The myth of searching for yield

With very low interest rates which are barely above the inflation rate, investors are looking for yield. Professional advice over the past year or so has been to buy the high yielding blue chips. Was that advice sound? Take for example the investor who took this advice and bought 10 blue chip stocks (including the banks, TLS, BHP, WPL, CSL and RHC, in January of 2015. The returns from this buy and hold, blue chip portfolio are shown by the blue line in the chart below with a loss of 16% for investors over this 15-month and hold

By comparison investors who had bought a managed portfolio of strongly trending growth stocks with a very high ROE in January 2015 would have performed much better. A performance of 10 such stocks in a managed portfolio is shown by the red line in the chart above and provides a 30% return for… Continue reading

Look for growth stocks in 2016

In a world where world growth is not only slow but in all likelihood will continue to decline it seems absurd to talk about investing in growth stocks. Yet consider the possibilities. The Australia stock market is dominated by resource and finance stocks which in general have performed very poorly during 2015 and as a result the ASX200 index has fallen significantly and during the past 9 months has fallen by about 14%. By contrast an investment in growth stocks has significantly outperformed the ASX200 index.

The following chart compares the performance of a portfolio of 10 such growth stocks (the red line) to the ASX200 index (the black line) over the past 3 months. During this period the index moved sideways while the growth portfolio which included Blackmores, APN Outdoor, Bellamys and NetCom outperformed the index by about 20%. 160101 Growth

Growth stock selection is simple and based on the… Continue reading

Is Commonwealth bank over valued?

I have just received a newsletter from my provider of fundamental data.  Their data and commentary are valued and they have a good record of identifying stocks with value which are potentially profitable.  Their latest newsletter includes an item on the value of Commonwealth Bank.  Their view is that “Commonwealth Bank of Australia (ASX: CBA) is a play on household and business conditions in Australia. Given that, we like some of the signs coming out of the major bank after its first-half results, including a relatively upbeat outlook from management and positive signs for credit growth.”

Despite its strong performance investors need to note that CBA is strongly linked to the Australian economy and in particular to the housing market.  With provisioning for bad debts at an historic low, should unemployment increase rapidly CBA could come under significant pressure with resultant capital losses for investors.… Continue reading

Telstra share price under pressure

After a stellar run since November 2010 the share price of Telstra is now under pressure.   Although from fundamentals there is no indication of threats to the business or that earnings and dividends will decline, technical analysis suggests a different picture.  Since going ex-dividend on Feb 24 the price has continued to decline.

Telstra has come off a double top and RSI analysis shown in the monthly chart below suggests that the share price could now undergoe a significant correction.  Telstra is showing a long term RSI divergence and the RSI trend line has now been broken.  It is important to note the similarity of current signal with that on the pattern in 2007 when there was a 53% decline in the Telstra share price.   tls

RSI is a powerful tool on charts of all time frames but is particularly significant on monthly… Continue reading

A significant correction for Telstra?

Telstra is a prime holding in the portfolios of most investors.  Not only does it pay an excellent fully franked dividend but it has provided a capital gain of more than 100% over the past 3 years.

The chart of TLS is now very interesting. Over the past 10 years there has been very strong resistance at around the $5.00 region and recently this stock has again retreated from this resistance region.  The previous two corrections by TLS over the past 8 years have resulted in retracements of 20% to 40%.  The current charts suggest that similar correction is about to… Continue reading

Do the Jaws of Death predict a bear market?

At this time both the Dow Jones Index and the S&P500 are showing a significant reversal pattern which has preceded most of the great bear markets over the last 100 years.  The pattern is variously called the jaws of death, a broadening top pattern or a megaphone.   The pattern is shown on the monthly chart of the Dow Jones below.    JAWS ON DOWThis expanding pattern typically shows the waves a, b, c, d, e, with the downward sloping boundary given by the lows of waves b and d and the upper boundary provided by the tops of waves a, c and e.   In all examples of this pattern, wave e is by far the longest but wave e is variable and may terminate at the upper trend line or move much higher before reversing.

This pattern appeared immediately prior to the crashes of… Continue reading

Telstra, a buying opportunity!

The recent history of Telstra provides a good example of how technical analysis can “provide those insights into human emotion and investor activity which we cannot get from fundamental analysis”. In an earlier blog on Telstra (TLS) on May 2nd I wrote: “Let me speculate that if the RBA lowers the rate by 25 basis points at its next meeting on May 7th, then the price of TLS will be pushed to higher levels and this may well be the high for TLS before a significant correction.”

The RBA did lower the rate on May 7th and subsequently TLS share price reached a high of $5.15 before correcting and as of June 1st it has fallen 8%. Having sold TLS on the RSI technical signal as in the previous post, when will it be time to buy again? The TLS dividend seems very secure and there will be continuing demand… Continue reading

Is there a potential opportunity with Telstra?

Telstra went ex dividend on February 18 with a fully franked dividend of 14c per share. On the exdividend day the share price closed a mere 7c lower reflecting the extraordinary market demand for this stock.  But is this about to change?

Telstra has been the market darling for the past two years, showing a significant capital gain and an attractive yield.  With falling interest rates, investors have been attracted to equities and Telstra has been the star attraction.  But all good things come to an end and at long last the share price rise has slowed.  The question is whether this is the end for Telstra or can it go further?  The fundamentals are very attractive.  It has a return on equity of more than 30% but while its debt to equity ratio at about 100% is high, a dividend yield of 6.2%… Continue reading

How to buy stocks in a bull market

Once a strong rally or bull market gets underway, nearly all stocks rise, often very rapidly.  For an investor who comes late to the bull market, stocks have already made significant gains and are starting to look expensive.  So how does an investor buy into a bull market?  The following is my approach.

I select stocks based on fundamental parameters.  I always look for stocks having a high and preferably rising ROE, a strong and increasing earnings per share over at least a 5 year period, an increasing dividend per share and a low,( preferably zero) debt to equity ratio. This approach provides a watch list of perhaps 12 quality stocks.  In a bull market there is the temptation to simply buy the stock at market price but patience is now required.   I now apply technical analysis and only ever buy stocks which… Continue reading

China, iron ore and Australian resource stocks

The World Bank forecast for lower growth for Asia is not a surprise coming after similar forecasts from the IMF, but it has cast a pall on world markets overnight.   Obviously with an even more negative outlook for China there is increased pressure on our Australian resource industry. 

Take iron ore for example.  We have had an overnight increase in iron ore price to about $110 per ton which is likely to be short lived.  While the big miners such as BHP and particularly RIO and Vale have reduced output as iron ore prices fell, smaller but significant iron ore producers  are now entering the market with mines developed on the basis of past high ore prices.

China’s growth has now slowed further and given that iron ore production cannot simply be switched on and off, this is likely to depress prices again perhaps… Continue reading

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