QAV 739 – The Buffett Measure

QAV 739 Club

[00:00:00] CR: Welcome to QAV. Uh, yeah.

[00:00:06] TK: Welcome back!

[00:00:08] CR: So Tony, you had a perfect run from Poifect and it’s still got a winter

[00:00:12] CR: coat, you were telling me.

[00:00:13] TK: Yes. So, uh, yes, she won, which was great. And she’ll get better as the spring progresses. So that’s really good news.

[00:00:23] CR: Oh, well, we’ll talk about more about more about that. And after hours you can get into horse racing.

[00:00:28] TK: yeah, okay,

[00:00:29] CR: Um, I hear you had a big chat with Taylor too in the car. He said, Oh, I spoke to your boss today. Really? You spoke to Chrissy? He said, no, the other one.

[00:00:40] TK: Fox.

[00:00:41] CR: Yeah,

[00:00:42] CR: true. Yeah, Um,

[00:00:44] TK: we did have a good conversation as I was driving back from Wagga.

[00:00:47] CR: he appreciates

[00:00:48] CR: your, uh, wisdom and

[00:00:49] TK: Yeah, I’ve got to call him back though, because I’ve been thinking more about it. And um, and

[00:00:58] TK: I mean, I don’t give personal advice, but I meant to ask him if he paid off his HECS debt. So he needs to probably do that before investing any of his cash pile.

[00:01:06] CR: Oh, that’s what he was talking to you about. I thought he was talking

[00:01:08] CR: to you about the acquisition offers that he’s getting.

[00:01:11] TK: yeah, he was, but we morphed into what to do with his bank account.

[00:01:15] CR: right.

[00:01:16] CR: Yeah.

[00:01:17] TK: Yeah. Yeah. And the other thought, yeah, the other thought I had was, you know, based on what he was telling me about his business, he might as well just put that cash to work trying to expand his business and grow that because the returns have been really good.

[00:01:32] CR: Yeah. I mean, that’s been his theory for the last couple of years is spending it on his business, but he hasn’t figured out how to do it yet, I

[00:01:38] CR: think. Anyway, the A Ord is at an all

[00:01:41] TK: I’ll give him a call.

[00:01:44] CR: Yet again, um, I think the RBA’s due to

[00:01:48] CR: Say something today,

[00:01:50] TK: Say something and do nothing, I think is the general consensus, general

[00:01:53] CR: even after the US pulled their rates

[00:01:56] CR: down.

[00:01:56] TK: Yes. Yep. Um, there’s been a, The thought amongst the RBA economists that we didn’t go as high as the USA and they’re just pulling back to our level. So they’ll probably hold.

[00:02:10] CR: Well, when I say we’re at a all time high, we were a couple of days ago. The market pulled back yesterday and has pulled back again today, by the looks of it. Down at 8. 356 at the moment, from a high of 8. 470 last week, on Friday. Um, but still. All things told, uh, in the vicinity of the all time high. Uh, so yes, and it’s been good for our portfolios still.

[00:02:41] CR: Um, I did the portfolio reports this morning for anyone who is still paying attention to these things, cause it’s just kind of the same every week, but the dummy portfolio is tracking at 16. 21 percent per annum, CAGA. Over the last five years versus the STW at 9. 15 per annum. So we’re doing 1. 77 times better than the market.

[00:03:07] CR: Not

[00:03:07] CR: quite double, but close to it.

[00:03:11] TK: Not quite double market, which by the way, runs on Thursday for its first start.

[00:03:16] CR: Look at you getting in a horse plug.

[00:03:19] TK: Yeah. Yep.

[00:03:21] CR: Um, but for the last 30 days, our portfolio is up 4. 91 percent per annum versus the STW up 2. 61, still not quite double, but close. Uh, but the. Stockopedia portfolios are just still going nuts, Tony. I mean, the Aussie one is up 17 percent since inception, which is July 23, versus the index up 11.

[00:03:48] CR: The US, I said last week it was up 50%, this week it’s up 60%. Since inception versus the S& P up 28%. Well, that’s September 23, the inception for that one. Um, like the US market is just absolutely bonkers at the moment. Um, all we’re doing is really just holding on, you know, to buying some frothy stocks and

[00:04:16] CR: watching the froth go frothy.

[00:04:19] CR: Um,

[00:04:20] TK: that’s the case, Cam. Our stocks aren’t generally frothy and at 60 percent we’re doing Double market, I would have thought, in the US, which is what we should be doing, um,

[00:04:32] CR: yeah, but I

[00:04:32] TK: on,

[00:04:34] CR: But I mean, the market’s up 30%. I mean, that’s my point. We’re up 60%, but it’s kind of, it’s nuts, right? The whole thing over

[00:04:41] TK: yeah, yeah,

[00:04:42] CR: The, uh, top performers, uh, same as they have been in recent times. Willis Lease Finance is up 186 percent since we bought it. Land’s End, struggling retailer, is up, uh, 142%.

[00:04:58] CR: Euroseas. Which is, uh, one of these shipping businesses is up 60 percent Optimum Bank Holdings, uh, which is a

[00:05:09] CR: bank holding company, uh, is up

[00:05:12] TK: optimally, yeah,

[00:05:15] CR: uh, run by the Transformers is up 40%. So is Regional Management, consumer finance company. It’s up 40. Innova International is up 40. ENVA, it’s a technology and analytics company.

[00:05:29] CR: And I’m right. Um, yeah, I only bought that in March this year, and it’s already up 40 percent since March. So, just, like, it’s absolutely bonkers. Absolutely

[00:05:44] CR: bonkers, the market over there.

[00:05:46] TK: yeah, and cutting interest rates is probably going to add fuel to the fire. for the stock market I would have thought. Sounds like it already is to some of those names and doesn’t it make sense if it’s happening to the finance companies because as interest rates go down their costs go down. So, um, yeah, I can see why they’re going up.

[00:06:03] CR: As always, we don’t expect it to

[00:06:05] CR: last. Um, it’s, it’s a, it’s,

[00:06:09] CR: a thing that will have

[00:06:11] TK: And we also know from history you don’t follow the hot hand.

[00:06:15] TK: It’s not going to go up 60 percent this year and next year and the year after that. Or it’s very, very unlikely to do that. The probability is very low for it to do that. I’m not going to try and forecast it but it will regress to the

[00:06:27] CR: Yeah. But you know, interesting to me that we are doing double market over there, just plugging in the same, um,

[00:06:37] CR: formula, slightly modified, but more or less the same thing.

[00:06:40] TK: yeah, but the interesting thing which I keep coming back to is that, um, is that Zed score, is that, where, yeah, we haven’t got the handles around the quality of these companies, but it seems like it doesn’t matter. And maybe that’s the sign of a frothy market, I don’t know.

[00:06:56] CR: I did email Joseph Piotroski, uh, over the last week, and asked him if he could recommend anyone to come and talk to us about F scores and Z scores. Um, haven’t had a reply back from him yet, but he might get back to me. Um, NGI Tony, which I’m not going to pronounce, because I’ll probably get cancelled if I pronounce it.

[00:07:20] CR: Um, yeah.

[00:07:23] TK: it Navigator? Navigator Global?

[00:07:25] CR: I was just going to pronounce the three letter

[00:07:27] CR: acronym together, and that would not go well. That’d be like watching the,

[00:07:30] TK: where your mind goes to

[00:07:31] CR: Roger Corman. Well, look, I grew up in 90s hip hop, man, let’s wear my own Tarantino films, and 70s Blaxploitation films, and then that Roger Corman William Shatner film I just watched.

[00:07:42] CR: Um, uh, shout out to, uh, Paul and Andy, who, uh, asked about that last week, and I really Uh, to my eternal shame, dismiss their inquiries, because I did look at it when it was on the share list. I thought that’s, because it had a crazy QAV score of like 36. And I went and had a look, because the normal problem when we have wonky looking scores with Stock Doctor is the, um, market cap.

[00:08:11] CR: And I went and looked at the market cap and it looked like, it looked legit. And I was like, yeah, yeah, all right. I think it’s fine. But, uh, you,

[00:08:19] CR: Did more digging.

[00:08:22] TK: Well, to be honest, it’s not normally the market cap. I think it’s more, it’s the number of shares on issue. And that was the culprit again this time.

[00:08:29] CR: So there was a bit of an error in Stock Doctor and they fixed it. You, you emailed Victor, Victor fixed it. Did the

[00:08:36] TK: Yeah. Good on them.

[00:08:37] CR: the Vic’s fix,

[00:08:38] CR: and

[00:08:39] TK: a quick, big fix.

[00:08:40] CR: quick Vic’s fix Yeah. And it wasn’t on the

[00:08:43] TK: Came back same day.

[00:08:44] CR: Yeah. So well done to Paul and Andy for, uh,

[00:08:48] CR: calling bullshit on that. And I

[00:08:51] TK: But that’s like, I mean, that’s a, there’s a,

[00:08:54] TK: That’s okay. I mean, we, we tell people to do their own research. If you see something which, as we’ve said before, if you see something which looks crazy like a, you know, an astronomical QAV score, um, I just simply went to the annual report and started going through and comparing the numbers.

[00:09:09] TK: And, um, I did, I did actually start with number of shares on issue because that was the problem last time we had this issue with, uh, News Corp, I think, um, and quickly worked it out. So, um, yeah,

[00:09:20] CR: If you see

[00:09:21] TK: um, if you see something, see something strange.

