Investing in a difficult stock market · Australian Stock Market Condition of the market • The...

Investing in a difficult stock market

ASA Melbourne Investor Hour 5 September 2012

Copyright Colin Nicholson 1

Key ideas for the current market

1. Ignore market noise and understand the big picture

Copyright © Colin Nicholson 2 1980 1990 2000 2010

2.803.00

4.00

5.00

6.00

7.00

8.00

9.0010.00

12.00

14.00

16.00

18.00M @ M 310174-310812 10YBY - AUSTRALIAN YIELDS

Bonds are not the answer

US Dow Jones Industrial Average Monthly 112 years


1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

30.0040.0050.0060.0070.0080.0090.00100.00

200.00

300.00400.00500.00600.00700.00800.00900.001000.00

2000.00

3000.004000.005000.006000.007000.008000.009000.0010000.00

20000.00M @ M 3101A1-310812 DJR - Dow Jones Industrials Index > +0.3% +42.76 to 13207.95

Deleveraging after debt-fuelled boom

US S&P 500 Monthly 112 years


1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

4.005.006.007.008.009.0010.00

20.00

30.0040.0050.0060.0070.0080.0090.00100.00

200.00

300.00400.00500.00600.00700.00800.00900.001000.00

2000.00M @ M 3101A0-310812 SP5 - S&P500 Index > +0.2% +3.07 to 1405.87


UK FTSE 100 Monthly 42 years


1970 1980 1990 2000 2010

100.00

200.00

300.00

400.00500.00600.00700.00800.00900.001000.00

2000.00

3000.00

4000.005000.006000.007000.008000.00M @ M 310170-310812 FTS - FTSE 100 Index > -0.1% -4.40 to 5847.11


Japan Nikkei 225 Monthly 42 years


1970 1980 1990 2000 2010

1000.00

2000.00

3000.00

4000.005000.006000.007000.008000.009000.0010000.00

20000.00

30000.00

40000.00M @ M 310170-310812 98NI2 - Nikkei 225 Index > -1% -87.16 to 8891.44



2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1800.002000.00

3000.00

4000.00

5000.00

6000.00

7000.00

8000.009000.0010000.00

12000.00

14000.00M @ M 291200-310812 98SSE180 - Shanghai All Ordinaries Index > -0.4% -17.164 to 4750.228


China Shanghai All Ordinaries Monthly 12 years

ASX All Ordinaries Monthly 112 years


1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

8.009.0010.00

20.0030.0040.0050.0060.0070.0080.0090.00100.00

200.00300.00400.00500.00600.00700.00800.00900.001000.00

2000.003000.004000.005000.006000.007000.00M @ M 3101A0-310812 XAO - ALL ORDINARIES INDEX > -0.6% -27.241 to 4302.821


Important caveat

1. The small number of sideways patterns available gives no statistical validity

2. However, common cause (debt-fuelled booms) and effect (deleveraging) suggests they are a useful model for current markets.

Copyright © Colin Nicholson 9

ASX All Ordinaries Monthly 32 years: The last two examples


82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

400.00

500.00

600.00700.00800.00900.001000.00

2000.00

3000.00

4000.00

5000.00

6000.007000.00MOV AVS 12(0) mnth 4265.7182

M @ M 290182-310812 XAO - ALL ORDINARIES INDEX > -0.6% -27.241 to 4302.821

12-month moving average weaves its way through the price

ASX All Ordinaries & Coppock Monthly 32 years: The last two examples


81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-600

800

Copp

Coppock = -92.122400.00500.00600.00700.00800.00900.001000.00

2000.00

3000.00

4000.005000.006000.007000.00EXP MOV AVS 12(0) mnth 4325.651

M @ M 300181-310812 XAO - ALL ORDINARIES INDEX > -0.6% -27.241 to 4302.821

Multiple Coppock signals during the pattern

Characteristics of sideways markets

1. Over the whole period – little capital growth with a variable dividend stream

2. Within the pattern, significant upward trends – capital growth and increasing dividends

3. But also significant downward trends – investors best served by standing aside.



ASX All Ordinaries

J FMAMJ J ASOND2007

J FMAMJ J ASOND2008

J FMAM J J ASOND2009

JFMAMJ J ASOND2010

J FMAMJ J ASOND2011

J FMAMJ J ASOND2012

3000.00

4000.00

5000.00

6000.00

7000.00W @ W 021107-310812 XAO - ALL ORDINARIES INDEX > 0% -1.135 to 4339.021

Potential lower boundary

Support/resistance (fuzzy)

