a different city and trying to get out of the country into Poland. But we did a bit of a collection, and some people, some of the listeners — you know who you are — were very generous, and I forwarded all that money on to Dennis last week. He was blown away, to say the least, at the generosity of a bunch of Aussies that didn’t even know he existed a week before that because we never talk about him. I’ve just, I’ve been working with him behind the scenes to do our editing, and he does a great job. He said, oh, this is great. It’s going to help us, you know, in terms of finding a place to live, having some cash on hand, obviously makes those things, particularly in wartime I imagine, a bit of cash to hand around helps get things done when you’re trying to move your family. I know they’re trying to get to Poland at the moment, last I heard there’s like a million refugees, Ukrainian refugees in Poland now. So, thank you for that. And if you do want to, if you haven’t yet contributed, no pressure, but if you have the means and you want to help Dennis out, just drop some money, PayID it into my account: cameron@motherload.com.au is the PayID. Motherlode is MOTHERLODE, and just put Dennis as a reference. And once a week or so I’ll just collect all of those and send them through to him via Wise payment system, which I used successfully last week and he was, he got the money within a few hours, so works pretty well. So, thank you to everyone who has supported that. And that’s all I’ve got for this week, Tony, what else? What have you got to talk about?

Tony  23:59

Yeah, well, thanks for supporting Dennis that way, and thank you to everyone who’s donated. That’s, that’s great. And I’ll be doing anything as well. So, hopefully it’ll help him. What have I got? I’ve got a pulled pork to do, and I’ve got our top movers in Navexa which we’ve already touched on. So, GRR was up 50% last week, down a little bit I think now, but up 50%, and Korvest was up 21% last week as well. So, two good results for us there. And then the pulled pork I want to do is on Challenger. So, I did say, I think, two weeks ago that I would talk about Challenger and its numbers which took a little while to get into Stock Doctor but they’re there now. I’ll do that now. So, just a quick recap: Challenger Financial, CGF is the code, it’s a company that in the main and historically has provided annuities to retirees in particular, so people can purchase a product and then get a guaranteed income stream either for a period of time or for the rest of their life depending on how much they pay and what kind of product they buy. Sorry about that. There’re some cars going by outside. They’re now starting to, I guess, expand, and use some of their skill sets…

Cameron  25:14

A bit of local Wagga colour.

Tony  25:15

My friend Ruddy thinks he’s bought a house in quite suburbia, but it’s quite busy. Anyway. So, Challenger are expanding; they’ve started to invest-open up a funds management arm to use the sort of maths that they’ve been doing to invest the pay for the annuities, and make that available to the general public. And they’re also, they’ve purchased a company which provides non-bank lending to people. So, I guess a bit like what Credit Corp did, once they get a sort of profile of customers and their repayments and their financial situation, they can lend them money with competence. So, that’s another area of expansion for them. But overwhelmingly, their biggest business is in providing income streams to retirees. CEO changed last year, and this new one seems to be doing well and certainly is either building on what the last one did or is going after this growth through expansion strategy, which has been reasonably well received by the market. But the stock last time I looked, today being the 8th of March, was a Josephine. So, just be careful if you’re listening to this in a couple of days’ time or a week’s time, it may not still be a buy. So, use the Brettelator to test that. But, to run through the numbers-oh sorry, I should also say it’s ex-dividend today, so take that into account as well when you’re working out whether you want to buy it or not. The ADT for Challenger is 6.5 million, so even though it’s very high up on our buy list — it’s one of the top stocks on our buy list — it’s still a large cap stock. I’m using a price of $6.50, which was the price on the weekend when the download was done, but it’s actually down to 6.35 today, so these numbers will be a little bit out of date. But the numbers will improve because of the lower share price. It’s slightly below the consensus price target, so it scores for that. It’s currently yielding 3.4%, and as people can recall, we put the benchmark yield up to 4.49% last week based on a mortgage from ANZ and therefore it doesn’t score on yield even though it’s paying out a reasonable yield. Financial Health in Stock Doctor is strong and steady. The price to operating cash flow was 1.43 times, so it’s quite low, and that’s one of the reasons why it’s way up top of our buy list. But, the PE is 18 times, so another one of these interesting stocks where they’re generating lots of cash, but it certainly does have a cost structure which is absorbing some of that cash before it hits the bottom line. And, that’s got me thinking, and I might try and do some analysis on that one going forward and break stocks up into those which have low price to operating cash flows but higher PEs, maybe higher than the average in the share market, and compare those that have low price to operating cash flow and low PEs and just see if there’s a divergence there that we can exploit. And maybe, you know, potentially one day put it into the checklist. But anyway, I digress. The share price is greater than the IV 1 but less than the IV 2, so it’ll score a one for that. The equity per share is $6, so it’s trading at less than what we call book value, and certainly less than 30% above that, by definition as well. So, it’s cause for that. There is forecast growth expected for this company of 17%, but the growth over the PE is only 0.91. So, even though it’s growing by 17%, the PE is still 18, so we’re not quite getting our 1.5 there, so no score there. Directors hold about 2.76%, so we’re not scoring on that one either. But it does have a record low PE out of the last six halves, so it scores for that. And it’s a new upturn, scores for that. But the equity hasn’t been consistently increasing, so it doesn’t score for that. So, all in all, the quality score for challenger is 71%, and the QAV score is 0.50, which is quite high.

