QAV 535 CLUB

Cameron  00:06

Welcome back to QAV everybody. This is episode 535, recorded on Tuesday 6th of September, 2:25pm Eastern Standard Time. How are you, TK?

Tony  00:22

Okay, in the wars a bit. It seems like every time we record a podcast, I’ve got a litany of illnesses to report. But no, I had a skin cancer cut out today. Well, two.

Cameron  00:31

That’s what happens when you get old, Tony.

Tony  00:33

Yeah, I know. It’s wonderful part of life, getting old.

Cameron  00:37

So, skin cancer cut out of your neck?

Tony  00:39

Yes, and a biopsy done for my forehead. I think I’m living too close to the equator, Cam, I’ve got to get back to Melbourne. Back to Cape Schanck.

Cameron  00:48

Don’t we all. We all need to get back to Melbourne.

Tony  00:50

Yeah, less intensity in the sun.

Cameron  00:51

We should build a QAV compound, like The Godfather compound, a QAV compound in Melbourne. Just houses for all of the people who graduate QAV, we just all live together. Big compound somewhere.

Tony  01:04

Yeah, in Cape Schanck, we’ll make it like the Tahoe compound.

Cameron  01:08

Yeah, you know, just start… Well, I guess we just buy the houses. I was going to say we take over a golf course and build houses on it.

Tony  01:16

Now you’re talking. Yeah, that’d be great.

Cameron  01:19

Just one by one, we’d buy all the houses at Cape Schanck and we’ll all stay down there.

Tony  01:24

That’s getting harder because they’ve all gone up in value since COVID.

Cameron  01:28

Unlike our portfolio this financial year. Let’s get into the show. Iron ore is now officially a sell as of last week. What a brutal, brutal couple of days it was for iron ore stocks in our portfolios last week. GRR was a killer.

Tony  01:45

In particular.

Cameron  01:46

 FEX was no good either, but GRR went from being a superstar to just… I think I sold it at a loss, eventually.

Tony  01:55

Yeah, I know we have a question about that later, so maybe I’ll just keep my remarks until then. But it’s a double whammy of the iron ore price becoming a sell and the company reporting at the same time, they weren’t forecasting what people thought they should.

Cameron  02:09

Yeah, well. We’ll talk about that later on, as you said. I found an interesting quote from Buffett on something I was reading this week. It was some article about how he sold at of Disney too early and lost $18 billion or something, but I think he’s doing okay. I don’t think he regrets it, but nice to know that even Buffett makes mistakes from time to time. I think he’s the first person to acknowledge that. But there was a great quote from him: “it’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” Our episode last week I called the “Qaverick”, and that’s what I keep telling people; like, Tony spent thirty years making mistakes. We don’t need to make our own mistakes over again. Let’s just learn from Tony’s mistakes and see how it goes.

Tony  02:57

Yeah, that’s exactly right. When we do the pulled pork, I’ll confess to another one as well.

Tony  02:57

Oh, yeah, that’s good. I like that. I always like it when you admit to mistakes because it makes me feel better about myself.

Tony  02:59

It’s ridiculous trying to hide them, right? Because apart from the fact someone will go through our disclosure list and say, “hey, how come you bought this stock?” So, we get found out. But you gotta own up to your mistakes. Just own up to them, front up to them, move on.

Cameron  03:21

Like, don’t worry about it. We’re all human. Everyone makes mistakes, even you.

Tony  03:26

We’re not robots, but even robots make mistakes as well.

Cameron  03:30

Yeah, the T 1000 didn’t kill Sarah Connor, so there you go. If he can make a mistake, we all can. Hey, I wanted to ask you some questions. These aren’t in the notes, I just came up with these this afternoon while I was doing stuff. You know we talk about down days and updates; we try not to buy something on a down day, we wait till it has an up day. What about a neutral day? There was a stock I was looking at yesterday, BRI, it was having a down day yesterday. Today it’s having a neutral day.

Tony  03:58

It’s pretty rare that a stock would have a neutral day. It must be fairly thinly traded.

Cameron  04:02

It’s a small cap: 18,000 average daily trade, you know. But it’s having a neutral day, is that is that kosher, then?

Tony  04:10

Yeah, I’d still buy it on a neutral day, I think. I can’t recall much experience with that, because generally the stocks are always in motion. But yeah.

Cameron  04:18

So, I figure if it’s not going down… Like the reason we don’t buy them on a down day is because, you know, we can buy it cheaper, maybe tomorrow, but if it’s having a neutral day, then that should be kosher.

Tony  04:29

Well, yeah. And there might also be a continuing trend and we don’t know what news is driving it down until we can do some research. So yeah, there’s all sorts of reasons for not buying on a down day.

Cameron  04:37

Well, there was another one I was looking at yesterday, LYL, Lycopodium or whatever it is. They’re in the lithium business, I think.

Tony  04:45

Oh, they used to be in the mining services business.

Cameron  04:48

Well, they provide services, they just won a contract to some lithium miner too. They were high on my buy list yesterday, they’re above their 2BL. They were having a down day yesterday, I looked at them today and they’re having an up day, but they’re now a Josephine. But, above their 2BL according to the Brettelator. Pull up the Brettelator if you can.

Tony  05:13

Yeah, I’ve got it’s above its 2BL but its below its last month close.

Cameron  05:18

Yeah, so how does that make any sense? It’s a Josephine but it’s above it 2BL.

Tony  05:23

That can still happen, and this is a good example of it. So, it’s second buy line is based on its highest peak and last highest peak, but it closed last month at 655 and its 640 today.

