Transcript QAV 402

Episode Name: QAV 402

File Length: 01:15:49

Cameron Reilly [00:04]: Tony Kynaston, how are you?

Tony Kynaston [00:05]: I’m good. How are you?

Cameron Reilly [00:07]: I’m good.

Tony Kynaston [00:09]: Good.

Cameron Reilly [00:10]: You sound muted.

Tony Kynaston [00:12]: Muted, really?

Cameron Reilly [00:13]: Not microphone muted. Just like docile, calm.

Tony Kynaston [00:19]: Yeah. It’s been a good holiday.

Cameron Reilly [00:21]: You’ve had too much holiday. You sound down. Is that because the market’s down today, Tony? Are you down with the market?

Tony Kynaston [00:31]: Not at all. I didn’t know I sounded down. No, I’m fine.

Cameron Reilly [00:33]: You’re good? You’re okay?

Tony Kynaston [00:35]: Yep.

Cameron Reilly [00:35]: What have you been up to, Tony?

Tony Kynaston [00:37]: What have I been up to?

Cameron Reilly [00:37]: Yeah.

Tony Kynaston [00:38]: I had a wonderful lunch yesterday with some friends over at Red Hill that was good, at a restaurant called Many Little. And it was a Singaporean set menu, but it was fantastic. So that was nice. Otherwise, pretty quiet. It was wet here for a couple of days. So I just hung around the house. Before that played golf, had some mates down for a couple of days overnight which was nice. Earlier on went for a big walk, a couple of big walks actually. Had a few too many espresso martinis one night out on the deck. But it’s all been good. Good all day.

Cameron Reilly [01:15]: Oh, very nice. You’re making your own espresso martinis at home, are you?

Tony Kynaston [01:20]: Yeah. We started off being very finicky and, you know, getting the measurements right. And brewing some coffee and putting it in. And after about the first round, it was just straight to the vodka and Cola. Just pouring it in.

Cameron Reilly [01:33]: Yeah, that sounds about right.

Tony Kynaston [01:34]: Yeah.

Cameron Reilly [01:35]: Yeah.

Tony Kynaston [01:35]: Yeah. Anyway, it was a good night.

Cameron Reilly [01:37]: Good. Well, the market is down today. We’re recording this on Monday the 18th of January 2021. Apparently, the US stocks slipped on Friday. Something to do with Biden’s $2 trillion stimulus package that he’s announced. The market was like, “Ah, stimulus”. No, I don’t know about that. That can’t be good. Have to…

Tony Kynaston [02:06]: It’s crazy, isn’t it? The market went up when Biden won the election because he was going to put stimulus in the economy and now the market’s going down because Biden’s putting stimulus in the economy.

Cameron Reilly [02:18]: It’s a…

Tony Kynaston [02:18]: A very fickle thing.

Cameron Reilly [02:19]: Buy on the rumor and sell on the fact.

Tony Kynaston [02:22]: It’s just a very fickle thing. Yeah. I see a market. I’ve noticed in the last week or so there’s been more chatter about inflation coming into the US, in particular, this year, this calendar year. So I think that’s behind it as well. People are worried that stimulating the economy and giving lots of cash to people will start pushing prices up, which will bring inflation back which will mean interest rates will rise.

Cameron Reilly [02:47]: He’s hardly talking about giving people lots of cash. It’s…

Tony Kynaston [02:53]: $2 trillion.

Cameron Reilly [02:54]: Yeah. But how much of it are the people actually getting? I read it was like $1,200 or something.

Tony Kynaston [03:03]: Oh really. Okay.

Cameron Reilly [03:04]: I think there is some unemployment insurance or unemployment benefits that are going to be slightly increased. But like in terms of the COVID relief stuff, instead of $600, they’re getting maybe 1200 out of this.

Tony Kynaston [03:20]: Once off or as a payment?

Cameron Reilly [03:22]: Once-off. I think so.

Tony Kynaston [03:23]: Oh really. That’s not much at all, isn’t it?

Cameron Reilly [03:24]: Not compared to what people were getting $3,000 a month here for eight months.

Tony Kynaston [03:30]: Yeah.

Cameron Reilly [03:30]: We haven’t had any inflation, so yeah.

Tony Kynaston [03:35]: Oh my gosh.

Cameron Reilly [03:36]: Anyway, I don’t know.

Tony Kynaston [03:37]: Well, I think, what I’ve read was that China from memory is forecasting something like 9% growth in GDP this year and the US forecast is 5%. So those kinds of numbers usually start to lead to inflation at some stage anyway.

Cameron Reilly [03:53]: Right. Well…

Tony Kynaston [03:56]: And if inflation happens, we all know what happens, interest rates go up and then the DCF valuations on Afterpay and Zero and all those kind of companies come down and there’ll be a reckoning in the market at some stage.

Cameron Reilly [04:11]: Well, everyone in the stock forums I’m on have been bitching and moaning today about Afterpay coming down. But as of Friday, Afterpay had a bigger market cap than Telstra.

Tony Kynaston [04:22]: Yeah, exactly. It’s incredible. Isn’t it?

Cameron Reilly [04:24]: It is incredible. Good luck to all of those Afterpay shareholders.

Tony Kynaston [04:29]: Yeah. They’ve had a good year. Bank that one. You might need it in the future.

Cameron Reilly [04:33]: Somebody in the Sydney Morning Herald comments section this morning wrote, “Selling APT is kicking my ass. I just don’t get it.”

Tony Kynaston [04:44]: Oh gee. Yeah. Something happened in the US, I forget the name of the company but another buy now pay later company had an IPO and it quickly doubled on the first day. And that’s what’s the fire under Afterpay recently.

Cameron Reilly [04:57]: Yeah. I would have thought…

Tony Kynaston [04:59]: US investors.

Cameron Reilly [04:59]: Who would have thought US competition would have made the argument for buying Afterpay lesser. But what do I know? People were like, “Ah!”.

Tony Kynaston [05:09]: I think when you go through the looking glass, you have a thought, then you reverse and that’s what happens. I think that’s what’s happening. Yes. There’s more competition, especially in the US but our share price goes up here. It’s a bit crazy.

Cameron Reilly [05:22]: Speaking of looking through the looking glass, I’ve seen a lot of my friends on Facebook pumping the hell out of Bitcoin recently. And these are smart guys, including my mate, Chris Saad, who used to be one of the lead developers at Uber in San Francisco. He’s now back here in Brisbane living high on his Uber wealth. But he’s been plugging the hell out of Bitcoin for many years. He’s been doing it again recently. 

And I was having a laugh this morning reading a collection of Warren Buffett’s quotes about Bitcoin. Let me read you some of Warren’s quotes. This one’s from February 2020, “Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce. They can’t mail you a check. They can’t do anything. And what you hope is that somebody else comes along and pays you more money for them later on. But then that person’s got the problem. In terms of value zero”. The really good one though was in 2018 at a Fox Business interview, he called it probably rat poison squared.

Tony Kynaston [06:40]: Oh, that’s very colorful and pretty apt too, I think.

Cameron Reilly [06:42]: I like that. Rat poison squared. Back in 2014, he said, “It’s not a currency. Does not meet the test of a currency. I wouldn’t be surprised if it’s not around in 10 or 20 years. It’s not a durable means of exchange. It’s not a store of value. It’s been a very speculative kind of Buck Rogers type thing,” showing his age, Buck Rogers, “and people buy and sell them because they hope they go up or down just like they did with tulip bulbs a long time ago”. In 2018, he said, “A rising price does create more buyers and people think I’ve got to get in on this. And it’s better if they don’t understand it. If you don’t understand it, you get much more excited than if you do understand it”. Anyway, it goes on and on.

Tony Kynaston [07:21]: That’s right. It’s true. Yeah. I mean, we’ve tried to listen to the arguments to buy Bitcoin, but they haven’t convinced me anyway.

Cameron Reilly [07:29]: It always comes back to this whole thing about it’s a limited asset. There’s a limited number of them and therefore it has value. And as I always say, well…

Tony Kynaston [07:42]: Well, it didn’t have or something last year, the number of coins in circulation.

Cameron Reilly [07:46]: Yeah.

Tony Kynaston [07:46]: I think.

Cameron Reilly [07:47]: I don’t know. I don’t follow it that closely. Something happened. It was some sort of a thing. Yeah.

Tony Kynaston [07:52]: I think that lights the fire and that gives it the price increase and everyone jumps on board and just ramps it up from there. So anyway, we’ll see. It’s way outside my circle of competence or interest, just like some of these other tech stocks stuff are.

