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The Experts

Michael McCarthy
+ About Michael McCarthy
Michael McCarthy is chief market strategist for CMC Markets in Australia. He has over 30 years of experience in financial markets – specialising in equity trading and trader education.

Wisetech: A stock for the active?

Thursday, June 07, 2018


Active investors reap rewards in markets that are trading sideways or mildly trending. Those who take advantage of market moves – locking in solid gains and buying good stocks under short term pressure – can outperform their “buy and hold” peers.

The Australian 200 share market index is higher than it was in December 2016 by 3% - 4%. In that time it has traded through an almost 10% range, between roughly 5,600 and 6,150. However in that period many stocks within the market have shown spectacular gains and heart stopping losses, far larger than the index moves. Some have done both.

A recent example is software logistics group Wisetech Global. It climbed from $9.00 per share in October 2017 to an all-time high at $16.27 in February 2018. That’s up 81% in 4 months. Investors who didn’t act may have watched in dismay as the share crumbled back to the $9.00 level in the following 2 months:

Wisetech Global Ltd – daily chart. (Top section is the price, middle is the MACD indicator, and the bottom section is the RSI indicator).

However once again WTC has climbed spectacularly. Any investors who bought around $9.50 in the first week of April (just two months ago!) are up more than 60%. Is it time to consider selling?

Bloomberg consensus estimates show that the price to earnings ratio for the next twelve months is around 107 times. This may be misleading in a high growth stock. However even after factoring in growth in earnings of better than 25% p.a. the PE ratio 3 years out is still higher than 50 times. That’s expensive in my book.

Further the chart is also flashing red. The MACD is crossing well above the zero line, usually considered as a sell signal. The RSI is in overbought territory and making lower highs – diverging from the share price’s higher highs. Another sell indication.

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A matter of interest for high profile Australian stocks

Thursday, May 24, 2018


Many high profile Australian stocks are under pressure, despite the fact the share market is within a few percent of ten year highs. Major banks, Telstra, AGL and others are at or near multi-year lows. In many cases there are sector or stock specific reasons, but these may obscure a “big wave’ that is affecting markets globally, and investors cannot afford to ignore.

Telstra’s growth concerns are now well exposed. Beyond the roll-out of the NBN there is a large earnings hole. At this stage there is no easy way forward for management. Telstra is the largest Telco in Australia and its margins are wider. This means organic growth is not the answer. The longer term choices for Telstra are shrink, break up or make a significant acquisition.

The underlying problem for Telstra shareholders compounds this issue. Longer term interest rates are rising. The US ten year bond breached the 3% level, and many other countries’ bond curves are showing higher yields. While weaker growth in Japan and Europe may slow the climb of interest rates the long cycle appears to have turned.

Higher interest rates diminish the importance of dividend yields. Why would income seeking investors take the capital risks of share ownership if they can source income from more capital stable bonds?

This is a double hit to Telstra’s investment profile. The appeal of dividends yields is dropping, and so is Telstra’s dividend. The situation looks like a classic dividend trap. Shareholders tempted to “double down”, and buy more Telstra at the now much reduced share price, may suffer further.

This principal applies to other stocks and sectors. There’s little doubt the Royal Commission inquiry is weighing on the financial sector.  However this is potentially obscuring the impact of higher interest rates on the investment case for banks that are largely held for dividend yields. Utilities like AGL, with the focus on the future of the Liddell power station, are comparable. Shorter term factors are grabbing the headlines, and hiding the impact of the global shift.

The changing macro environment demands a shift in investment strategy. Income streams could become less important, and growth exposures more vital. The good news is that the interest rate sensitive property sector has rallied around 9% over the last three months. Investors looking to shift their portfolios could start there.

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Locking in gains in resources

Friday, May 11, 2018

Just over two years ago Rio’s share price hit a low at $36.53. This week, it’s trading close to $82. BHP’s low in January 2016 was $14.06. Today, it’s closer to $32. Capital gains of better than 120% PLUS dividends. Who said blue chips are boring?

Traders say “Harry Hindsight is a great trader”, and it’s true. It’s easy to look back and say “coulda, shoulda, woulda”. But how do investors know at the time that a stock is offering an opportunity to either buy or sell? One approach is to throw off the blinkers and consider all the important factors that can drive a stock price.

Fundamental analysis of companies is a powerful tool in attempting to understand whether a stock is cheap or expensive. However all company valuations are estimates. They require analysts to make guesses about future earnings and costs, and external factors like interest rates and commodity prices. The often wide range of valuations of a single company tells that valuations are opinions, not fact.

