Welcome back to QAV. This is episode 549, we’re recording this — well, we hope we’re recording it, we hope it’s working — on Tuesday, the 13th of December. This is our third attempt of recording this, this afternoon. Skype crashed on us twice so we’re trying on Zoom, which means the audio quality won’t be as good but that’s all we’ve got to work with today. How are you down there in TK land, TK, after your week off?
Very good. Very well, thank you. It is TK land down here, isn’t it? It’s good.
Your own little fiefdom down there the Cape Schanck.
It is yeah. Well, it’s windy and wet here at the moment though, so I can’t play golf. I can’t, but I choose not to play golf.
Robin Williams would say, “which is nice if you’re with a lady, but not when you’re in the jungle.” Maybe windy and wet, no, I think it’s hot and wet. I think it was the line, not windy and wet. You don’t want your lady to be windy and wet. That’s no good. So, moving right along. You’ve been playing a lot of golf.
Except that it’s hot and wet in the jungle. Yeah, I have, I played golf every day last week.
Played in a little tournament?
We did this, yes, we played Royal Melbourne West, which is a fantastic course and one of my favourites. Often rated number one in Australia. We played Metropolitan, another really good course, and then we had a charity day for leukodystrophy at Woodlands on the third day, which was good.
Played well, one a little bit of prize money, which I put back in raffle tickets at the charity auction. So, that was all good. First time I won some prize money in a long time.
And what did you win in the charity auction?
Nothing, it was a donation basically.
You didn’t get another Eagles — not Eagles — Angels, Angel’s concert?
That’s a shame. It’s been a big week in the stock market, Tony. Well, when I say big, bad big, in a bad way. Your good friend, Mr Lowe, at the RBA decided he’s not done fixing the economy. He lifted interest rates yet again last week and sort of kicked the market in the nuts. I just posted, “oh, the markets been going up for a couple of months. I think we’re on an uptick trend,” and then he did that, and it came down. It’s still up since the beginning of October quite a lot though. What did you think about the RBA interest rate rise? Were you surprised, not surprised?
Not surprised at all, I think it’ll keep going for a while. Inflation was, I think, 8% in his most recent announcement. So, it’ll keep going for a while. I think it will come off, but who knows. I think overnight tonight, tonight being Tuesday, the 13th, the US Federal Reserve might raise interest rates by 50% over there. So, yeah, we might see some, who knows? It’s hard to say whether we’ll see up or down movements in the stock market. It went up today overnight, the US market went up because they think they’ve got it all figured out and they’re expecting a 0.5% rise tomorrow, but they could be surprised.
I thought it went up because they’re expecting the announcement of Q is greater than one today, US time. That’s supposed to come out today.
Q being what?
The amount of energy generated by the latest cold fusion reactor.
Yeah, right. I saw that.
Livermore, Lawrence Livermore, Liverpool, Liver pod, something. Lawrence Livermore, I think, research facility. They’re rumoured to be doing a press release Tuesday US time to say that they have created a fusion experiment that generated more energy than it took to create, which is called “Q is greater than one” in fusion circles. So, that if true, and if confirmed and verified, and all that kind of stuff… You know, I was saying to someone earlier today, ChatGPT taking the world by storm in the last week and now cold fusion as a reality, I’m starting to think Ray Kurzweil… I remember years and years ago, I had Ray Kurzweil on a podcast — I think it was like 2015 — and back then he was still saying he thought the singularity would hit by 2030. I think he’s pushed it out to maybe 2035 in recent years, but the thing with the singularity is, you know, in singularity circles, there’s always been this talk that you won’t see it coming until it hits, it’s at the front door, right? Because it all comes at the end. Like, wow, we have functional AI and cold fusion hit in the same week. That sounds like singularity speeding up to me, but who knows?
I remember learning about tokamak reactors at university. So, cold fusion has been a thing for a long time without any results.
Well, they’ve had results. The Chinese created a fusion reaction a couple of years ago, but again, Q was less than one. It took more energy to create than they generated, but we’ll see. Could be big. Well, I don’t know what that’s got to do with the RBA.
Or the Fed Reserve. Well, if they ask ChatGPT, he might know.