Cameron Reilly [08:06]: In January 2018 Buffett said, “I get into enough trouble with things I think I know something about. Why in the world, should I take a long or short position on something I don’t know anything about. We don’t have to know what cocoa beans are going to do or cryptocurrencies, we just have to focus on 8 or 10 stocks”.

Tony Kynaston [08:24]: That’s really good advice, isn’t it?

Cameron Reilly [08:26]: Yeah. It’s hard enough to get it right when you’re working within your circle of competence, let alone when you’re not.

Tony Kynaston [08:35]: Yeah, exactly. And it just reminds me, I mean, Bitcoin seems to survive on people pumping it. So that usually means it’s a pump and dump at some stage.

Cameron Reilly [08:45]: Yeah.

Tony Kynaston [08:47]: Yeah.

Cameron Reilly [08:48]: Anyway…

Tony Kynaston [08:49]: I mean, it’s not like you and I use it during our normal, you know, daily exercises and work. Or we know people who use it or we walk down the street and see the Bitcoin shop and can go in and have a look. But it’s just so far outside of my circle of competence. I mean, I do have an opinion on it, but I’ve got really no opinion on it as an investment at all. I don’t see it as an investment really.

Cameron Reilly [09:15]: Well, it’s similar to that conversation we had about Tesla last week. Like how do you value it?

Tony Kynaston [09:20]: Correct.

Cameron Reilly [09:21]: Why really no one I’ve spoken to, including Torsten producer of our film, he’s produced two documentaries on Bitcoin now, and he has interviewed all the high flyers and Bitcoin around the world. I went to see his film with my son Taylor, a second film on Bitcoin. When it premiered here in Brisbane last year, Taylor and I went to see it. And it was probably the year before now. And we both walked out of the film going you know, we understand less about it now, having seen the film than we did going into it. Like, it comes across as being even more dodgy as a result of the film than we thought it was. But Torsten still thinks it’s a great investment vehicle. So anyway.

Tony Kynaston [10:02]: Well, hopefully, he got paid last year in Bitcoins because he’s worth a lot more now, but yeah. Will it last or not? I mean, the blockchain technology might have some users, but it doesn’t seem to have gone too far away from Bitcoins and the alike. But that might be a use for it. But that’s not really what you’re buying when you’re buying Bitcoin, you’re buying the currency, not the blockchain technology underneath.

Cameron Reilly [10:23]: As we’ve discussed before when everyone talks about whether there’s a limited number of them and this and that and the other is what happens when governments around the world just make it illegal. Because the part of the hype factor around it is well, governments can’t see it, and they’re not in control of it and they can’t touch it and they can’t tax it and they can’t do this. So what happens when they just go, well, it’s illegal. You can’t do it anymore. I mean…

Tony Kynaston [10:45]: That’s right. Well, I think that’s one of the uses of Bitcoin, isn’t it? To transfer money between people who don’t want to be tracked?

Cameron Reilly [10:53]: Well, none of us want to…

Tony Kynaston [10:54]: Whether they are avoiding tax or whether they’re criminals or whatever.

Cameron Reilly [10:56]: None of us want to be tracked.

Tony Kynaston [11:02]: Well report their earnings anyway, and pay taxes. Anyway, that’s probably enough on Bitcoin. I put it down. I put it alongside baseball trading cards and collectible sneakers. These things I’m not going to touch.

Cameron Reilly [11:13]: Rat poison squared. That’s my go-to quote from now on. A question from me, Tony, somebody asked me this during the week, and I thought that’s a good question. If your portfolio is full, why do you run downloads and buy lists each week? Is it just for our benefit or would you be doing that anyway?

Tony Kynaston [11:33]: I wouldn’t be doing it anyway. It’s just for the sake of having stock to talk about on the podcast and for the listeners.

Cameron Reilly [11:40]: Right.

Tony Kynaston [11:41]: And I hasten to add that the buy list that I ran is not a recommendation list. It’s a start for people to do their own research and there’s plenty of questions coming up about the buy list. So it’s good that people are starting to think about it as a kicking off point for research. But yeah, now I do it just for trying to find a stock of the week to talk about really.

Cameron Reilly [11:59]: Right. So under normal circumstances when your portfolio’s full and this is what I said to somebody who asked me this, I think in an email or on the phone, is I think once Tony’s portfolio is full, that’s it. Like he just really, you know, keeps an eye on how things are going occasionally, but unless something’s in massive decline, there’s nothing to do, really.

Tony Kynaston [12:23]: Correct. Yeah. And that’s sort of a neat segue into something that I’ll talk to people about, which is that the reporting season is coming up in a couple of weeks. So, you know, people should be ready for that because that will be an intense period of downloading into the master spreadsheet and producing buy lists potentially every day for a couple of weeks. So, you know outside of that period, no, I wouldn’t download it all. Unless as you said, something’s happened to the portfolio and I need to think about replacing a stock.

Cameron Reilly [12:55]: Yeah. And in the normal course of events, outside of a COVID cough how often do, we’ve talked about this before, but I think you turn over about what is it, 30% of your portfolio a year? Is that right?

Tony Kynaston [13:12]: Oh, no. I think it’s more than that. I think it’s probably half. I’d say half. But I would think most of that’s going to be in February, March and August, and September when the new figures come out.

Cameron Reilly [13:24]: Right.

Tony Kynaston [13:25]: Yeah. I mean that’s when I’m most active. But yeah, things can happen during the year. Like a bad earnings outlook comes out and the stock price goes down and breaches our three-point trend line. So I sell it and I’ll do a download and replace it. But that’s about it.

Cameron Reilly [13:41]: Yeah. Do you have a stock of the week for us, Tony?

Tony Kynaston [13:47]: I have two. The first one is because I was going to make National Tyre and Wheel stock of the week, and that was in the stock journal on Friday when I downloaded it. But I think I’ve made a mistake. It hasn’t reached its three-point buy line yet. It’s close.

Cameron Reilly [14:02]: What’s it, Tony?

Tony Kynaston [14:03]: National Tyre and Wheel. Sorry.

Cameron Reilly [14:05]: What’s the code for it?

Tony Kynaston [14:07]: NTD.

Cameron Reilly [14:09]: I’ll bring it up.

Tony Kynaston [14:10]: So that was a new addition to the buy list last week. I think I had a QAV score of about 0.12. And this is obviously what the stock name says it was. It sells tyres and wheels particularly to the freight sector to semi-trailers. But this was a stock that Damian Parker made us aware of last year. He was excited about it and I hardly bought into it at that time, because it’s risen ever since. But it was always been below our three-point buy line. It went down heavily in this sort of period before that, and now it’s on its way back up. I use my three-point trend calculator spreadsheet to work out what the buy line is. And I put National Tyre into the three-point trend line calculator spreadsheet last year when Damian first raised it with me. So that’s why I got a breach of the buy line last week. 

But unfortunately, I was using a high point. It’s now scrolled off into the graph and the new high point replacing it’s a bit lower. So the buy line’s raised a little bit, so the whole buy line is flattened out a bit. It was steeply down or steeper down in the past, but now that original high points scroll off over the last six months. So it’s not too far from its buy price. The buy price is going to be around $1.15. So I’ve set an alert in Stock Doctor for that. So people might still want to have a look at it. It’s a good company score as well on the quality side of things. And if you want to fudge it, it’s a great fudge. Because the buy lines are almost horizontal and there was a couple that can point down towards the last high point and the one to its right can point down to a buy towards the time when the upturn started. And you would have made money if you did that. But I didn’t include it as a fudge at the time.

Cameron Reilly [16:08]: So I’ve got the chart in front of me. I see the first high point is being January 2018 at about a 1.30.

Tony Kynaston [16:16]: Let me just call that. Hang on.

Cameron Reilly [16:18]: I don’t know how it kind of gone off the edge of the chart. The chart is only three years old.

Tony Kynaston [16:24]: Yeah. Originally I had a high point one going back, I have erased it now, it was going back six months before that.

Cameron Reilly [16:32]: There is nothing six months before that. In Stock Doctor, it only starts in December, 2017.

Tony Kynaston [16:41]: Yeah. You’re right. Hang on. So I had…

Cameron Reilly [16:43]: How many espresso martinis have you had today, Tony? That’s what we need to know.

Tony Kynaston [16:47]: Hang on. Let me just go and call up my spreadsheet and have a look. Here we go.

Cameron Reilly [16:51]: They were listed in December 2017.

Tony Kynaston [16:54]: Yeah. So I’ve currently got, yeah, hang on, I have done the right thing. What am I talking about?

Cameron Reilly [17:00]: Martinis.

Tony Kynaston [17:01]: This has changed from what I looked at this morning, again, preparing for the show. Okay. Let me start from scratch. Take two. High point is January 18 at $1.30. 