Cameron  05:37

So, we say that if something has become a Josephine, we don’t buy it until it’s crossed it’s 2BL, but this is another Schrodinger. This is a double Schrodinger. It’s above its 2BL but also a Josephine at the same time.

Tony  05:52

Yeah, I think it is, because if you look at the Brettelator, the last leg of the graph is down even though it’s above its buy line. So, I’d still want to see that turn up.

Cameron  06:01

Right? So, it needs a third buy line now?

Tony  06:05

No, it just needs to be above the last month close and it’s second buy line.

Cameron  06:09

So, we don’t need to do another buy line that it crosses.

Tony  06:16

No, you can’t because the highest point is the rightmost point at the moment.

Cameron  06:21

Well, that’s good. So, I’ll keep an eye on that and wait until it turns around. Another question for you: rule one and dividends. So, there was another stock, Genworth, GMA, which I had to sell from one of our portfolios today. It was a rule one, but it had a dividend, but the dividend was paid on the 31st of August. So, we’re past the pay date and it’s a rule one, but when I look at it, it’s down 10% from the buy price but the dividend was sufficient that it’s actually only down 5% if you factor back in the dividend. If I look at Navexa it says if you include the capital loss, if you add the capital loss, and the income, we’ve lost 5% on it. But we would still call that a rule one sell, right, if the price is down?

Tony  07:10

Yeah, if the dividends been paid, yeah. All things being equal, it should have recovered. So, it goes ex dividend, it goes down, dividend gets paid and the stock price and get back up again. If it doesn’t, it’s probably going to be in a downtrend going forward.

Cameron  07:22

Yeah, it was down again today too so I felt comfortable getting rid of it. But I did think, if we’ve only lost 5% of it because we’ve got the income, we haven’t really lost 10%, we’ve lost 5%.

Tony  07:32

That’s correct, but the share price should start to recover once the dividends banked.

Cameron  07:36

And if it’s not, it’s just not a good sign anyway.

Tony  07:38

Yeah, that’s right. Yeah.

Cameron  07:40

Okay. All right. That’s all I wanted to ask you. Portfolio updates. Well, it’s been a rough week on the All Ords. Crashed on Thursday, and basically has just tumbled along since then; hasn’t really recovered from the crash last week. The DP is up slightly for the FY even after taking a hit from FEX and GRR last week, but we’re still getting our asses kicked by the sexy 200 on a financial year basis. It’s been a rough year for our portfolio.

Tony  08:16

Well, financial year; we’re talking about, what, five weeks.

Cameron  08:21

Well, the whole last twelve months we’ve been underperforming.

Tony  08:25

I guess I’ve have had a bit of a musing about that, and I don’t know if this will come to too much, but if you look at the Navexa portfolio, the dummy portfolio graph, you can see that if it was a stock, it would have been a three-point trendline sell back in the middle of life last calendar year. So, you know, the thought did cross my mind: what if we had have sold it then gone to cash and kept running a dummy portfolio just on paper to pick the turnaround, and then reinvest it? I mean, it’s, again, an added protection about losing money. So, I’ll have to think about that one more. It’s a pretty big call going to cash, but it would have been the right one in this case.

Cameron  09:03

That goes against the policy of “always be fully invested.”

Tony  09:06

It does, yeah. But as you pointed out, we’ve gone backwards since the middle of last year. And as listeners will know that from their own experience, we’ve been rule one’d on rule one’d on rule one’d continually. So, it hasn’t been an easy time to be in the market.

Cameron  09:20

And the market, we know the sexy is up 9-10% for the financial year. What’s driving the All-Ords success, do you think, this financial year?

Tony  09:34

It’s driven by a few big stocks just because of their market cap weighting. So, we don’t have BHP, for example, in our portfolio; we don’t have CBA, we don’t have Coles and Woollies. Maybe we do have Woodside, I think. So, yeah, generally this will happen if BHP and RIO go on a tear, for example. They have been coming down and should come down because of the iron ore price, but BHP did have a growth spurt when it repatriated back to Australia and ceased its London listing.

Cameron  10:00

So, I’m looking at BHP for the last six months. Six months ago, it was trading at $50. It’s now trading at $37.

Tony  10:08

Okay, it’s not BHP then.

Cameron  10:10

CBA six months ago was trading at 94, it’s now at 96. It’s gone up, come down, gone back up. What were some of the other ones you mentioned?

Tony  10:21

RIO.

Cameron  10:23

RIO six months ago was trading at 120, it’s now trading at 91. So, it’s none of those.

Tony  10:30

Well, something’s been driving the All-Ords up, though. Let’s do a quick look at what makes up the top 20, see if we can pick it. But that’ll be the reason, there’ll be something large in the All Ordinaries which is having a good run and we don’t have it — which is fine, I’m not worried about that, Cam.

Cameron  10:47

No, I know, I’m not either. I mean, I know it goes in swings and roundabouts and we always come out on top, in my vast three years of experience.

Tony  10:57

Yeah, so BHP and CommBank are the two biggest. RIO. CSL maybe? Let’s have a look at CSL.

Cameron  11:02

Oh yeah, CSL has had a great run: 249 up to 294.

Tony  11:08

Okay, so CSL could be doing it. Not sure when BHP paid its dividend, but that could be part of it too because we’re using the STW which is the accumulation index. So that could be it. It’ll be something in that list. CSL, NAB — I think we bought NAB, so it’s probably okay.

Cameron  11:28

NAB went from 28 to 30.

Tony  11:31

Westpac, I think went down, ANZ probably went down, Woodside’s been going up but we own it. Macquarie… I don’t know if Woodside and Macquarie in the dummy portfolio, but I certainly have them. They’re going up. And then you’ve got Wesfarmers. Fortescue has been going backwards. Wesfarmers, ResMed, Woolworths, Telstra.