Yeah, the RBA is asking ChatGPT what they should do with interest rates.
I saw, do you know Mark Bouris.
What was the company that he founded?
Yellow Brick Road.
What was it before that?
I can’t remember, one of the mortgage brokers
Some mortgage things. Yeah. Saw him on TikTok this morning ranting about the RBA and the government. He said, you know, “COVID, you know, they created all of this money, dropped interest rates down to zero, told us to go out there and spend it. So, we spent it and now they’re punishing us. Everyone’s getting punished by the RBA and the government for doing what they told us to do two years ago.” So, maybe he wants to throw them into a fusion reactor, and that’s how I finish the loop on that. Do you think we’re being punished, Tony?
I think it is a bit like a pendulum swinging at the moment. Because personally, I think the real danger is that interest rates keep rising but inflation comes down because it’s not being caused or influenced by interest rates, its being caused by supply cuts and trade constraints and the Ukraine war, amongst other things. So, you know, it’s a blunt instrument.
Well, moving on. Coal was a buy again, and iron ore.
I didn’t find any coal stocks on the buy list to buy this week, but I did buy some GRR last week, which was nice. I tried to buy FMG yesterday, but it was having a down day. Having a down day again today last time I checked, too, first thing this morning. But yeah, that’s exciting. What do you think is going on with coal, iron ore and gold?
I think on the gold side, I mean, I’ve been suspecting gold would increase because of inflation, it normally does. It’s been a bit of a surprise seeing that the Chinese economy will pick up. It’s been constrained because of all the cities being in lock down and, and coal and iron ore get driven by the Chinese economy. At least in Australia.
Okay, well, moving on to a portfolio update. Dummy portfolio still doing good since inception: 15 versus 7 against the STW, still hasn’t changed much from last week. Last thirty days is interesting if I look at the QAV portfolio; it says that we’ve had a good thirty days versus the STW. It’s saying we’re up 4% in the last thirty days versus the STW, which is up 0.8%. So, if I look at it from a financial year perspective, we’re still seriously underperforming: STW is 16% versus our 3-4%, but in the last thirty days it’s started to turn around. Looks like our stocks have outperformed in the last thirty days. So, with some thanks to CLX which is up 28% in the last 30 days; LAU was up 16%; NCK up 13.5%; NHC up 11.5%. Some of the big winners. So, yeah, let’s see how we go.
You know, its swings and roundabouts in the market, isn’t it, in the short term?
Yeah. A couple of weeks ago, you know, when we went through your results over the last twenty years, I’ve had a few people that I’ve spoken to — a few listeners — since then say, “yeah, that was really interesting and very brave,” they seem to think of you, to do a full frontal on your numbers.
Expose yourself. I was like, well, he’s done it before. It’s not the first time we’ve gone through your numbers, but I think it’s hopefully helped everybody chill out and realise that there are good years and bad years.
What else do you have on your notes to talk about before we get into the Q&A and the pulled pork, TK?
I had just a couple of things. There’s some bank AGMs going on this week, and coincidentally their dividends will hit our bank accounts. So, for me that’s NAB and Macquarie Group, and they’re both on the buy list. So, just be aware of that if either of those are close to a rule one for you. I think they’re reasonably above their three-point trendline sell points, but yeah, you can’t add the dividend back once they hit your accounts. And just wanted to talk quickly, there was a collapse of an engineering company called Clough Engineering. They were doing some work for Beach Energy, which is now going to delay the bringing online and one of Beach Energy’s local gas fields. And so, that’s hit Beach Energy this week as well; they’re down 8 or 9% this week, which makes them very close to a rule one for me. So, people might want to check that if they don’t have their alerts set. That’s about it, I think. We spoke about the commodities before being buys again, gold, iron ore and coal, which brings some stocks back onto the buy list for us.
Good stuff. And who are you doing your pulled pork on this week, TK?
Well, I told you this morning it was gonna be BlueScope Steel, but guess what? I spent about an hour researching BlueScope Steel, got all the way to the end, was documenting the risks — one of which is the steel price — looked at the steel price, and it’s a sell. I don’t know if I should do BlueScope Steel if its not a buy even though it’s on the buy list.
