QAV #526

Cameron  0:01

Welcome back to QAV, live and in person, in front of your naked, steaming eyes, as David Lee Roth would like to say. I’m still in the United States, it’s the fourth of July here. And of course, to celebrate, there was a mass shooting at a fourth of July parade in a wealthy suburb of Chicago, I think, today, because that’s what America is all about. And where you are, it’s biblical floods, I believe, Tony.

Tony  0:32

Yeah, I’m clearing out, Cam. I’m leaving, I’m going down to Wagga for a couple of days. I’ve been kept inside since Friday. It’s now Tuesday. So, yeah, I’ve had enough. This is like the fourth time in recent memory that it happened. It’s pretty bad. Look, I’m making light of it. It’s bad for all the people who have to leave their houses because of floods, so I feel for them. Yeah, it’s, it’s just never-ending rain.

Cameron  0:56

Did you buy an ark, or do you just rent one in situations like this? Or are you like Buffett? Do you go, “I don’t need to own my own Ark. I don’t need to buy my own. I got plenty of friends with arks, I’ll just borrow one of their arks.” Isn’t that what Buffett said about private jets?

Tony  1:10

He’ll set up a fractional ownership situation. I call my ark “the indefensible.”

Cameron  1:21

That’s what he calls…

Tony  1:21

What Buffett calls his plane.

Cameron  1:22

Hi plane, yeah. Well, it’s the opposite of that here. It’s like they’re in the middle of a three- or four-year drought, I think, in this part of the US.

Tony  1:30

Well, the water’s got to come from somewhere.

Cameron  1:32

That’s right. It’s the Colorado River, as I believe. Happy New Year to everybody. It’s the new financial year this week and I guess it’s a good time as any to have a look at the performance of the dummy portfolio in the last financial year, the 2022 financial year. And it wasn’t that inspiring, I have to be honest. I looked at it this morning, our return for the full financial year was negative 3.03%. Capital Gain was negative 8.49%, Income return though was 5.46% positive, so it brings it to a negative 3.03%. Now, compare that to our benchmark, the ASX 200, it was down 6.84% for the financial year. So, our goal is to do twice as well as the index, and we did. We did twice as well as the index, we fell by 50% of what the index fell over the course of the financial year. So, it works. In all seriousness, the system, you know, prevents us from losing as much as we might otherwise. It gets us out. But it’s been a dismal year for the stock market in Australia — and around the world, not just Australia. But, you know, the good news is the long-term, you look over since inception — and for new listeners, we started the portfolio when we were fully invested with our original imaginary $20,000 capital, first of September 2019. If we look at it from inception, the dummy portfolio is up 15.75% per annum versus the index, which is up 3.55% per annum over the same period. So, we’re doing roughly five times better than the index since inception. So, it’s, you know, we’re doing okay. It’s been a bad year for everybody, but in the big picture, we’re doing okay. Best performing stocks in the last week in the dummy portfolio were LAU up 13% in the last week; ECX up 5; KOV up 2; FEX up 1.6; CGF up 0.29%. So, that’s my portfolio report for this week, this year-financial year. Tony, what are your thoughts on all that?

Tony  4:03

My overriding thought is that, during the financial year anyway, the share market went up and came back again. And minus 3% for a year is actually unfortunate, it’s down 3% and the market is down 6%, but that’s not a bad year. I mean, I’ve lived through years where it’s been down 30%, so, this is, what’s happened that made people, I think, feel it more is that, you know, six months in I think we were up like 10 or 15% or something even higher than that maybe, and it’s come back in the last six months. So, it’s been a bad start to calendar year 2022, but the financial year… Like, if you looked at a whole list of the last twenty or thirty years of gains and losses in the share market, minus 6% would be, you know, just a blip. It wouldn’t be consequential. So, I think a little bit of perspectives required even though people will be feeling like, a, they’re hurt, because their portfolio has gone down in the last six months significantly, and, b, probably tired because it’s been a choppy market. So, we’ve been rural oneing a lot and buying things, and rule oneing again and buying things, then three-point selling and buying things. And now like me, I think a lot of people are sitting on cash waiting for the time to start re-buying. So, that’s my overriding thoughts on the market in the last twelve months.

Cameron  5:20

Well, one of the things I’ve learned from being in the US for the last couple of weeks, Tony, is the reason the markets been down in the last six months, and the reason that fuel prices are up and all these sorts of dramatic economic things: it’s Joe Biden. I’ve had a number of people tell me it’s Joe Biden, “it’s all Joe Biden. It’s his fault all of this is happening. Americas in the toilet.” I said, “well, hold on. Australia’s economy’s in the toilet as well, is it Joe Biden’s fault that Australia’s economy’s in the toilet?” and they were going, “oh, I don’t know. Probably, yeah.”

Tony  5:52

I think the answer is, “if only you had that much power.”

Cameron  5:55

He wishes he had that much power.

Tony  5:57

Exactly. Yeah. If he’s got that much power, take it off him. Rise up, arm up, take back the government. Happy Sedition Day to you over there as well.

Cameron  6:07

Yeah, thanks. I gotta give a plug for my new favourite drink of choice. You can’t see it in my plastic cup, but it’s a Nicolada. I was introduced to this at a Mexican restaurant in Phoenix. You ever have a Nicolada in your time over here, TK?

Tony  6:22

Nicolada. No. Sounds like a Niki Lauda. Was it a Formula One racing driver who got badly burnt?