Cameron  11:49

Macquarie hasn’t done much. Macquarie has gone from 175 to 178 in the last six months. Telstra has gone from $3.82 to $3.89, not much. So, none of the top ones seem to have grown a lot. As you say, it might be dividends, but I don’t know where… It’s not the tech stocks, it’s not the big caps, it’s not our stocks. What the hell’s driving the All Ords.

Tony  12:16

Woodside has gone up a lot.

Cameron  12:18

Since the acquisition, or demerger or whatever the hell that thing was.

Tony  12:22

Yeah, when they bought BHP’s oil business.

Cameron  12:25

No, it hasn’t. Six months ago, Woodside was 34 bucks, now it’s 35 bucks. If anyone knows what’s driving everything up, let us know.

Tony  12:37

It’ll just be a mix of those big ones, the big caps.

Cameron  12:40

Yeah, right. But of course, what really matters is our long-term performance since inception, which is 2nd September 2019: Dummy portfolio is up about 15% per annum versus the benchmark which is up about 6% per annum, that’s the STW 200, the sexy 200. So, we’re still doing two and a half times better than the index over three years. So, I’m not worried, not complaining, just wondering what the hell, you know, why the markets going up and we’re not, really.

Tony  13:12

Yeah, well, when stocks like GRR in our portfolio have the kind of reversal of fortune they’ve had, it doesn’t help.

Cameron  13:19

I know, it’s shocking. Like, all of our big reversals in the last six months to a year have been iron ore. Remember, it was about this time last year that we did an iron ore sell, I think it was September last year we had to sell off all our iron ore stocks when iron ore became a commodity sell. We lost a bunch then and then we bought back into iron ore and then we lost a bunch on it again.

Tony  13:45

Well, it might be the last time we do that for a while.

Cameron  13:48

Though I gotta say, looking at our top five stocks since inception: number one is C6C, 177% per annum in the times that we’ve owned that. GRR is number two at 138% per annum, even after its collapse, because we’ve owned it three times. FMG 87.7% per annum, CAA 59.6%, and IGL 59%. So, four mining stocks there, two iron ore stocks that we’ve taken a beating on at various times, but they’re still two of our top five stocks. So, we take a beating, but they’ve also delivered very well for us over the last few years. So, can’t complain about iron ore, really?

Tony  14:38

No, I agree. And that’s, I guess that’s the perspective that we’ve had over the three years and certainly mine over time is that yeah, you tend to focus on, “oh gee, I could have sold out $1.50 and I finished up selling it at 75 cents.” So, you feel really bad, but looking back over the history, it works out.

Cameron  14:54

That’s the thing that I have to keep reminding myself, it’s a long game that we’re playing here.

Tony  14:59

Yep. And look, it’s not perfect. I mean, if we can come up with a better way of doing it, then that’s great. My experience is, and I guess I’m pre-empting the answer to the question here that’s going to be asked a bit later, is that if you draw sell lines closer to the upward trend, invariably you’ll sell out too soon and they’ll have a second leg, and you’ll have regret that you sold too soon. But if you don’t, then you have what we have now which is opportunistic regret. I wish I had sold it when it was higher. So, yeah.

Cameron  15:29

So, you’re gonna have regrets. Unless you follow rule 1.5, which is “never look back.” Don’t look back.

Tony  15:39

Yeah, focus on the long term as we do, look at the long-term performance of the portfolio.

Cameron  15:43

Who was in that film? Don’t look back.

Tony  15:46

Don’t look back. That’s the Bob Dylan one, isn’t it?

Cameron  15:49

Oh, no, well, what was the one I’m thinking of, then?

Tony  15:53

Is that the Bob Dylan biography with Cate Blanchett playing Bob Dylan? Is that Don’t Look Back?

Cameron  15:57

There was a bunch of people playing him I think, I’ve never seen it. Yeah, you’re right. That’s not the one I was thinking of what was the early 70s movie with the negative waves guy in it? It was “Don’t Look something.” What’s negative wave’s guy’s name?

Tony  16:13

Donald Sutherland.

Cameron  16:14

Yeah, a Donald Sutherland film.

Tony  16:17

I don’t know. He’s made a lot of good ones.

Cameron  16:20

It was a really trippy film about, I think he and his wife lost a kid and she went nuts, and there was a lot of surrealist horror stuff. It was one of the great horror movies. Let’s see, I’m scrolling down IMDb here. “Don’t Look Now.”

Tony  16:41

I don’t think I’ve seen it.

Cameron  16:44

Oh, I highly recommend it. It’s only got a 7.2 on IMDb. “A married couple grieving the recent death of their young daughter in Venice when they encounter two elderly sisters, one of whom is psychic and brings a warning from beyond.” Directed by Nicolas Roeg who did the David Bowie film.

Tony  17:02

Oh, the Man Who Fell to Earth.

Cameron  17:02

The Man Who Fell to Earth. Yeah, so it’s that kind of Nicolas Roeg. Julie Christie and Donald Sutherland, really kind of trippy, early 70s surreal horror kind of thing. He was a really interesting director back in the 70s.

Tony  17:18

He was very much so, wasn’t he?

Cameron  17:20

Anyhow, sorry for the… Don’t Look Back, rule 1.5 I always say: never look back at the decisions that you’ve made because you’ll always beat yourself up.

Tony  17:30

Unless you meet a clairvoyant. “Hubble bubble, toil and trouble. Beware the Ides of March.”

Cameron  17:40

He also did “Erotic Tales Volume Three” in 1995. I never got to see that one, I’ll have to check that out.

Tony  17:46

Nicolas Roeg or Donald Sutherland?