Cameron  29:26

And why do you think its price is plummeting at the moment? I’m gonna have to rule 1 it I think if it keeps going.

Tony  29:34

Well, add back the dividend, Cam, because it’s paid, you know, that grossed up 16 cents a dividend. So, this happened, doesn’t always happen this way, but it happened last year I recall that there was a fairly unusual reporting season when the dividends came out, whether it’s because people get nervous and they see, like, a couple of percentage point drops in a day. So, like, Challenger would have dropped, say, 2% on the day it went ex-dividend for no other reason than it went ex-dividend, and so people who are buying it didn’t want to pay for the dividend which had just been divested and they got nervous. Maybe that triggers activity one way or the other, probably selling activity in the market at the moment. So, we did see that in the last one or two reporting halves,  where going ex-dividend could cause the stock to drop in price. But I think from memory, they’ve pretty much all recovered after the initial period.

Cameron  30:32

Thank you for that. What else you got to talk about before we get into Q&A, today, TK?

Tony  30:38

I think that’s pretty much it.

Cameron  30:40

Well, let’s start with a question from Paul. This question was a week or so ago, 28th of February, he said: “MML, Medusa, sits up high on the QAV list, however it released figures on Friday showing significant drops in revenue and profit on the basis of them now mining the lesser grade of the mine. The new mine, Tiger, won’t be open for three years and their recently announced purchase of an Australian prospecting area seems to be further out on the horizon yet again. On the basis of what looks like a three-year drop in revenue and profit, I’m out. Do you and TK agree or disagree? Cheers, Paul.”

Tony  31:22

Yeah, it’s a good, good question. I guess my immediate thought was that this could qualify for bad news. But then, and I guess I’ve got the hindsight of answering this question a little bit after Paul asked it, if the results are so bad, why did the price go up? So, the price has gone up quite a bit in the last week. So, my guess is that the market had fair warning about the tail off in the sales or revenue and profit for this company, and perhaps it actually did a little bit better than what people thought it would and its forecast has improved. So, that might be driving the price up. So, I guess, you know, if it’s a quality management running this company — and I’ve got no reason to think it’s not — and they keep the market very well informed and the share price is looking forward, that if even though there is this, as Paul says, drop off in sales and revenue coming, it’s probably already factored into the price. And so, if they deliver a little bit better than that, then chances are the share price will hold up, will actually improve. I’m just looking at the number. The Pr/Opcaf is down a little, but it’s still strong and it’s still only two times at the moment. So, there’s, it’s, we’re certainly not going to overpay for this stock. There are no forecasts in Stock Doctor, so I can’t see how, you know, what the other analysts or brokers are thinking of it, but, you know, I do suspect that the drop off in revenue and profit is baked into the share price. And if I recall, over the last twelve months or so when Medusa mining has been on our buy list, it’s kind of gone up and back and sideways, in a sort of zigzag fashion. So, it’s quite possible that the market was digesting the fact that revenue was going to come off until new mines came on string. But of course, the big thing which could be affecting Medusa at the moment is the gold price. And so, with a higher gold price, you know, it could counteract the the decrease in the ore grades that they flagged. And the other thing which has happened in this particular earnings season is that they started paying a dividend, and they didn’t last half, so that could also be driving a bit of the share price movement as well. So, I’m in the camp that this could be bad news, but I’ll wait and see whether it’s reflected in the share price and just stick to our system rather than to try and forecast whether it will be bad news or not.

