Why You Shouldn’t Miss Out on Short and Medium Term Gains

Earnings season kicked off yesterday. Consumer electronics and whitegoods retailer JB Hi Fi [ASX:JBH] always reports its numbers first. It’s a great company to follow to get a gauge of how the Aussie consumer is travelling.

Judging by JBH’s performance for the six months to 31 December, Aussie households are doing just fine. Having said that, JBH is a very well-managed company, with a proven business model. It tends to outperform its competitors.

For example, Dick Smith went bust last year and closed its stores, so JBH would have benefited from seeing this competitor off in the reporting period.

The important metric to watch out for with retailers is ‘same-store sales’.  This adjusts for new store openings to give a better measure of underlying sales growth. On this basis, JBH grew revenue at an annual rate of 8.7%.

Given the economy is probably growing at a rate of about 2% per annum, this is a very strong performance.

There are a few tailwinds supporting JBH right now. And they are all connected. Strong population growth, combined with a housing construction boom, is leading to a surge in demand for its products.

JBH sells ‘must have’ consumer electronics. These are always being updated and improved, which keeps demand for new products constant.

In addition, a few years ago JBH moved into whitegoods retailing (think fridges, washing machines etc). The timing was perfect. Australia was in the midst of a residential building boom. All the new apartments and houses needed whitegoods, and JBH caught a lot of that demand.

They obviously liked what they saw from the sector, because last year JBH bought ‘The Good Guys’, one of the largest whitegoods retailers in the country.

So JBH is a good bellwether stock for the consumer economy. And as you can see from the chart below, it’s been doing well over the past 12 months.

Source: Bigcharts
Click to enlarge

The stock price jumped sharply on yesterday’s results. That tells you the underlying numbers were better than expected. If JBH can go on to breach last year’s high at around $31, it will tell you that housing and the consumer aren’t about to roll over anytime soon.

On the other hand, if this rally fails to make a new high, turns down and breaks below $25 (the mid-November low), it will be a decent sign that the housing side of the economy is slowing.

Stocks and the economy

This is why focusing on certain companies’ results and share price is so important for bias-free analysis. You might think the economy is weak and fundamentally flawed, but as they say, the proof is in the pudding.

And bellwether companies are the pudding. If economic conditions in the economy are indeed deteriorating, you will see it in their share price performance.

Based on what I’m seeing across a range of sectors, there is simply no evidence of a major economic slowdown approaching.

If you’re like me, you may find this viewpoint hard to rationalise. I mean, I know Aussie households are up to their eyeballs in debt. I know house prices are crazy. And I wonder how the debt edifice will remain supported before collapsing on itself.

But I’ve also been around long enough to know that big picture macro currents flow at a glacial pace. If you get too caught up in the big picture, you’ll miss lucrative investment opportunities along the way.

With this in mind, here’s how I view things right now…

There are plenty of risks surrounding the Aussie economy. We have huge household debt levels, amongst the highest in the world. We need a constant inflow of foreign capital to sustain this debt — and therefore sustain our standard of living.

If (and when) the global economy turns down again, Australia will be severely affected. Global capital flows will dry up, our dollar will plunge, and the RBA won’t have much firepower to offset the downturn.

This scenario was a very plausible one throughout 2015 and early 2016. Commodities, a major source of income for Australia, were in a deep bear market. China was struggling to contain the fallout from its huge credit bubble. At one point the Aussie dollar fell below US$0.70.

The message from BHP

But things started to turn in 2016. And that momentum has continued into 2017. Commodities are in a new bull market. For evidence, just look at the share price of Australia’s commodity bellwether, BHP Billiton [ASX:BHP]

Source: Bigcharts
Click to enlarge

It’s jumped from $16 to a recent high of $28 over the past 12 months. That’s a gain of 75%. You simply don’t get such a share price surge in one of the world’s biggest commodity producers if the short term prospects for the Aussie economy are poor.

On top of this, Australia has a big increase in LNG exports underway right now. (In fact, this is creating a huge but little known investment opportunity. Click here for details). These LNG exports will improve our balance of payments for the next year or so, and reduce reliance on foreign capital.

That’s why the Aussie dollar is so resilient.

For now then, the pressure is off the Aussie economy. That’s why the market is rising. Investor sentiment is improving, and this always increases stock prices. Earnings should improve too, which will provide a further boost.

But that doesn’t mean we’re in the clear. The problem — too much debt — remains. It’s just not a problem right now.


Greg Canavan,
Editor, Money Morning

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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