Cameron  6:28

Badly burnt, yeah. It tastes just like Niki Lauda. That’s dark. Wow, you have been trapped inside for a long time, haven’t you? It’s half beer, this is half prickly pear beer, and half clamato juice.

Tony  6:46

Wow. No.

Cameron  6:47

Which is my favourite go to drink whenever I come over here. It’s clamato juice, I crave clamato juice when I’m back home. Anyway, so half clamato, half beer.

Tony  6:56

I haven’t had that. We used to… well, I probably have if you take the beer first and clamato second, because we used to always have a couple of bottles of clamato juice in the fridge. It’s lovely.

Cameron  7:06

Ah, so good.

Tony  7:07

We used to put vodka in ours, too, and have Bloody Mary’s. Or Caesars as they called in Canada.

Cameron  7:12

Yes, Caesars. People kept saying, “you should have it as a Caesar.” I didn’t know what they were talking about. Well, I’ll tell you who’s had a good year, is one of our subscribers, Brent. He posted on Facebook yesterday, “with the end of the financial year, I’ve been tidying up my paperwork and reflecting on the QAV, process, performance and trends over the year. What a tough year. My central theme for the year was the system got me out of retailers and banks and moved me into oil, coal and cash. Along the way, there were a lot of rule one sells, and I’ve become much more comfortable selling companies and moving into companies that are rising. The QAV process protected my capital to fight another day and I’m looking forward to the days ahead that will be full of bargains. I’m extremely happy with my return for the year but slightly disappointed as the last three weeks halved my yearly return and destroyed me. My returns were solely the result of overweight positions in GRR, YAL and NHC and the dividends they paid. This compound annual growth rate,” and I don’t know how long this is for… oh, I guess he’s got it down below, it’s a couple of years. 28.37% is his CAGR since inception, which is the 25th of January 2021. He says his return is 64.79%. I guess there must be, like, total over the period, and he said the All Ords, All Ordinaries returned over the same period is 0.37%. Outperformance of 64.42%. For the financial year just gone, he said his return was 35.87%. So, minus the All Ords — and he’s not just doing the 200 like we do, he’s doing the ASX JOA, actually, so the total return index — down 7.44% over the period. So, outperformance of 43.31%. I don’t know how Brent did this because we didn’t, but that’s a great return so well done.

Tony  9:13

It’s a great return.

Cameron  9:14

Gary replied, “well done, Brent. I’m sitting at 15% total return over the same total period as you. Was at 40% back in March but got hammered since then. Only 0.65% for the last financial year. My fault, not QAV’s. Better than negative though.” Well, hey, we are negative for the last financial year, Gary, so you’ve done better than us, too. But that’s a great performance for Brent. So, maybe Brent should come on the show and tell us how he did it.

Tony  9:42

Yeah. Well, especially if Brent did something different, if he fudged something or if he modified the rule somehow.

Cameron  9:48

Well, he said he was overweight in Grange Resources, Yancoal and New Hope Coal. So, I don’t know what he means by overweight, why he was overweight? With QAV with you shouldn’t be overweight in anything, you should be relatively evenly balanced across your fifteen to twenty stocks, right?

Tony  10:08

Well, yeah, I mean, I have double bought things in times like this when I’ve got cash to deploy, so you can get slightly overweight. But yeah, I wonder if he just means that he let those stocks grow and they became large in his portfolio and overweighed his portfolio maybe.

Cameron  10:20

Yeah, it could be. But anyway, well done. Congratulations, golf clap to Brent. That’s great.

Tony  10:24

Yeah, well done. And I think that’s the other commentary I’d make on the last financial year, I was looking at some of the sector returns as well, and the ASX, I think it was 20, was down something like 12%, I think, for the year and that would be without dividends. So, large-caps were down more than small-caps. But the big winner for last year was the energy sector, the ASX energy index was up 25% for the year. And as Brent said, I mean, we started the year — I think I started the year in iron ore stocks, actually, and banks and gold, and got out of those and into Beach Energy, Santos. I think I had Santos all the way through, but Beach and then eventually Yancoal and Newhope. So, it is getting us into the right situations in the market without trying to be thematic, we tend to end up being thematic.

Cameron  11:13

Good stuff. So, what else have you got to talk about today before we get into Q&A, Tony?

Tony  11:19

Yeah, a couple of things. So, I’ve got, I’d say about three weeks ago we had a question from a listener about a company called Byron Energy, BYE. And the question was, and I’ll paraphrase, was BYE had a qualified audit in its annual report and then nothing in its half-yearly accounts. There was a material uncertainty raised in the annual report, but it wasn’t raised in the half yearly report, and the question was does that mean it’s no longer a qualified audit? And I didn’t know the answer to that, so I went out and asked James Oliver, our member who is an auditor, and he came back with an answer and I’ll just I’ll read it out quickly. His answer is, “this was a good question, and unfortunately the answer is not an intuitive one to the average investor. If you look at the history of BYE’s audit and review reports, June 20th audit report ‘material uncertainty ongoing concern’ paragraph added. December ’20 interim review report, no such paragraph added. June ’21 Audit Report ‘material uncertainty on going concern’ paragraph added. December ’21 interim review report no such paragraph added, and June 2022 audit report we’ll see soon enough.” So, he goes on to say, “I think there’s a bit of a pattern here. I think this is because technically there is no audit of going concern at the interim dates and the user is meant to read an interim report in conjunction with the most recent annual financial report, including any disclosures in relation to going concern.” What he’s saying there basically is we may not see that that qualified audit statement in the half-yearly report because it’s not a full audit. So, when I found out that and got that answer we took Byron Energy off the buy list because it had reversed the qualified audit, and now I’ve reversed it back. And there’s been follow up questions from that from listeners saying that yeah, a director has been buying shares recently and the share price is going up, etc. And this reminds me of our old friend Apollo Tourism and Leisure, who did the same thing. They had a qualified audit in their annual report, nothing in their interims, and, you know, I will repeat the same comment I made there that it’s entirely possible that Byron Energy and Apollo Tourism and Leisure have gotten better over the course of the year, and we won’t know that for sure until we see the annual report when it comes out in a couple of months. There are plenty of other stocks to buy in the market — well, maybe not so much now because of where the markets at — but there are always other stocks to buy at some stage, and so I just wouldn’t want to take the risk that we buy a stock that looks like it’s going up and then the annual report comes out and we find it’s a qualified audit still. So, it’s a risk mitigation strategy that I’ve taken Byron Energy off the buy list.