Cameron  17:48

Nicolas Roeg. There’s no plot even in IMDB, so no information, no synopsis, no cast. So anyway, there you go. All right. Moving right along. What have you got on your list of things to talk about?

Tony  18:04

Yeah, a few things here. We’ve covered the musing about three-point trend lines on the portfolio level. A couple of heads up: I did a download today to do the pulled pork, Santos and Woodside are getting close to becoming back on the buy list, so people can keep their eyes open for that. It’s starting to rain dividends, which is always good, this time of year. So, just as we spoke about before, add them back before selling because the price can drop. So, for example, JBH, JB Hi-Fi would have been a rule one except I added back the dividend and it’s not, and it’s been rising, so that’s good. And I shouldn’t overlook the fact that Mr. Warren Buffett turned 92 last week, on the 30th of August. So, happy birthday to Warren.

Cameron  18:47

Unbelievable.

Tony  18:48

Still going strong on Cherry Coke and peanut brittle.

Cameron  18:51

Every day, like, I have a news alert every day and it says “Warren Buffett…”, and I go, “oh no, he’s dead.” He’s rocking along.

Tony  19:00

Yeah, that’s always been an interesting thought of mine, and one of the reasons why I did sell Berkshire Hathaway, eventually. It’s got to be a breakup play when Warren goes. It’s a conglomerate, right, and someone with a lot of money like a private equity firm will come in and say, “I can get more for the sum of the parts rather than the whole,” and they’ll break it up and start selling things off. Which may be a good thing for shareholders, but yeah, interesting thoughts on what might happen when Warren shakes off the coil. But he’ll probably go for longer than you and I the way he’s going, he’s just unstoppable, really.

Cameron  19:36

Don’t they have something in the constitution of Berkshire that says that it’s going to be around forever, and nothing can ever happen to it?

Tony  19:43

I’m not aware of that? Possibly.

Cameron  19:46

Okay, let’s get back to oil. You mentioned STO before. Oil is a Josephine at the moment, doesn’t oil need to cross a second buy line before we can buy any of those stocks?

Tony  19:57

Correct, it does. So, yeah, so you’re right. They’re close to coming back on the buy list, but we just have to check for whether the underlying commodity is a Josephine or not, so you’re right.

Cameron  20:07

It’s very much so, very much so a Josephine.

Tony  20:09

Yeah, the oil stocks have had a bit of a leg up again because of the, what is it called, the Nord gas pipeline shutting again.

Cameron  20:17

Yeah.

Tony  20:18

And also, too, OPEC have cut back their production as well. So, it’s an interesting place for the oil market at the moment.

Cameron  20:25

Well, I guess that its been, I mean, it’s just been such a rocky global climate in the last year. Particularly for commodities with Ukraine, and with China and supply chains. I read a thing in one of the Reddit investment forums yesterday or over the weekend; somebody said my father or father-in-law or something works in shipping, and he was saying all the containers are empty going to China, just empty, nothing’s going in. It’s a big bad sign for supply chain issues. And somebody else pointed out, “well, it’s because China’s in lockdown, half of it. They’re not buying stuff.” And “it’ll turn around the next month.” But I don’t know, it’s too hard for me to unpick all of the macro-economic events happening around the world.

Tony  21:22

And that’s why we don’t try, that why we just follow the graphs. But you’re right, yeah. So, Woodside and Santos, even though they’re coming back on the buy list, check the underlying commodity before you buy. Moving on to an excellent article that your son Taylor wrote on Yahoo Finance that people can go and Google “Taylor Riley, Yahoo Finance.” He’s talking about the snowball effect, and I’ll just quote a little bit here: “if at twenty years old I had saved up $10,000 and put my money into a portfolio, if I also worked a fairly average job and only managed to save an extra $5000 a year to feed my snowball, assuming the 9.8% market returns for the last thirty years stay consistent, by the time I have my 51st birthday, that portfolio will be worth over 1.055 million. If I left the same money until the average retirement age of sixty-five, I would have over 4 million in that portfolio.” So, excellent analysis from Taylor and shows the power of compound interest. And it’s often wasted on the young, but it’s the best time to start doing it. So, hopefully he’s taking his own advice. I think it’s great that he’s written articles like this, you know, a little bit of me hopes that I’ve had an effect on someone young like Taylor to do things like that.

Cameron  22:32

Oh, you may have had a small effect on him, yeah. And when you say he wrote it… He did. He actually did write this one. I wrote one paragraph of it, the one giving QAV a plug, but he wrote the rest of it by himself.

Tony  22:47

Yeah, very good.

Cameron  22:48

Yeah, it is very good. And I don’t think he listens to the show very often at the moment, so I can say that I don’t know where this kid came from. I think he came from you; I think he’s your kid. He’s in Sydney doing meetings today, cutting deals with people. Three or four years ago this kid couldn’t even answer the door when the pizza guy was delivering the pizza because he was too shy and too introverted to even answer the door. Now he’s writing articles, cutting deals, flying around. Where the hell did you come from, man? What happened? What happened to you?

Tony  23:26

Oh, but you were like that when you were his age?

Cameron  23:28

What, a hustler?

Tony  23:30

Yeah.

Cameron  23:30

Well, I was both. I was introverted and then became a hustler. Yeah, that’s true. He’s way smarter than I was at that age, but yeah. I didn’t have Tony Kynaston as my mentor.

Tony  23:45

Well, I’m glad that it’s seeping through, because it’s one thing to be told something and another thing to do it. So, it’s great.

