Twice a year Aussie investors are treated to summary listings of the best and worst performing stocks on the ASX; first for the fiscal year ending on 30 June and again for the calendar year ending on 31 December.
The following table from the 10 January digital edition of The West Australian lists the best and worst performing ASX 200 stocks and sector performance as of the close of the 2018 calendar trading year on 28 December.
A list like this has something for any investor with an appetite for risk and the confidence to invest in market conditions uncertain at best. Growth investors will look to the winners to gauge which, if any, can sustain their upward momentum. Value investors will look to the losers to see which, if any, are potential comeback candidates. Investors looking to ride the wave of the latest “hot” sector will look for best of breed healthcare stocks.
But first, there is a question – why would anyone be willing to take a risk right now?
On the one hand you have the bullish sentiment that explains the dramatic market declines commencing last October as a result of the combined impact of rising interest rates in the US along with trade war skirmishes. They read the comments from members of the US Fed and President Trump on fewer interest rate hikes and progress in trade talks between China and the US as explanations for the significant turnaround at the beginning of the 2019 trading year.
On the other hand, you have the bearish sentiment reminding investors the role of US corporate earnings may have been overlooked as contributing to the slide. The red-hot earnings reported in FY 2018 may have been spurred by the US corporate tax cut and elimination of certain regulatory burdens, but as bearish analysts warned, those effects would be short-lived.
Recent evidence supports that view. Apple Inc and its bitter rival Samsung Electronics issued revenue and profit warnings. US beverage behemoth Constellation Brands lowered its 2019 earnings forecast and major US homebuilder Lennar Corporation delayed a release of its earnings forecast due to weakness in the housing sector.
US financial website CNBC points to more troubling evidence – companies in all 11 S&P 500 sectors have reduced forward guidance and twice as many companies have issued negative guidance as positive guidance.
The answer to the “why invest” question is surprisingly simple – to make money. History shows money can be made in downturns and even bear markets. This is only to say it is possible and not for the faint of heart. It is for those willing to invest the time in reading everything possible about macroeconomic conditions and news and analysis of specific stocks or sectors.
The GFC was devastating but investors willing to take risks had the opportunity to make money and some did. Our largest diversified resources company, BHP Billiton got hit with dire conditions in three of its operations – iron ore, coal, and oil.
Investors bold enough to climb on in the crushing aftermath of the GFC and held are still slightly above water, weathering the slides commencing with the “death of the mining boom.” But the “Ds” in the chart led to a ten-year average annual rate of total shareholder return of 6%, with 5.3% over five years and a healthy 36% over three years.
Similar stories could be found with other distressed stocks that rose from the dead and high-flyers that kept flying.
From the best and worst list of 2018 stocks we found both winners and losers with double digit forward earnings growth forecasts in excess of 50%, with four in the triple digits.
Afterpay Touch Group (APT) and Appen Limited (APX) are recent entries to the ASX with outstanding share price performance since listing. Xero Limited (XRO) listed earlier with equally stellar share price performance. All three are software and service providers operating with relatively recession proof business models.
If you examine the price movement charts for all three companies you can see all dropped in the October calamity but rebounded relatively quickly, although still not back to their all-time highs.
Afterpay is the clear leader in “market darling” status, with investors hungry for every morsel of news concerning the “buy now pay later” operator’s entry into the US market. Afterpay reportedly has already signed close to 900 US retailers with another 1,300 waiting in the wings. The company’s Touch System platform is accessible via websites, mobile applications, and voice interactive systems to consumers at no cost. The platform is secure and offers both the contracting retailer and the end-customer sophisticated fraud protection. Afterpay is still in search of its first net profit, but revenues leaped from $22.9 million in FY 2017 to $113.9 million in FY 2018, an increase of nearly 400%.
Appen Limited is not far behind in the eyes of Aussie investors with its machine learning and artificial intelligence capabilities in language recognition and search content relevance. Appen is also penetrating the US market. The company is profitable, increasing both revenue and profit in each of the last three fiscal years, with revenues rising 50% and profit up 136%. It would be nearly impossible to find any list of megatrends anywhere that did not highlight machine learning and artificial intelligence at or near the top.
In terms of their ability to withstand market downturns, both Appen and Afterpay out performed the ASX healthcare sector during the October to year-end period.