[00:09:25] TK: see something,

[00:09:25] TK: strange, do something strange. I know that was, um,

[00:09:28] CR: Doctor Strange?

[00:09:30] TK: Hunter S.

[00:09:31] TK: Thompson’s approach to all that.

[00:09:36] CR: I miss Hunter S. Thompson.

[00:09:39] CR: Um,

[00:09:41] TK: He would certainly have fun with Donald Trump, wouldn’t

[00:09:43] CR: Oh, the whole thing, not just Trump, but the whole

[00:09:46] TK: true. Yeah.

[00:09:47] CR: you know.

[00:09:48] TK: Hmm.

[00:09:49] CR: was watching an interview last night with, uh, John Mier, it was a live, uh, thing on stage, actually, a panel interviewing John Mearsheimer and, uh, Jeffrey Sachs, and they were talking about the current election.

[00:10:06] CR: Uh,

[00:10:08] TK: No, go on.

[00:10:08] CR: not the woman who died with her hat on

[00:10:11] TK: Yeah, that’s Oliver Sacks, I just realized. That’s Oliver Sacks, isn’t it? Yeah. The man who mistook his wife

[00:10:17] TK: for a

[00:10:17] CR: that’s it, no, Jeffrey Sachs is an economist who’s very critical of the US, um, and he was an advisor to Gorbachev and Yeltsin back in the end of the That’s it.

[00:10:29] CR: USSR days. Um, but they were talking about how the, the Democrats have moved to the right and, and Mearsheimer, I think, or no, Sachs said the Democrats would be a right wing party in Europe. And I often say this to my American listeners, Bernie Sanders would sort of be a centrist in Australia. Like it’s

[00:10:52] TK: Hmm. Yeah.

[00:10:53] CR: considered extreme left over there.

[00:10:55] CR: He’d be

[00:10:56] CR: in the center somewhere. Nothing is like he

[00:10:59] TK: That’s what I’ve always thought. I’ve always thought the Republicans are the National Party in Australia, the Democrats are the Liberals, and there is no Labour Party in the US.

[00:11:06] CR: Yeah, well, what these guys were saying is, you know, the Democrats have moved so far to the right since Clinton that the

[00:11:12] CR: Republicans have had to move even further and further to the right until they’ve

[00:11:16] TK: Mm hmm.

[00:11:16] CR: know, as Chomsky’s been saying for years, they’ve fallen off the edge and just gone completely batshit crazy.

[00:11:21] CR: But John Mearsheimer says he refers to them as Tweedledum and Tweedledee. Like, they’re basically the same party, you know. Because they were talking about the fact that Dick Cheney has come out and supported Kamala Harris. Uh, and his daughter, Liz Cheney, has said, well, that’s because her foreign policy, the Democrats foreign policy, most closely reflects Dick Cheney’s policy.

[00:11:48] CR: Like, in any other era, like 20 years ago, the Democrats considered Dick Cheney the devil, and now he’s supporting their candidate over the Republicans, and they’re like, oh, that’s all good, you know. Anyway,

[00:12:01] CR: Tweedledum and Tweedledee.

[00:12:04] TK: I mean, that’s right. I was listening, I’ll talk about it in the after hours, but listening to a great. Podcast interview with Nicholas Taylor, the author of The Black Swan, and he, he made, he’s making, like, it’s one of those podcasts where you kind of have to stop after every sentence and just think about what he said, but one of his offhand comments was that, um, Donald Trump’s isolationist policy is better for world peace than the Democrats foreign policy of trying to democratize the world, because that’s where the, that’s where all the conflict starts.

[00:12:34] CR: democratize the world I think they mean,

[00:12:36] CR: you know, maintain U. S.

[00:12:40] TK: viewers interests.

[00:12:41] CR: over the world, yeah. Anyway, back to investing, uh, in the Financial Review today, uh, our friend Alex Gluyas has an article, ASX in the dividend doldrums as boards hoard cash. And I, I just want to give a shout out to either him or his sub editor for the alliteration and the rhyming schemes in that headline.

[00:13:06] CR: The Dividend Doldrums and Boards Hoard Cash. Like that’s, that’s, great. that’s

[00:13:12] CR: beautiful. I love it. Boards

[00:13:14] TK: We should try and get Alex on the show to talk about his reporting because we, we seem to quote him a

[00:13:18] CR: Yeah,

[00:13:19] CR: and just whoever, who writes these subheadings, headlines,

[00:13:22] TK: from what I’m,

[00:13:23] TK: a little bit I’ve heard is they don’t have sub editors anymore. It’s either, it’s either computer or it’s the journalists themselves. That’s probably

[00:13:32] CR: I’d be surprised if they actually have journalists anymore. Alex is probably just an AI writing it. Uh, Investors are concerned that Australian companies are hoarding their earnings rather than using the money to grow their business or return on investment. Turn it to shareholders as boards worry about a slowdown in the economy and the hit to profits.

[00:13:50] CR: The ASX was hit with one of the sharpest declines in payouts in the world in the second quarter of 2024, with the headline rate plunging 19 percent from a year earlier to just US 7. 1 billion or 10. 4 billion Australian, Janus Henderson said. Is it Janus or Janus Henderson,

[00:14:12] CR: Tony? I know in Roman

[00:14:15] TK: I’ve always said Janus. Yeah.

[00:14:17] CR: times, the god who had two heads and looked both ways was the god of Janus.

[00:14:24] CR: They had the temple of Janus, well the Romans didn’t pronounce the letter J, J was a Y like a Y, so it was Julius Kaiser, Julius Kaiser, not Julius Caesar, Janus was Janus, Jesus would have been Yeshua, or Yesus, um. And, you know, they had the Temple in Rome, and if they were at war, the doors would be open, and if they were at peace, the doors would be closed, and the doors of the Temple of Janus, that’s also where January comes from, January is the month of Janus, is the first month of the year.

[00:15:02] CR: And so on the, on my Caesar show, I’m always talking about how they had to open their Janus whenever they went to war.

[00:15:10] CR: God, I don’t know

[00:15:10] TK: Well, I’m sitting here like a, like a, like a Roman

[00:15:13] TK: centurion and release. Roger the sketch. Trying not to laugh every time you say Janus,

[00:15:19] CR: you had to open your Janus. Anyway, Janus Henderson said. is despite global dividends jumping to a record of 606 US billion. Um, now, correct me if I’m wrong, but, um, Buffett, Buffett, Buffett’s a big fan of companies holding onto the money and reinvesting it, isn’t He

[00:15:42] TK: Yes.

[00:15:43] CR: like them

[00:15:43] CR: paying out dividends. Right. Hmm.

[00:15:46] TK: Um, it’s, it’s a very much us sort of approach to investing. Um, Australia’s different because of our. Ranking credit system, so there’s actually an extra advantage to shareholders if you pay out a dividend in Australia because you get a tax break for whatever tax the company’s already paid.

[00:16:05] TK: At least on locally earned profits, doesn’t always work that way because some companies get their profits from overseas investments. Um, so yeah, so there’s a bit of it. So, and, and it’s also because of our superannuation industry, which is designed to, to support people in retirement. Um, it’s also skewed towards serving that beast, um, which is huge.

[00:16:25] TK: And of course they want dividends for that purpose as well, for retirement, passive income for retirement. So Australia tends to favour dividends. Americans don’t. Buffett technically is correct to that. Why would you pay it back to a shareholder if you can reinvest it? at a higher rate of return than the market in your own company.

[00:16:44] TK: So he kind of uses it as a mis test to see how strongly the board feels about its ongoing ability to reinvest.

[00:16:53] CR: Well, I had a look at the dummy portfolio. For the last one year, according to Navexa, our capital gain is 5. 2 percent per annum and our income return is 6. 19 percent per annum. If I look over the last two years, our capital gain is 8. 13 percent per annum and our income return is 8. 73 percent per annum.

[00:17:19] CR: So, our dividends have actually been quite good. Strong in the last one year, if I’m reading that correctly. If I look over the last three years, our capital gain has been 0.71% in our income return 9.6%. But 2022,

[00:17:38] CR: as we know, was a shocker. Um, if

[00:17:42] TK: Yes. So there’s some things to unpack

[00:17:44] TK: there, which is you’re right to point out that income in Australia is a huge part of returns. So what Buffett would say is that whatever it was, 9% of our growth was through income. He, he would say, yeah, but if the company kept that 9 percent and they were growing at a high rate of return, it’s, it’s the benefit to you is more than 9%.

[00:18:04] TK: It’s whatever it is. Um, but the flip side to that argument is, you know, we’re lucky enough to be able to reinvest those dividends in a way that earns above market returns anyway. So we’re kind of getting the same. Result because of our strategy. But if you’re an index investor, then yeah, sure. It’s, it’s better in the long-term to let the companies compound the money they’re giving to you as a dividend by reinvesting them in the company.

[00:18:30] TK: That’s the first thing. The second thing is that, um, the longer you hold a share, but it may have started off as a 4 percent yielder, which is about the market average, but you know, um, as the dividends get increased over time, based on the initial starting point, you know, price you paid for that stock, the yield must go up.

[00:18:48] TK: So, um, you get to a, there’s almost like a tipping point when a company does pay out consistently increasing dividends where you’re, um, getting most of your return from that dividend income. Cause it’s just, it’s just growing so large based on your initial, on the current yield based on your initial investment.

[00:19:09] CR: yeah, right.

[00:19:11] CR: It becomes a larger and larger

[00:19:13] CR: component of the pie.

[00:19:16] TK: yeah.