Cameron  14:00

And if people hold Byron Energy, as I think we did in one of our portfolios, we sold it when you made that decision. So, people who might want to consider, please seek professional financial advice. Don’t listen to anything I say, I’m a guy sitting in the desert wearing a bandana. But you might want to think about de-risking by removing it, because it is a risk.

Tony  14:25

It is a risk, yeah. And a company will turn around the most when it goes from being financially risky to back on its feet again, and we may miss out on that if we decide to adopt a risk mitigation strategy like this, but I’m having to do that because I’ve also been in the situation where things can get materially worse quickly and the stocks can go broke. I’m thinking of one called Collection House which isn’t on the buy list at the moment and hasn’t been for a while, but it has been something I’ve looked at years ago. It had a material uncertainty raised in this annual report and it’s now broke. So, it can go both ways and I think we just have to be careful with these kinds of stocks. And if people want to read more, James did provide a link which people can Google this, it’s on the CPA Australia website, which is cpaaustralia.com.au. And if they go there, or if they Google, “A Guide to Understanding Auditing and Assurance,” so “A Guide to Understanding Auditing and Assurance”, there’s a whole paper there on understanding audit reports which people might find useful if they want to investigate this more.

Cameron  15:33

Big thanks to James for taking the time to do that work and put it together for us and for the members. Very generous with his time as always, and if people haven’t heard the episode when James was on a few months ago talking about qualified audits, it’s worth having a listen. It’s very insightful.

Tony  15:52

Yeah, thanks, James. Now moving on, a couple of other things to talk about. One of the things that got picked up in my readings over the last week — and I’ve been able to do lots because I haven’t been able to get out much with all the rain. The ASX forward PE is around 12 times, which is very low. That’s what we’re trading on at the moment.

Cameron  16:11

Can you explain ASX forward PE to me?

Tony  16:14

Yeah, so there’s two ways of looking at the PE, which is the price to earnings ratio. One is to look at what the actuals have been reported at in the last reporting season, that’s called the trailing PE. And then the other one is to use the consensus forecast for earnings per shares to calculate a new PE based on the current share price. So, it’s the expectations for the market. It’s now down to 12 times. I think at the end, or the middle of the GFC, it got down to about eight times, that’s probably the record low I would think. So, we’re not quite at the bottom yet, but we’re certainly in the cheap category or cheap territory. So, I’m not saying it’s gonna go up soon, but this kind of situation is when the market may well rally. But whether that’s next month, six months, next year, who knows, but it is getting cheap. So, what is next, we’re moving into confession season now, so be alert people, especially in this kind of environment where we’ve really only had one quarter in Australia of high fuel prices, gas prices, and rising mortgage rates. So, most companies I would expect going into this earnings season are still going to meet their consensus targets, because they may be trailing off at the end of the year if people are tightening their belts, but they’ve probably had three good quarters in there as well. So, I’m not expecting a whole heap to come out of confession season, but be alert, there could be some companies who say look, you know, especially in the retail space as I spoke about last week, I’m seeing a lot more empty shop fronts as I get around Sydney. So, I think retails doing it tough, so we may see some of the retailers in particular perhaps come out and say, “we’re not going to meet our earnings projections, so be aware.” So, keep aware of that. After confession season of course comes reporting season. Again, I don’t expect much carnage during reporting season, but we’ll see. I know the US reporting season that’s just gone by, because they have quarterly reporting seasons, has been meeting targets. More companies met targets than didn’t, so it hasn’t been a problem over there. But the market, of course, looks nine months ahead, and it’s predicting what’s going to happen. So, that’s why the PE is now 12 times rather than, you know, historically it’s about 15-16 times forward estimate and last year was probably up around 20 times for the estimate, so it’s been dropping rapidly. But typically, what we see, or what I’ve seen when things play out like this is that it’s the next half that we’ll start to see companies come out and say our earnings are being impacted, or analysts come out and say earnings are being impacted. I would think the thing to watch out for is companies who won’t give guidance. They’ll use weasel words like the markets or the environments too uncertain to predict trading. That’ll be a red flag to the analysts, and they’ll start marking down the PEs even further, the prices they are prepared to pay for these stocks even further. So, that’s something else to watch out for during this time. So, all in all, it’s going to be a fairly choppy year I would think. The market’s going to look nine months ahead, they’re gonna see inflation, they’re gonna see the war in Ukraine, etc., still going on. But as we know, predictions are really hard and it wouldn’t surprise me at all if today’s concerns aren’t the concerns in the market in nine months’ time, there’ll be a new set of concerns, you know, another COVID outbreak or whatever that’s happening. So, pretty hard to predict. Part of me thinks that the central banks who are hiking interest rates if things do turn south within the next couple of months may well hold that, which may well spark a rally in the market, but I just don’t know. So, I guess the point of all that is we’re heading into confession season and then reporting season, be alert during those times. And then after that, I think we should still be alert because I think perhaps three months after that, we may still see some companies coming out with either guidance downgrades or inabilities to make guidance.