Luckily investors can draw on additional sources of information in deciding entry and exit points. A simple one is a measure of sentiment. If there is almost universal consensus on a stock, it is often at a turning point. If everyone believes Wesfarmers is a buy, bearish analysts are capitulating and contrarian opinions are hard to find, it’s probably close to time to sell.

Further, if these extremes of sentiment coincide with important chart levels, the signal is reinforced. And if the most important stocks in a sector are displaying these characteristics simultaneously, investors should take note.

This brings us to BHP and Rio. Remember how oil prices hit a low below $30 a barrel and some were calling for $10? Iron ore touched $42 a tonne? All industrial commodities were under pressure, and the almost universal consensus was that they would fall further. That was the turning point.

Right now the commodity bears are capitulating. Analysts are reluctantly increasing commodity price forecasts. Share valuations are going up. And major mining stocks that ran hard against consensus are now the subject of buy recommendations from the same analysts that were bearish 50% ago.

This extreme in sentiment occur as the share prices of both BHP and Rio are hitting key resistance. For BHP that is the 3 year high at $32.16 in January this year. For Rio it is the high at $82.73 from February.  None of us know the future, but in my view there is a short term flush due in the global mining stocks. I’m looking for a 10% - 15% pull back in share prices.

This may not matter to long term holders. However active investment is a strategic response to a market with a modestly positive outlook and sideways tendencies. Decreasing the overall cost of my portfolio by locking in gains with a view to buying back at lower share prices can be an important tactical response to spectacular gains in blue chips.

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Listen to the market - it's sending some strong signals

Thursday, May 03, 2018

The Australian 200 index is shouting a message. Investors who heed the market’s call will likely outperform those who don’t. But how do professional investors hear what a market is telling them? They study the charts.

The rationale for studying price action dates back to Aristotle. He is credited with the first acknowledgment of the “wisdom of crowds”. Statistician Francis Galton (Darwin’s cousin) performed a famous experiment in 1906, demonstrating that in a county fair competition the average of 800 guesses at the weight of a dressed steer was closer to the mark than the winning entry. James Surowiecki published on the topic in 2005, and scholars at MIT and Princeton (among many others) are currently working on refining crowd based analysis techniques.

Investors don’t need an economics lab to distil the wisdom of crowds. At any given time, a share price reflects the collective wisdom of all participants in that stock’s trading. Essentially, charts track the distilled wisdom of the crowd. Professional traders and investors benefit from studying the changes in market (crowd) thinking over time. And the local market is speaking right now.

This weekly chart shows the Australia 200 index is sending a clear technical signal. The slice straight through resistance at 6,000 is a sign of underlying strength. On balance this market action indicates a test of the post GFC highs around 6,150.

Adding confidence is the Moving Average Convergence Divergence (MACD) indicator at the bottom of the chart. When the MACD is near highs or lows it represent overbought or oversold conditions. Right now it’s close to zero, suggesting neither is present. The MACD also gives signals when the black line crosses the red. The black line is coming from below the red and is crossing upwards, generating a buy signal. The fact this is occurring on a longer term chart points to a longer term upswing.

Commodity strength, a lower Australian dollar and relatively cheaper valuations could all contribute to the positive momentum. Whatever the drivers, the higher levels of the Australia 200 index could in itself force more cautious investors back into the market as underperformance (due to defensive positioning) becomes a more prominent risk.

Traders and investors should respond in ways that reflect their own circumstances as well as the change in the market. No one can say with certainty whether the index will break through 6,150 to make new post-GFC highs. However a move through that level would in big picture terms introduce the possibility of a test of the all-time highs around 6,852.

Even at its much reduced level the financial sector plays an important part in the Australia 200’s performance. The sector comprises around 34% of the value of the index. That is substantially down on the peak composition of about 47%, reflecting the sell down in the sector from the 2015 peak. Mathematically, all the financial sector has to do for the index to make new post-GFC highs is sit still. Given a positive outlook for industrial commodities, any further recovery in financials (up 1.9% yesterday) may see those marks hit well before most investors currently expect.


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The News on Isentia

Thursday, April 12, 2018

Value investors can be unbearably smug. Despite an overwhelming body of evidence that no one investment style is best in all markets, value investors delight in their own certainty. The stock is undervalued, the investor is right and eventually the market will agree and the stock price will rise.