[00:19:17] CR: Uh, Chris Co.

[00:19:19] CR: One of our subscribers, um.

[00:19:22] TK: Sorry, before you leave that topic, I had some notes to talk about. It’s a, it’s a, apart from the alliteration in the title, Dividend Doldrums, Um, it’s a, it’s an interesting topic and, and I, Alex Hay, my stockbroker, asked me to go into a presentation on Zoom on Microsoft Teams from Clime Asset Management, which is a listed investment company, it’s been around for a long time, today, so I listened to their presentation and they honed in on this issue too, because Uh, they point out that they often look for, um, dividend income as part of their strategy for investing because they know that they’re, they want to pay out a good dividend because a lot of their people who buy their shares are retirees.

[00:20:08] TK: So, they, they put up a slide, and I haven’t had a chance to verify this, but they’re saying the forecast dividend yield for the ASX200 is about 3. 25%, so that’s probably about 1 percent below the long term average, which is around 4. 5%, or as I said, 1. 25 percent below that, so it’s quite low, um, and they were pointing out, though, a couple of different things that’s been happening.

[00:20:35] TK: The, the. Point they made was that, um, most of the, you know, a lot of dividends in the Australian market come from banks or financial sector companies or resource companies. And so, um, if you look at the banking companies, you know, Commonwealth Bank is at an all time high. So they, they picked on three stocks.

[00:20:54] TK: They looked at CBA, West Farmers and J. B. Hi Fi and CBA and J. B. Hi Fi have been on the buy list from time to time, so some of our listeners may hold them. Um, but, you know, now that they’re at record high PEs and West Farmers is trading at 30 times and CommBank trading at 25 times as a PE ratio, their yields are quite low compared to their historical numbers.

[00:21:20] TK: Um, so that’s one of the reasons why the market is low. And then the other reason is that, A lot of dividends were coming from resource stocks over the last few years, like Fortescue Metals at one stage was yielding 10%. Um, I think, uh, even BHP had a high yield, but as iron ore prices drop, they’re not able to continually, their profits will decline, so they’re not able to pay out that same sort of number, um, as a dividend.

[00:21:46] TK: So there’s a couple of things going on there. Um, I guess the million dollar question is, is this some kind of leading indicator to a market correction as things regress to the mean, or is this going to be, um, business as usual, or will it be affected by, you know, um, interest rates being cut? So, I don’t think anyone knows the answer to all those things, and there’s so many moving parts, it’s hard to forecast, but, uh, I, I think their analysis as to why the market was yielding three and a quarter percent was quite accurate.

[00:22:15] TK: The, the banks are on high PEs, and therefore low yields, and the, you know, Recent payouts by iron ore miners are coming to an end.

[00:22:24] CR: Yeah. Well, you know, my main question, I mean, looking at the last year in our portfolio, is that as a percentage of the return, capital gain up five, income up six, it hasn’t been a bad dividend year for us. I’m wondering if that’s, um,

[00:22:45] TK: Yeah,

[00:22:46] CR: to

[00:22:46] CR: do with the stocks that we invest in.

[00:22:49] TK: yeah, good point Cam, I was going to make that point too, that dividend yield is not often a problem on our buy list because we’re buying value stocks, and so it’s kind of the inverse of what I just said about banks, if a company’s price is low, and it’s a quality company with lots of cash flow so it can still maintain its dividend, the yield’s usually high or above market.

[00:23:07] TK: So a lot of our stocks are yielding above market, it’s not hard for me to find stocks on our buy list which are yielding well above three and a quarter percent. And sort of five or six percent, which is almost getting to double yields, double market yields.

[00:23:21] CR: Even though it’s not something that we

[00:23:23] CR: specifically look for or filter on.

[00:23:26] TK: Yeah, correct.

[00:23:28] CR: Okay.

[00:23:29] CR: You’re done with that segment?

[00:23:32] TK: I am, thank you.

[00:23:33] CR: Good. Chris Co.

[00:23:36] CR: Back to Chris. Uh,

[00:23:38] TK: That’s alliteration as

[00:23:39] CR: It is. Congratulations, Chris. Well done. Good job. He, uh, has recommended this newsletter before, mentioned it before. It’s a New Zealand based newsletter, Market Analysis, and he said he thinks it’d be good for QAV members if they want something else to read.

[00:23:58] CR: It was started by a guy called James Cornell, um, and having a look through their website, I believe he sort of retired to Malaysia or something at some point, I’m not sure if he’s still running it or not, but it’s been going for 40 years or something, it’s been going since the

[00:24:13] CR: 80s. You ever subscribed to it or read it or anything?

[00:24:17] TK: I haven’t, no, I haven’t heard this one before.

[00:24:19] CR: I had a look at, uh, through the site and, um, There, there’s a post from 1997 called Identifying Shares with the potential to outperform the market. And I think it’s sort of the, the basis of their strategy and thinking. And I just sort, I’d read, um, some sections from it because it, I, it sounds familiar. Um.

[00:24:45] CR: Bits of it we won’t agree with, but most of it sounds familiar. So it says, um, the main reason why the share market works so well is that nearly every investor has a different opinion on the future of a particular share. For every investor using, using a share selection method and seeking to buy shares in a particular company, there has to be an equal number of investors using alternative methods who are seeking to sell.

[00:25:09] CR: Quite obviously, many investors, and that includes professional fund managers who, overall, are unable to beat the market, must be using share selection methods that, overall, don’t work very well. Some share selection techniques, for some reason I’m finding it really hard to, to say share, share selection without lapsing into Sean Connery and saying share selection. the share selection.

[00:25:35] CR: Mr.

[00:25:36] TK: feel free to.

[00:25:36] CR: Yeah. some

[00:25:38] TK: Well, the New Zealand South Island accent is very

[00:25:40] TK: Scottish anyway, so you can pretend to be a Kiwi. Yeah.

[00:25:43] CR: Some share selection techniques, for example, buying shares trading on high price sales ratios or on high price earnings ratios, work quite poorly. No, that’s enough of that. But there are always enough exceptions, at least over the median term, that some investors will believe that their Favorite growth share is worth this high valuation.

[00:26:06] CR: Usually what happens is that the company grows strongly, but the share price had anticipated most of that growth. and appreciates at a lower rate than the market average. So to invest successfully in the share market, it is necessary to firstly choose a sensible share selection method. One that is based upon both sound investment theory and which has been shown to work in practice over a reasonably long period of time.

[00:26:37] CR: A chimpanzee throwing darts at the share table in a newspaper once outperformed a professional fund manager. However, despite the chimpanzee’s, actually he calls it Champanzee here, maybe that’s if you have a chimpanzee that succeeds at

[00:26:52] CR: something he becomes

[00:26:53] TK: Yeah.

[00:26:54] CR: Champanzee, it’s a

[00:26:55] TK: Yeah. Like Sean Coons becomes P Diddy.

[00:26:58] TK: Yeah.

[00:27:00] CR: it’s in, in the chimpanzee

[00:27:03] CR: hierarchy, if you’re at the, if you’re like

[00:27:06] TK: the, P Diddy.

[00:27:07] CR: you’re the alpha male, you’re the alpha male. You’re the Champanzee.

[00:27:13] CR: Good on you, Champanzee. despite,

[00:27:16] TK: Remember that TV series from

[00:27:18] TK: the sixties? The Lancelot Link. Secret Chimp. Maybe you go around like Lancelot Link, you know, remember Lancelot link where the monkeys got dressed up as secret agents and they’d smoke cigars and they’d Yeah.

[00:27:28] CR: but I would, I totally want to watch that show. It looks awesome.

[00:27:31] TK: Yeah.

[00:27:31] CR: awesome. Anywho, however, despite the Champanzee’s advantage competing against a fund manager, not against the market average, it is unlikely to be able to repeat this performance over several time periods. The reporting of this share selection method.

[00:27:46] CR: Is also probably biased in favour of this one successful result, as no one has reported on the performance of other animals, e. g. bulls, bears and stags, that play an important role in the stock market. Secondly, no share selection method will work on this. All Of The Time. If a method works most of the time, or only some of the time, and does no harm at other times, then it could still generate significant, above average profits over the longer term.

[00:28:14] CR: So once you have chosen the right, in inverted commas, method. It is still necessary to apply that technique consistently over a long period of time, allowing its superior profits to steadily accrue. For example, growth investing worked in invest, inverted commas, in the 1980s, while value investing has been better in the 1990s.

[00:28:36] CR: So if you tried value investing in the 1980s, then switched to growth investing in the 1990s, you will probably be rather disillusioned with the share market. However, applying Either method consistently over both decades would have worked out quite well. Assuming you started investing some time in the last 20 years, and again this was published in 1997, and not knowing in advance which method would work, and by the way, which means this came out sort of in the middle of the dot com boom,

[00:29:06] TK: Yeah, dot com, yeah,

[00:29:09] CR: And before the GFC, uh, which method, not knowing in advance which method would work best in the immediate future, the most consistently reliable results would have been achieved by investing 50 percent of your portfolio in growth shares and 50 percent in value shares over both decades. Diversifying your investments between shares selected by different successful methods is just as important as diversifying between shares of different companies, diversifying internationally globally.

[00:29:38] CR: And diversifying across time. All right. I’m going to pause there because

[00:29:43] CR: I got to that bit and I went, I did

[00:29:46] TK: yeah,

[00:29:47] CR: I did a Scooby.