Cameron  20:05

Can I ask a question?

Tony  20:07

Yeah, sure.

Cameron  20:08

So, when you say be alert, what form does that take? I mean, aren’t I just running the numbers as I normally am?  What do I have to be alert about?

Tony  20:18

Yeah, so we are doing the process, the process doesn’t change. In this kind of time period when I’m saying I’m being alert, I’m making sure I read the paper, the Financial Review every day, and I’ve got all my alerts set in Stock Doctor, especially three-point trend line alerts and rule one alerts. Because, if a company does come out and say, “look, it’s tough going out there, I can’t confirm guidance,” the share price could drop 20 or 30% in a day. So, that’s something to watch out for.

Cameron  20:45

So, make sure you do what you should be doing all the time, right? Have your alerts set, keep your eye on the papers. But there’s nothing different, really, that we do in this period, right? We just keep doing what we always do. We just have to… if I translate what you’re saying, it’s a particularly precarious time right now so make sure you do the stuff you should be doing.

Tony  21:05

Yeah, and at that means if you’re going on holidays, like you’re doing for four months…

Cameron  21:10

Yeah, it’s hard.

Tony  21:13

Sorry, for four weeks.

Cameron  21:14

It feels like four months, I tell ya.

Tony  21:17

You’ve just got to check in as much as possible. You and I kind of back each other up, so if we see something which is a sell and I think you might not have got it I’ll send it to you, and vice versa. But, you know, if I was in your shoes and I didn’t have a network of people that we have in QAV, I’d probably as soon as I got back into Wi Fi range catch up on all the AFRs I missed out on. So, I might binge read three or four or five in a row and just make sure that I’m up to date on financial news. Make sure that if I was away for a couple of weeks, I’d reset the alerts when I got back into range, that kind of thing.

Cameron  21:49

I gotta tell you, so slightly off topic, but when we got here, we got Verizon SIM cards, 5G blardy blardy blar, this was in LA the first day. The Verizon network here is the worst piece of shit I’ve ever… like, even now, like right now I’m in Cedar City, Utah. It’s not a big town you know, there’s like 30-40,000 people, but the 5G has given me two megabits a second. Like, back home in Australia on Telstra’s network that’d be more like 200-250 megabits per second on 5G. Getting two megabits per second here. Fortunately, the Airbnb we’re in has got really good broadband, I’m getting 500 megabits a second on this. It’s from the ridiculous to the sublime. But when we were down at the Grand Canyon, you know, everyone had told me — when I say everyone, Chrissy told me — there’d be Wi Fi at the lodge at the Grand Canyon, knew that the telephone signal would probably be better. She said there’ll be Wi Fi at the lodge. So, I got there, went straight to the lodge, said “you got Wi Fi?” They went, “no, we don’t have any Wi Fi in the lodge.” They said try the general store which is a five-minute drive up the road. So, I went to the general store, logged on to their Wi Fi and I was getting 400 kbps speeds. I went inside and said to the staff, “look, I’m sitting out the front,” like on some chairs they had at the front, “and I’m getting this. Is there a place here where it’s better?” They were like, “nah, that’s it. That’s what you get.” Alex had sent me the spreadsheet; I couldn’t even download a spreadsheet or upload a spreadsheet. I spent an hour trying to answer emails from you and Alex and just, it was just the most frustrating thing. We were there for five days with no net when I thought I’d have net that entire week. And the other thing that gets me over here is, you know back home you tap to pay everything, and you have done for years. Here, at some places you can tap to pay, others you can’t. Some places you can use a pin, other places you can’t. You have to put a signature on a thing.

Tony  23:53

Yeah.

Cameron  23:54

It’s all over the place. You know, some places accept this card, but the other card isn’t accepted. Like, you have to have four or five cards as backups because you don’t know which one this place is going to take. It’s such a dog’s breakfast over here with stuff. I always think of the US as being five to ten years ahead of us on basic things like this, and they are in the couple of areas…

Tony  24:22

Like what?

Cameron  24:23

Legalisation of marijuana. We were in Arizona for the first couple of weeks, man there’s like dispensaries on every street corner. You can just go in and buy gummies and weed to your heart’s content. Can’t in Utah. And they were ahead of us in legalisation of gay marriage, although the Supreme Court looks like they’re gonna do their best to probably overturn both of those things in their next sitting. They’re rolling back the clock on as much as they can hear right now, it’s fascinating. Anyway, I’ll leave this for after hours. But yeah, the telecommunications and the payment networks here are just so far behind it’s really, really fascinating.

Tony  25:06

And it’s still paper money. Has anyone gotten their black pen out and put a stripe through the paper money when you give it to them yet?

Cameron  25:12

I haven’t been giving people paper money except for tips, really.

Tony  25:15

Yeah, okay.