Cameron Reilly [17:12]: Yes.

Tony Kynaston [17:13]: Yeah. And that’s what I had in my spreadsheet. But for some reason that went missing this morning.

Cameron Reilly [17:18]: You see that’s what I’m here for Tony is just to, you know, just correct your mistakes.

Tony Kynaston [17:24]: Yeah good. I need that.

Cameron Reilly [17:25]: I’m here to check your work. That’s my job.

Tony Kynaston [17:27]: Good.

Cameron Reilly [17:27]: While it may often appear…

Tony Kynaston [17:30]: Can I retake the test please, Teacher?

Cameron Reilly [17:31]: While it may often appear to the casual observer that you’re the one correcting my mistakes. And when I say our portfolio went up by 42%, you went, “Nah. No it didn’t”. Really. Yeah. So the high point January 2018. What are you using for the second? Are you going all the way to December 2020? The most recent.

Tony Kynaston [17:53]: No, it’s only using August 18.

Cameron Reilly [17:56]: Right. Okay. That nice little peak there. So…

Tony Kynaston [18:01]: Yeah. And buy price is 92 cents. That’s what I had on Friday. I’m sorry that high point on January 18 wasn’t there when I checked it again this morning, for some reason, I’m not sure why. So I was using the next high point in April 18.

Cameron Reilly [18:18]: Right.

Tony Kynaston [18:19]: And that was giving me a high buy price. I apologize. I was right on Friday. National Tyre and Wheel is our stock of the week.

Cameron Reilly [18:26]: You’re reminding me of Albert Einstein and the universal constant there.

Tony Kynaston [18:32]: All right. My big error.

Cameron Reilly [18:33]: Yeah. You know that story? We’ve talked about this before. I’m sure.

Tony Kynaston [18:36]: Yeah. You can tell it again if you want. It’s a good story.

Cameron Reilly [18:39]: I love that I tell it at least once a week to somebody. In 1904, 05 whenever it was Einstein came up with this special theory of relativity. One of the things that the math seemed to indicate that the universe was expanding, but he knew, as everyone knew back then that the universe wasn’t expanding. It was static. It had always been this size. It was always going to be this size. So he fudged it. 

He created something called the Universal Constant, which basically fudged his own maths to make it look like the universe wasn’t expanding. And I think it was a few years later that Hubbell said, “Hey, look at that. The universe is expanding.” Einstein had to go back with his razor and go, oh, just rub that out. And hope nobody noticed that I… Even Einstein went well, my maths can’t possibly be right. That just goes against common knowledge, the universe is expanding. And I love it. I love the fact that even Einstein had a moment of self-doubt when he was like, well, I can’t possibly be right. That there must be a mistake and had to go back. And he had to fudge it and then he had to fudge the fudge.

Tony Kynaston [19:42]: Well, I’m glad that he also fudges things. So yeah. So sorry. I’ll stand by my original recommendation on Friday to have a look at National Tyre and Wheel.

Cameron Reilly [19:52]: NTD is the stock of the week. Thank you to Damien Parker.

Tony Kynaston [19:56]: Yes. We did some good research on that.

Cameron Reilly [19:59]: What do they do National Tyre and Wheel with a name like that? I can’t even begin to imagine.

Tony Kynaston [20:09]: They sell tyres and wheels.

Cameron Reilly [20:14]: No.

Tony Kynaston [20:14]: Yeah. They do. Company brands are called Cooper Tyres, Mickey Thompson Dynamic Wheel, Dick Cepek Starfire Tyres, Mayhem Wheels, et cetera, et cetera. Basically, they import them. Import tyres and wheels from overseas and then sell them. So they’re basically a wholesaler. A lot of their tyres go through other chains. And what else do they have? Let’s see. No, that’s about it.

Cameron Reilly [20:47]: Average daily trade is relatively low. 56,000.

Tony Kynaston [20:51]: Yeah. Pretty small. Market cap 109 million. So it’s not a huge one.

Cameron Reilly [20:55]: Right.

Tony Kynaston [20:56]: Yeah. And as I said before, this could have been a fudge because we could have used the two right-hand peaks there, given that the buy line was a long way from the share price. And we would have gotten in way back probably in about June when it started to turn up. But we would take on risk as well to do that. Yeah.

Cameron Reilly [21:16]: It started, it bottomed out in April at 25 cents, now at 94 cents. So it’s had a good run over the last, when it was, eight months, nine months.

Tony Kynaston [21:27] Yeah. It was going down before COVID though. So that was probably one of the reasons why I didn’t fudge it. If it hadn’t just gone down in COIVD, I might’ve been more inclined to fudge it. But there was something else going on there, which I wasn’t aware of. Yeah.

Cameron Reilly [21:41]: It took a big drop in around August 2018 dropped from $1.22 down to 40 cents over a period of six months.

Tony Kynaston [21:54]: Yeah. So that’s National Tyre and Wheel. The other one I was going to talk about was Michael Hill Jewellers and JB Hi-Fi. They both come out with trading updates over the weekend and sales are up in both as you’d expect because they’re comparing themselves now to the period that had COVID in it. But they’ve both had good Christmases and their share prices are up. So Michael Hill Jewellers is on the buy list. It was up 7% on Friday. I haven’t checked it today, Monday.

Cameron Reilly [22:25]: Seventy-two cents today.

Tony Kynaston [22:28]: Dropped 1.37% so far. But yeah, it was up 7% after announcing the good Christmas sales. And they expect that their earnings will be up. So we’re actually in confession season Cam, I should have mentioned that before, too.

Cameron Reilly [22:41]: Right.

Tony Kynaston [22:42]: Coming up before February, when they start to actually tell us their results companies like Michael Hills and JB Hi-Fi are coming out with their sales. Because it’s pretty easy to calculate your sales. A bit harder, it takes more time to do profit, the P&L, and balance sheet, but their sales are out. And that’s why they’re announcing them now. And they’re both good. So JB Hi-Fi, I think it was on the buy list for a short while and it dropped off again as the share price has risen. But it’s going up as well.

Cameron Reilly [23:12]: It seems to have also floated in late 2016, reached its peak not long after that. August 2016 at $1.68 and has sort of been steadily falling ever since right down to the COVID cough where it had hit 20…

Tony Kynaston [23:32]: You’re talking about Michael Hill.

Cameron Reilly [23:33]: Yes. Michael Hill. Sorry. When it hit 26 cents. No, 24, 25 cents. Now it’s up to 72. So it’s been coming back nice and strong, but you know, had a bad sentiment for a long time there.

Tony Kynaston [23:48]: It did. Yeah. It’s always going well though. It’s always had a good quality score, Michael Hill Jewellers. So I would expect it’s a well-run company. It was obviously founded by Michael Hill. I think he may have stepped back now. We all know it’s definitely run by somebody else. He might be the chairman or on the board. So it’s always been sort of on the watch list, but it’s only now that it’s coming on to the buy list.

Cameron Reilly [24:10]: I did a marketing pitch to Michael Hill Jewellers about 10 years ago, 11 years ago when I was working at an ad agency here in Brisbane. My suggestion to them was, early days of social media, this is like, you know, 2010, something like that, and my pitch to them was we should create a competition where people get to design their own piece of jewelry and everyone submits their jewelry. Hashtag it. Something MHJ tag, you know, design competition, whatever. And that the winner, the best design got their piece of jewelry made for them and also the store would sell it. Make it commercial and have a big thing about it. They never went with it. No, they didn’t like my idea. So, you know, I’ve always sort of frowned every time I’ve walked past a Michael Hill Jeweller shop ever since. I took it deeply personally that they didn’t like my…I thought it was very clever.

Tony Kynaston [25:10]: Yeah. And that kind of marketing, you see it all the time now. It’s basically in branded goods, like, you know, developing a new flavor for chips for Samboy.

Cameron Reilly [25:17]: Yeah.

Tony Kynaston [25:17]: Or arts or a new flavor of Paddle Pop. They make it for you.

Cameron Reilly [25:24]: Yeah.

Tony Kynaston [25:24]: Yeah.

Cameron Reilly [25:25]: Any who. Michael Hill Jewelers, what’s their score on the buy list now?

Tony Kynaston [25:30]: Michael Hill. Sorry, I haven’t. Let’s call it up.

Cameron Reilly [25:32]: I’ve actually got it on the watch list by the looks of it. And in the buy list. It’s in both, along with, I think NZO is also in both too. So a question, we’ve got later on in the show. They shouldn’t be in both there, right? It should be one or the other.

Tony Kynaston [25:50]: No, no. The buy list is a subset of the watch list.

Cameron Reilly [25:55]: Really.