Maybe we skip it this week, then, because we got a lot of questions to get through.
Well, I did do another one on AngloGold, which I can do quickly if you’re like.
Okay, well, let’s be brave. Gird our loins.
Okay, quickly: AngloGold Ashanti, gold company obviously. Very storied background. It’s a South African based gold miner, based in Joburg, but it also has EDI listings in the US, here, and Ghana, which is where the “Ashanti” part of their name comes from. Because they’ve spent most of their life buying and selling mines, so bit of a trader. They were big in Australia at one stage, but they sold the Boddington gold mine to Newmont ten or so years ago, which is one of the reasons why they’re still listing here. They would have had local shareholders in Boddington, it was a pretty big goldmine. They still do have two gold mines in Australia, one called Tropicana and one called Sunrise Dam, and they have another eleven around the world. Most of them are still in Africa, but funnily enough, no longer in South Africa. But some in Ghana, Tanzania, other parts of Africa. They have three mines in South America, and they’ve just acquired a mine in Nevada. So, they do like to trade their mines, this company. I should point out from the outset that it’s a small ADT stock, and I think that’s because of the dual listings, or the quad listings. So, the market cap in Australia for the listing is much lower than that in Joburg and the ADT is only something like $25,000 a month, so it won’t suit a lot of investors, but it’s very high up on our buy list. So, running through the numbers. There are no consensus targets or no brokers following this because of the small volume. It’s a thinly traded stock on the ASX anyway, certainly not in Joburg where it’s large, but here it’s thinly traded. No consensus target, which gives us a bit of an edge because we’re doing the analysis that the brokers would be doing. I’m doing my numbers based on the share price of $5.55 which it was on the weekend. It has gone up 20 cents since then today, so that will change the numbers slightly, but at $5.74 the share price is greater than IV 1, there’s no IV 2, but it’s much less than net equity per share, which is 14.84. So, it scores for that, and also, of course, for being less than book plus 30. Stock Doctor financial health is strong and steady. The PE is 8.81 which is reasonably low, but not the lowest in three years so it doesn’t score for that. This is where it gets a bit interesting, and if anyone’s thinking of investing in the stock they might want to just email Stock Doctor and ask them a question, but I get a Pr/OpCaf of 0.19; Stock Doctor has one of 2.7, so there’s a bit of a difference there. I tried to research why Stock Doctor has $2.03 as the operating cash flow per share, but we’re getting $6.14 in the download. And that’s strange because we’re using Stock Doctor numbers, so I’m not sure what’s going on there and I can’t explain the difference. It might need a an email to Stock Doctor to explain that if someone wants to invest in this first. Either way though, it’s still appearing on our buy list, it just drops from about the second highest QAV score back to, I think, 0.26 if we use Stock Doctor’s Pr/OpCaf number. I’m not sure why that’s occurring, that’s a question for Stock Doctor. Yield on the stock is 1.78, so it’s not going to score there. It does score for a new three-point upturn, doesn’t score for consistently increasing equity, and all in all, it’s 9 out of a possible score of 13, or 69% for quality, which isn’t too bad but not right up there. Using our Pr/OpCaf we get a QAV score of 0.77, or 0.26 using Stock Doctor. So, something to look into, there, with Stock Doctor. And I just wanted to point out, too, that I have followed AGG for a long time because it does come on to the buy list frequently, and the risk with AGG which people should be aware of is the low liquidity. So, it’s ADT is $25,000; that’s an average. It may just be, when it comes time to sell, that there’s no trade at all. So, just be careful with this stock and be patient, especially on the way out. So, that’s AGG.
Thanks. Yeah, 0.77, I saw that this morning, and the low Pr/OpCaf of 0.9 or something. They really looked like extremely good numbers.
Yeah, it does. Stock Doctor is strange, because we use the Stock Doctor download numbers, and part of the download is to download what Stock Doctor has as Pr/OpCaf. Even though it’s got all the same numbers, except for that one operating cash per share, when it downloads to us, we use the $6.14 number, but in the field called “price to operating cash flow”, they’re getting 2.7 times, which is strange.