[00:29:50] TK: yeah, well the growth, the comments about growth and value, whilst I agree with pick and stick, you know, stick to a strategy, um, you know, for the long term, don’t drop and change, you know, what works on Wall Street has done long term regression analysis which shows that growth underperforms value. Which is also, you know, story of Berkshire Hathaway and my experience as well.

[00:30:17] CR: Yeah. And you know, in terms of diversifying your portfolio, 50 percent in growth and 50 percent in, um, value.

[00:30:26] CR: What do you think about that?

[00:30:28] TK: No, I think you’ll get average performance because, as he said, one does well at one stage and one does poorly at one stage. So how can you get outperformance from that?

[00:30:37] CR: balance each other out over time.

[00:30:40] TK: yeah,

[00:30:42] CR: Anyway.

[00:30:42] TK: um,

[00:30:43] CR: He finishes, he finishes this section with saying, um, a successful share selection method is not about making instant riches. It is about adding a few percentage points to your investment returns year in and year out, but compounding that little extra annual return over a few decades will make you very rich.

[00:31:04] CR: So. Mostly good with that stuff. But then, in page three, he gets into share selection methods. He covers some familiar territory. He talks about the small company effect. The small company effect, that is the tendency of small enlisted companies to outperform the market, was first reported in 1978 by Rolf Banz.

[00:31:26] CR: Share broker neglect. Institutional neglect. The first study of neglected or unpopular shares was published in 1964 by Professor Scott Bauman. Between 1954 and 1961, he constructed a portfolio of 30 popular stocks, being the most widely owned stocks from a survey of 80 large mutual funds, and a less popular portfolio of stocks held by only one or two of these funds.

[00:31:50] CR: Over the eight year period, the popular portfolio underperformed the by 2. 7%, while the less popular portfolio outperformed by 0. 9%. It just reminded me of how you’ve said many times that if we find a share that doesn’t have broker or analyst coverage, they can often do quite well because eventually they get picked up and they regress to the mean.

[00:32:16] TK: Yeah,

[00:32:16] CR: We get in on them early. He talks about undervalued shares. One of the first studies of the price earnings ratio and investment returns was published in 1960 by Francis Nicholson. This study covered 100 large stocks in each of four periods of five years, i. e. 20 years in total. Stocks were ranked by P. E.

[00:32:36] CR: ratio and divided into five portfolios, overall the highest P. E. ratio portfolio, i. e. the most overvalued. Underperformed the market by 1.8% per year, while the lowest PE ratio portfolio IE the most undervalued, outperformed by 4.7% per year. A study published in 1977 by Professor Sanjoy Basu covered 1400 stocks for 15 years.

[00:33:03] CR: From 1956 to 1971, yielded almost identical results with the high PE ratio portfolio underperforming two by 2.8% per year. And the lowest PE portfolio outperforming by 4. 2 percent per year.

[00:33:19] TK: certainly similar in style to what O’Shaughnessy found during his regression testing too.

[00:33:25] CR: Speaking of which, it goes on to say, Later work examining these results, broken down by company size, revealed that 1. High PE shares underperformed regardless of company size, and 2. Small companies with low PE ratios outperformed the market very strongly. This result is contradicted in the recent study by James O’Shaughnessy, Now I’ve got to say, share selection and O’Shaughnessy.

[00:33:49] CR: For the 43 year period from 1951 to 1994, mentioned previously, which found that a portfolio of the 50 highest P. E. stocks selected from the whole market underperformed by 4 percent per year, but that the portfolio of 50 stocks with the lowest P. E. ratios also underperformed. By 1.3%. O Shaughnessy’s study suggests that the price to sales ratio is the most reliable fundamental statistic.

[00:34:18] CR: His low PS ratio portfolio selected from the whole market outperformed by 3% per year. While the high PS ratio portfolio underperformed by an extremely significant 8.3%.

[00:34:36] CR: Price to sales, similar

[00:34:39] TK: to price to operate in cash flow, isn’t it?

[00:34:42] CR: very close.

[00:34:43] TK: Yeah. Yeah. And I’m, I’m guessing the PE ratio didn’t, um, analyse as well because of the earnings manipulations that we talk about, we have talked about before.

[00:34:53] CR: Yeah,

[00:34:55] TK: it’s

[00:34:56] CR: And then another one that he talks about, I’ll finish with this one, Insider Buying and Selling. They also talk in here about management having a large stake in the company as being a good thing. But then, and this is something that I know has come up on QAV in recent months. Share repurchases, buying by insiders, i.

[00:35:16] CR: e. directors and senior management, and share repurchases, i. e. where a company buys back its own shares on the market, are widely considered to be favourable. Knowledgeable insiders are the best place to know what a share is really worth. An early study by Professor Shannon Pratt and Charles DeVere monitored 52, 000 insider trades in 800 NYSE stocks in the seven years from 1960 to 1966, a buy signal was considered to have occurred when three insiders bought shares within one month, while three sellers within a month constituted a sell signal.

[00:35:53] CR: Stocks with insider buying were found to outperform shares with insider selling for up to three years after the insider transactions. The buy group had ridden an average of 59. 1 percent while the sell group was up only 27. 1%. The buy group steadily outperformed the sell group throughout the first 24 months after the insider signals, with both groups showing approximately similar rates of appreciation during the third year.

[00:36:22] CR: Where did we get to with insider buying? I think from memory we found it hard to get an easy report downloadable on Stock Doctor for that.

[00:36:34] TK: usually an ASX announcement, but I have tracked insider buying in the past and haven’t found it to be all that useful in Australia.

[00:36:43] CR: Ah,

[00:36:43] TK: And I think, well, for a couple of reasons, I think, um, There might be different rules in the U. S., and I’m not familiar with the rules around declaring insider trades in the U.

[00:36:55] TK: S., but in Australia, they’re a blackout period. So management can’t buy shares in a company leading up to their results, um, which means they buy them after they announce their results, and if they are good results, then everyone’s buying them. So, you know, it’s the fact that insiders are buying them. When they’re allowed to buy them, in other words, when all the information is disclosed, it’s not often as strong a signal in Australia.

[00:37:24] TK: That’s the first thing. The second thing is that there’s a lot of announcements about insider trading. And it’s, it’s a lot of the times it’s just like someone sold something to pay the tax on their options or they’ve exercised a few options. So there’s a lot of dribbling of insider announcements on the ASX.

[00:37:43] TK: So I think Quantity, the size of what’s going on matters, but then even then, like even today, you see companies like WiseTech Global, which is, um, uh, has an owner founder in it who’s been selling down over the years, um, hasn’t affected the share price. And If I’ve seen him interviewed and he says the reason he’s selling is because fund managers want to buy more of the stock and they can’t because there’s he owns so much of it the ADT is not big enough so he’s selling down to allow him to get in so which has supported the stock price so um yeah again there’s no clear rules for me in Australia to support insider buying as being a good metric.

[00:38:22] CR: how long is the

[00:38:23] CR: blackout period?

[00:38:24] TK: Not sure, um, it’s At least a month, um, I’d have to have a look, but yeah, it’s generally from, well, sometime in confession season when manage, like probably the end of the financial year, I would think through to when they make their results announcements, I would guess. I can ask Jenny, she’s, she’s subject to it, being a board, being a bank director.

[00:38:47] CR: Uh, anyway, just to wrap up that whole newsletter thing, he says, investors seeking maximum long term capital growth should use the value and performance criteria, giving particular attention to neglected shares of smaller companies.

[00:39:02] TK: Yeah, makes sense.

[00:39:07] CR: So thank you

[00:39:07] TK: I had a look at the website when you, uh, When you sent through

[00:39:10] TK: the link, um, and I think to me, there was a, uh, a really pithy quote, which I think was probably summed everything up, um, and again, this, this chap Cornell inverted his approach to share investing and said, it’s much easier to see what I’m doing by looking at what I would be the last thing I’d want to do, and he said that you should avoid it.

[00:39:33] TK: The largest companies, widely followed by brokers, trading at high valuations with declining share prices. to me, that’s patently obvious. Um, and if you kind of take that and invert it, invert it, you get to where, you know, you just did, which is small undiscovered companies, which are trending up with their stock price, which is pretty much what we do.

[00:39:58] CR: So thank you to Chris for sharing that again. People can check that out if they want, just market analysis. I think, uh, stockmarket. co. nz is the website address. What have you got on your list of talking

[00:40:14] CR: points, TK, that we haven’t already covered?

[00:40:17] TK: Yeah, so just, just, uh, a couple of things, but the first one is I bought some, I was looking at what shares to buy recently and, um, I do look at yield because I’m trying to fund retirement from Dividends, and, uh, I looked at AGL, which was a large ADT stock with a good dividend yield, but, um, when I had a bit of a research into it, a bit of a deep dive into it, it doesn’t have any franking credits, so, I think it was AGL.

[00:40:46] TK: Anyway, but anyway, my point is, if you are yield conscious, then, um, we don’t report in the buy list whether the company is fully franked with its dividends or not, so. If you are looking for that, then do your own research and check out something before you buy it and make sure the yield is fully franked. Does make a material difference. Uh, stocks, one stock in the news that I came across, which, um, piqued my interest was Nick Scali. So had been on the buy list earlier this year. Um, so I’m guessing a number of people who were listening might hold it. And there was an article, uh, I think on the weekend in the Fin about their expansion into Great Britain. And, uh, I thought it was interesting, um, Nick Scali, the furniture retailer has bought, uh, a company in the UK called Fabb, F A B B. Um, they have 21 stores scattered across England in edge of town retail parks in the UK. It’s fair to say. But the chain, a former co operative founded in 1979, isn’t one of the titans of the UK furniture market.