Tony Kynaston [25:55]: The watch list is companies that have priced to operating cash flow less than seven but don’t score well enough on sentiment or audit to get into the buy list.

Cameron Reilly [26:08]: Right. But if they’re on the buy list, shouldn’t they be removed from the watch list?

Tony Kynaston [26:13]: Oh, if you want to do more work, yeah. It can make you do more work. Yeah. I mean, I create the buy list in my spreadsheet by copying the watch list into another tab and then sorting it.

Cameron Reilly [26:27]: Okay.

Tony Kynaston [26:28]: Sorting it on three-point trend sentiments. Sorting it on where it hasn’t qualified or then sorting it on the QAV score. So it’s a subset from the watch list.

Cameron Reilly [26:37]: You know, I thought that they were different. Okay. All right. Good to know. Well, that explains that question. So Michael Hill Jeweller in the buy list, where was it there? It’s 0.26.

Tony Kynaston [26:52]: 0.26. Yeah. Just got to it, too.

Cameron Reilly [26:54]: Not too bad.

Tony Kynaston [26:55]: So what’s that, about halfway along.

Cameron Reilly [26:57]: Well look at the one above it. [inaudible 00:26:59] Mining directors own 934119% of the stock, according to Stock Doctor. Good for them.

Tony Kynaston [27:09]: So as you know I’ll be looking into that for us.

Cameron Reilly [27:10]: Doing very well. Wow. Okay. MHJ. What else have you got for us? What was the other one you said?

Tony Kynaston [27:16]: No, that’s it.

Cameron Reilly [27:17]: You said another one, sorry there, I didn’t do the chart for the second one. What was the second one? You said MHJ and something else.

Tony Kynaston [27:23]: I said JB Hi-Fi, which has been on the buy list. It’s not on the buy list anymore because the share price is rising.

Cameron Reilly [27:30]: Oh, okay.

Tony Kynaston [27:31]: But it’s an interesting sort of thing I’ve noticed is that we do get from time to time, what I call a blue-chip company, like a JB Hi-Fi, comes onto the bottom of the buyer list might get a score of 0.1, 0.12, something like that. But then the share price rises quickly after that. And we lose it from the buy list. So I think from time to time, people should pay attention to what’s come onto the bottom of the buy list. And if it’s a good solid company like that, they might want to consider buying it, even though it’s not near the top of the buy list.

Cameron Reilly [28:01]: Wow. Okay. I’m looking at the chart, I wanted to talk to you about the chart for Michael Hill, but let’s do JB because just got it open in front of me. So you’re taking the high point around about whatever there is July.

Tony Kynaston [28:14]: Hang on. Let me call it up. MAH.

Cameron Reilly [28:16]: Hit its high point end of August, sorry, $50.32. And now it’s currently trading at $52.07. So what would you take as the second-high point there? October, I guess.

Tony Kynaston [28:33]: Yeah. So…

Cameron Reilly [28:33]: Or December.

Tony Kynaston [28:36]: The high point is the current point, but I wouldn’t use it. Then I’d go back to August and then I would use the next one to the right, which is October.

Cameron Reilly [28:45]: October.

Tony Kynaston [28:46]: Yeah.

Cameron Reilly [28:47]: Yeah.

Tony Kynaston [28:48]: Yeah. So it was a buy briefly in December for us, I think. And it’s probably, I think it’s now gone too high for us. It’s fallen off the buy list again. But I just wanted to, I guess I was raising it because, like Michael Hill, some of the retailers are coming out with good results during confession season. They’re all forecasting good results. So it’s a sector we might want to pay attention to during the reporting season.

Cameron Reilly [29:12]: Well with Michael Hill the high point is pretty obvious back in August 2016, $1.68. What are you taking here? What would you take as the second point for this one? Would you take January 2018 or would you come down a bit? Or would you do like December 2020?

Tony Kynaston [29:31]: Okay. Hang on. I’m just pulling it up. Michael over here. Yeah. So definitely the high points are obvious that’s back on August 16. So now I’m just going to run a ruler across all those high points, going down as it was a falling knife. And then the one that allows the ruler not to have a line across it, but still beyond the line is back in January 2020. So that’s my second point, high point.

Cameron Reilly [30:01]: Not like December 2020. What did you say?

Tony Kynaston [30:07]: Sorry. I said January 2020. Do you mean December 19?

Cameron Reilly [30:11]: No, I mean December 2020 where sort of peak went back up. So I guess it’s not really a peak. December 19 or January 2020.

Tony Kynaston [30:22]: January 2020 I’m using as a second-high point.

Cameron Reilly [30:24]: Okay.

Tony Kynaston [30:25]: Yep. And so then it crosses during that upswing, which was probably crossed around October 2020.

Cameron Reilly [30:33]: Yeah. Okay. Surely good. And the sell lines pretty obvious.

Tony Kynaston [30:40]: Yeah. It’s staying above it for now, but it’s not too far above it, so it could be one of those rising Schrodinger’s, but it’s not at the moment. It’s good.

Cameron Reilly [30:50]: Yeah. Okay. Thank you, Tony. Questions. Will we get onto the questions?

Tony Kynaston [30:55]: Yeah, sure.

Cameron Reilly [30:55]: Cool. Here’s a flurry of questions.

Tony Kynaston [30:58]: I’m sorry. I’m not having a good day, am I? Before we go on to the question, something I wanted to just mention was that I noticed recently in Index Mundi that natural gas has had a three-point upturn as a commodity as well. And the two stocks that we’ve had in the past on the buy list, I think they may have, I should check. Anyway, the two stocks that we’ve talked about before, which have natural gas as a product are Santos and Beach Petroleum, Beach Energy. Sorry.

Cameron Reilly [31:35]: BPT and STO.

Tony Kynaston [31:37]: Yeah. I’m just going to see if they’re on the buy list still. No. Santos has slipped off. I think they’ve both slipped off now. Beaches just slipped off. It’s the next stock on the watch list. So yeah, people might want to go back and revisit those. They’re not on the buy list, but I expect that the natural gas price still keeps going up. They’ll get some strong support from here. And probably the support they’ve had recently is because of that rising gas price.

Cameron Reilly [32:06]: Right. Okay.

Tony Kynaston [32:09]: I promise that’s it.

Cameron Reilly [32:11]: What’s going on with Perseus Mining? Do you know?

Tony Kynaston [32:16]: No. Why? What’s happened?

Cameron Reilly [32:17]: Well, I just, not Perseus, sorry, SSR Mining. The old AKG.

Tony Kynaston [32:22]: Well they merged whatever with AKG. I just noticed that in our Google sheet that its prices have come back down a lot lately. It’s dropped from 27.28 bucks down to 21.

Tony Kynaston [32:44]: Yeah. There was a bit of a sell-off going on in the gold mines at the moment. The gold prices dropped back from around 2000 into the 1800s.

Cameron Reilly [32:51]: Right.

Tony Kynaston [32:52]: US an ounce. So yeah, they pulled back a bit. It happens with these commodity prices. I’m not worried about gold at the moment. It’s a long way off its three-point sell line and so are these minors. Gold miners are also a good insurance bet on something going wrong this year. If inflation does rear its head, if the vaccine doesn’t work, if people can’t travel like they used to, I think anything that happens this year is going to sort of rock the boat. We’ll probably see a rise in the gold price, which will start to support these shares again.

Cameron Reilly [33:33]: Nothing’s going to happen this year, Tony. Smooth sailing. Sweet sailing. I wouldn’t worry. It’s still going to be fun.

Tony Kynaston [33:41]: Well, Biden’s surrounded every capital in the US with armed guards. So we should all be fine, shouldn’t we?

Cameron Reilly [33:49]: Yeah. That’s how you know that nothing bad is going to happen this year. It’s just so good when he’s got 25,000 heavily armed guys in Washington, you know, it’s going to be good. It’s going to be a good year. Off to a good start. All right.

Tony Kynaston [34:04]: Yes.

Cameron Reilly [34:07]: Let me see, questions. A flurry of questions from Mark. He says, so number one, I always love these sorts of questions. “I know Tony’s answer will be no stick with the process.” But…Love it, love it. “But I figure you always need content to pair that show.” Yes, we do, Mark. Thank you so much, Mark, for thinking of us. “Would Tony ever sell a non-performing stock e.g. share price stagnant or declining for an extended period, but not having had crossed the sell line or had a perturbing company announcement to buy another higher up the buy list be it already in the portfolio or new? If no”, let’s just assume that you said no to that. “Does Tony think opportunity cost is fake news? I accept the usual response that you never know which stock will shoot out the lights or get the daylights kicked out of it. But is that the same for the stock you hold and the stock you don’t hold so irrelevant. Surely if you trust and follow the system selling a non-performing stock in order to buy another higher up the buy list is rational.”