Cameron  25:16

Oh, that’s the other thing that’s annoying; when you pay for everything, they’re like, “now, two screens will appear. Please answer them as you see fit.” And the first screen is “what kind of tip would you like to give this person?” I’m like, nothing? I don’t know.

Tony  25:31

And you get hardwired into 10,15 or 20%

Cameron  25:35

Yeah. Or there is a custom Chrissy showed me today. But yeah, the whole…. Anyway, that’s probably why I haven’t slept for three days.

Tony  25:43

What’s the basic wage in the US at the moment? Seven bucks an hour or something, isn’t it? So, they live on tips.

Cameron  25:48

I don’t know. Yeah, they do. It’s like, it’s 2022, it’s such a… Anyway, don’t get me started. All right. What else you got?

Tony  25:56

Pulled pork. Oh sorry, one more thing before the pulled pork. We’re recording this on Tuesday morning, July 5 Australian time, and the RBA meets today and I expect, well, everyone’s expecting the interest rates to rise. I’ll put out a new message about what to plug into the spreadsheet to test for interest rates, to put into the interest rate’s cell to test if the yield is higher than the mortgage rate. I noticed over the weekend the mortgage rates had been put up by some of the major banks, but I haven’t bothered to update the spreadsheet yet because I think they’re gonna go up again today.

Cameron  26:29

Wow.

Tony  26:30

Yeah. We’ll see. Okay, pulled pork. Pulled Pork today is one of the only stocks that we’re seeing to buy at the moment, which is NZM, New Zealand Media and Entertainment — NZ ME for short. I think it went out in an email yesterday. I also saw Sunland, I was thinking about doing Sunland, but I think I’ve done Sunland before last year. Cam, can you recall? If not, I’ll do it next week.

Cameron  26:54

No, I can’t recall, but I can have a look at my notes.

Tony  26:56

Okay. Anyway, this week is New Zealand ME. So, interesting company. When I was living in New Zealand many years ago there was a website set up called stuff.com by a young entrepreneur in New Zealand, and it eventually grew to be like the — I guess what the Yahoo portal should always have been, sort of that gateway to the internet — and it sort of branched out into a combination of eBay and a news site and all sorts of different things. And it was eventually bought out, I think, or sold to one of the media companies and morphed into NZ ME if I’m correct, from memory. But now anyway, it’s a very large media company in New Zealand. It has interest in radio, it owns the New Zealand Herald, which is a newspaper, and it has the digital still with the stuff.com website. So, it’s quite large over there and it’s a classic big fish in a small pond. So, this is the kind of company that I think a Warren Buffett, or a young Warren Buffett might have been interested in because it’s got certain monopoly characteristics. It has a big toehold in the media sector over there, it’s gonna be hard for someone to come in and compete with it. The New Zealand Herald is a well-established newspaper over there. And newspapers were something which always interested Buffett, he owned the Washington Post. You know, he liked their ability to raise prices even during all kinds of economic cycles. And if you think about it, who ever heard of a newspaper putting its price down? They never have, it’s always gone up over time. The Financial Review’s now $4.50 a copy, so that’s an example of that. On the flip side of that sort of big fish in a small pond situation for NZ ME is, how does it grow? The media regulators in New Zealand are probably gonna look fairly poorly on any attempt to buy another media presence in New Zealand from competition concern perspectives. So, it could go overseas into Australia; again, it will be hard to buy something in Australia, the media companies over here are quite big as well. So, it’s a company which throws off a lot of cash which is really good, and they’ve been using that cash to buy back shares and to pay special dividends, which is a sign to say they can’t find something to buy. That’s, I guess, where it is. I would think it’s a potential takeover target for an Australian media conglomerate like Channel Nine, but, you know, is New Zealand really going to be a big enough interest for them? So, anyway, that’s all speculation. The good thing about this company is that it trades on a PE currently of 4.3 which funnily enough isn’t the lowest PE in the last three years, it’s been down as low as 2- or 3-times earnings, but it’s price to operating cash flow is not much more than that. It’s price to operating cash flow is 4.4. So, most of the cash it makes flows straight to the bottom line. I guess if you think about radio and print and all those kinds of things, and even the dotcom site, once you make the initial capital outlays there there’re just staffing costs from then. So, that’s probably why we’re getting lots of cash thrown off and then it flows straight through to the bottom line, pretty much. If this was in the dotcom boom, you know, it’s trading on an ROE of 39%. It’s the classic dotcom company: no capital investment required and throwing off lots of cash. The problem is it doesn’t have growth. It’s hard for us to measure growth because there’s no consensus earnings forecast, but looking historically, the growth has bounced around a lot in this company. So, you’d expect without any sort of acquisition it’s not going to grow much at all going forward. The numbers for it are interesting. It’s $164,000 on average per day, so it’s not a large company but it’s still a reasonable size for a lot of our listeners to look at. It’s a New Zealand company but it’s listed here as well, so it would have a dual listing. There’s no issue there really, except that sometimes people on either side of the Tasman can play arbitrage if the share price for whatever reason goes out of sync. But anyway, the financial health of this company is steady and strong, so it scores well there. The yield is quite high in this company as well, so it’s certainly above the mortgage rate. This is one of the companies we spoke about before where the PE is less than the yield, which is something I’ve always looked for when I’m investing. So, if you think about that, the price to earnings ratio is low, very low, and the yield is very high. So, again, it’s an indication of a high cash flow company, which is great. It’s a classic coffee shop, it’s throwing off lots of cash but the only way it can grow is to buy another coffee shop, really. It doesn’t have consistently increasing equity, so that’s no good, doesn’t score there. It’s less than TK IV 1, we don’t have IV 2 so I can’t measure that on that basis. The yield is 6.78%, so very high, although there have been some special dividends in there as well. There’re no earnings per share forecast, so I can’t give a score on that basis. Anyway, all up it’s got a quality score of 75% and a QAV score of 0.17, and that’s using a share price of $1.12 which was the share price at the time of analysis.