All right. AGG, check it out if you have low ADT requirements, I guess. But don’t all buy it and then try to get out of it at the same time I’m trying to get out.
Because that would not be good. All right. Anything else before we get into all the Qs and the As this week, TK?
No, that’s all.
Thank you, Tony. Okay, first one is from Ally: “Hi Cam and Tony. Do you mind discussing trailing stop losses versus our standard stop losses? Does anyone in this group use a trailing stop loss?” Part two is: “also, with inflation at 7.3% in Aus, is it still business as usual for us? Inflation really eats into our profits or magnifies losses, any advice around this?” And then she’s got a part three, too. Anyway, let’s start with part one: trailing stop loss.
Yeah, trailing stop losses, they are what they say. So, you can with at least most brokers, put in either a dollar amount that the share price can drop before it’s sold or percentage amount. So, if you’re away from a computer for a while, you’re hiking somewhere or whatever, or you’re in hospital, you can set trailing stop losses to be able to sell you out if the share price drops by, say $1 if a $1 is relevant, or by 20% or 10%, or whatever the number is. I’ve never used them; I’ve always preferred to use the alerts and execute the trades myself. A couple of things about it is that when the stop loss is executed, the trade becomes an at market trade. So, even though the share price may have dropped by $1 and that was your desire to get out, you may get out at a much lower price because the market may not be at that price, it may drop through it. Once the stop loss is reached, it will just execute at whatever price is then available. So, you might say, “execute the trade if it falls by $1,” but you might find you’ve actually had a trade executed when it fell, which was $1.50 below the share price.
But we use at market anyway if we get an alert and go to sell it, so isn’t it the same thing?
It is pretty much, yeah. Although you can decide if you think the share price is going to return to wait for a bit.
No, you can’t. That’s against the rules. If it triggers, you sell. You don’t stick around and wait. Come on, TK. That’s forecasting.
Yeah, right. Well, yeah, you can finesse it a little bit during the day if you do it yourself. Stop losses execute at market. The other things to be wary about with stop losses are that you’ve got to set the stop loss price or percentage so it takes into account normal price fluctuations, because you can be stopped out quite quickly if you set too fine a trailing stop loss. Like, if you say it’s 2% and the stock is occasionally fluctuating by 5%, you’ll be stopped out and you’ll be cursing it when it goes back up again. So, just be aware of that, and also be aware around dividend times if you, again, have a trailing stop loss which is close to in the money, and you’ve said it a very narrow range. You could be stopped out during a dividend time.
Which probably is not so bad if you are like Samuel, who was going to be hiking Kilimanjaro and offline for a month. Okay, yeah, worth taking the risk. But day to day, you might want to check things like dividends before you let it go to sell on your behalf.
Yeah, correct. And the other thing, too, is that trailing stop losses don’t really suit three-point trend lines, which is a fixed point. So, what I mean by that is, you know, the sell price for a stock might be $5 and the share price might be $6. If the share price drops by 2% or 5% or 10%, we’re still not selling. But if you said $5 was a 20% drop from $6 — whatever the math is — it might take three months for that to come into effect, and by that time the three-point trendline sell may change. So, it doesn’t really suit the way that we invest.
I mean, if you could pick a price, if you could get the 3PTL price and stick it in and say, “okay, it it hits $1.10, sell then.” That would be okay, but by 10%, or whatever…
That’s a fixed stop loss. You can do that now, too. Yeah.
As opposed to if it just drops by a certain percentage.
Yeah, correct. It’s handy if you’re away and you can’t execute your trades; it keeps an eye on it for you. But otherwise, if a stock drops that dramatically… Like, say, for example, Beach Energy did during the week, and you had a 5% stop loss on it, it may well have plummeted through that 5% and you’re out at 8%. Which, in my case, it wasn’t my rule one which is 10%. So, using that kind of percentage-based stop loss wouldn’t have really worked in my case, and I’m still holding; at present I would have been sold out, but not at 5, probably at 8.
Okay, what about Ally’s question about inflation? Business as usual?