Cameron  23:51

And he does do it. He’s got his investment portfolio and he’s sticking as much money in there as he can and living as cheaply as possible. My mother gave him her old car when she won a new one in a raffle, and it’s a 1991 Toyota something, and it’s, you know, he calls it a shitbox. And he goes, “I love it. Everyone says, all my friends are paying $60-70 grand for new cars, and I’m like, ‘No, I’m gonna just drive the shit box until it falls apart and invest my money.'”

Tony  24:22

That’s exactly what I did to until I was about 30-35. So, yeah. And loved it. I actually quite got a kick out of going and buying an old Mad Max Falcon and things like that. That was great fun. Even though they were crappy and broke down a lot.

Cameron  24:37

Well, when he was in the market for a car when he got his licence, we were looking at a bunch of shitty old second-hand cars, and it was really hard to find one that was in his budget, you know, that wasn’t completely a piece of shit and being sold by some dodgy guy. You knew the engine was going to fall out of it in a month, you know? So, getting one that my mom had owned for seventeen years and I think was her father’s before her too… I think she inherited it from her dad when he died. But, yeah, no, I like his attitude. It’s “nup, going to live cheap, live simply, and get rich by the time I’m thirty. That’s his mindset.”

Tony  25:16

Yeah, that’s great. Very good, good article. I recommend it for people. And then lastly, I’ve got to talk about Stanmore Resources which is my pulled pork today: SMR, Stanmore resources. So, it’s on the buy list.

Cameron  25:29

Not to be confused with ASMR, which is when people *get up close to the microphone, and they do this and they make scratchy nice and supposedly it turns some people on, but I don’t get it. Is this turning you on, Tony?*

Tony  25:49

You’re making me laugh. I wouldn’t pay money for it.

Cameron  25:57

*Can you do the pulled pork like this, Tony? Get up really close, do SMR as ASMR?* Sorry, this is the brain damage and filter thing that we were talking about off air. Sorry, as you were.

Tony  26:23

Alright, so ASMR. I’ll do it in Morse code by scratching the microphone. Okay, so Stanmore Resources. A little bit of background had a big change in business in the last six months when they bought a lot of coal mines off BHP. And, you know, this is this happens a lot in the coal industry, and it’s oftentimes driven by non-economic factors. But this could just well be the deal of a lifetime for a company like Stanmore, because I just briefly went through their results presentation today, and they say that they have debt on their books at about $258 million, which was used to finance the BHP acquisition, and in the six months since then, they made a profit of $232 million. So, if they chose to, they could pretty much pay off the acquisition in six months. So, pretty good deal, and BHP were hell bent on getting out of the coal market, not because they thought it was a good time to sell but because they were copping a lot of flak from investors and banks who wouldn’t lend to them and things like that, because of the climate change concerns. So, well done to SMR for picking up some resources on the cheap. Background for SMR, it’s a metallurgical coal miner. So, if you remember, there’s two types of coal: there’s the coal used for power stations, which is by far the majority of the coal mined, and then there’s coking coal or metallurgical coal, which I think is about 12 or 13% of coal mined overall. And that’s used in steelmaking to fire the burners to smelt the iron ore. So, this is a metallurgical coal miner in the Bowen Basin. They already had some tenements, which they’ll still continue to develop, but now they’ve got an operational mine. So, that’s really boosted their operating cash flow, which is why its hit the buy list after their latest results. One of the difficulties, though, with these companies is finding a five year monthly coking coal chart. So, I found a five-year chart at a site called barchart.com, but it’s a five-year weekly chart, I don’t have a monthly chart. So, if anyone knows of one, let us know. But Coronado is another one that’s been on our buy list and might still be there today which is a coking coal company. Finding a chart for these is hard. And that’s, I guess, my confession about potentially making a mistake; last week, when I bought this stock myself, it had just looked like it had broken through its second buy line, but when I did the research again today it looks like it’s turned down again. So, it was just touching last week, but again, I was using a weekly five-year chart, so not as good as a monthly one. But I bought it and I’ll hold on to it and use the usual rules for selling to see how we go. But it is actually up at the moment even though as they point out, and as Stock Doctor points out, the price in coking coal has collapsed in the last six months or so. It reached a high of $650 per turn and now it’s down to $250 per tonne. And in fact, this company is calling out negative earnings growth of 18% for the next half, so they expect that they won’t have another bumper half like they had this time. And in Stock Doctor, they’ve outlined four risks with the company which I’ll just quickly go through now, because I think it’s interesting to know the risks. The first one is the Met coal price is down. Having said it’s down, it’s still in the buy territory for us, and like I said, it’s skirting with the second buy line. It just briefly crossed it last week. There’s been a change in royalties; the Queensland Government are now charging coal companies, so that will negatively impact this company. Stock Doctor are quoting that there’s a 40% royalty for prices exceeding $300 per tonne. The price is below that now, so that won’t be paid, but there still has been a general increase in royalties on a step like structure depending on the price of the coal. SMR recently acquired the coal mines from BHP but there is a second leg to the acquisition. I think that they currently own 80% of the coal mines, but they have a deal to buy the other 20% for $380 million. So, again, in reading the management’s report, they’re saying there’s no problems finding the cash flow to do that, and they won’t have to issue more shares or to take on more debt to do that. And then the last thing that Stock Doctor lists as a rick is that it’s a recently formed entity, because they’ve acquired the coal assets in the last six months, “the company has low endless coverage, placing extreme uncertainty on this outlook.” So, as you know from past podcasts, I don’t mind that. I like the fact that there are low analysts covering this stock, it gives us a level playing field to potentially get in before more analysts cover this. So, anyway, the reason for going through those risks is that this is not without risk. However, as the company management point out, even though the Met coal price is down it’s still at a very healthy level at $250 per tonne, and they expect to make good money going forward at that level. So, that’s good. The second thing that they call out is that they do have a very large runway of undeveloped tenements, and so they expect the company to grow dramatically. They now have the cash flow to fund that development. So, you know, even if the coal price does drop, maybe even a good deal from where it is, but a little bit anyway, they still have plenty of runway to expand and grow. So, interesting company, pluses and minuses for it. But again, I’m not going to focus on those, I’m going to focus on the numbers. At a share price of $2.32 and an average daily trade of $3.8 million, $2 billion market cap, this is quite openly available for anyone who wants to invest in it. Going through the numbers, there’s no dividend yield, which is probably a good thing for this kind of company which is still in growth phase. So, it doesn’t get a point for that. The Stock Doctor financial health is strong and steady, and this company has an ROE of 32% currently. So, again, highlighting the good deal it’s done. It trades on a PE of 3.6, which is incredibly low given the amount of cash it’s throwing off and has a price to operating cash flow of 2.2 times, so incredibly cheap. The price is less than our IV 1 and IV 2, and also two times IV 2, so scores well on all the value metrics, as well as the net equity per share, which is $1.97. So, share price when I did the analysis was $2.32, it’s slightly above it on $1.97, but less than net equity per share plus 30%, which is $2.56. As I said, earnings per share forecast is negative, so we don’t score for that, we give it a minus one. Directors are holding 5% of the company, but our test is 10 so it doesn’t get a score for that. Its price is less than the consensus forecast even though there’s only one analyst forecasting, so it scores for that. It does have record low PE out of the last three years. It’s not a new three-point trendline upturn however, and the equity is all over the place, which probably reflects the merger. So, no consistent increase in equity over the last three years. Adding all those things up, the quality score is 80%, which is good, and the QAV score is 0.36, so it’s high up on our buy list. But people should just watch that barchart.com graph and make sure it’s not a Josephine before they buy it.