Cameron  31:56

So, it’s down 5% today, I see. It’s currently trading at $1.10 and it’s a Josephine according to the Brettelator.

Tony  32:05

Okay. It wasn’t when I had a look at it.

Cameron  32:06

It closed last month with a $1.15, but I wanted to ask you about the chart. And the reason I’m drilling down on this is because I’ve had a couple of questions on Facebook today from, I think, Ed and I think the other one was from maybe Alice, or Carolyn, I think it might have been actually, asking us to go over the second buy line again, or asking for a reference to an old episode of the second buy line. We’ve talked a bit about this in recent weeks, because everything is a Josephine and even things that are turning around — like, there have been a few positive days in the market in the last three or four days, or the last three or four market days. But you know, we keep saying “well, we can’t buy anything because they haven’t crossed that second buy line.” So, can you just review for us the thinking behind the second buy line for people like Ed and Carolyn?

Tony  33:01

Yeah. So, I mean, I think it’s safe to say that I still haven’t gotten my rules together on second buy lines and on Josephine’s and all that, but there are two components. One is, is the share price currently above the closing price for the end of last month? So, if it’s not then the share price is in decline quite clearly. Although it’s July 5, we’re only a few days into the new month and so sometimes the share price can bounce around before we find out what the clear trend is this month. So, it’s best to wait until week two of the month before making clear decisions on that basis. And that also brings into play the second buy line. The second buy line is there to say, okay, the share price is turning up, but it could still be a falling knife, so it’s been going down for a number of months and how can we guard against this being a dead cat bounce? So, it’s an upturn this month but it may not last. Well, the only real way is to look for it to cross another buy line. So, the shares we’re talking about already are in buy territory, they’ve been buys previously, they’ve gone up, and now like a lot of shares they’ve had a peak and they’re coming down. If we use that peak, which is usually the highest share price on the graph as H1, and then look for a secondary peak and draw a second buy line, has the share price gone above that? Has it basically broken out of its falling knife trend is what we’re trying to test for? I say that without having clear rules, Cam. They’re the rules that I’m using at the moment, but if I look at some companies — like I’m thinking of, say, an Ardent Leisure Group — they’re not past their second buy line but they’re above their previous closing month price and they’ve just returned a lot of money in a special dividend. So, if you wait for the second buy line to come across, you’ll miss out on that special dividend and you think the share price will drop, so I guess you’ve got to apply a little bit of common sense if you like Ardent Leisure in that situation.

Cameron  35:03

So, I’m looking at the NZM five-year monthly chart. Looks to me like the peak was the end of March ’22 at $1.61. So, I would start there, H1 for my second buy line, and then I don’t really have another peak as such.

Tony  35:24

Yeah. So, using the three-point trendline rules, if we didn’t have a second peak we’d go back to the peak before that, which is November 30th, 2021.

Cameron  35:35

Yeah.

Tony  35:35

And then there’s another point after that you can draw a line through.

Cameron  35:40

December ’21 point?

Tony  35:42

Yeah.

Cameron  35:43

So, not a peak there obviously, just a thing. Okay. So, if I draw through those, I get a line that I think it’s probably just above, but again, it’s still a Josephine because it’s $1.10 and it closed at $1.15 last month. But that is how you would draw the second buy line for NZM, and I’ll post this up on to Facebook and the different comms channels so people can see.

Tony  36:09

So, what I’m gonna do… so Brett Fisher has kindly updated the Brettelator to draw the second buy line.

Cameron  36:15

Oh, nice.

Tony  36:16

So, I’ve been using that for the last week or so and testing it, and I think I can release it, so I can put it out there. And there will be situations like this where you look at it and go, “oh, that’s a bit strange.” But if you work back through the rules, that’s what’s going on.

Cameron  36:28

Right. So, in the case of NZM it’s a Josephine, but if it turns around it will be already above that-it’s already above the second buy line. But it’s a Josephine.

Tony  36:40

Yeah, but it’s below the last month close. So, there’s these two rules at play here, and I haven’t written the code yet to be able to work out which one… Maybe it’s just either or if it’s above the buy line — or maybe it’s an “and not”, and the price is above the last month, it’s safe to buy.

Cameron  36:57

Yeah, no, I understand this is sort of a working theory that you’ve been playing around with. It’s only six months or so, I think, you’ve been playing around with this.

Tony  37:07

Correct. And it gets us into a whole other situation which Brett and I’ve been going back and forth at, and Brett’s kindly done some research into it, whether when we coded the buy line following the sell line, which gives for NZM a nice buy line purchase way back in 31st of October 2020. So, you can see how we caught all that upswing, and the price back then was 52 cents. Brett’s been testing whether we should go back to just having the most recent H1 and H2 as our buy lines. Again, we haven’t come to a conclusion on that because it’s almost like the buy line follows the sell line works at some stages in the cycle, and the second buy line, which is how we used to do it, which is H1 being the highest point on the graph and H2 being the second highest point on the graph, works at other times in the cycle. So, it’s kind of again, we’re playing around with a combination of both here trying to land on some rules that we can code.