Tony Kynaston [35:15]: Oh, well I think Mark should try that and tell us his results because that’s not what I do. And I think he’s got the answer in the question. He talks about not knowing which stock is going to outperform. And he says, that is the same for the stock you hold and the stock you don’t hold. And it is. So if it’s the same for the stock you’re holding and the stock you don’t hold. If you don’t know which one’s going to go up next, then why would you move from the one you already hold? Apart from the fact that you’ll have transaction costs, which I know aren’t much these days with brokerage being so low, but you also have capital gains tax, potentially. I’m assuming that even though it’s an underperforming stock, you probably still made some kind of profit out of it over the period we’ve held it. 

And lastly, it just increases the volatility of the whole portfolio. And I guess I shouldn’t say last, because the other question I have from Mark is, you know, define underperforming. Is it any stock that hasn’t gone up this year? Is it any stock that has gone down? How much does it have to go down? How close does it have to get to the sell line before you want to sell it? All of that’s just bending the rules. You know I have clear ideas of when I want to sell something and buy something when it breaches sentiment trend lines. That may mean that stocks will go through a period of underperformance and they all do.

And I pulled out two examples when I saw this question that you might want to have a look at, Mark. One is Schaffer Corp which is in our stock portfolio. I think even we bought two tranches of it and after you bought the second lot, you went down. But now it performed really well in the last sort of six months since COVID and it’s up 78% since March. But if you looked at it going into March, it didn’t breach its three-point trend line so we held it but it was going down. So based on that kind of assessment of its underperforming, we should sell it. We would have missed out on that 78% rebound, assuming we didn’t find a stock that did better than that. But that’s a big call trying to find a stock to do better than 78% improvement since March. And so Schaffer Corp is an example and so is Beach Energy, which we spoke about just before. Likewise, we bought it, I don’t know if we did, we bought it then we sold it around COVID time. Then it came back onto the buy list just after COVID. But soon after it came back onto the buy list, it dipped right down again, almost breached its three-point trend line for a sell, but it didn’t. And since that time, it’s now at 70% as well.

So I’d rather just accept that stocks are going to be volatile and fluctuate. And if like don’t breach their sell lines, I’d still hold them because, you know, I think about the logic, as the share price is going down, it’s getting cheaper and it’s priced to operate and cash flow is getting better. So the QAV score is actually improving. It’s moving up the buy list. So, you know, you might find you if you sell something too early and then look to buy something off the buy list in a month or two’s time, the share you sold is a high share on the buy list. So, you know, if anything, if something went down and I like that I’d buy more rather than sell it until it reaches its three-point trend line.

Cameron Reilly [38:34]: Well to be fair, the second tranche of Schaffer Corp that we bought, we did sell.

Tony Kynaston [38:40]: Oh, did we? Okay. Sorry.

Cameron Reilly [38:42]: Yeah, we bought another batch of it on the 20th of February and we sold it on the 28th of October.

Tony Kynaston [38:50]: Okay. 28th of October. Let me just call a share.

Cameron Reilly [38:53]: Drop down to only 15 bucks.

Tony Kynaston [38:56]: Did we sell them both or did we keep some?

Cameron Reilly [38:58]: No. We held the first one, which we’ve owned since August 2019. We bought it for $14.50. It’s now at 70.94. So it’s up 24% since we bought it. It’s been okay. An okay performer not kicking the lights out. It’s not FMG but it’s okay.

Tony Kynaston [39:16]: 24% is still pretty good. I wonder why we sold the second tranche and not the first tranche. I can’t recall.

Cameron Reilly [39:27]: I can’t remember.

Tony Kynaston [39:28]: Yeah, they should both have the same…

Cameron Reilly [39:31]: Sell line.

Tony Kynaston [39:31]: Sell on. Yeah.

Cameron Reilly [39:34]: Yeah.

Tony Kynaston [39:35]: I don’t know if it was a three-point, we should have sold them both. But anyway, I can’t recall what our thinking was at the time. Maybe it was like, what Mark saying. We wanted to sell [inaudible 00:39:44] But yeah, anyway, my point still remains that Schaffer again, came close to a three-point trend line, but has reverted back to the mean, and is up quite a lot in the last six months from COVID.

Cameron Reilly [39:59]: Yeah. Well, I think you know, what I’ve understood from what you’ve told me in the past is we buy a stock because we believe it’s undervalued and that the market will revert to the mean, but we don’t know how long that’s going to take. So it could take six months, 12 months, or more as long as it’s not going backward, we expect it to eventually come good.

Tony Kynaston [40:27]: Correct. Yeah. I think probably the hardest thing to do in a share market is to predict timing. So we could hold something for six or 12 months and it goes sideways. And then all of a sudden something happens and it lights a fire and off it goes. So that happens quite frequently in the share market. So if I’ve liked it and I hold it and it hasn’t performed, all that means is I expect it to perform in the future, not that it goes backward. And if it does go backward, we sell it when it breaches its three-point trend line. So I take Mark’s point about opportunity costs. I don’t think opportunity cost is fake news, but I just know my predictive powers aren’t that great. So if I’ve bought something, I’ll hold it rather than trying to predict what might beat it. Whereas, you know, you don’t want to sell something and the next day it jumps. It’s just heartbreaking.

Cameron Reilly [41:18]: I hate to call you a liar for the second time on the show today. But I just found the email that you sent me on the 28th of October 2020, where you said swap the second purchase of SFC with C6C use the same amount. And that was because you did predict that CXC was going to do well.

Tony Kynaston [41:38]: True. I’m a liar.

Cameron Reilly [41:40]: Yeah, you just did it exactly what you just said you don’t do, is you predicted that copper was going to do well.

Tony Kynaston [41:51]: Yeah, true. [crosstalk 00:41:52].

Cameron Reilly [41:54]: We were fully…

Tony Kynaston [41:55]: We’re out of cash.

Cameron Reilly [41:56]: We’re fully invested. Yeah. We’re out of cash. That second tranche of SFC was underwater. And you said you know what? I like the CXC. I’m going to fudge it. Let’s you know, get rid of the worst-performing thing and replace it with C6C.

Tony Kynaston [42:09]: So we’re just on that then. So that was in when, October?

Cameron Reilly [42:12]: Yeah. End of October.

Tony Kynaston [42:14]: End of October. So the end of October, okay, C6C has gone up more than Schaffer Corp has since then.

Cameron Reilly [42:22]: Oh, I see. Yes.

Tony Kynaston [42:12]: Schaffer’s gone up to $2.50 a share, probably what’s that 25%. And C6C has doubled. Hasn’t it?

Cameron Reilly [42:29]: Well, it’s gone where it’s currently around 90% growth since we bought it.

Tony Kynaston [42:34]: Yeah. Okay. Well, here you go. Made a liar of myself, but that’s not normal. That was a one-off case, I think.

Cameron Reilly [42:44]: Guidelines, not rules.

Tony Kynaston [42:46]: I think what Mark is asking a more general question if there’s been something under-performing for a while, swap it out and buy something else on the buy list.

Cameron Reilly [42:53]: We particularly wanted to experiment with your Index Mundi observation with CXC and that was the way that we did it.

Tony Kynaston [43:00]: Yeah. So we’ll put an asterisk on my last comment. Unless I have a brainwave on something else. I’ll hold it.

Cameron Reilly [43:10]: Yeah. Unless he doesn’t. This is what he does. Unless he doesn’t.

Tony Kynaston [43:15]: Yeah.

Cameron Reilly [43:15]: Generally.

Tony Kynaston [43:16]: All fudges aside.

Cameron Reilly [43:17]: Yes. That was a fudge. Good. Thank you. Next part. The next question from Mark, “The monumental is”, speaking of fudges, “the monumental ECX fudge was raised wisely by Jamie last week and didn’t really receive the penance it deserves.” I thought you as our Archbishop were the one that handled our penances, Tony. Now you’re being served penances by Mark. He says, “September 16, $4.07. I guess he’s talking about the highs here that we use to draw the buy line. September 17th, $4.05. October 17, $4.05. November 17, $4.04. December 17, $4.04. So Tony spurned the three highest prices and used the lowest of the series to start the three-point trend line exclamation mark. Five data points aren’t enough of a trend.”

Snippet [44:11]: I don’t believe those figures. Please explain.