Warren Buffet’s long term investment performance is often cited as an example of the power of the value style. There’s no disputing the strategy has many successes. However, there are at least two problems with this approach. The first is that the wait for a stock to “come good” can be interminable, tying up capital for years. This is an investment opportunity cost. The second issue is that value investors rarely use the discipline of a stop loss order. In other words if a value stock is falling, there is no share price at which many value investors will admit defeat.

This brings us to Isentia Group (ISD).

Isentia is a long term darling of the value investment community. Initially listed in mid-2014, the stock more than doubled in price from $2.40 to $4.95. Those buying ISD on a value argument were well rewarded. However, since the high in late 2015, the stock has slid dramatically and is now closer to $0.80 per share. The problem is the downward revisions of ISD’s market value have lagged the share price drop, trapping investors.

Many valuations are based on the present value of future earnings. This does not account for market failure. It’s hard to dispute that the failure of ISD’s content marketing business is the primary cause of the share price slide, and the trapping of value investors.

Now that ISD has shed content marketing and its CEO, my view is the stock has become interesting. The remaining media monitoring business is well established and profitable. I estimate the current PE ratio around ten times - cheap if there is future growth. The long term outlook for the media monitoring industry is not clear. Right now it is delivering. Some investors may wait for the share price to break the downtrend with a move up through $1.00.  But at eighty cents I’m happy to take a 12-month speculative view that this share price will recover significantly.

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Is now the time for traders to start panicking?

Thursday, March 29, 2018

Professional traders know fear and greed. Panic is the active manifestation of fear, and affects markets as much as every other field of human endeavour.  The saying above reflects the human nature of markets. Panicking early means preserving capital as markets fall, ready to grab bargains. Panicking late can mean selling at the bottom of the market. One of the keys to trading and investing success is panicking early, not often.

Pressure on share prices is growing. Fears of trade disruption and the negative impact of higher interest rates are fraying investor nerves. Share market indices near multi-year and all-time highs are adding to the worries, as are stretched stock values. Is it time to bail out?

One of the reasons for investor optimism is a positive outlook for local and global economies. However the market is not the economy, and the economy is not the market. While they are clearly connected, the economy is happening now whereas markets price the future. This means a market sell down can occur even when the underpinning commercial activity is rudely robust.

How do professionals decide when to panic? One school of thought relies on prices themselves as indicators of market thinking. The chart based analysis of trends, and price support and resistance, are attempts to discover the collective behaviour of the participants in a given market. The beauty of this approach is the market “tells” traders when to act. And the charts are pointing to a very important price point:


This weekly chart is the big picture. Relative to the past seven years share prices are elevated. There is a longer term uptrend (yellow line), and a defined trading range between 5,650 and 6,150. With the market sitting close to 5,800 the chart is mildly positive. There are a number of scenarios, including the possibility that the Australia 200 index will find a footing and rise to test the resistance at 6,000 and then 6,150 (orange lines).

However a market drop of just 3% would paint a negative picture. Not only would it breach the longer term support at 5,650, it would break the uptrend line. This sort of price action opens the door for an index pull back to levels closer to 5,000.


This demands attention from investors. A clear breach of 5,650 could be a read as a signal to panic, or at least reduce market exposures. And if the breach occurs its unlikely sellers at that level will be the last to panic.


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IAG – time to jilt your market sweetheart?

Thursday, March 15, 2018

On St Valentine’s Day, Insurance Australia Group (IAG) delivered shareholder love with the announcement of a 24% lift in first half profit. Management also re-iterated their estimate of the annual operating margin in the 15.5% to 17.5% range. The market took off to make all-time highs for IAG above $8 per share.

IAG has grabbed a lead on its industry peers. Suncorp’s net profit fell 16%, and QBE reported a net loss after significant write downs and increased insurance losses. IAG’s engagement with Warren Buffet and the subsequent pivot to globally re-insuring risk could be a key driver, given that written premiums and revenues increased much more modestly.

IAG is now facing the same problem faced by many market darlings. One misstep and the share price could crater – and missteps are almost guaranteed in the insurance industry (declaration of personal bias – the author does not invest in insurance shares). Around $8 a share the PE ratio is close to 18x next year’s earnings and a dividend yield (last 2 dividends) of 4.5%. This makes IAG look expensive against its peers, financial stocks and the broader market.

The weekly chart illustrates the steepness of the IAG share price rise. The recent stand out earnings result deserves accolades, but the sharp rise puts shareholders in danger territory. It’s harder to identify support as this is a completely new level for IAG shares. From a technical point of view the first downside support is between $7.00 and $7.37. And a pull back to a zone between $6.40 and $6.60 cannot be ruled out.