Yeah, it is in terms of QAV. I mean, the business environment in times of high inflation is different to the business environment in times of low inflation. We don’t have all the dotcom stocks going to the moon when we’ve got interest rates which are higher, so that’s one difference. I’m always reminded of Warren Buffett’s words when he says that a quality business is one that can raise prices at any stage during the cycle, and we’re trying to find quality businesses. So, hopefully, the ones that we’re invested in won’t be that affected by inflation. And then Buffett talks about the moat and being able to raise prices during inflation because of the quality of the business and because it’s selling a product that people want to use. So, you know, your Heinz tomato sauce, Google, that kind of thing. So, they’re going to always be able to sell things during periods of high inflation. But we do see businesses come in and out of the mix during periods of high inflation. So, high inflation usually hurts discretionary retail expenditure. So, we might see that Myer might struggle a little bit during a period of high inflation, and typically the supermarkets will be bought up by people wanting a safe harbour because, again, it’s a basic need, and people will still need to buy their food. Supermarket sales often go up during periods of high inflation because restaurant meals go down, people eat out less and they buy and cook at home more. But what I found is that the supermarket companies share prices go up, so their PEs expand during periods of high inflation. So, even though they offer a safe harbour, they’re not necessarily a good investment to own. There will be phase shifts in the market, which is probably the best way to put it, but the process will still take that into account, and we’ll find stocks that can’t put their prices up will come off the buy list and those that can, will come on.
Ally asked about inflation, is inflation eating into our profits? How does inflation eat into our profits? Just because money’s not worth as much?
I’m guessing she means our profit as QAV investors, and it doesn’t. Like I said, I think the system will take into account which stocks are hurt by inflation and which stocks will do fine. If she means eating into the profit of the businesses we invest in, again, it’s the Buffett saying: if we’re invested in quality businesses, they’ll maintain their profits in a high inflation environment. So, for example, the banks: the big four banks in Australia, they’ll benefit from inflation, or shouldn’t be hurt by inflation, unless, you know, it becomes a full-on recession and people lose their jobs and default on their mortgages, because the banks can put their mortgage interest rates up and put up their deposit rate. So, that’s an example of a business that does well during a high inflation environment. But stocks like we’ve spoken about already, like the high PE growth stocks are all doing terribly because of the simple math of a discounted cash flow. Inflation means as people discount the cash in the future, it’s worth a lot less now. When inflation is at near enough to zero, a dollar you own in ten years’ time is worth the same as the dollar you own now. So, you can push the profits of these companies down the tracks and still expect to make money at some stage. But when running at 8 or 9% inflation, if the company doesn’t turn a profit for ten years, their profits are worth half of what they are now. So, therefore, the amount you want to pay for that dollar in ten years is half of what it was last year when inflation was very low.
Alright, part three of Ally’s question: “I’d be keen to hear how Tony comes up with the hurdle rates.”
Yeah, sure. So, again, I guess she’s meaning IV 1 and IV 2. So, IV stands for Intrinsic Value. And I guess just as an introduction, I’ve found over the years that no one metric for valuing a company or valuing all companies works well, so I use a number of them and just try and create a bit of a heat map for valuations of companies. It’s an imprecise science, but generally if you have a number of different ways of valuing a company, and it’s cheap on some and maybe not so cheap on others, you still err on the side of being a value company. But there are two ways to do it. Basically, you can use the assets of the company, which is where we talk about equity per share, or occasionally net tangible assets per share, and are we paying more than that for the company or less than that for the company. But in terms of hurdle rates IV 1 and IV 2, basically saying that we have a company which is making a profit, and that profit can be expressed as a return on our investments and is that return high enough. To decide whether it’s high enough, we use the term hurdle rate to set the bar for what’s high enough. So IV 1 is, I guess, my own metric, and historically I started to use it as a way of saying, “if I’ve got a concentrated portfolio of fifteen stocks, I only want to add a stock which is going to improve the overall return on investment of that group to me.” So, I’m looking for stocks to add to the portfolio which have a higher return on the investment than what the portfolio generates. So, 19.5% over