[00:41:55] TK: So it might seem an unlikely launching pad for Scali’s big assault in Britain. The Australian company’s chief executive, Anthony Scali, admits as much. It’s a very poorly presented store network with average looking furniture, he told the Australian Financial Review. after Nick Scali’s recent annual result, but he has grand plans.

[00:42:14] TK: It’s his first attempt to bust out of Australia and New Zealand, and he isn’t planning just to stick a few Nick Scali signs over the top of Fabb ones. He’s ready to take some risks. The 70 odd staff will stay put, but the stores will be given a makeover and eventually restocked with Nick Scali products ranging from modern swivel armchairs to mid century modular sofas.

[00:42:34] TK: Fabb’s board has been cleared out. Collard appears from regulatory filings to have spared nobody, but Fabb’s Finance Director Tracy Jackson, and Veteran Managing Director Matt Hesketh, but Hesketh is now referred to as Commercial Director. Nick Scali has just named former best in class Ross Rodney Oreck as its British Chief Executive, ready to fly over from Australia, run the relaunch, and then go for growth.

[00:43:01] TK: For Anthony Scali, the growth opportunity lies simply in the sheer scale of the UK market. 67 million people is just a lot more than Australia’s 26 million people. He goes on to say, all the UK retailers do double sales per store than we did in Australia, and we also think there’s less competition.

[00:43:21] TK: However, at its most recent trading update in mid June, DFS, one of the major furniture stores in the UK, had its full year profit forecast in half. The company cited shipping delays on the Red Sea, which had driven up freight costs and delayed sales. It also said consumer demand was at record lows, which makes sense given the state of the UK economy.

[00:43:44] TK: So, interesting article, um, Nick Scali has clearly gone in as a value investor and bought FAB. Um, which, on the surface of it, looks like a strange investment, but I think it’s a fairly smart one, given that, um, he can change over the management, uh, bring in people he likes and trusts, and In a country with three times the population and where furniture retailers do twice the store sales, there’s plenty of upside if he gets it even partly right.

[00:44:15] TK: So I think it’s a fairly astute move for him.

[00:44:17] CR: aren’t you traditionally skeptical of Australians trying to expand to Great Britain? Why are you giving Nick Scali the nod and the wink when you’re normally poo pooing

[00:44:27] CR: on that?

[00:44:30] TK: Uh, I think what resonated with me was the way he’s doing this. Traditionally it hasn’t worked. Bunnings became a cropper after doing something similar. So a bit of a case study in that, that they were trying to sell barbecues in winter in the UK and it didn’t work. And you know, there’ll be all sorts of reasons why an Australian going to the UK won’t have that kind of environmental experience that’s required.

[00:44:57] TK: And you know, the fact that Furniture retailers are having problems with the Red Sea, delaying shipping might be one he hadn’t thought of. So, um, yeah. So, um, there is plenty of reasons to think he won’t work. Why do I think he’s got a better chance is because, um, it’s, it’s 21 stores, it’s got plenty of upside, and if he does get it right, then, um, he can expand from there.

[00:45:23] CR: Okay. All right. Good luck, Nick

[00:45:25] TK: Owner founder, Nick Scali’s done well

[00:45:28] TK: in Australia. He does know the retail business, furniture business in Australia really well. Um, operates a lot of drop shipment, which, um, was a revolutionary, revolutionary approach in furniture retailing in Australia. So, yeah, it might work in the UK as well. Anyway, just, uh, that caught my interest.

[00:45:45] CR: Well, actually it wasn’t, I mean, it’s run by Anthony, wasn’t it? It was

[00:45:48] CR: founded by his dad, wasn’t it? yeah.

[00:45:51] TK: It was back in the 50s. Yeah. It’s now run by the Sun.

[00:45:54] CR: Hmm.

[00:45:56] TK: Oh, so you’re saying it’s not known a founder.

[00:45:57] CR: Well, I guess it kind of is. It’s the family, right? Yeah. The family’s in it.

[00:46:01] TK: Yeah.

[00:46:02] CR: By the way, the RBA has earned the very high salaries. Uh, by doing nothing. So there you go. That’s, that’s a great, it’s a really, it’s a pretty great gig really, isn’t it? Like you just like, Hey, uh, you know, we’ve, we’ve, we’ve sat for three months and thought long and hard and we’ve decided we’re not going to do anything.

[00:46:23] CR: So where do I get my check from? They, uh, yeah, just, thank you. I’ll pick it up on

[00:46:28] CR: Tuesday. Yeah, good.

[00:46:31] TK: Yeah. Alex should have studied economics at university and gone and worked for the RBA rather than becoming an artist.

[00:46:37] CR: the family business, isn’t

[00:46:38] TK: Easy money. Yeah. I mean, she could’ve, she could’ve gone off and painted. So I, there’s, I dunno how many economists they have at the RBA . They wouldn’t, they wouldn’t miss her buggering off to paint in the afternoons.

[00:46:49] CR: She could be painting and saying she’s thinking about what to do about interest rates while she’s painting.

[00:46:56] TK: Yeah.

[00:46:56] CR: Uh, uh, what else you got?

[00:46:59] TK: I got, uh, one more article. Um, and this was a stock picker, which, uh, lined up with all of our buy list stocks. So, uh, chap’s, uh, name is Nick Sladen. The company is LSN Capital’s Emerging Companies Fund, which he runs from Melbourne and oversees around 50 million in assets. But, um, just went through. This is one of the sort of fun manager interviews that AFR does regularly, but some of the companies he had, you know, weren’t on our buy list, like Zip, but a lot were.

[00:47:31] TK: So Southern Cross Electrical Engineering, Genus Plus, both of those have enjoyed the tailwinds. of electrification and work flowing from the dependence of connectivity across data centers and renewable energy. Durotech, there’s another one of his which has also been on our buy list, specializes in protection and remediation of infrastructure assets, has doubled their profits in 2022 levels.

[00:47:55] TK: Um, he was asked to nominate his most undervalued stock and he picked out oOh!Media. which has been on our buy list for a long time, um, and he says the stock trading on a very cheap 11 times P. E. ratio is well below what it traded on for many years before COVID 19. As one of the two market leaders in this space, this seems far too low.

[00:48:15] TK: Their assets are hard to replicate across road, rail, airport, office, and street furniture. given the regulatory approvals required and contracts in place with advertising firms, landlords and clients. They’ve invested heavily to digitize many of their billboards over the last decade, which has driven improved yield and profitability, which we saw in the recent result with strong gross margins.

[00:48:38] TK: Anyway, I thought that was interesting to find someone who was lining up with our, um, buy list and it might be good to get him on the show and talk about that a bit further.

[00:48:46] CR: Hmm.

[00:48:47] CR: What did you say his name was?

[00:48:50] TK: Uh, his name is Nick Sladen. S L A D E N.

[00:48:54] CR: Oh,

[00:48:54] CR: like Elizabeth.

[00:48:56] TK: Who’s, who’s that?

[00:48:58] CR: Tony,

[00:48:59] CR: Tony, Tony, Tony, Sarah Jane, Sarah

[00:49:02] TK: That someone tied with

[00:49:04] CR: Tony, was Elizabeth Slayton, Liz Slayton.

[00:49:07] TK: Oh, really? Okay.

[00:49:09] CR: My childhood, my childhood crush.

[00:49:13] TK: Really?

[00:49:14] CR: Come on. You didn’t, you weren’t in love with, uh, Sarah Jane in the seventies.

[00:49:19] TK: No. No.

[00:49:21] CR: did you ever crush on in the seventies?

[00:49:24] TK: Oh gosh. O’Reilly and I were talking about this. I think she was on the box. He was, he was a number 96 guy and I was a box guy.

[00:49:33] CR: I remember number 96.

[00:49:34] CR: I don’t remember the box. What was the box? Soapy.

[00:49:38] TK: Oh, number 96 set in the TV station.

[00:49:40] CR: Ah hmm. Alright, Nick Sladen expect to call.

[00:49:46] TK: Nick’s line. Yeah. Okay. So Paul Pork on Qantas. And I,

[00:49:53] CR: okay.

[00:49:54] TK: I did a Pulled Pork on Qantas many, many years ago, but it’s back on, back on our buy list now, so I thought it was worth going through again, given it’s recent on the buy list, and it’s a large, very large ADT stock. So, Pulled Pork on Qantas, um, I don’t know if it’s worth outlining what they do, since probably everyone listening will know about Qantas.

[00:50:14] TK: They, um, operate the International Airline. It has an enviable safety record. They operate Jetstar. The budget airline, as well as QantasLink, the regional carrier. QantasLink is benefiting from the recent failure of Regional Express, a competitor. And I guess also too, perhaps from the failure of Bonza, which was a smaller company, but another airline that went into administration recently.

[00:50:38] TK: Qantas also have an air freight division and operate a large loyalty program, which has been a large profit center for them. Due to the margin on charging suppliers, mainly credit card companies for points. So the share price has resurrected, um, got to its lows about a year ago. It’s resurrected following a messy CEO transition 12 months ago, and the company is back on the buy list.