Cameron  38:03

All right, well, thank you for the pulled pork on NZM, TK. We ready to get into the Q&A?

Tony  38:10

Yeah, sure.

Cameron  38:11

Before you have to go and jump on your ark.

Tony  38:16

I’ll show you what it’s like at the moment. Have a look at this. I don’t know if you can see anything.

Cameron  38:21

It’s Biblical.

Tony  38:22

It’s just completely whited out.

Cameron  38:24

You’ve got to go jump on your ark, and I gotta get out of here before people start setting off fireworks outside of my window, which is gonna happen anyway.

Tony  38:32

That’ll be fun. Fox will enjoy that.

Cameron  38:34

He will if he’s not still having a meltdown. He stayed with his cousins last night again, and I heard he went to bed at-they all went to bed at 12:30am. So…

Tony  38:47

Midnight feast, always a highlight of the sleepover. I used to get a phone call at about 12:30 in the morning when Alex was a kid, “come and get her, she’s had her midnight feast and she’s running around.”

Cameron  38:59

She’s got her second wind.

Tony  39:01

“She’s highly anxious.” So, Fox is enjoying his cousins, so has a thought crossed your mind that you’re probably gonna be staying over in Utah a lot longer than you think?

Cameron  39:11

These actual cousins live in Phoenix. We were with them in Phoenix. They’re up here for — there was a family reunion here a couple of days ago when we got here. Yeah, he loves his cousins. There’s a bunch of kids, but the two of them are twins and they’re about a year older than Fox and they just get along like a house on fire. They’re like triplets running around, they just bounce off each other. But apparently their father, Jeff, asked Fox today or yesterday, “Fox what would you do if you were rich?” And he said, “I would move to America and buy a gun.” So, he’s been here two weeks and that’s what he’s worked out is what to do. But as Chrissy said, that’s Fox just being a clown. He thinks he’s cracking a joke, right?

Tony  39:52

Being funny.

Cameron  39:53

He thinks that’s a funny answer. Good. Okay, onto questions, Glen. Glen’s done some really interesting analysis here, which I’m gonna read out. I don’t expect to understand it and I don’t expect anyone else to understand it except maybe you, but anyway, I’m gonna do my best to read this out. Glen says, “hi Cameron. I’m by no means a commodity expert but like to research things of interest. I found that GRR, which I own, produces almost 100% revenue from iron ore pellets, which is a premium grade of iron ore compared to the one we usually track in Stock Doctor, 62% China FE. I’ve been searching high and low to find a chart for iron ore pellets and found this one after a long period of time,” and he has a link to a website called stealmint.com. “It’s a bit of a fiddly chart but you can get the attached trendline for a two-year period. When I say two years with a fiddly chart, I get the L1 line on the chart by manually counting back one month increments on the live web page, selecting one month or period. It does have the origin as Brazil, but it does trade in USD which GRR convert their sales, so would assume some correlation? May be want to run through TK, but thought on this being an early indication that iron ore pellets not iron ore 62% Fine as a commodity are a sell. Just one observation relating to iron ore.” And he gave me a link, he says 63.5% grade when he sent me this a couple of days ago is trading at a closing price of $116.50 USD per ton. “From memory Tony references TR# iron ore 62% FE CFR China in Stock Doctor, which has a closing price of $129.71 per ton. In Trading Economics, they have the same 62% grade further down the page under industrials, which has the same closing price of $129.71 per ton. The 63.5% versus the 62% charts are very similar, however the 63.5% is a big Josephine this month compared to the 62% charts so there are some differences. It’s hard to obtain for all miners, but Rio and FEX mentioned 62% in their reports, so maybe check with Tony on which iron ore he references on Stock Doctor and possibly update the link in the buy list. Sorry for the long email, just bunkering down during this period of market pain and getting ready to go when the opportunity presents. Really appreciate your show each week. Keep up the hard work. Regards, Glen.” I think Glen needs to get on the ark with you, Tony.

Tony  42:32

With his iron ore pellets.

Cameron  42:35

He’s going stir crazy wherever he’s holed up.

