Should You Buy Challenger Ltd at This Price?

What happened to the CGF share price?

Challenger Ltd [ASX:CGF] opened lower today. The Aussie market followed a weak session in the overseas markets. Over the past year, CGF strongly outperformed the ASX200 benchmark. The month of April saw the stock once again starting to diverge from the broad market and outperform.

Why did CGF shares do this?

CGF shares outperformed recently because it posted a strong performance in its annuity sales for the third quarter. While the group reported better numbers for its funds management business and from its distribution agreement with the Commonwealth Bank of Australia [ASX:CBA], its strength remains in its core annuity business. It has benefited from the rise of Australian median life expectancy.

A better look at the company’s financial indicators tells us a number of things. The company is expected to bring in more revenue as its businesses continue to perform well. Earnings per share will also rise as a result.

Remember the company has a beta of 1.2, meaning it generates more volatility relative to the market. The company pays a dividend, which is a sign of good financial health. The dividend growth rate and payout ratio have also been rising over time. On liquidity, the company’s interest coverage shows us Challenger is not under much financial pressure.

What now for CGF?

For those who are looking at CGF as an opportunity in the near future, I can tell you that it’s not among the best performing stocks in terms of return. Sector exposure continues to favour the commodity sector in recent weeks. However, an investor in CGF can rely on the fact that the company is fundamentally strong. It has a positive business outlook.

Will the recent rally continue? The ‘chartist’ evidence does not suggest a strong potential for the stock to generate a stronger rally. If you look at the Moving Average Convergence Divergence (MACD) indicator, the short-period moving average currently converges with the long-period moving average. In plain language, this means the current trend may remain, but there’s little evidence for a strong uptick.

My best bet at this point is that the stock will continue its current upward trend, unless asset prices start to revert to the downside strongly.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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