Tony Kynaston [44:15]: No, they are. First of all, the penance I’ve had from buying Eclipx is about, you know, made a couple of hundred thousand dollars at least out of buying it. So it’s not much of a penance. Eclipx particularly caught my eye, one, because I’ve owned it in the past many times and know the business model and understand the business. It’s a leasing company for cars. And secondly, the reason why the share price was going down apart from COVID, which eventually caused it to have a double-dip, was going down because they had tried to expand into other areas, including online sales. And I think it was a driver training school, a driver education school and they hadn’t worked out so the market was marking them down because of that. Then they were taken over by somebody else and he sold those other underperforming businesses. One was [inaudible 00:45:08] Online from memory. One was a driver education company.

Now that, you know, those selling assets means the market cap shouldn’t be less than it was. So the share price went down. So waiting for it to get back up to its old share price for a smaller company was a bit of a stretch, I thought. And I could see that the downtrend had been broken. So I bought it in. It’s a fudge. That’s my logic behind it. But again, like, you know, if you don’t want to do fudges and you feel free not to. I do them occasionally, but they’re pretty rare. And yeah, this was a definite fudge, but as I said, I’ve held the Eclipx before and I liked the company, so I bought it.

Cameron Reilly [45:56]: All right.

Tony Kynaston [45:56]: So does Mark think I should go into confession and tell the priests I’ve been fudging.

Cameron Reilly [46:00]: Oh yeah.

Tony Kynaston [46:02]: See what will, I get.

Cameron Reilly [46:02]: Yeah. You want to be careful. A last one from Mark, NZO, back to NZO. “Seems an odd one for the buy list considering the last period analyzed was the 31st of December 2015. Can you please ask Tony Kynaston his thought process for basing his analysis on five-year-old data with the minister? Please explain why he’s basing his analysis on five-year-old data or has he used recent data from the New Zealand stock exchange?” NZO is dual listed.

Tony Kynaston [46:38]: [inaudible 00:46:36]

Cameron Reilly [46:38]: I needed that clip as well. Going to add some clips.

Tony Kynaston [46:46]: Yeah. So NZO was delisted for five years. So that’s why we’ve still got five-year figures. I did go to Stock Doctor and asked them if they had any more, but they don’t. And the reason that we’re on the buy list was if you look at the share price when it did get relisted, it jumped quite solidly. So yes, that was in the absence of recent figures. We’ll get them, I guess, in the next reporting season coming up. But you know, that’s may have been the wrong call because the share prices have collapsed again, since that initial flurry, when it was relisted and it’s getting back close to its sell line, which I have down as 45.80 cents a share. 

So yeah. So again, well done Mark for finding it, you’re obviously using the buy list to do your own research. And it’s only a very small company, so I would never buy it. But yeah, I put these things in for completeness really. Normally if I was doing this for myself, they wouldn’t get through my filters. One, because it’s all data, and two because it’s a small company. I think it’s interesting to put these things in just to show that there are so many different variations of what you can get on the share market. It’s interesting just to have these for knowledge reasons, I guess.

Cameron Reilly [48:02]: How do you draw a buy and sell line on the NZO chart?

Tony Kynaston [48:05]: It’s a hard one. Isn’t it? Let me call up and have a look.

Cameron Reilly [48:10]: Just a big flat line for four and a half years, then it spikes and falls again.

Tony Kynaston [48:18]: Yeah. So, what I did, you use the low points, pretty obvious it’s four or five years ago. It’s almost about the scroll off the edge. There are the low point’s January 16.

Cameron Reilly [48:27]: What?

Tony Kynaston [48:28]: So I’m talking about the sell line first of all. Then I took the next point as being the [inaudible 00:48:29] in August 2020 so that the share price is coming back to touch that line. So it’ll be a sell soon if it doesn’t improve. And then for the high points. Yeah, it’s pretty hard. I actually used just before it relisted or when it relisted, I used March 16, which was the high point to the left, and then on listing it went through, I use the August 2020 point as the next highest to the right. So once it listed and went up it breached that buy line.

Cameron Reilly [49:08]: Right.

Tony Kynaston [49:10]: Yeah. And it went up very, very substantially. So you know what part of my thinking was, okay, the sentiment’s there, people are understanding what’s going on here. Maybe it is worthwhile putting it on the buy list. But yeah, this is something which I wouldn’t normally do. I would never do it for myself, but I put it there just as an interesting example of what can happen.

Cameron Reilly [49:32]: Right. Okay. Thank you, Mark. Let’s move on. Who’s this? Brett. “Kelly came in this week’s episode when discussing Regis Resources RRL, Tony mentioned he was surprised the three-point trendline calculator was reporting a buy price of $3.97 on your recording day of the 11th of January 2021. He stated it was probably because the calculator extrapolates out to the end of the month. He scared me a bit. So I went back and checked the calculator. I’m pretty sure that it’s correct and $3.97 is the correct price on that day. I think the issue is when you look at the chart on Stock Doctor gives each month equal spacing on the horizontal axis, including the current month. So while it is saying today’s date at the end of the chart, it is actually plotting it as though it were the end of the month. When I plugged 31st of January 2021 at a three PTO calculator gives 3.77, which is about what it looks like on the SD chart. Double checked the math the three PTL at the end of December is showing about $4.09. You recorded on the 11th of 31 days. And then he’s got a bunch of formulas. So pretty close to just pulling numbers from the SD chart that doesn’t even snap the chart points. Apologies if I misunderstood Tony. Cheers, Brett.” Do you follow any of that? I don’t follow any of that.

Tony Kynaston [50:56]: No, I got a bit confused. I think I do. I think what he’s saying is that, well the thought I was having last week was that if you draw the line on the Stock Doctor chart, it looks like the buy price is in the three seventies. But if you use the calculator, it’s in the three nineties and so Brett’s suggesting that it’s because Stock Doctor is either compressing or expanding that last month. I’m not sure which. But yeah, I’m confident that the three-point trend line calculator works as well, Brett. So that’s the number I’ll be using.

Cameron Reilly [51:28]: Oh, okay. Well, that was easy.

Tony Kynaston [51:30]: Not quite sure what the question is there either. I think he’s just maybe entering my question from last week.

Cameron Reilly [51:38]: Penance. That’s all he wants. Penance. They’re getting stuck in here this week. I mean, there is so far everyone’s taking the boot in Tony Kynaston.

Tony Kynaston [51:46]: I’m not going on holiday again.

Cameron Reilly [51:47]: I think the problem is you’ve been on holiday too long there. They’re penalizing you for being on holiday. Gary, “Hi, Cam, might I bother you to ask if this is the correct system that has been described for the challenger system Top 20 for new listeners? This is something that Tony’s talked about in the past and it’s in the Bible the challenger system where you buy the most undervalued stock in the Top 20.” Is that correct?

Tony Kynaston [52:19]: Yes. Correct. It’s the difference between the current share price and our forecast IV.

Cameron Reilly [52:25]: Right.

Tony Kynaston [52:26]: Whatever has the biggest gap. Yeah.

Cameron Reilly [52:29]: Gary says, “Presuming that trend lines are in place, for instance, FMG would be the buy as TCL is in the shit at the moment. Would it be better to wait until December figures come out before measuring this sort of method or does it not really matter because it is forecast?” And then he’s got a spreadsheet where he has calculated market, well, the future IV and competitor market caps. What did you think of Gary’s calculations, Tony?

Tony Kynaston [52:54]: It’s spot on. That’s what I would do too. So Gary has a Stock Doctor filter, which filters for obviously the company name, trading status, the share price. He looks for a market cap greater than I guess that’s 20 billion. He puts in the forecast. He puts in P in dividend yield. You don’t really need those for this, but he puts in the forecast EPS and then drops that into Excel. And does the forecast IV calculation, which is, I can’t see the formula in Gary’s spreadsheet, but what my formula would be the forecast EPS divided by the hurdle rate of 6.1%. And that does come up with Fortescue Metals. It comes up with Transurban, that’s just probably an error in the calculation in terms Transurban’s forecast earnings per share is negative. So if you work out a valuation on that you get a negative number, which gives it the biggest gap to the current number of the current share price, which is a positive number.

But that aside, if you take out the company with a negative APS forecast, yeah, the top-performing one is Fortescue Metals which has been the case for at least the last couple of reporting periods. Fortescue and Rio Tinto had been up the top and they are again. BHP and then the banks are also there. So to answer Gary’s question, yes, he’s done it right. And yes, I would wait until the new reports not, when the new numbers come out and forecast come out in a month or so. Because that may change when we’re at the end of this the usefulness for these figures. So I would wait. But no, you’ve done it right, Gary. It’s good.

Cameron Reilly [54:42]: And of course at the other end of the scale, you’ve got Afterpay which is different from SP 6154%.

Tony Kynaston [54:56]: Yeah. The future IV we have, or if we do our calculation for Afterpay is $1.80 and the share price is like $110 or something. So yeah.

Cameron Reilly [55:05]: Hit a hundred.