Tony  42:38

I had to look at this and I don’t profess to be an expert on it. Tough one. I’ve just been using the Stock Doctor iron ore price, whether it’s pellets or not, I haven’t taken into account. I defer to Glen’s research on this if it’s a better graph for GRR, then go for it, sell. I noticed that, when I did a little bit of research, that we’re looking at the iron ore 62% Fine it’s called, but it’s basically the grade of the iron ore in that the ore that’s being shipped, and Glen’s graph is 63.5%. So, it’s not going to be a huge difference I wouldn’t have thought. I think both graphs are in US dollars, I don’t know if Australian dollars would make a difference when it comes to iron ore. So, there’s all sorts of things we could go down the rabbit hole on with this. If Glen thinks that’s a good graph to use, then by all means go ahead and sell. My only commentary is that I’ve had contact from a couple of people who have pointed to other graphs which suggests the iron ore market has just become a sell, and I don’t disagree with those. There was the graph that we talked about a little while ago which I’m still looking into which is the brick, where it puts stacked bricks on a curve, and it’s available in Stock Doctor as well. And then there are other various graphs around whether it’s iron ore in general, iron ore into the Asian market, its different grades, etc. I think all that’s telling me is that iron ore is getting pretty close to a sell if it hasn’t already become a sell. I think it’s only about $10 above the sell price that we’re using anyway in Stock Doctor. So, I’ll defer to Glen on this one. If he wants to sell for GRR, that’s fine. I’m going to stick with Stock Doctor in general, and I hold Champion Iron so I’m using Stock Doctor as my commodity for Champion Iron if I need to sell it. My overall comment is that I tend to be a little bit loose as I can with these things, because, you know, they can go both ways. The iron ore price is going down, does that mean it’s going to keep going down or could it go back up again? So, as we’ve spoken about before, commodity share prices, all these things move in oscillations, usually with a general upward trend. But they go from peaks to troughs, and we’ve seen Iron Ore go to a high peak and now it’s coming down. Are we nearing the trough? Are we not nearing the trough? Is it going to rebound again? All it would take would be for China to get on top of its COVID situation, perhaps, and the iron ore price could rise again. Or a limit in supply somewhere because of rain or whatever in iron ore mines, and the price would rise again. So, the worst thing to do is to sell at the bottom. So, I’m kind of, I’m gonna stick with the way I look at it which is the three-point trend line graph using the Stock Doctor 62% FE concentrate, and it’s getting pretty close to a sell there. I’m just gonna see, it may turn around, it may not, and I could be out tomorrow, but I’m just gonna stick to what I’m using.

Cameron  45:26

Okay. I am in Iron County here. I could just walk out and just ask someone down the street.

Tony  45:32

What do they think of the iron ore price for Challenger?

Cameron  45:34

The red rocks of Utah. Okay, thank you for that analysis, Glen, but you need to get out more, get some sunshine. Mark asks, “could you go through a few second buy line stock examples?” I think we’ve talked enough about that today. I got a late question from Dan that I haven’t sent you, but I think you can do this one on the fly. He said, “if over the last few weeks your portfolio dropped from fifteen down to seven companies, would Tony advise to dollar cost average back in the market by, let’s say, buying one parcel of shares a week or fortnight or month. Or in case you would find five companies to buy this week, for example, would Tony advise to buy them all within that week, mindful of the fact that a few days in the market actually can account for a big part of the gains? If you dollar cost average slowly, would you potentially miss out on the market turning?”

Tony  46:29

So, I would advise buying if you can see something to buy at the moment, and all at once. Now, the only thing I’d say in addition to that is that that’s hard for me to do given the parcel sizes I’m buying, so I do take a number of days to get into a position sometimes. It’s as much because of the banking restrictions I have as it is filling the orders with what’s available. So, I’m kind of forced into dollar cost averaging, but it’s not a long term one. I’ll be in as soon as I can.

Cameron  46:56

Yeah, that’s not deliberate, it’s just you facing limitations to buy those sized parcels, yeah. As Dan says, because that’s true and I keep reminding people of this in my newsletters, that history shows that when the market turns around, a lot of the growth does tend to come very quickly in a day here, a day there. If you look back over fifty years, that’s where the majority of the gains come. I think I read an article, we talked about it on the show at some stage, over the last fifty years if you missed out on the top twelve days, I think, of the market, your returns were reduced by 50% or something. I’m making up the numbers here, but it’s something like that. It was like a matter of twenty days that resulted in 50% of the gains in the market, and if you weren’t invested in those twenty days, you’re only half of where you could have been. So, that’s why you tell us to be fully invested at all times if we can find things to buy that pass the rules, right?

Tony  47:59

Yes, exactly. I think that’s a good summary. It kind of backs up the fact that if we find something to buy, we should jump back in, because chances are it’s the beginning of the upturn that you were just talking about and we want to be positioned well for that.

Cameron  48:13

And as we’ve seen with all of our rule ones, there’s a lot of false starts there. We jump in and then we have to sell something a week later.

Tony  48:19

Yeah.

Cameron  48:20

But the principle is that we want to be there for the great turning.

Tony  48:25

Yeah, and that’s a good point, too. So, the person who’s asking the question, if they went out and bought five stocks tomorrow, I wouldn’t be surprised if they were selling one of those five stocks as it turned down again. I’m thinking, like just that example we went through before with New Zealand ME. I did the analysis yesterday and it was okay to buy and today it’s a Josephine, it’s down 5% or whatever its down today. So, you know, it can turn either way quickly in this kind of market. But yeah, to your point, the fact it can turn quickly means you should get in as soon as you can. The other point I’d make is that I’m also looking at what are called double positions in this kind of market, as well. So, I’ve already bought a second tranche of West African Resources a week or two ago, and something like Beach Energy is on my radar to look at as well. I don’t want to sit on cash and I’d rather if something that I already own is a buy and it’s not a Josephine, I’d rather take another position in that and kind of overweigh the portfolio a little bit towards those stocks than sitting in cash at the moment.

Cameron  49:23

I got your email about BPT, and I went to add it to the dummy portfolio but we sold it a week before the end of the financial year. And I know it’s a dummy portfolio so the ATO’s not going to come after us for asset washing, but I thought you did remind us all not to get caught out asset washing so I didn’t add it back.

Tony  55:38

Okay, good.

Cameron  55:38

We could do it and get away with it but everyone else can’t, well can’t if you’re doing it with real money, so I didn’t. All right. Well, that’s all the questions for this week, TK. After hours. What have you been up to?

Cameron  1:07:16

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