[00:51:03] TK: So, interest, I mean it’s an interesting one, um, controversial, the, There’s been much gnashing of teeth by domestic customers this year about cancellations and delays and about general rise of airfares and I know Jenny’s been bitching about it lately because she flies often between Sydney and Melbourne and Sydney and Brisbane and other places and she keeps quoting very high airfares for that, uh, for those routes, so they’re up, um, and they, and quite as to their, um, I guess, uh, Betterment have claimed that they’ve been putting, they put 230 million in the last year to address what they call customer pain points, um, which, um, I’m not sure if they have addressed customer pain points, but they put money into upgrading IT systems, improving food and beverage and on time performance.

[00:51:55] TK: So, um, I dunno, maybe they should have just lowered the price. people would’ve gone over it a bit more on, on the airfares. But anyway, latest, latest results were interesting. Um, NPAC was down some 28%. They still made over a billion dollars. Um, however, margins were up from, uh, 10.4%. Um, but the, the important metric I focused on, they call RPK, um, which is I think, uh. Revenue per kilometre. That’s up 19. 7%. And the reason why I singled that one out is that, um, uh, I call RPK the Buffett measure because, um, he uses it to illustrate what he calls the heavy lifter, uh, in KPIs for a company. So he always tries and find the, finds the one metric that summarises how the company is going.

[00:52:48] TK: And in this case, revenue per kilometre is that metric for airlines. And, um, it kind of summarises everything. It gives you a sales up. Um, if they’re flying a lot of planes and their seats are empty, then RPK is down. If they, um, uh, have full planes, but they’re not flying it often or their margins are thin, then RPK is down.

[00:53:08] TK: So it’s a good heavy lifter KPI, and it’s doing well for them at the moment. Um, they’re also, Qantas is also investing in new aircraft. And during the year they received delivery of 16 new planes, uh, they are undertaking a buyback, so they bought a lot of their shares back last year, and they’re calling out they’re going to continue the buyback with another 400 million dollars of purchases this year, and they’re not declaring a dividend, so they’re following the U.

[00:53:35] TK: S. Style of, uh, returning value to shareholders by buying back their shares. Um, however, to do all of this, they’re increasing their debt by about, oh, just, uh, well, a bit over a billion dollars, 1.3 billion. Um, so does, it comes with a price. And, um, that’s gonna be reflective when we get to the numbers in there.

[00:53:56] TK: Financial health scores. Uh, after investing in customer pain points, they report increases in customer satisfaction and net presenter scores. Um, but I guess anecdotally they still have some way to go because there’s still articles all the time about people dissatisfied with cancellations and planes running late and the price of airfares.

[00:54:17] TK: Um, So they’re putting money into refreshing the fleet and that will deliver operating savings as newer planes are more fuel efficient, so that’s good, and strategically they’re also continuing with Operation Sunrise which is their strategy of, of You trying to get one leg flights from Australia to London and New York.

[00:54:42] TK: So they’ve been successful at doing that from Sydney to London, and they’re going to expand that, try and do the same from Melbourne and also to go to the east coast of the US. And as planes get better at flying longer distances, then that’s a fairly popular thing for Australians who, you know, suffer from the tyranny of distance.

[00:55:03] TK: Um, Breaking it down by divisions because Honest is always a tale of Different divisions working well at different times. Jetstar’s earnings were up 23 percent year on year. I guess that’s not surprising if people are finding the airfares are high and they don’t have as much money to pay for them, they’re going to migrate towards the budget carrier.

[00:55:25] TK: Um, Laws to the loyalty section, there was also a strong performer with revenue up 18 percent and EBIT up 13%. So that’s been a real profit house for them over the last few years. Um, both of those things though offset a 39 percent decline in international earnings. Um, and they also put their air freight.

[00:55:46] TK: earnings within international so it’s a combination of both of those things. International is very competitive with overseas carriers pushing for more access to the Australian market so it is a risk for Qantas and it does make that division fairly political because the government sort of gets lobbied a lot by people who want international airfares to come down and therefore want more overseas carriers in Australia.

[00:56:13] TK: I get lobbied a lot by the overseas carriers themselves to get more access to slots, in other words terminals, in Australia. But they also get, um, they also get lobbied a lot by Qantas to stop that from happening. Um, and there’s been lots of articles in Rear Window suggesting that there’s a lot of soft influence going on, like politicians getting Chairman’s Lounge memberships,

[00:56:37] CR: their sons.

[00:56:39] TK: and their sons, yeah.

[00:56:41] TK: Don’t know if that works, but, um, to date Qantas has been able to stave off a lot of overseas carriers from increasing their slots in Australia. Anyway, buy the buy. Uh, the other thing which I, I found interesting in the results was that, Qantas has provided some 270 million to settle court cases arising from an ACCC case alleging that Qantas sold tickets on flights that had already been cancelled and another ruling by the High Court that the outsourcing of baggage handlers involved the illegal termination of some of their staff.

[00:57:17] TK: So a couple of issues which they’ve, um, they’re putting behind them now I guess, and I guess it’s good that they, they’ve come to. Settlement on those things, or they will in this year and they provided for it. I guess the good thing is that they don’t have to provide for it going forward. So that should be a boost to profit in, in future years, unless they do something daft again to get themselves offside with the ACCC or the law.

[00:57:41] TK: Anyway, enough about Qantas, um, I guess my summary is that, uh, the new CEO, this is, this is her first results announcement, and she’s certainly been at least trying to address the problems that Qantas has, and, um, there’s certainly some, uh, a lot of progress being made on a lot of fronts to, um, to solve those problems.

[00:58:02] TK: It’s also coming through in the numbers, uh, share price for the analysis is 7. 26, that’s just below consensus, um, and, uh, Uh, but above the IV1 of 427, but below IV2 of 926, so it’s a little bit in the value range there. ADT is 30 million, um, per day, so it’s a huge ADT stock, so it won’t be a problem for anyone.

[00:58:26] TK: Uh, there’s no yield, just calling that one out again, um, that’s why we can’t score it for that. Stock Doctor Financial Health and Trend is Marginal and Steady, so Marginal is the interesting thing here. We don’t score it for Marginal Financial Health. And I noticed that Qantas has had a Marginal Financial Health in Stock Doctor since COVID.

[00:58:48] TK: So they’ve increased their debt and have had revenue issues since COVID, I guess. Stockopedia ranked Qantas at 63 for Quality, so they’re also marking it down. And I would think that. Both of these are, um, are due to the, uh, uh, the debt Qantas holds. So, Stock Doctor, if I break down their financial score, they mark Qantas down for a couple of ratios, but they’re basically ratios of cash to liabilities.

[00:59:17] TK: So, um, basic cash to liabilities, cash to assets, and change in cash versus change in liabilities are all things that Stock Doctor, uh, rate, uh, What is, um, lowly for, and that, um, rolls up with the other things, other various ratios that they look at, given the marginal financial health. Uh, p for this company is 8.7 times, which is not the highest or lowest in the last three years, so it gets no score for that.

[00:59:46] TK: The big winner here is prop calf, which is only, um, 3.3 times. So we’re able to buy this company at the very cheap, multiple of its, of its, uh, cash. Cash return. Net equity per share for this company is only 19 cents. And if you look at the net tangible assets, it’s actually negative at negative 22 cents. So the share price is many, many times book value.

[01:00:09] TK: So we can’t buy it for book plus 30. And that pretty much reflects the fact that Um, debt matches assets on this, uh, balance sheet, so they’ve geared up, um, quite a lot. However, I’ve got to say, it’s not unusual in the airline industry to see that kind of high debt load because they have a lot of assets, i.

[01:00:28] TK: e. the planes, and even though these are leased, there is often a lot of, um, uh, manipulation of lease. So lease buyouts, if they want to retire a plane early. They buy out the lease, um, they can write down assets in that case, which is the, the, um, the lease, uh, buyout. Um, and uh, they often need to do that to modernize the fleet.

[01:00:51] TK: So, as I said before, it’s a trade off between, um, ending the lease on a plane early to, um, to upgrade to a new lease on a plane, which is more fuel efficient. So they’re doing the sums on that kind of thing all the time. Uh. I think, um, let me move on then, to earnings per share, uh, earnings per share growth is forecast at 20%, which means Qantas passes our growth test of EPS growth over PE being greater than 1.

[01:01:17] TK: 5, and in this case it’s 2. 3. So, interestingly enough, once again, we see a growth company selling it as a value play at least this stage in the cycle for Qantas, so, um, it’s, I think it’s a good thing. I might even do some testing on whether, you know, these companies would share. Scoring for growth and they’re on our buy list for value are actually performing better than generally for the buy list because it seems to be a thing at the moment, which could be just the stage of the economic cycle we’re in, but it does seem a little bit more unusual than a little bit more unusual than we normally see to have these companies scoring on growth.

[01:01:54] TK: Um, as frequently as, as they are. Uh, moving on, no owner, owner, founder, of course. Um, it’s been around for a long time. Uh, there is a relatively recent three point upturn in sentiment. So we score it for that. Um, equity is not consistently increasing, so we can’t score it for that. So all in all, the company on a quality basis gets 10 out of 16 or 63%, which is kind of low ish, but not too bad.

[01:02:20] TK: So 63 percent for quality. But a good PropCaf, so the QAV score is 0. 19, which is pretty good for a large company. So that’s Qantas, it’s risks. I think there’s a few risks here. If interest rates do go back up, then that, uh, that has a big negative impact on a heavily indebted company. Um, it’s not likely, I think.

[01:02:42] TK: Um, I think most people are thinking that interest rates will come down as they have recently around the world, but not yet in Australia. Uh, the other risk is that there is political pressure, um, to open up more overseas competition. And I think the other risk is that, um, the, I think something may come out of the ashes of Rex Regional Express and so they might, uh, get some more competition in the, um, QantasLink market.