New Zealand based Xero Limited (XRO) offers cloud-based accounting and financial services platforms geared towards the needs of small and medium sized businesses (SMEs). The company operates globally, with a growing presence in both the UK and the US to augment its principal base of operations – Australia and New Zealand.
Xero’s business model expanded from its initial focus as a provider of accounting services to include a full suite of financial operating services. The company’s Half Year 2019 results, reported in late September, followed a pattern now familiar to its investors. Subscriptions, operating revenues, and gross profit are up yet the company is still in search of positive earnings per share and net profit as operating expenses continue to take a big bite. However, analyst consensus is that the company will turn the corner and reach the profitability milestone in FY 2020.
A newcomer to share market investing would look at this list and wonder how four of the five stocks with the highest growth forecasts performed so poorly in 2018. What’s more, even a casual follower of business news has read of the coming emergence of Electric Vehicles (EVs). Hardly a person on the planet is unfamiliar with the lithium-ion battery that powers the electronic toys of today and the vehicles of tomorrow.
Three of those four worst performers are in the business of mining the metals needed to produce those li-ion batteries. Those three companies – Pilbara Minerals (PLS), Orocobre Limited (ORE), and Syrah Resources (SYR) along with satellite communications provider Speedcast International (SDA) are all in the ASX Top 30 Short List.
In the eyes of many retail investors, the short-sellers, or shorts, are the smartest people in the room since with the unlimited risks they face due diligence is a premium without which they cannot do.
The essence of short selling is borrowing shares at a given price and profiting when the price drops and the seller buys the shares at the lower price and pockets the difference. When the price goes the opposite way the losses keep mounting, theoretically to infinity, until the shorts panic and buy to cover. That means, in theory at least, the shorts need to be virtually certain a given stock is due for a downtrend.
So why would they bet against EVs and their battery packs? Retail investors who have been in the game for awhile know how quickly a red-hot sector can freeze over. In the fire-up stage investors rush in to buy and producers rush in to produce more of whatever has caught fire, thus inadvertently lowering the price. Orocobre and Pilbara are in the lithium business while Syrah is a graphite producer. Initially the shorts appear to have latched on to the falling price of both graphite and lithium as the perception crept into the market that supply was outstripping demand. In addition, some experts were questioning the extremely optimistic forecasts for EV demand in the next decades.
Now there is a new concern; one that was always there and has now bubbled to the surface. The truth is the lithium-ion battery may not be the technology of tomorrow as it has serious drawbacks. Right now, cobalt, graphite, nickel, and manganese are in the mix but research efforts for alternatives abound. The industry was shocked in mid-2018 when Tesla’s CEO Elon Musk made the claim that cobalt, once the must have metal, would be less evident in Tesla batteries in favor of increased nickel content, a cheaper metal.
That could have served as a reminder of the potential of other minerals falling out of the mix in the future. The price of both lithium and graphite has been volatile over the past several years, but both are improving.
While the price of both metals fell due to the oversupply issue, lithium recovered more quickly than graphite. Now the concern for graphite has shifted to shortage concerns with the price gradually improving in 2017. The following graph is from Canadian producer Northern Graphite.
All three of these companies are on the cusp of major production capability and at the very least deserve a spot on any investor’s watchlist.
The story behind the fall of satellite communications provider Speedcast International (SDA) represents the fickle nature of market loyalties. The company bills itself as the “global leader in remote communications and IT solutions”.
Speedcast’s network of satellites provides communications to remote locations on land and on sea, serving government, energy, maritime, and emerging markets with a presence in more than 40 countries.
The company more than doubled revenues between FY 2016 and FY 2017, up from $301 million to $659 million, although net profit declined slightly from $8.1 million to $7.1 million.
Investors fled in droves following the release of 2018 Half Year Results, which were largely positive but tainted by a $10 million reduction in EBITDA (earnings before interest taxes depreciation and amortisation) guidance.
However, the company’s business with the world’ militaries should be of interest to investors. On 10 January a subsidiary of Speedcast was awarded a $23 million-dollar contract to provide Internet, VoIP, and business application services to Forward Operating Bases in the Middle East and Southwest Asia operated by the unnamed client.
>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter