1) The bear market in US stocks is over, according to Wells Fargo.
That's the good news. The not-as-good news is that doesn't mean we're headed straight into a bull market, according to an article on MarketWatch.
"The bear market is over, but it is not the great reflation," said Wells Fargo equity analysts, led by Christopher Harvey, in a research note Monday. "We see neither a bull nor a bear market, just a market."
Wells Fargo "envision a malaise, not a hard landing" for the economy. "However, this does not necessarily mean it is risk-on from here on out," they cautioned. "A sustained re-pricing of risk is not supported by valuations or anemic economic growth expectations."
The same could be said about the Australian stock market, especially after the ASX 200 rally to start the new year, the benchmark index up close to 6% so far in 2023.
Some of the big winners this year have been more speculative stocks, like Nuix Limited (ASX: NXL) and Appen Limited (ASX: APX).
But yesterday they both came crashing back to earth.
The Nuix share price slumped 26% after the AFR reported corporate regulator ASIC is expected to dump Nuix when it chooses its software partner late next month, as concerns rise over the troubled tech stock's cash burn and a wave of client defections.
The Appen share price plunged 15% after it said it expects to recognise a $204 million impairment charge relating to poor performance in its new markets division, excluding China.
Call it momentum trading, bottom fishing, fear of missing out (FOMO), or just plain gambling, but speculating on turnarounds for under-performing businesses often comes with a sting in the tail.
2) Leading global fund manager Ophir characterised January's stock market rally as a "dash for trash", where low-quality stocks rallied hard.
Writing in its January letter to investors, Ophir said some stocks rallied despite no earnings news, and simply because of sentiment that inflation may be tamed, with the US market being led higher "by some of the lowest-quality, unprofitable and highly geared businesses".
"We expect to underperform during a low-quality rally in shares. It is not something that we want to chase. Sticking to your knitting is crucial as an investor as there are constant temptations to stray into the latest flavour of the month market segment through fear of missing out (FOMO)."
Ophir remains cautious for the middle and latter parts of this year, saying…
- "Interest rate hikes in major economies will continue to eat into demand, and corporate earnings may have further to fall. The size of any drop in demand and earnings, though, is highly uncertain."
- "Both a soft and hard landing are plausible outcomes."
- "In our view, the probability of more significant earnings falls is still higher than usual."
As for Ophir's edge, in the medium to long term, earnings growth drives share prices.
"With enough time and patience, and with no key changes in our investment team and process, we remain confident we can keep picking a higher proportion of earnings 'beats' than the market, which we believe will help drive long-term outperformance of our funds."
3) It can be a long and lonely time waiting for earnings growth to be recognised by the market, especially in the smaller and less liquid ASX stocks.
In mid-2021, I bought shares in Duratec Limited (ASX: DUR), a leading Australian contractor providing assessment, protection, remediation, and refurbishment services to a broad range of assets and infrastructure.
Whilst the company did endure some challenges imposed by COVID-19, it steadily and methodically grew revenue and its order book, the latter giving solid visibility into future earnings growth.
Yet the Duratec share price stagnated for 15 months. Doubts crept in. Boredom set in, and the temptation to sell and recycle the funds into something else. Was I missing something?
Then, somewhat suddenly, Duratec shares sprung to life.
A strategic acquisition, forecast FY23 revenue growth of 40%, and EBITDA growth of 73%, plus a string of contract wins has seen the Duratec share price jump to 77 cents, up 100% in the past six months.
It's a win for the maxim that earnings growth drives share prices, in the medium to long term. Trading at around 0.4 times sales and around 5.6 times EBITDA, I remain a happy holder.
4) It doesn't always work out that well for my small and micro-cap portfolio.
I'm underwater on my Good Drinks Australia (ASX: GDA) holding, with the share price of one of the country's largest independent brewers trading at close to a 52-week low.
This comes despite the company having posted first-half revenue growth of 80%, albeit EBITDA coming in flat at $6.1 million as the company continued to invest in marketing for growth.
Giving hope for long-suffering shareholders like me is the Good Drinks Australia target of growing its earnings to $25 to $30 million by FY25. By comparison, the market capitalisation today is just $85 million. The upside potential looks attractive.
Before it gets there, however, the company itself recognises it will have to carefully navigate an environment of reduced discretionary spend across the liquor category over the next 18 months.
In September last year, the Good Drinks Australia Board and senior management team spent $3.2 million buying shares in their own company, paying 75 cents per share.
"This significant level of financial commitment by the Board and management team reflects a shared belief in the attractiveness of the Company's valuation at these prices," said Chairman Ian Olson.
Today, the Good Drinks Australia share price languishes at just 66 cents. Should the company hit its FY25 EBITDA target, the GDA share price should indeed turn out to be attractive both at 66 cents and 75 cents. But it's a competitive market, and premium-priced craft beer may struggle to sell once the "mortgage cliff" hits households.
I continue to hold my GDA shares, may add, but will mostly just wait, and hope.
5) The market is shooting first and asking questions later with Temple & Webster (ASX: TPW). The share price of the online furniture and homewares retailer is being taken to the cleaners, currently down 26.67% to $3.63.
Revenue for the first half declined 12% to $207 million, with the company reporting a rather skinny net profit after tax of just $3.9 million. That's a lot of sales, logistics, marketing, and investments for a tiny return. Compounding things was a decline in active customers to 840,000.
For the first five weeks of the second half, Temple and Webster sales were down 7% over the prior corresponding period, although this has been blamed on strong sales a year earlier due to the omicron outbreak.
Looking ahead, Temple & Webster's CEO, Mark Coulter says…
"Longer-term, ecommerce in the Australian furniture & homewares category remains highly under-penetrated, and we have a much larger addressable market to go after in our new target verticals."
Retailing is tough. Competitive, cyclical, and with skinny margins. I'll wish them the best from the sidelines, and wait for the headwinds to turn to tailwinds. It might take some time.