Tony Kynaston [55:06]: It’s way overvalued.

Cameron Reilly [55:07]: Hit 140 on Friday, I think.

Tony Kynaston [55:09]: Oh really.

Cameron Reilly [55:10]: Yeah.

Tony Kynaston [55:11]: Wow.

Cameron Reilly [55:12]: And Zero is 140 when Gary did his sheet and our future IV was $6.42.

Tony Kynaston [55:20]: Yeah. Exactly.

Cameron Reilly [55:23]: Yikes. All right. Fortescue. That’s surprising to me because you know, obviously, it’s had a great run for us over the last year or two, but it’s still the most undervalued in the Top 20. Amazing.

Tony Kynaston [55:35]: Yeah. Well, that was from the August reporting period, the June numbers. So we’re seven months beyond that. So it may change.

Cameron Reilly [55:45]: Yeah. Right.

Tony Kynaston [55:45]: But that’s, you know, one of the reasons that are driving up the Fortescue Metal share price is that people are looking at the future earnings and going, wow, they’re really good. This is very cheap compared to its future cash flow.

Cameron Reilly [55:58]: Yeah. Cool. Thanks, Gary. Duncan, “I know just of the 65ish stocks on the buy list, only 11 trade more than a million each day. My interest in this matter is similar to Tony’s but slightly different from what is outlined in the Bible. If this suddenly becomes a falling knife due to some kind of development, is it likely that the market in this stock will dry up considerably and make it very difficult to dispose of? Or are these stocks just so darn small that they are unlikely to develop this profile?”

Tony Kynaston [56:31]: When he says the market in this stock would drop, is he talking about small companies with lower ADTs under a million dollars? I guess he is.

Cameron Reilly [56:40]: I think so. Yeah.

Tony Kynaston [56:44]: Yeah. I wasn’t quite sure when I read that question. But the general comment is that yes. So companies with small average daily trades can be difficult to get out of when the share price is going down and there’s a rush for the exits and lots of people are trying to sell. And that can mean you can sell through the three-point sell line and have to sell much lower than that. The reverse is true as well, which is one of the reasons why small caps can outperform big caps is if the company’s thinly traded, then if good news comes out and there’s a rush to buy, and the same thing happens in reverse. There might be usually $10,000 worth of trades in the share and suddenly there are a million dollars wanting to buy it. Well, the share price is going to go up and the same thing happens in reverse. So, yeah. So not only do I not buy thinly traded stocks because they’re too small for me to get a position in, but I’m also wary of them being plummeting stones if they are ever turned down.

Cameron Reilly [57:45]: Okay. I hope we understood your question properly, Duncan. If not, shoot me an email and we’ll do it again.

Tony Kynaston [57:51]: Yeah. Sure.

Cameron Reilly [57:52]: Another one from Duncan, “I noticed that the Stock Doctor filter download includes all ETF and LIC stocks, but wouldn’t some of the metrics being looked at be less relevant because of the way they operate. I’m also thinking about the fact that the cash flow statement for these types of stocks would be quite different from that for other operating businesses. Indeed, it seems that LIC reports their investing cash flows differently to ETFs. Presumably because of the way they transact with their investors. Indeed, the NTA consideration that is mentioned in the investment ladder section of the Bible is not even considered in the QAV checklist. Why?” We’ve talked about this before.

Tony Kynaston [58:28]: Well, it actually is. It is. One of the things on that checklist is only buying the share price for less than book value. And for an ETF and LIC, that’s the NTA, which is the figure we use from Stock Doctor net tangible assets.

Cameron Reilly [58:45]: Yes.

Tony Kynaston [58:46]: Yeah. So we are actually looking at the book value of all the NTA or book value for those, as we do for all companies. So it’s in there. It’s on the checklist now. But to the other questions, again I include these for completeness. If you do some research once, once an ETF or a LIC comes on the buy list and you don’t like it, then don’t buy it. But Gary, is it? Gary’s correct.

Cameron Reilly [59:16]: Duncan.

Tony Kynaston [59:16]: The operating cash flows…Sorry?

Cameron Reilly [59:17]: Duncan.

Tony Kynaston [59:18]: Duncan, sorry. Duncan’s correct. The operating cash flows for LICs and ETFs are quite different compared to our coffee shop model. LIC is probably a bit closer because you know, they’re both buying and selling stocks. ETFs will have high operating cash flow when they’ve sold a lot of shares, which is a bit like we saw during the COVID periods. And we bought, I think we had Gear on the buy list and GGUS on the buy list. And both of there’s a reason, by the way. But there are operating cash flows that were looking good, were more about the fact that that was selling shares into the falling market rather than sewing more coffee beans if you’re like more coffee. And LICs are fairly similar. LICs do look a little bit more like a regular business because, you know, they get dividend income and they have their costs and they have a P&L, which looks more like a business but their business is in buying and selling shares. So that can look a little bit more like a traditional business, but the same thing applies there.

If they have lots of shares sales and their operating cash flow can go up as well. But having said that, you know, as I’ve found over the years sometimes we get LICs that come onto the buy list and they are good buys at that time because, for whatever reason, they’ve got lots of cash and the other metrics are good. There’s a founder involved. There’s maybe lots of dividends coming in, et cetera, et cetera. So they score on the quality side of things quite well. So I found that to be a good time. It does happen reasonably rarely, like during times, like the COVID cough or the GFC and the ETFs are the same, although they’re less like a regular business and it’s more about what they’re buying and selling in the market to the fixed their operating cash flows. The other health ratios, et cetera, often don’t get rated for ETFs. But yeah, I include them for completeness on the buy list again. I did own which one Gear for a while after the COVID cough. So I’m happy to buy an ETF that appears on the buy list and scores well, but recognizing that they are different from normal businesses or industrial-type businesses.

Cameron Reilly [01:01:39]: And do you do anything differently when you’re evaluating them on the checklist?

Tony Kynaston [01:01:45]: No. No. I just keep my eyes open that the operating cash flow, in particular, is because of money being sold so often on the market. But that’s about all. I think that’s a good time to buy an ETF or a LIC because you know, if we see the sentiment going up, chances are the market’s going up and they’ve got lots of cash to deploy into that rising market. ETF maybe not be so much if they’ve had to sell shares and then pay out customers, who’ve sold the ETF, that’s a different matter. But yeah, just again, timing details. I probably do get more cash flow during that time and it depends on how they manage things. Like, for example, they may have a mandate which allows them to be an active player in the market so they could be selling not just for redemptions, they could be selling for other reasons. Yeah. So anyway, Duncan’s right. They are very different but when they do appear on the buy list I still pay attention to them.

Cameron Reilly [01:02:53]: Right. Good. Thank you, Duncan. And the last question of the day. Gary, again, “Hi Cam, quick questions as I’m sitting doing my daily prayers.” To you, I assume that is, Tony.

Tony Kynaston [01:03:07]: There’s a little religious flavor in these questions, aren’t they?

Cameron Reilly [01:03:12]: Penance. Prayers. Yeah. I told you.

Tony Kynaston [01:03:16]: Maybe we should start marketing to the Catholic church on Facebook or something. Shouldn’t we?

Cameron Reilly [01:03:22]: Well, look, as soon as we can get 500 signatures on a document, I’m turning QAV into a registered religion. We get tax breaks and you know, all sorts of things. It’s great.

Tony Kynaston [01:03:35]: Yeah.

Cameron Reilly [01:03:36]: “Hi Cam, a quick question as I’m sitting, doing my daily prayers. In the manually enter data tab, there’s a column for new positive cash flow Y or N. My question is, is this a positive that follows a negative, e.g. June 20 minus 1000 and December 20 positive 1000, or simply a positive cash flow e.g. June 20th, 1000, December 2,900?

Tony Kynaston [01:03:58]: So it’s for the first one. This is one of my tests on something I’ve been looking at. So it’s testing to see if in the latest figures. So there are the six-monthly figures. So the first point there about it’s negative on June 20, but it’s positive on December 20 is the one I’m doing. And I’ve noticed in the past, just anecdotally that when shares have negative cash flow and then become positive, that’s a turning point often a tipping point in their share price. And they go up substantially from there, which kind of makes sense. Other people have talked about this in the past that companies, maybe startup companies, for example, go through a whole life cycle where they grow without making a profit. Then they become cash positive, then they become profitable long term. So this is the turning point, which happens when they become operating cash positive.