Cameron  33:57

*Thank you, Tony.* I thought you said the bar chart was daily?

Tony  34:02

Weekly.

Cameron  34:03

Weekly.

Tony  34:04

Five years weekly, yeah.

Cameron  34:06

So, that’s not really useful for us for figuring out if it’s a Josephine, but we just like do the best we can?

Tony  34:13

Yeah, I think so. You just have to try and pick out the monthly peaks and troughs from it.

Cameron  34:17

So, it’s bar chart coking coal.

Tony  34:20

Yep.

Cameron  34:21

Okay, well, that was fun.

Tony  34:25

Especially the ASMR part.

Cameron  34:27

Yeah.

Tony  34:28

That’s a new podcast we can do.

Cameron  34:30

Yes, I love it.

Tony  34:31

*Late night Stock Doctor with Cam and Tony.*

Cameron  34:39

Fox and Chrissy were making kinetic sand for a school thing that he’s doing. You know what that is? It’s like clumpy sand that you can make stuff out of. Anyway, we were watching YouTubes about how to make and a lot of them are ASMR videos, because they have this sand and then they will, like, cut it, and they put the microphone up close, and you hear the knife slicing through the sand. People just listen to that, put their headphones on, you know, turn the lights off, get a box of tissues and they’re off. I don’t know, man, I love people’s quirks and foibles. So, fascinating. Humans are fascinating,

Tony  35:22

Lots of interesting caves in the internet, isn’t there?

Cameron  35:25

There definitely are. All right, let’s get into Q&A. First one is from Tim: “possible question for TK. Is SGM less impacted by the iron ore price than the iron ore miners because it is both a buyer and a seller of iron? If it is less impacted, should we take less notice of the iron ore price graph when making buy and sell decisions?”

Tony  35:49

Yeah, good question, Tim. So, it’s almost reminding me of Capral Aluminium which is the same sort of deal. But I thought the easiest way to answer this is to go into Stock Doctor and graph SGM and then overlay it with the iron ore price. There’s a high correlation between both; not quite one to one, but the correlation is pretty clear if you have a look at it.

Cameron  36:11

So, we talked about these guys last week. Scrap metal recycler, and you said the graph is turkey scrap 80/20.

Tony  36:19

Correct, yeah. Which generally, again, follows the iron ore graph. It’s just at a cheaper price point.

Cameron  36:26

Another good early ’70s film, “Turkey Scrap”.

Tony  36:28

Donald Sutherland?

Cameron  36:32

They were racing turkeys from one side of the US to the other, The Vanishing Point style. Thank you, Tim. Mark: “hi Cam. Like you I’ve been holding GRR for a while.” Grr indeed, that’s how I’ve felt about it last week. “Bought at 77 cents, rode it up to $1.79 and way back down to 70 cents and out. Is it worth asking TK to dissect whether we could have exited earlier? Or is it a case of suck it up?”

Tony  37:05

I haven’t found a way of getting around this, as I said before, so it’s a case of sucking it up. Like I said before, we can draw a sell line more steeply, but then we fall into the problem of the second leg. So, stocks like Fortescue Metals Group that we’ve had in the past, you know, if you draw the line too steeply, it looks like a sell but then it goes up again and does those three or four times. So, I know you can always buy back in, that’s potentially a solution, but I haven’t found a way of getting out of these stocks that go up steeply and then come back steeply in terms of using the commodity charts. Because there’s obviously something else going on with the company because they are shooting above the underlying commodity. The one thing that I’d say to have a look at, Mark, which has been brought to my attention by Brett from the Brettelator, is to have a look at Renko charts. And this might be the solution but I’m still playing around with them and haven’t had a chance to, you know, apply enough cases to them to see if it works. But if you have a look at Renko charts and use those, in this case you would have gotten out of GRR at about $1.50 a share. And Renko charts are available in Stock Doctor. If you go into Stock Doctor and go into advanced charting and call up a stock like GRR, and instead of using a line graph, use the Renko chart you’ll see a whole heap of green steps going up and red steps coming down. That seems to be picking up those cases where you have a big upward swing, and then it picks the downswing. So, that’s one thing to look at.