Cameron  33:48

For it to be bad news doesn’t it have to be surprise bad news?

Tony  33:52

Yeah, well, that’s a good way of putting it. Yeah. I mean, I used to only use things like the CFO resigned or an independent director resigned without notice or without any sort of explanation as my trigger for bad news. I kind of have have widened it a bit because we have seen some cases where a surprise downgrade comes out into the market and we’ve used that as a bad news sell. But, oftentimes if we stick to our three-point trend lines and rule 1s it takes care of the bad news anyway.

Cameron  34:21

*Cameron in the editing booth, here, on the 9th of March — Wednesday, the day after we recorded. Of course, first thing this morning there was an announcement: “Medusa Mining Ltd. advises that Mr Paul Ryan Welker has been appointed as the company’s managing director following the termination of Mr Andrew Teo’s contract.* Yeah, I think last week we were talking about Midway. When their results came out, sales were down 39%. You said that was a bad news, that it would have been a bad news sell.

Tony  35:00

Yeah, well it is bad news if it’s a surprise, so you’re right to mention that. If the market hasn’t been flagged, and they should be flagging the market, they would have known, Midway would have known their profit was going to be bad. They just sat on it until the last possible minute, which is why the share price reacted so violently, I guess.

Cameron  35:17

Don’t they have a responsibility during confession season to tell us this stuff?

Tony  35:22

They do. Exactly. So, look, I don’t know, the circumstances of Midway, I shouldn’t be too harsh on them without knowing the circumstances. But yes, it should be, if the market is operating under the rules that are there in the Corporations Act, yes, as soon as they have reason to believe, concrete reason to believe that they will produce a result which is different to what the market expects, they should be out there telling people about it.

Cameron  35:47

Right. And the same would have been true with Medusa and their revenue and profit.

Tony  35:50

Yeah. And so, it’s quite possible Medusa has been saying this for a while and the market’s absorbed that, and the results have come in a little bit better than what some of the big analysts thought and therefore the share price hasn’t gone down. And with the gold price rising and the reinstatement of the dividend, it’s gone up in the last week.

Cameron  36:10

Okay. Thank you, Paul. Hope that helps. Question from Nick next: “the old do you rebuy a stock that’s crashed you out on rule 1 question.” Oh, the old do you rebuy a stock that’s crashed you out on rule one, chief? Get Smart reference for people under the age of 50, TV show in the 60s, co-written by Mel Brooks, look it up, it’s a great show. “Tony said he’s never really had it come up, and he just picks again from the top of the buy list. For example, GWR for me has recovered to a negative 15% overall after a rough couple of days of one cent shifts. It’s the second stock on the buy list, though admittedly now a Josephine. So, hold on for dear life and hope it comes back up again or take the hit and the lesson on the ability for very low-price stocks to swing around widely and move on further down the list?”

Tony  37:05

Yeah, so, and we’ve talked about this before, I actually don’t have any experience where I’ve sold something because of a rule 1 and it’s still a top thing I want to buy and I have to buy it back. Sounds, a couple of things, sounds-what may have happened here for Nick. One is that he didn’t sell at the 10% mark for rule 1 and it’s fallen below that. And we’ve had this question before as well, what do you do? And I would sell in that circumstance. So, I guess using Nick’s example, if I sell GWR but it’s the next thing to buy on the buy list, would I buy it back. Like, I don’t have experience of that. It looks like GWR’s a Josephine, so I wouldn’t be buying it back. But in a different world, if it wasn’t a Josephine and I was holding it and it was rule 1’d I personally would probably sell it and buy the next thing on the buy list and just wait and see what happened to the price, and be fairly, you know, fairly happy with the fact that I was out even if it went back up. I really don’t like holding on to shares that have dropped, and this case is like 15% or more. I think that’s the market trying to tell you something. So, I would sell. But yeah, I’ve never actually experienced this idea of selling something that you want to buy next. It’s usually a sell and move on to the next thing.

Cameron  38:27

Yeah. But as you say, according to Nick, when he wrote this comment anyway, it was a Josephine so, you know, don’t buy it anyway. So…

Tony  38:35

Yeah, correct.

