Another week and another week behind we fall. But you know you’ll be up to date on your stock debates! On today’s agenda:
- How did my stock portfolio perform?
- What questions should I ask during Q&A?
- How do I answer questions?
- Stock updates and a new portfolio
A quick brush over my portfolio:
- 25% PLS – up 12% this week
- 50% CSL – up 1.5% this week
- 75% MQG – down 5% this week
All in all, around break-even (arguably MQG’s first disappointing financial result in a while, as you can see, the market is quite unpredictable).
By now, students should recognize that these investment debates are 95% driven by your reasoning, not portfolio performance. Those who are able to ask the most relevant questions and have the best answers are those that are awarded first place.
Here are some questions that you should be asking for each stock/sector (realistically you shouldn’t ask these questions because most students don’t know how to answer them):
Materials / Pilbara Minerals (ASX: PLS) / Lynas Corporation (ASX: LYC)
- Wesfarmers recently offered to acquire Kidman Resources (ASX: KDR), a mid-tier lithium producer that is slightly smaller than Pilbara at a 50% premium. How does this affect your decision to long/short PLS?
- For the LYC investors, do you know what Neodymium (Nd) and Praseodymium (Pr) (just say NdPr) is and how what is the price of NdPr. (When the student says “I don’t know”) you reply with “How do you not know the main material produced by LYC, this should be the most important piece of information for an LYC investment”.
- For the PLS long investors, you have seen the LYC share price soar on the back of a takeover offer and then fall. Why did you decide to long PLS when it’s share price has arguably been pumped up by the KDR offer. Would you not short it instead?
Healthcare / CSL Limited (ASX: CSL) / Cochlear Limited (ASX: COH)
- The US markets is experiencing some volatility in their equity markets and US-China politics. Is this not an inherent risk for CSL and COH that derive their revenues from America?
- The ASX finished last week down 0.6% while CSL and COH closed out in the green. Do you think this momentum will continue or will the stock ultimately fall as well?
- The US Federal Reserve announced that they will be patient in interest rate changes. This resulted in a sharp market pullback and the US dollar rising. How does this affect CSL and COH?
Banks / Macquarie Bank (ASX: MQG) / Westpac Bank (ASX: WBC)
- What is your opinion on Macquarie Bank’s FY19 result?
- Do you think Macquarie Bank is a long or short based off Ms Wikramanayake’s comments (I’ll leave you to figure out who that is :D) ?
- What did MQG comment on FY20 performance?
- Can you tell me how the other bank results affected the market last week?
- Does the US Federal Reserve announcing that they’ll be patient with interest rate cuts/hikes affect bank performance?
- Why would you long/short WBC when they will be reporting soon? Is it not a gamble given ANZ and NAB performance?
How do I answer questions?
Almost all topics you discuss in your stock debates will be speculative – “we think this will happen”, “it should be positive” etc. So while you might or might not know what you’re talking about, my key tips for answering questions is:
- Take your time and spend a few seconds thinking
- Have a clear cut concept/answer that takes a few sentences to answer
- Put on your best poker face so people don’t think you’re bsing
I don’t want to give clear cut answers to my questions above. But I will make a comment about the US Federal Reserve’s comments.
Investors wanted the US Fed to announce anticipated cuts due to slower economic growth. Remember that a lower interest rate makes it cheaper to borrow, which promotes economic growth. When they announced that they want to be patient about a rate cut, this obviously disappoints the market and hence, the stock market falls.
The country with higher interest rates will have a stronger currency. When the general market anticipated cuts (which would weaken the US dollar), but the Fed announced to wait (which is neutral or stronger), this makes the US dollar stronger. So ask yourself, how does a stronger US dollar and neglecting the market a lower interest rate affect stocks.
Update to this week
In terms of content, please refer to week 1.
Pilbara Minerals (ASX: PLS)
Lithium prices are still pretty weak, poor for sentiment. The only positive news (mentioned above) was Wesfarmers takeover offer for another lithium stock called Kidman Resources (ASX: KDR). This offer obviously renews sentiment for mid-tier producers.
Why would Wesfarmers make a 50% premium takeover offer for KDR if they didn’t believe the stock was undervalued. This doesn’t mean PLS is going to receive a takeover offer, but reignites sentiment. Good work on those that took a LONG position on PLS.
I believe the lithium sector will continue to struggle but the renewed sentiment for mid-tier producers might continue on the back of the KDR offer. I do feel like PLS will fall, but perhaps not immediately. I would SHORT if this debate let me start my short on Wednesday.
Lynas Corporation (ASX: LYC)
No significant updates.
CSL Limited (ASX: CSL)
No significant updates.
Cochlear Limited (ASX: COH)
No significant updates.
Westpac Bank (ASX: WBC)
No significant updates. However, WBC is expected to release its half-year reports this week. Bank results have been quite volatile. ANZ met the market’s expectations despite a difficult operating environment announcing a 2 per cent rise in cash profit. This decent result had a positive impact on other bank stocks on the day.
Subsequently, NAB released an underwhelming half year result cutting its interim dividend by 16.2 per cent, citing surging customer compensation bills in wake of the Royal Commission inquiry. This dragged other banks down on the day.
So as you can see, bank performance is quite speculative or a 50/50 at the moment.
Macquarie Bank (ASX: MQG)
Macquarie released their full year report on Friday. Below is a summary of the results.
The results are pretty decent and in-line with expectations. But MQG stock fell 5% due to FY20 profits to be “slightly down” on FY19.
This weeks portfolio
I played it safe last week with a portfolio that performed flat vs. the general market that finished down 0.7%. (C’mon that’s somewhat respectable).
This week, I’m going ham.
- 100% PLS Short
- 100% WBC Short
- 300% CSL Long
PLS Short – I believe the lithium sector is going to continue to struggle. The supply/demand imbalance will continue for the foreseeable future, which will halt any form of lithium spot price gain. I believe PLS has gotten ahead of itself thinking “Omg KDR have gotten a huge takeover bid, we must be undervalued too”. The share price should pullback.
WBC Short – In a chronological order, ANZ’s report came first which made investors feel “ok banks are performing quite well in a difficult operating environment” which lifted the overall bank sector. Then NAB dropped their fresh album, including a 16% cut to dividends which made investors think “ok never mind banks are actually kind of struggling and the others might cut their sweet sweet dividends too”. I believe bank stocks have run up a little too much, and WBC should have a very ordinary result.