“Don’t fall in love with your position” is a well-known saying among traders. The principle could apply here. Investors in love with IAG should consider a break up – at least temporarily.

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As the Dominos fall

Friday, March 09, 2018

Picking stocks is an exercise in predicting the future. No matter how intelligent or hard-working, no-one knows the future with certainty. In both strategic and tactical terms as investors we make our best estimates based on the available information. It is inevitable that at times our choices will lead to poor investments.

Putting stocks in “the bottom draw” is a classic investment mistake. Sitting on losing positions until they “come good” not only drags on a portfolio’s value, it ties up capital that is better deployed elsewhere. There are techniques available to help avoid this error. The most popular is the use of stop loss orders.

Stop loss orders recognise the limitations of forecasting. Essentially they ask investors “at what stock price will I say this a poor choice?” The best time to make this decision is before the investment is made. Ideally a sell stop loss order is placed with the buy order.

However like any risk management techniques the use of stop loss orders has its own risks. This brings us to Domino’s Pizza (DMP).

When Domino’s fell below $40 in August last year and then stabilised around $43 it came onto my radar. Earnings growth slowed – from near 30% to around current guidance of 17%-20%. The PE to Growth ratio was around 1.5x – attractive in my view. The risk management aspect also worked. The clear low at $39.50 gave a line in the sand. Buying at $43.30 with a stop loss sell order at $39.30 fits my investment strategy.

Alert readers can see what’s coming. The results delivered on February 13 were largely in line with consensus, or potentially a small miss. However the share price reaction was extraordinary. The shares were smashed over the next few weeks, from close to $50 to a low at $38.11. Naturally this triggered many stop loss orders.

DMP is consistently ranked as one of Australia’s most shorted stocks. The current short position is around 16% of the issued capital, or 12 million shares. With the event risk of the results announcement out of the way it’s possible the selling was related to existing shorts. In my view the current share price represents an opportunity to gain exposure to a higher growth stock. However, maintaining portfolio discipline is even more important to long term investing success than stock picking. Under my rules I can’t buy DMP until a clear uptrend is described. At the moment that means a move over $50. What do your rules say?


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Two stocks to hold on to for 5 years

Thursday, March 01, 2018

One of the most frequent questions from investors is, what stocks should they buy for the long-term? The reason being that finding long-term holdings is no easy feat. So, here are two that I'd recommend holding onto for at least five years.


One criterion in looking for shares for the long term is higher barriers to entry. A company with a clear lead in product, technology or process that is difficult to replicate, may enjoy many years of higher margins. Ship builder Austal (ASB) fits the category.

ASB manufactures combat and transport ships for the US Navy and the Royal Navy of Oman. It makes patrol vessels for the Australian Border Force. It also makes an assortment of auxiliary vessels. It has ship building operations in the USA, Western Australia and the Philippines, and enjoys a strong reputation for high quality delivery.

The company also supplies and installs weapons and other systems, and provides training and other support services. In short it is involved at every stage of vessel supply from design to post delivery. This vertical integration and close relationships with customers means ASB is not often threatened or pressured by competition. Combined with the long term nature of its contracts, this may give investors assurance about the future for ASB.

At its recent half year result announcement ASB released an improved bottom line and a guidance towards a steady earnings this year. Additionally ASB is one of the few stocks likely to benefit if geo-politics heats up. Long term earnings, high barriers to entry and a beneficiary of increased military activity makes ASB a stock worth considering for defensive earnings.


This long term chart shows Austal is trading at historically lower levels and is bubbling up towards a potential break through $2.00 per share.


Balancing ASB’s long term defensive profile is the growth exposed Woodside Petroleum (WPL). Currently suffering some indigestion after a placement the shares are well down on recent peaks close to $35.

However the longer term prospects are strong in my view. World class fields and reserves, proven building and operating expertise and demonstrated investment discipline are three key reasons to hold WPL for the long term.

Despite the hopes of environmentalists for a switch from fossil fuels straight into renewables, none of the new technologies are economical without government support. The need for a transition fuel that is big enough to scale up but has lower carbon dioxide content is more pressing than ever, and LNG is in the frame. As reality dawns on environmentalists and investors there is potential for a long term re-rating of the stock.

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Woodside shares plummet despite equity raise

Tuesday, February 20, 2018

At the resumption of trading this week, Woodside Petroleum shares plummeted. The successful completion of the institutional leg of a capital raising seemed to leave the market unimpressed, or at least with some indigestion.