Cameron  38:35

It’s not even, it’s not even a real option if you’re obeying the Josephine rule. Thank you, Nick. Question from Jeremy, “referencing the discussion on Josephine’s, I’ve been thinking about how to make it easier.” So, we’ve been having this conversation, for new listeners, over the last couple of weeks about Josephine’s and you know, when to sell. A Josephine for new listeners, by the way, is a stock where it’s above its buy line, it’s above its sell line, it’s technically a buy, but the share price today is below where the share price was at the end of the last month and so we don’t buy it. We want it to show-we want it to demonstrate an upturn in sentiment before we buy it. But then we’ve had been having lots of questions about well when is it no longer a Josephine? How do we match that? And you’ve got some ideas, you’re still working your way through. So, Jeremy goes on and says “rather than looking at the closing price of the previous month, which on the second or third of a month might be misleading, wouldn’t using a thirty day EMA or SMA be better? If the stock is trading below the EMA it’s a Josephine for now,” and then he attached an MQG example. Now, EMA and SMA: EMA is something something moving average and SMA is something else moving average, right? Remind me what an EMA and SMA is, Tony?

Tony  40:03

I can’t recall EMA, SMA is Simple Moving Average. So, it’s basically taking the long term movements in the share price, averaging that, and then graphing the short term movements in the share price on that and looking for when they cross each other. Or in this case, I think he’s just using one of those. So, the short term movement and overlaying it on the share price and seeing if that trend is up or down.

Cameron  40:28

I just looked it up. EMA is Exponential Moving Average.

Tony  40:31

Right.

Cameron  40:32

“A type of moving average that places a greater weight and significance on the most recent data points.”

Tony  40:38

Yeah, look, this could be valid. I haven’t used them and don’t use them, but not to say it won’t be a valid scenario. I think we’ve had this question before, Cam, and I think my response when I’m using or when I’ve looked at moving averages in the past is that they lag a little bit because you’re waiting for the average. So, if you say, for example, your using a three-month moving average as a short-term line on the graph, it’ll take three months before you get significant movement because it’s got to average — if it’s a one month, you might get it quicker. Whereas, if we’re using the three-point trendlines, I often found that I was in or out of a stock quicker than waiting for the moving averages to catch up and give me a signal. But I’m not criticising Jeremy’s point, I just encourage Jeremy to do some research and let us know if it’s better or worse. And just on what I think will be the outcome of the Josephine discussion, and Brett Fisher from the Brettelator and I are still going back and forth on what’s good about this. And he’s, he’s in the camp of using the old style H1 H2, so we don’t worry about the buy line following the sell line rule. And I, you might be to be able to help me here, Cam, because I think from memory the buy line following the sell line became much more important back when we were coming out of COVID. We were looking for stocks that we could see the stocks were going up sharply, from lower left to top right in the graphs. But in waiting for our normal buy lines it was taking too long, but if we did buy line follows a sell I think we were getting it earlier, but my memory is hazy on that. And I’m, you know, I’m reticent to change a rule or make a rule based on the current market, because the next six months or the next year it could flip and be the reverse and we’ve got a rule which doesn’t apply anymore. So, you might be able to help me. Are you able to search the database and see what we said about buy line following the sell line and the context for that, when we sort of discussed it around the COVID cough time at all?

Cameron  42:45

Oh, yeah, possibly. I can go back and have a look. I mean, we talk about that so much it’s going to be hard to pinpoint it, but yeah. I thought that had always been the rule, buy line follows the sell line.

Tony  42:57

It did, but it came into its vogue, like it came into its own at one particular stage and I think it was around then. But if I can just get a few examples and some graphs that I can share with Brett we can help to nut out the problem.

Cameron  43:08

Okay, yeah, I’ll go back and dig through the transcripts. Well, Alex had a follow up to Jeremy’s question; Alex said, “further to Jeremy’s question I just discovered that Stock Doctor has a field called ‘price change one month’ that can either provide a percentage or as a value. I’m wondering if checking this as positive provides a similar approximation to the ‘price is greater than the end of month’ price. This will eliminate one of the manual data entry points, as in Josephines, and problems that arise in the first few days of each month. Has Tony ever tried this ‘price change one month’?”