Cameron  38:36

Renko, named after Jerry Renko, who…

Tony  38:45

Was in Vanishing Point?

Cameron  38:49

Yeah. Okay, I’m just pulling up GRR and the Renko now to have a look at that, see if I can understand what you’re talking about. So, am I still looking at five years monthly on this Renko? Because then I just get one big green bar at the… Oh, hold on. That’s 1987. What the hell is going on here?

Tony  39:09

Because the other one I was looking at was Whitehaven Coal, which was another question, and the same thing; I think a Renko chart might be useful there.

Cameron  39:17

Okay, so I’ve got this Grange Renko open in front of me, walk me through it again. What am I looking at here?

Tony  39:25

So, go into advanced charting. See where you can pick the graph style.

Cameron  39:30

I’ve got it under Renko, yep. Got a bunch of green and red boxes.

Tony  39:34

Yeah, so the green boxes are buys and the red boxes are sells.

Cameron  39:38

Right, and how would we use this if we were using this?

Tony  39:42

Yeah, so the last couple of months have been red boxes, but you’d be selling when the green box turns red, so that would have been 31st of May at 1265.

Cameron  39:56

Well, that sounds too easy.

Tony  40:00

Yeah, but I mean, it’s not as easy as it sounds because if you look back over time, you’ve got, again, this problem of red boxes turning green for a short period of time and going red again and going green and going red again. So, there’s a lot of trading going on. But it does seem to be getting you out in these cases where you have a big, quick upturn, and then a pullback, and it seems to work better than the three-point trend lines in those circumstances.

Cameron  40:24

“A Renko chart is a type of chart developed by the Japanese that is built using price movement rather than both price and standardised time intervals like most charts are. It is thought to be named after the Japanese word for bricks, ‘renga’ since the chart looks like a series of bricks. A new brick is created when the price moves a specified price amount, and each block is positioned at a 45-degree angle up or down to the prior brick. An up brick is typically coloured white or green, while a down brick is typically coloured black or red.” Okay, “Renko charts are designed to filter out minor price movements to make it easier for traders to focus on important trends. While this makes trends much easier to spot, the downside is that some price information is lost due to simple brick construction of Renko charts. The chart shows a strong uptrend in a stock with a $2 box size. Boxes are drawn based on closing prices for highs and lows as well and moves smaller than $2 are ignored.” Well, that’s sort of similar to our monthly charts, right?

Tony  41:28

It is, yeah.

Cameron  41:29

“Renko charts don’t show as much detail as candlestick or bar charts given their lack of reliance on time. A stock that has been ranging for a long period of time may be represented with a single box which doesn’t convey everything that went on during that time. This may be beneficial for some traders, but not for others. Highs and lows are also ignored, only closing prices are used,” that kind of works for us. “There can often be false signals where the colour of the bricks changes too early, producing a whipsaw effect. That’s why it’s important to use Renko charts in conjunction with other forms of technical analysis.” I’m reading this off Investopedia. Okay, so you’re thinking about this.

Tony  42:09

Yeah, well, it does solve the problem that Mark has highlighted that we don’t, if we use our traditional three-point trendline sells for stocks that go asymptotic, they can crash back a long way before we get to sell them or rule one them. Whereas the Renko brick will tell us if it’s fallen back a certain quantum, I guess. It’s almost like quantum, but it’s only reporting a brick for a certain quantum of movement in the chart, rather than, you know, every day or every month a movement in the chart.

Cameron  42:39

Alright, so you’re gonna think about that and get back to us with your analysis?

Tony  42:43

Well, I think we should all think about it. I’d be tempted to say if we do see cases, especially with these commodity charts where they go from green to red, we should think very carefully about selling. So, I’m going to do this in real time and just track my portfolio and Renko both at the same time as three-point trend lines and see how we go.

Cameron  43:01

Throw it out to the QAV Brains Trust, the QAV trust. The QAVelater. We need a name for the brain trust. Well, thank you, Mark. Good question and thank you, Tony.

Tony  43:19

The QAVelength.

Cameron  43:20

The QAVelength. Oh, that’s good. I haven’t used that before, the QAVelength. Well, that doesn’t really suggest a brains trust, but we’ll use that for something. When we come up with their own kind of chart, we’ll call it the QAVelength. “Are you on our QAVelength?” Last one is from Nick. He asked if you could do a pulled pork at some stage on ALO. He suspects it’s a scalable software play, and I actually added it to one of my portfolios yesterday.

Tony  43:50

Yeah, of course, Nick. I’ll do that next week.

Cameron  43:53

It was good. It’s on the buy list and was good numbers yesterday.

Tony  43:58

Okay.

Cameron  43:59

Pretty new float, it’s only and six months old, eight months old. Something like that. But yeah, good numbers. Well, that’s it. That’s the meat of the QAV sandwich for this week, Tony.

Tony  44:15

I did have two late questions, they were on Facebook. I don’t know if you’ve dealt with them on Facebook already?

Cameron  44:15

I haven’t been on Facebook today much.