Analysts are re-cutting their numbers, and projected target prices are moving up AND down. The offering to individual investors opens on Wednesday. How will they decide whether or not to take up their 1 for 9 entitlement at $27?

At the heart of the analysts’ stoush is the question of strategy. Is this a prudent re-focusing of development priorities or a timid response to a joint venture split? Is Woodside buying Exxon’s Scarborough stake a sign of frustration at difficult joint venture negotiations or simply the result of a disciplined and carefully considered investment process?

Perhaps more importantly; are those who are now suggesting Scarborough is a low quality growth option the same critics who for the last two years criticised Woodside’s lack of growth options?

It can be difficult for investors to decide when the “experts” disagree. Each investor must make up their own mind. Nobody knows the future and the answer to these questions will not be clear for three to five years.

Stepping back from the argument, it’s worth remembering the development of oil and gas fields is a high risk, potentially high reward activity. Woodside have demonstrated their ability to bring vast projects online successfully, and the foresight in building the Pluto processing plant with capacity to handle production from fields as yet undeveloped is an example of their longer term, strategic thinking.

Investors who agree that in a carbon dioxide constrained universe, gas is the answer, may see the current Woodside share price weakness as an opportunity:

As an investor I’d be delighted at the opportunity to buy Woodside shares at $27. And as a trader I see a buying opportunity developing. There is important support near $28, and that’s where I’m setting my price alert.

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How low can the US go?

AWE Limited – game on

Seven West in the SWiM

Telstra - out with the old

US tax cuts – sell the fact

Bursting Bitcoin’s bubble

Buying the farm

Flexible thinking

Washington H Soul Pattinson - an expert investment

Orica’s implosion

Time to go shopping

Copper and oil ring BHP’s bell

Taking a chance on telecommunications

Healthscope under the microscope

A free hand in a free market

Ausnet flying without a safety net

Time to take a bite of Retail Food Group?

Don't fall into the dividend trap

Domino's looking tasty

Bluescope under the microscope

Stock in the spotlight: oOh!Media on display

Key company reports: What to look out for

Stock in the Spotlight: Brickworks

Investor alert: Heightened downside risk

Profiting from a holding pattern

Fairfax (FXJ) and the damage done

Diversification across sectors is key

Milk bubbles?

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Is the market set for a pullback?

Wild Western Areas

Retail tales: The Amazon effect and JB Hi-Fi

Stock in the spotlight: Adding growth exposures

Stock in the spotlight: Going for Platinum

Climbing the wall of worry: 3 events that could derail the market

A beef with P/E ratios

Going for growth

Stock Spotlight - Healthscope (HSO)

The triple top: Is the market set to slide?

Are shares at risk of a pullback?

Gold for Australia: stocks to watch

Reporting season: the good, the bad and the ugly

Factors affecting portfolio performance

Common behaviours that could hurt your investments

Can the 'Goldilocks' economy keep the bears away?

How to invest in 2017

Who’s afraid of the big bad Fed?

Market volatility demands action

3 market hurdles in the silly season

ASX 200 could reach 5900 by year's end

The chart every investor must see

3 things you missed during the US election circus

Could Trump sink your portfolio?

Healthcare stocks catch a cold. Time to sell?

This week's jobs numbers could make or break the market

Will there be a Santa Claus rally?

Should you buy the banks?

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Why should Aussies care if the Fed raises rates?

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How to energise your portfolio

How to know if your company is a winner

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Is the market in the sell zone?

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Investors need to stick with a strategy

Flight Centre has its wings clipped

What every successful investor needs to know

Sell in May and go away?

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Buying stocks in choppy markets

Any value in Woodside?

Media under the Southern Cross

ANZ: forecasting disaster

Blowing housing bubbles

Australian shares back in the zone

Investment approaches in volatile markets

The not-so-big Australian

Signs of a market bottom

Slaying golden goose myths

Investment strategy and the reporting season

Good news for rational investors

Tightening tales

The upside of low energy prices

Australian shares: looking ahead

Energising your portfolio

The wisdom of copper

How will rising US rates impact your investments?

News versus noise

The investment toolbox

The three-stock portfolio

Digging for gas bargains

How to keep your investment cool

“Dow 30,000 Now” and CSL

Canberra puts a Buy on shares

Market volatility and dividend floors

Dusting off the portfolio

Market routs, corrections and sell offs

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