Here’s how Australia’s best share picker beat the banks

Meet Australia’s new best share picker!

Brian Johnson is his name. According to The Australian Financial Review, the CLSA analyst was voted the best of the best in 2015 in the Thomson Reuters StarMine analyst awards.

No wonder, considering he outperformed his benchmark by a whopping 22%!

That’s no easy feat – especially considering his industry of expertise is in financial services.

So how did he do it, exactly?

There’s an old marketing catch phrase “No one ever got fired for buying IBM“.

For stockbrokers, the same goes for buying shares in the Big Four banks.

They’re so big and widely held that they’re generally considered a safe bet, even when they might not be the greatest buy.

Rather than focusing on that however, Mr Johnson went out on a limb:

He went underweight on the banks.

As quoted by The AFR, here’s Mr Johnson’s take on his success:

Someone asked me how I perceive my job: I often feel it’s a bit like being an archaeologist, finding these obscure facts that can actually be interesting.”

Now, one fact that cannot be denied is that each of the major banks have been wonderful long term investments.

Together, they’ve produced staggering returns for shareholders – both in the form of capital gains and fully franked dividends – thanks to a strong economy and nearly a quarter of a century without a recession.

Various other factors have also played a role including rising household income and a booming property market, which have provided an avenue to mouth-watering growth.

‘The Regulatory Noose’

It seems this history has lulled investors into a false sense of security.

Indeed, the major banks account for more than a quarter of the S&P/ASX 200  (ASX: XJO).

For that reason, they’re perceived as ‘unavoidable’ to most investors, many of whom maintain large positions behind the banks in their personal portfolios.

Like Mr Johnson however, we Fools (capital ‘F’) have also been pretty bearish on the banks for a long while.

And who ever said you have to own shares in any of the banks?

In fact, not one of the banks has made it to the official Motley Fool Share Advisor  scorecard!

Not yet, anyway…

Our calls that the banks were ‘too expensive’ or ‘too risky’ might’ve looked questionable for a while, but those investors who listened to us in 2015 are likely grateful that they did.

For starters, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) both remain in an official bear market – defined as a drop of 20% or more from their peaks.

The situation isn’t quite as bleak for Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC), although their shares remain well below their highs from earlier this year as well.

Rather than focusing on their soaring profits or the record low bad debt charges, Mr Johnson took a stance against the big four banks referring to what he calls “the regulatory noose“.

Aside from being too expensive – in my opinion, at least – it seems the market was also ignoring some of the key risks facing the banks.

The biggest of those was their reliance on residential lending, or home loans, which ballooned out to record proportions.

Enter the Australia Prudential Regulation Authority, or APRA, as it is commonly referred to.

Recognising the need for a greater buffer against a potential credit crisis, APRA asked the banks to shore up their balance sheets.

A wave of massive capital raisings ensued, raising roughly $18 billion and sending the banks’ share prices crashing. The broader share market got dragged down with them.

The trouble is, there could be more to come…

To borrow another line from The AFR, Johnson said “I personally don’t think we’ve seen that last recapitalisation”. He suggests they could collectively need to raise another $30 billion.

This is all to protect the “too big to fail” banks from a potential economic downturn.

In that sense, it’s good for the government and tax-payers knowing that our economy is better equipped to weather a severe storm…

But it’d be a big blow for shareholders.

Further capital raisings could severely impact the banks’ returns on equity, which are currently far greater than those of the banks’ international counterparts.

It could also impact their ability to grow or even maintain their dividends.

If that happens, I wouldn’t be surprised if there was a rush of investors towards the exits as well, pushing the share prices even lower…

Now, this is not all to say that the banks will never be good buys for long-term investors.

Each of the big four banks represent high-quality businesses that deserve a position in any Australian portfolio, just not at any price.

Despite their hefty falls this year, the banks still aren’t cheap – not in my opinion.

When their balance sheets are in better shape and their share prices represent good value, Scott Phillips, who leads the Motley Fool Share Advisor service, could tell members to load up!

But for now, there simply remain far better opportunities.

Just ask Brian Johnson. If he’d played it safe and bought the banks, I doubt he’d have achieved anything quite like his 22% benchmark outperformance!

As is quite often the case, those potential market-beating opportunities exist in places few other investors think to look.

Many exist outside the traditional blue chip shares like the banks or miners, and often don’t receive the same kind of coverage from the financial media.

Take Corporate Travel Management Ltd (ASX: CTD), as a great example.

The shares surged 8.9% on Friday after it announced a new acquisition and upgraded its earnings guidance.

That’s great for a one-day gain, but investors who bought when Scott Phillips first recommended the shares are now sitting on a total return of 459%! 

Of course, it’s possible to find these companies yourself, or you could have Scott and his team of analysts do the work for you.

Join today to gain immediate access to a list of every company Scott and his team have ever recommended, including the latest ASX share recommendation which hit members’ inboxes just last week.

With the Christmas spirit in mind, it could well be the gift to yourself that just keeps on giving over your investing journey.

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Motley Fool contributor Ryan Newman owns shares in Bellamy's. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares in Bellamy's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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