Tony  43:54

I haven’t in terms of Josephine’s and I’d have to find out from Stock Doctor exactly what they mean by that, whether it’s as we do with the price change this month or whether it’s a rolling thirty days figure so it’s continuously updating. But we download that column into my spreadsheet, the master spreadsheet, every time we do a download but I use it for something different. But, it’s there at the moment and again I’d encourage Alex to do some research and let us know if she’s found a way to formulate the solution to the problem.

Cameron  44:26

It’s a he, actually.

Tony  44:27

Oh, it’s a he is it? I’m sorry, I’ve got an Alex myself that’s a she, so I default to that.

Cameron  44:33

Yeah. That’s alright. Thank you, Alex. Yeah, test it out, tell us what you think.

Tony  44:38

Yeah, exactly.

Cameron  44:38

Show some examples.

Tony  44:40

Yeah.

Cameron  44:41

Got a late question from Dave that doesn’t require any prep. He says, “hi, Cam and Tony. I started a QAV mini portfolio of seven stocks last November, had a disastrous start, and by mid Jan was down 17% versus the index down 5%. However, through reporting season they’ve bounced back strongly and now it outperforms the index since inception; now down only 3% versus the index being down 6%. Got me wondering, have you found that QAV’s out performance is better over reporting season compared to the rest of the year?”

Tony  45:19

Oh, I haven’t sorry, I can’t comment on that. It’s just over time that I track it. I think a seven-stock portfolio, though, is going to be highly volatile and much more volatile than a fifteen to twenty stock portfolio, and therefore, you know, I’m not surprised by those numbers. It’ll wag around a lot compared to the index.

Cameron  45:40

Yeah, that’s what I said today in my email. Yeah, I think it’s a little bit concentrated, seven stocks, you might want to stretch it out to your fifteen or twenty so you get more opportunity to find the big winners in there that pull everything up, right?

Tony  45:52

Yeah, certainly, like, I certainly see, I would think the most stock movements one way or the other happen around reporting season because you everyone’s getting new figures. So, that can happen. But, you know, like, if a stock has gone up after its announcement, you can still see buying for the next four or five, six months, until the next reporting season as the market digests it. You know, because the markets always forward looking so it’s not just the current results which will drive things but people will take time to, especially the big analysts and big fund managers, to meet with management and look at their forecasts and talk about the industry and all that kind of stuff, too. So, the buying continues all the way through the half. But it usually does get that first 20% kick around reporting season, is my experience.

Cameron  46:37

Yeah, so it gets a bump but that’s not…

Tony  46:39

Yeah, yeah.

Cameron  46:41

Well, that’s all the questions that we have for this week, Tony. Short show at 50 minutes, according to my clock.

Tony  46:47

Well, can I just add quickly to that, because I’ve got a follow up answer from last week. I think one of our listeners was asking about dividend payout ratios, and particularly in respect to IGL. I think it might have been Alice, but didn’t write her name down in my notes, I’m sorry. So, we were talking about dividend payout ratios and our subscriber, so this is a red flag if the dividend payout ratio is greater than 100%. In other words, more than the profits has been paid out in dividends, and I said that it probably was and then they listed an example of IGL. I did do some research on IGL and what might be happening there, and this is just based on a desktop review of the of the results. It looks like IGL had cut their dividend during COVID, and they did have a tough time during COVID so that makes sense. So, potentially, this is a bit of a catch-up dividend. In the next half, they’ve increased the payout to try and smooth it over time, because as I’ve said a lot in the past, the company boards are very nervous about cutting dividends at all. So, they try and keep it up as high as possible and keep it consistent to shareholders. The EPS was down during 2020, so COVID did affect this business a lot, but it’s forecast — or 2021, sorry — but it’s forecast to rise next year. And management have stated that their dividend payout ratio should fall within the 65 to 70% range, and that sort of looks like what it will be using the current dividend and next year’s forecast EPS. So, I’m not saying it’s not still a risk. You know, obviously, if the company doesn’t achieve its forecast next year, then a high payout ratio can’t be sustained. But it may just be a COVID related thing and might just be there for a six to twelve-month period and they decided they could afford to continue to give dividends for whatever reason. But, yeah, so that was just more of a detailed answer to I think it was Alice’s question from last week.

Cameron  48:50

It was Alice, yeah, thanks. And IGL, to remind people, is IVE Group I think. They’re a printing and marketing business, so no doubt would have got hit hard during COVID.

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