time, that’s the hurdle rate I’m looking for, and so I’m looking for stocks which if I pay the price that they are now, their earnings per share equate to more than a 19.5% return. That’s a pretty thin list of stocks, because that’s a high hurdle rate. So, most people when they talk hurdle rates are talking sort of single figure numbers, or maybe 10% as a hurdle rate, and we’re talking double that. It might be easier for Ally to think of it in the reverse or the inverse. So, the IV calculation, if it has a hurdle rate of 19.5%, is like saying if I put one over 19.5, I’m gonna get a PE ratio of around 5. So, inverse of 20% is 5. So, we’re looking for stocks which have a PE ratio of less than five, is the other way of expressing a hurdle rate of 20%. But we see them, they’re on the buy list. There are plenty of stocks on the buy list which have a PE ratio of five or less, but they are very deep value stocks. And so, I, you know, from time to time and different market cycles, I found that looking for that kind of stock was getting pretty thin on the ground, and it was hard to find them. So, I have other metrics, and IV 2 is the most common metric which is used by the stock market. It basically says, if I can invest my money in the most risk-free asset out there, which is generally accepted to be government treasury bonds — so, ten-year bonds — then at what return am I prepared to take the risk of leaving a treasury bond and investing in the stock market, which is inherently much riskier? So, I know if I buy a treasury bond, I’m gonna get, say, 3% or around that from the government, and the government is more likely to be here than a company on the stock market is after ten years, and I’ll get my money back and I will have earned 3% along the way. Not a great return, but it’s often spoken of as “the risk-free return.” It’s the least risk in the in the investing universe. So, how do I measure that up against the risks and rewards in the stock market? Well, I add what’s called the risk premium to that 3%. It’s generally, I guess, accepted that the stock market has a 6% risk premium compared to government bonds. And so, the hurdle rate for IV 2 calculations are simply 6% plus the current RBA cash rate, which is usually the ten year bond yield. And so, that’s been going up recently, and so the IV 2 hurdle rate has been going up as well. But that’s sitting at around 9% now, which is a much lower metric than IV 1. But that’s generally what people are using in the market and analysts are plugging into the discounted cash flows, which I just spoke about. So, they’ll use around 9% at the moment, and they’ll be saying that “if I can take a company and look at its cash flows over the next ten years and then discount them back, I’m using a 9% hurdle rate.” Which basically means that’s like a 9% inflation rate. And what’s the dollar worth in ten years’ time? Well, I have to discount it back by 9% a year, and the rule of 72 tells us that if we invest it in the stock market and get a 9% CAGR in eight years’ time, we will double our money. It’s the reverse of that. So, $1 in eight years’ time is worth 50 cents now if I discount it by 9% over the intervening period. And so, that’s what a discounted cash flow is, and that’s what the hurdle rate is that’s being used in most analysts’ models. We just simplify that by taking it as the return that we need before we invest, which is called IV 2.
Very good. Thank you, Tony. Hope that helps, Ally. Jordan: “Hi Cam and Tony. I’m interested to know Tony’s thoughts on C6C selling its Australian assets. Is this likely to lead to a delisting on the ASX?”
I can’t be sure. I wouldn’t think so, because there’s still a large number of shareholders who invest in C6C. It’s a bit like AGG, AngloGold Ashanti. You know, they had a lot of shareholders from Australia who wanted to own the Boddington gold mine, which I think might have been the biggest in Australia at the time. And then they sold that to New Crest, but they kept all the shareholders as CDIs even though AGG is listed in the main in Joburg. I think the same thing will happen with C6C. Generally, a company will keep it alive because it’s a source of capital for them and will only turn off an exchange if the cost of keeping it going outweighs the benefit. And so, there has to be a pretty small number of shareholders left before that happens. So, I don’t think that will be the case with C6C, but I can’t guarantee it. Its an interesting time for C6C. I just did a bit of a dive into it. So, in summary, they sold off, I think the copper mine was called Eva, I think; anyway, they sold a copper mine in Australia to Harmony Gold. Yeah, so they’ve got $170 million dollars which they’re going to redeploy into Canada, where their other mines are based. But C6C came out and said they didn’t make any money in the last quarter, they lost money, and they also fired their CFO earlier in the year. So, there’s fun and games going on with C6C at the moment from a corporate perspective. I think the sale of the Australian business has come in handy for them to be able to keep going in in Canada and get themselves back on a good footing again.
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