And so I decided to do some research on it and that’s what Gary’s seeing in the QAV Master Checklist on the manual enter data page. So I haven’t gone to the trouble of taking it out Gary because when I post it, I’m posting my own version of that master checklist, but feel free to ignore it. But the interesting thing aside is that those companies, I think there were 10 of them that became cash flow positive in the ones that we watch anyway during that last reporting period. If we bought each of those with equal weighting they’re up 38% in the six months since then. So it’s only a small sample and it’s only a test at this stage, but it’s something I’m watching and I’ll keep monitoring just to see if it does become either a checklist item, which is likely or maybe even a challenger portfolio. I’m just debating that because only putting one item on a checklist may not get some of these shares high enough in the buy list to make a difference.

But if there is something special about this class of shares, they might become a challenger portfolio. So it’s under the research. I’m going to get the intern. It’s one of the things I want to get Dillan to do for us is to go back and do some back testing on this. He’s got a lot of things to test, but that’s one of them and yeah, it may lead to a change in the checklist. The other one, which I’m also thinking of doing which isn’t in the checklist in the master spreadsheet at the moment is looking at whether we should have a checklist item for commodity prices that go through a three-point upturn on Index Mundi because that’s been profitable for us too over the last 12 months for nickel and iron ore and well gold in the past for me as well. And copper most recently. So there’s definitely enough evidence there just to support it. But again, I’m not sure whether it’s become just the one point item on the checklist, which won’t make much difference, or whether it becomes a challenger portfolio again as well. So yeah, these things are just things I’m testing at the moment.

Cameron Reilly [01:06:56]: Right.

Tony Kynaston [01:06:56]: Gary, feel free to ignore them.

Cameron Reilly [01:06:58]: Thanks, Gary. Keep doing your daily prayers, everybody. Before we go, I just sort of wrap up with something I meant to do at the beginning, which is our portfolio performance update. This financial year our portfolio is up 27.81% or 27.43% or 31.69%, depending on whether or not you look at Sharesite, Navexa or my Google sheet. Either way compared to the all odds, which is up 14.83% total return, or 12 point something, This one 86200.

Tony Kynaston [01:07:51]: It should be the same.

Cameron Reilly [01:07:52]: 15.05% or well, I don’t only do the total my Google sheet only do the total return at the end of the month. So either way, we’re doing about, I don’t know, roughly double. Double the all odds or the ASX 200 anyway for the financial year to date. So everything seems to be on track, Tony, so far.

Tony Kynaston [01:08:17]: Yeah, it’s good. Isn’t it? Yes. I agree. It’s on track. It’s good. And yeah, so we should all just sort of rest up until February comes along when we hit a hive of activity with the new company reports coming out.

Cameron Reilly [01:08:30]: When will you be back in Sydney?

Tony Kynaston [01:08:33]: Yeah. So looks like about the middle of next week. Middle of next week.

Cameron Reilly [01:08:38]: Right.

Tony Kynaston [01:08:40]: Yeah. One of the reasons we’re staying down here a bit longer is that we’re getting some work done to our apartment in Sydney, and they should finish by this Friday, and then we’ll head back after that.

Cameron Reilly [01:08:51]: Soundproofing your recording studio.

Tony Kynaston [01:08:56]: No, getting some new air conditioners put in.

Cameron Reilly [01:09:00]: A quieter air conditioner, so you can record and still have the air con on.

Tony Kynaston [01:09:04]: Oh, that’d be good. Wouldn’t it? Yeah. Hopefully.

Cameron Reilly [01:09:07]: And a room for me so I can move in. Nice. Very nice.

Tony Kynaston [01:09:12]: Well there’s a room there for you. Even the Shatner room.

Cameron Reilly [01:09:15]: The Shatner room. I love the Shatner room. Hunter said to me the other day talking about his TikTok. He goes, “I’ve got an idea I’m thinking about trying it out. I’ve got this great idea. I think I’m going to take like contemporary pop songs, but act them like really seriously, like act out the lyrics, like recite the lyrics.” I said, “Oh, like Shatner.” And he was like, “What? Who?” I said, “William Shatner.” He goes, “Who’s that?” I was like, “Oh my God. Really?” Okay.

Tony Kynaston [01:09:47]: Yeah. [inaudible 00:06:21] Listen to common people. That’s a good one.

Cameron Reilly [01:09:49]: Yeah. I actually sent him the clip of Shat doing whatever Rocket Man, like 1971 or 72 or something sitting on the stool at some awards show with a cigarette, 6:00 AM pre-dawn flight. So what have you seen and read lately, Tony that you can recommend to us before you go? What have you been watching? What have you been reading?

Tony Kynaston [01:10:20]: I watched a good Australian movie called The Merger recently, which was good. It’s a low budget Australian comedy in a sort of vein of the castle or the dish. Shot in Wagga Wagga.

Cameron Reilly [01:10:33]: Wow.

Tony Kynaston [01:10:33]: It’s like a bit of like Australian comedy. It’s pretty good.

Cameron Reilly [01:10:35]: Where do you see that?

Tony Kynaston [01:10:36]: It’s on Netflix.

Cameron Reilly [01:10:37]: Netflix, right. The Merger. Okay.

Tony Kynaston [01:10:39]: The Merger, it’s about a footy team merging. And I’m getting really into, I don’t know if I pronounce this right, it’s a French series called Lupin. Really, really good. It’s about a gentleman thief.

Cameron Reilly [01:10:54]: Okay.

Tony Kynaston [01:10:55]: Yeah. It goes back in time, a little bit so that the current thief was given the book about the gentleman thief, a guy called Lupin by his father, and his father was framed for a jewelry robbery and killed himself in jail. He was distraught over it. And so his son is not only a thief but also trying to uncover evidence to clear his father’s name. It’s really good.

Cameron Reilly [01:11:23]: Oh good.

Tony Kynaston [01:11:24]: Set in Paris. It’s French with subtitles, but well worth the watch.

Cameron Reilly [01:11:28]: I will check both of those out. Thanks for the tips. And you reading anything?

Tony Kynaston [01:11:34]: Actually reading US History for Dummies. Coincidentally, it’s been interesting. All the stuff has been going on in the US but no, I ran out of things to read and we’ve got a few books down here at the house and that was one of them. I think I bought that around the time I bought Napoleon for Dummies. I bought that one and British History for Dummies. But it’s actually really good. I’d recommend it.

Cameron Reilly [01:11:57]: Napoleon for Dummies, My friend J. David Markham.

Tony Kynaston [01:12:01]: Correct. Yes. But the US History for Dummies is good. I mean, as much as we were always, you know, just swamped with US media and you grow up hearing about their iconic characters actually going through and reading them is really good. Getting an insight into some of the big players and what actually happened and you know, how incompetent the Brits were during the independence war and all that kind of stuff. And in fact, how, how incompetent Washington was as well. It seems like his best feature was being able to retreat without having been wiped out after losing so many battles. [crosstalk 01:12:40] another day.

Cameron Reilly [01:12:41]: Did it talk about the fact that the British commanders kind of let the US win because they were in favor of their independence?

Tony Kynaston [01:12:50]: No, it didn’t. It didn’t talk about that at all.

Cameron Reilly [01:12:50]: No. You have to listen to my podcast to hear that side of the story.

Tony Kynaston [01:12:55]: Which one? Which podcast?

Cameron Reilly [01:12:57]: I don’t know. I talked about it at some point, but yeah. The two brothers that were in charge of the British troops for a large part of the war, got hauled over the coals back in England. But they were of the progressive wing of British politics. They believe the Americans should be independent, but when they were called up to lead the troops, they said, okay, they weren’t going to say no to the King, but they really didn’t try very hard. They kept letting Washington escape because they didn’t really want to win. So they got in a lot of trouble when they got back. But they were like, “No, no. Listen, we were just taking our time and trying to do it carefully”.

Tony Kynaston [01:13:47]: Yeah, that’s interesting. That’s what I mean, that’s sort of dimension to it is very interesting. I’d heard the names of things like Lexington and Concord but didn’t understand the actual detail around it. How the British tried to march on the armory and rob it of supplies before the Americans had a chance to launch an assault. And Paul Revere’s ride and how that became famous in Longfellow’s poem. But also I found it really fascinating, the history of the slave trade, the history of the Monroe Doctrine, the creation of Liberia and its capital Monrovia as a place to send slaves back to, which never really happened but that was there. Louisiana purchase, I didn’t know a whole heap about. I’d heard about it on the Napoleon podcast, but that was interesting too. So yeah. Lots of stuff I’d skimmed through in the past, which is been interesting going back over and reading.

Cameron Reilly [01:14:39]: Thank you, Tony. Enjoy the rest of your week down there and I’ll talk to you next week.

Tony Kynaston [01:14:44]: All right. You too. I’m going to hit the golf course now.

Cameron Reilly [01:14:47]: Lovely. Hit it hard. Hit it like…No, I won’t go there. Okay.