Tony  44:22

Okay, well one from Evangelos and one from Ed. I’ll just go through those quickly. So, Evangelos asks, “I have been doing some light Father’s Day reading about reversion to the mean. From what I understand stock prices will fluctuate around the mean or average, this average is the moving average. I totally get this concept and it is clear to see this happening on any stock chart. I cannot see the correlation with the 3PTL concept. I have used the Brettelator in conjunction with my charting tool to show both on the same chart, and struggle to find a connection. Given that reversion to the mean and 3PTL are both central to QAV methodology, can [I] please explain this in relation to the moving average?” So, that’s the question. So, yeah, I mean moving averages, you can use moving averages to predict when to buy or sell a stock, short-term moving average when it crosses a long-term moving average is the traditional way of doing that. But, you know, what the 3PTL does is something slightly different. So, to put this in context, if you think about a chart, it’ll generally have a trend. So, if you do plot a chart, say, a monthly chart in Excel, you’ll see a dot plot which will scatter all over the place, have highs and lows, but generally move in a direction. And if you then use the average ability in Excel to plot the average direction, you’ll see it either moves generally upwards left to right or downwards left to right. If you look at that, you can see that it’s almost like the share price will oscillate around that moving average. So, for some periods it’ll be above it, some periods it’ll be below it, but generally it stays within a tranche. So, even though it’s oscillating up and down, if the share price is going high left to low right, the peaks are gonna get lower as they go, and the little troughs are gonna get lower as they go. And so, you could use a moving average, therefore, to pick a time when that trough deviates down too far or starts to revert back upwards, but generally I find that you have to wait for that trend to establish itself longer than you do with the three-point trendlines. So, what the 3PTL tries to do is draw the outliers, the lines along the outliers of that tranche so all the high points are joined up or the low points are joined up. And if the share price drops below that low point line, it’s generally trending downwards, and it’s a sell. Or if it breaks above that trendline for the peaks, then it’s generally turning up again in a trend. So, we’re just looking for breakouts, that’s the basic concept of the 3PTL. Of course, it gets complicated, because shares don’t necessarily just go in one straight direction over five years, so we do have to fiddle around with it a bit. But that’s the thinking behind it. We’re looking at breakouts from the edges of the tranche rather than the direction change in the moving average even though we are buying things cheaply, because we expect them to get rerouted by the market. And that’s what reversion to the mean means in that context rather than the graphing context.

Cameron  47:27

SD Max is a moving average plotter, isn’t it?

Tony  47:31

It is, yeah.

Cameron  47:32

In your version of the spreadsheet, you’ve had this for some time. I think Steven Mabb suggested it a couple of years ago. We’ve been, sort of, comparing the SD Max to our analysis, and I think you’ve told me before there’s a bit of a lag between SD Max and the 3PTL.

Tony  47:49

Yeah, so Steven was trying to find a way of numerically calculating the three-point trendline effect, and was using six-month price changes, five-year price changes in SD Max, and there’s some correlation there, but it’s not complete. And it’s the same thing with all these moving averages; because they’re a moving average, you’ve got to wait for a period of time before the damn thing moves up or down. It’s fine, it’s a good way to spot a change in trend and sentiment, but it can be a month or two late compared to three-point trend lines.

Cameron  48:25

Okay, thank you. You’ve got another one?

Tony  48:27

Thanks, Evangelos. Yep, from Ed: “how would I think about Whitehaven Coal? The operating cash flow has increased because of the rising coal price. The stock price is, therefore, parabolic and looks more like a tech stock than a value stock. Since I have no knowledge of coal markets, I just read the news like everyone else, it just seems inherently risky. One approach is to follow the process and invest, say, 10% of my portfolio, risk 10% on the trade and thus expose myself to a 1% loss of capital. Interested in insights here.” So, yeah, getting back to what we said before about GRR, the three-point trend lines for both coal as a commodity and Whitehaven Coal are going to be a long way below where the share price is at the moment because it’s going up very steeply from low left to high right. And the risk is, therefore, that we don’t draw the right sell line, or we draw a sell line which is going to stay too low, and the whole thing crashes to Earth. So, hopefully it doesn’t work that way and we get a guide by the commodity price when it starts to turn down, but again, I just draw your attention to these Renko charts and that will give us an earlier read, I think, on when to get out. So, I’ll be trying those with Whitehaven Coal in particular.

Cameron  49:38

Oh, okay. Interesting. Things are changing.

Tony  49:42

Maybe, we’ll see. It’s been one of the issues that we faced in the three years we’ve been doing the podcast, and me for longer than that, is that a three-point trend line works consistently well, but we do have this “sellers regret” or buyers regret that we don’t get out soon enough when these stocks take off and then sometimes crash back to where we bought them before we sell them.

Cameron  50:03

And, you know, we’ve talked about this before, obviously; the intuitive solution would be to sell, take your profit when something goes up a certain amount. If it comes back, as you said before, if it starts to fall, we sell, take out profit off the table. And then if it goes back up, buy back in. But the question I always have in my mind is, well, how much does it have to fall by before you sell it, and how much does it have to go back up buy before you buy back in? Is there a new buy line? A new sell line you could configure somehow, I guess, so you could save it, put a percentage on it. But there needs to be some rules and testing of those rules, and retroactive analysis of those rules.

Tony  50:47

It’s got to be systematic. That’s the thing. Because we’re going to have to apply it in all cases. You can’t just say it applies to the Grange Resources of the world. You know, there’ll be other stocks — like I’ve said before, FMG — where it doesn’t go just up in a straight asymptotic line. It goes up, pulls back, goes up, pulls back, goes up, pulls back…

Cameron  51:03

That’s what all stocks do, right?

Tony  51:05

Yeah, you could buy and sell a lot in that case or use the three-point trend lines which tends to keep you in longer.

Cameron  51:10

Well, thank you, Ed. Thank you, Tony. Thank you, Mr Renko. After hours…

Cameron  1:09:43

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