[01:03:10] TK: Uh, on the positive side, the, the new CEO is, uh, The ex CFO and therefore will have a good handle on debt management and fleet investment. She has a deep understanding of that and it appears to be moving the chess pieces quite well with that. Improving customer sentiment, you can say it’s off a low base but that’s got to be a good thing for a company like this, a retail company like this.

[01:03:32] TK: There is a domestic duopoly design, you really want to see some Virgin in the market. I know the National Party has been tried to suggest that they would break that up, but they were shot down by the Liberals on that one. And I think a hidden positive for this company is the loyalty program. It has almost little to do with airlines, except for the fact that some points are redeemed for flights, but it is a very large loyalty program and makes its money out of charging the credit companies a margin for points issued.

[01:04:03] TK: So that’s a hidden benefit for this company. So yeah, Good to see Qantas back on the buy list. Its share price has been doing well this year, um, but, uh, it’s certainly trending upwards.

[01:04:15] CR: Did you have a look at it

[01:04:16] CR: on Stockopedia?

[01:04:17] TK: Uh, I did, yeah, so, what was it, um, the quality score was down. I forgot the total ranking though.

[01:04:24] CR: Quality

[01:04:24] TK: got it in front of you?

[01:04:25] CR: Yeah. Quality score is 63 value 78, momentum 84. It’s a stock reg of 86, but interestingly it has a Z score in distress, negative 1.4.

[01:04:39] TK: Right.

[01:04:40] CR: So you know, that’s what I found looking at a lot of the. Companies, uh, on our Stock Doctor buy list, as I’ve said before, that are also on the Stockopedia buy list for Australia,

[01:04:53] TK: Mm hmm.

[01:04:54] CR: the Z scores are all over the place.

[01:04:58] CR: And Qantas is, uh, one of the ones that has, uh, quite a dark red distress score. It gets a five for the F score though, which is, you know, sort of just north

[01:05:10] CR: of middle for that.

[01:05:13] TK: Yeah, well that seems to suggest that the Zed score is focusing a lot on debt levels then.

[01:05:20] CR: I

[01:05:20] TK: And that’s, I guess that’s a good point too you’ve raised, is that I would not buy something with a marginal Stock Doctor financial health like Qantas, um, so it’s a reason that Zed scores just might not be, won’t be a go or no go, but just might not be a score on the checklist.

[01:05:36] CR: Did you say you wouldn’t buy something with a marginal

[01:05:39] CR: or you wouldn’t not buy it?

[01:05:42] TK: Wouldn’t not buy it. I wouldn’t buy Qantas.

[01:05:44] CR: Yeah, right. Yeah. So, um, there you go. Uh, I was just looking at their five year, uh, price also on Stockopedia. So go back to five years ago, uh, a little bit later than that, sort of, um, December 19, just before COVID. COVID trading at 7.

[01:06:05] TK: hmm.

[01:06:07] CR: Then they crashed and, uh, haven’t got back to that yet. 7 sort of 20, give or take today.

[01:06:15] CR: So they’re trying to get back to that pre COVID peak. If you’d bought Qantas and not sold them. Like we did. I remember, they were one of the first ones that we sold, I think. I think they were one of the first stocks that got hit in COVID, yeah, early 2020.

[01:06:34] TK: Right.

[01:06:34] CR: Um, if you’d bought

[01:06:35] TK: Yeah, I certainly owned it and made good money out of it, but gave a fair bit

[01:06:38] TK: back when I sold it, um, when COVID hit. And that’s the story of Qantas. I mean, I think it’s a cyclical stock. It’s, it’s, you know, it’s, it’s constrained by the economy. It’s constrained by interest rates, all those kinds of things.

[01:06:52] TK: So, it’s, it’s, you know, it’s never gonna, you know, Um, be an Amazon or something like that and, and trade on a large PE and, and be a huge growth stock. But at the moment, um, I think it’s one to trade in and out of.

[01:07:08] CR: it just reminds me, like, I’m a member of a number of value investing subreddits. Mostly full of

[01:07:15] TK: Oh, yeah.

[01:07:16] CR: And from time to time I see somebody asking a question about should I sell these things down or should I just hold and sometimes I’ll weigh in and say well what Tony Kynaston says is that he has these sell triggers and the amount of hate that I get in value investing subreddits if you suggest that you should have sell triggers That’s not value investing!

[01:07:41] CR: You have to hold it! Forever! I get really, really angry. You get yourself in like, uh, cell tornadoes or something and it’s like, yeah, well, we’ve, you know, we do go through periods where we tend to sell a lot, but you know, over the long term, we think it works out. in our favour and oh the fury if you

[01:08:03] CR: suggest selling something in value

[01:08:06] TK: Yeah. I know. It’s amazing,

[01:08:07] CR: it’s like a cult it’s a hardcore cult you can’t sell you gotta buy and hold it forever

[01:08:16] CR: well thank you

[01:08:16] TK: And just, I mean, that’s so,

[01:08:19] TK: that is so hard to do, to think about all the stocks that you could do that with. Maybe Apple, maybe Amazon, and they probably weren’t making money when they were good times to buy them. So value investors would not have bought them. And yeah.

[01:08:35] CR: and QAN? On, uh, Qantas is, uh, I think a good example. Like we did buy them pre COVID. They were in the dummy portfolio. And I think in my super portfolio, um, because, you know, they were undervalued at the time we thought good company obviously makes a lot of money. We bought them. If we had held on, uh, we still, depending on when we bought them, but you could still be underwater five years later, even

[01:09:05] CR: with a company like Qantas.

[01:09:06] CR: You know,

[01:09:08] TK: And that’s the real thing, isn’t it? You’re better off deploying, even though you’re selling something, which is, you know, you’ve liked as a value share, um, you, you’re better off redeploying the capital during that five years and hanging

[01:09:20] CR: Yeah, it makes sense to me, but, oh my god, suggest that in value investing subreddits, man, and I’ll

[01:09:26] CR: bite your head off. I think it’s hilarious. I mean, it’s so cult y. Like, it’s, like, so many things in life, right? People just develop this sort of cult y mentality towards stuff and don’t

[01:09:38] CR: question the cult.

[01:09:40] TK: Yeah. And I know where it comes from. I mean, Buffett famously said, you know, consider investing to be a bus ticket that has 10, 10 rides. And every time you buy a share, you clip off a ride. And, um, you, you don’t want to use up, well, if you use up the 10, that’s it, you can’t buy any more. But how many shares is Berkshire Hathaway?

[01:09:57] TK: How many businesses is Berkshire Hathaway?

[01:10:00] CR: Yeah, and

[01:10:01] TK: So it’s a great apocryphal story to sort of,

[01:10:03] TK: you know, get your mind thinking that way, but he doesn’t do that.

[01:10:07] CR: Yeah, he sold stuff. I mean, it’s like, it is. I, I, I read that as a, it’s a

[01:10:12] CR: mindset. You should think about stuff that you

[01:10:15] TK: Mm hmm.

[01:10:16] CR: and hold. So you’re not in there as a day trader, but it’s not a religion or, or,

[01:10:22] CR: yeah, maybe it is. Um,

[01:10:25] TK: And the fact that he sold, I mean, look at the last quarterly results of Berkshire Hathaway. He sold half his apple stack. So he’s trading all the time.

[01:10:32] CR: well, thank you for that Qantas breakdown, Tony. Um, I’ve got five minutes left. I’m going to have to do a quick after hours.

[01:10:39] TK: Oh,

[01:10:40] CR: gotta go to Kung Fu.

[01:10:41] TK: okay. All right. So what do you want to spend the five minutes on? I’ve got a quote from what works on Wall Street or I’ve got after hours or I can do both quickly.

[01:10:49] CR: Do both quickly. Start with O’Shaughnessy, I guess. Or you can save it for next week. We already, I

[01:10:54] CR: already quoted a bunch of stuff today, you want to save it for next week.

[01:10:56] TK: Yeah, I’ll save it for next week?

[01:10:57] TK: That’s

[01:10:58] CR: We’re already, sort of, over an hour, I think. Yeah. Uh, hour 20. Oh my god. Um, give me a quick after hours, Tony. We talked about

[01:11:08] CR: Poifect. She had a win.

[01:11:10] TK: Yeah, double market. The horse I own was Steve Mabb. Races for its first start on, uh, it was meant to start tomorrow, Wednesday, but it’s going to run at Geelong on Thursday, which I think is a better option. So looking forward to seeing that one run. Sorry.

[01:11:24] CR: said, good luck

[01:11:26] TK: Yeah, thank you.

[01:11:27] TK: Um, I spent all of Sunday afternoon using ChatGPT to, to try Learn how to code, um, better,

[01:11:36] CR: Code what? Poifect.

[01:11:38] TK: um, uh, my form analysis, I wanted to download racing data and then manipulate it the way I do, which I do all manually now.

[01:11:46] TK: Interesting, ChatGPT was impressive, but it was still a long way from perfect. I spent a good part of that, yeah, a good part of that time going around in circles

[01:11:57] CR: Which, version were you

[01:11:58] CR: using?

[01:11:59] TK: Is it 4.

[01:12:01] CR: You weren’t

[01:12:01] TK: Anyway, it must have been, must have been, well, whatever one, it gave me a certain number of questions and then after a while it said I can’t ask another question until 5pm and it dropped me back to the old version. Um, so, both.

[01:12:15] CR: Well, 4. 0 is now the old version. There’s an older old version, but 0. 1 is the version you should be using. That’s the new PHD version, but even that’s not Poifect. I’ve, I’ve been having problems with it all week as well, but, um, it’s

[01:12:31] CR: better, but not as good. Perfect, by a long stretch. ChromeDriver?

[01:12:36] TK: Selenium and, and, um, HTML coding and stuff, which was really interesting. Um, but I had to download a Chrome drive, and we got into this kind of, yeah, Chrome drive, we got into this recursive loop where ChatGPT kept sending me to a Google page to download the version of Chrome driver I needed.

[01:12:57] TK: But her, but the link that ChatGPT was referring to was old. So something had changed where you don’t, she was kept, well, I could call her she, but the ChatGPT kept telling me to look for the version of Chrome I had on this website and download the Chrome driver to a, to a match. And of course, Chrome drivers have changed now, and any sort of version after a certain version number works.

[01:13:20] TK: So, um, the website had changed, and we were going around in circles. I kept saying, but you’re sending me to a link. It doesn’t make any sense. My version of Chrome isn’t there. Well, try this. And so you sent me to a different site. Same problem. In the end, I worked it out for myself, but it was interesting.

[01:13:35] CR: Just a point on that, there is some code that you can put into your script that will keep the

[01:13:41] CR: ChromeDriver up to date every time you run it.

[01:13:44] TK: Ah,

[01:13:45] CR: they go out of date. Pretty quickly, and then you have to go through that whole process again, so just ask it for the code that keeps the Chrome driver updated constantly, and that’s good, yeah.

[01:13:58] TK: yeah.

[01:13:59] TK: good.

[01:13:59] CR: Good, what else?

[01:14:00] TK: So I did that. Uh,

[01:14:02] TK: watched the first episode of The Penguin, which is fantastic.

[01:14:06] CR: that on?

[01:14:06] TK: Farrell’s brilliant. Foxtel. Colin Farrell is brilliant. It’s amazing, like, he’s under all this makeup, but he’s still really charismatic. Um, it’s great. Just this sort of, uh, that classic, almost like a Blackadder story where the underling to the prince really runs things from, you know, behind.

[01:14:25] TK: It’s just great. Watching, watching him. Yeah. Um, reading a book called Think Like a Freak. You ever read the Freakonomics series?

[01:14:33] CR: a P. Diddy book?

[01:14:35] CR: Is that by P. Diddy? No? Oh, okay. Yes,

[01:14:38] TK: Freakonomics

[01:14:39] TK: Um. Series.

[01:14:41] CR: the day.

[01:14:42] TK: Yeah, this is the third book and I hadn’t gotten around to reading it. So I’m reading it now. So it’s, it’s like, it’s interesting, great, great about, you know, how to think about problems and, you know, admit you don’t know what you don’t know, all that kind of stuff, all basic stuff.

[01:14:56] TK: But it’s, it’s a good fast paced read to recover it. And the reverse, listening to Nassim Taleb on Joe Walker’s podcast, where it’s like, It’s just so dense, but so interesting, on probabilities, you’ve got to stop and really think about every minute of what Taleb talks about, really. But that’s interesting.

[01:15:19] TK: You ever read Taleb? Black Swan, and Skin in the Game, and all those,

[01:15:22] CR: yeah.

[01:15:23] CR: I mean you recommended him to me years ago and I read Black Swan I think, maybe a different one, I can’t

[01:15:29] CR: remember, but yeah, really impressive stuff.

[01:15:32] TK: yeah, and interesting takes on probability, so it goes into the maths behind Black Swan events and how you should frame it and how it applies to share markets and history and all sorts of things, which is really interesting.

[01:15:47] CR: fantastic, well

[01:15:48] TK: And that’s me for the week.

[01:15:51] TK: Yeah. And one of those weeks where, I love those weeks where you Just listening to Joe Walker’s podcast, I’ve got about 10 things I want to go and read, you know, based on what they’ve said. It’s great to come across something like that every now and then, which is, you know, you go down rabbit holes on.

[01:16:07] TK: It’s fantastic.

[01:16:08] CR: Yeah. Absolutely. Well, I’ve spent a lot of the last few days, uh, using ChatGPT, uh, with server maintenance stuff. Um, the webs, all the webs, all my websites have been going down several times a day. My IT guy is doing nothing. So, GPT last week at one point and got it to guide me through a bunch of server admin stuff, which seemed to work.

[01:16:34] CR: The sites, the servers were performing really well for three or four days. As opposed to going down two or three times a day and I was like, Oh, I nailed it. And then they crashed again on Sunday night. So I’ve spent most of the last day and a half, uh, it was different things that brought them down this time.

[01:16:51] CR: So just been going deep, but great, like again, not perfect, but just great having this tool that I can say, Hey, what does this mean? And how do I configure this plugin? And what do I do with this code here? And stuff that there was no way in hell I could do by myself. Um, I can now figure out most stuff, uh, if I have enough patience.

[01:17:14] CR: So at the moment they’re running well, but it’s been frustrating. It gave me a headache by the time I finished late last night, um, on yesterday’s efforts, but just having it as a tool to enable me to do this kind of stuff has been great. I’ve been watching, um, 1956 version of 1984, um, which I’d never seen before, directed by Michael Anderson, who I most know as the director of Logan’s Run in 1976, which has always been one of my favourite films, but he did this 20 years earlier.

[01:17:52] CR: And, uh, really good! Donald Pleasence, a very young Donald Pleasence is in it, pre Blofeld, and pre Wake and Fright. Um, two things I normally associate with Donald

[01:18:05] CR: Pleasence. What Voyage?

[01:18:08] TK: Fantastic Voyage?

[01:18:09] CR: I don’t think I’ve ever seen that. Good.

[01:18:12] TK: Yeah, it’s the sci fi movie where they shrink people down and inject them into the bloodstream.

[01:18:19] CR: Um, and interestingly, this version of 1984 was funded by the CIA. Uh, secretly, but I love this, it was funded through a front organization called the American Committee for Cultural Freedom. You can’t get a more 1984 Orwellian title than the American Committee for Cultural Freedom funding a propaganda film about the evils of socialism, basically, is the way that they were framing it.

[01:18:54] CR: Um, Of course, as we know, the, you know, the NSA now is basically Big Brother and is recording everything and watching everything and listening to everything. So we ended up with Big Brother, but yeah, it’s a really, really well done, uh, version of the film, like cinema, cinematically, um, the, the artwork, the Big Brother is watching you, posters everywhere.

[01:19:17] CR: Um, fascinating. Speaking of fascinating, I’m still reading The Demolished Man, the Alfred Bester Sci-Fi book. I’m getting towards the end of it, but the chief prosecutor in this book, which I think was also written about 1956, is an ai so the like the chief detective in it is preparing his case against the murderer that he then has to give to the ai.

[01:19:42] CR: They’re putting it in with punch cards into the ai, which then. Basically throws the case out because he doesn’t have enough evidence. Um, and I was like, wow, that’s, that was really, uh, forward thinking. The, an AI as the chief prosecutor that you have to convince because it’s unemotional and it’s purely logical and it has the entire legal database in it.

[01:20:06] CR: And I wonder how long it will be before we get to an AI justice

[01:20:11] CR: system, AI based justice system. Haha!

[01:20:17] TK: Harry Callahan on the chief prosecutor, that was the premise of, um, dirty Harry, wasn’t it? The, the Miranda laws had come in and Harry had broken all the laws to get Serpico

[01:20:29] CR: Not Serpico

[01:20:30] CR: Serpico. was an Al Pacino film, but uh, yeah. Can’t remember what his

[01:20:34] TK: Oh, not Serpico. Scorpio. Scorpio,

[01:20:35] CR: That’s right.

[01:20:37] TK: yeah. Yeah.

[01:20:39] CR: I’m listening to Cellophane Memories. The new album by David Lynch and Christabel. Uh, Christabel was the hot Brunette FBI agent in Twin Peaks The Return.

[01:20:56] CR: Do you remember her? She was the,

[01:20:58] TK: to picture her.

[01:20:58] CR: she was the eye candy in Twin Peaks The Return.

[01:21:02] CR: She was working with Alfred and, uh, Agent Cole. Anyway, she’s, she’s a musician. She’s done songs with David before. They’ve just come out with a new album, which is really Lynchian, like really dreamy with lots of lyrics and, you know, it’s great. It’s good sort of

[01:21:22] CR: background music while I’m working. Very, very

[01:21:25] TK: Yeah, right. I’ll check it out.

[01:21:28] CR: reading Spinoza’s Ethics, finally cracking into Spinoza. I’ve been reading about Spinoza all my life. I thought I should finally crack open Spinoza. 17th century Jewish pantheist philosopher. It’s good stuff. I’m enjoying it. Uh, anyway, so that’s been my week outside of server maintenance, which

[01:21:53] CR: is driving me nuts.

[01:21:56] TK: And Kung Fu.

[01:21:57] CR: Yeah, well with that, got a grading coming up, got a brown belt grading coming up in a couple of weeks,

[01:22:01] TK: Oh, good luck.

[01:22:02] CR: a runoff,

[01:22:03] TK: Good luck. All right.

[01:22:05] CR: thank you Tony,

[01:22:06] TK: Enjoy.

[01:22:07] CR: have a good

[01:22:08] TK: nice to chat as always.

[01:22:10] CR: bye now,

[01:22:11] TK: happy ASX. Bye.

[01:22:12] CR: good week, whatever we say.