Upper boundary

Current lower boundary


1. Ignore market noise – watch the big picture 2. Nobody can predict the market – analyse its

condition and design an appropriate strategy.


Australian Stock Market

Condition of the market • The market is trading in a long-term sideways

pattern • Nobody can predict for how long • Market was rising within the sideways pattern,

but rise seems to have failed near resistance • Coppock has just given a second signal to buy,

but there can be several signals in these sideways patterns.


Australian Stock Market

My current strategy • Prepare for the bull market Look to buy stocks

making new highs or trending up (not many yet – I am about 55% invested)

• Income Collect solid dividend stream • Safety Tight stops on all investments • Tactic Try not to give back all capital growth • Discipline Select and evaluate prospects

thoroughly for a margin of safety.



1. Ignore market noise – watch the big picture 2. Nobody can predict the market – analyse its

condition and set an appropriate strategy 3. Discipline - evaluate prospects thoroughly for

margin of safety


Please Note The views expressed in this presentation are intended

only for discussion and education

They are neither intended to be, nor are they suitable to be, acted upon as investment advice

It is advisable to obtain investment advice from a

licensed adviser before making any investment decisions based on my presentation

I am not a licensed investment adviser

18 Copyright Colin Nicholson

STOCK INVESTMENT JOURNAL: TATTS GROUP (TTS)



How I found this stock Tatts Group had come up on my scan for stocks making new yearly highs earlier in 2012 and I had been monitoring it daily on my watch list.

Finding stocks – scan market Scan criteria • Stocks making a new yearly (52-week) high in the last week • Those stocks must make a profit • And pay dividends (or soon likely to)


Company profile Tatts Group Limited (TTS) is a provider of leisure and entertainment products and services in the gaming, wagering and lotteries segments of the Australian gambling industry and has an investment in UK gaming venues. Through Tatts.com, TTS enables its customers to access all wagering and lottery products from one website, utilising a single account. TTS comprises six operating segments: Tatts Lotteries; TattsBet; Tatts Pokies; Maxgaming; Bytecraft; and Talarius. TTS´s strategy is built around two key objectives - expansion of the company´s gambling businesses and lowering operating costs. Organic growth is low so TTS is primarily focused on bidding for new long-life quality gambling licences and acquiring state-owned lotteries and wagering businesses. By winning new licences and acquiring state-owned businesses TTS can leverage existing strengths and capabilities to achieve strong profitability. TTS´s management is deeply experienced in both lotteries and wagering which strongly assists cash flow growth. TTS lowers operating costs through the development and leverage of proprietary technology systems across its existing and acquired businesses. The company has developed a strong core in-house gambling systems capability, which is currently being used to integrate NSW Lotteries into the TTS business. Source: Morningstar


Company profile continued The major risk with Tatts Group is the transition away from its terminating licence for poker machines in Victoria from August 2012. My judgement is that this is already reflected in the share price. Tatts has also announced plan for an orderly transition to a new managing director and CEO at the end of 2012.


Which model?

The monthly chart shows that Tatts Group is clearly a value model stock. It appears to be breaking out of an accumulation zone. This is my ideal set-up for a purchase.


Earnings and dividend quality This picture shows a steady earnings pattern rather than the growth picture we might prefer. Also, the second half year dividends were passed in 2008 and 2010. Some of the lack of growth has undoubtedly been due to the orderly retreat from the Victorian poker machine market after the licence was lost.


Pre-purchase checklist Date

StockASX Code

ModelStage

Mkt Av AssessmentPlan Req V Plan

Price Earnings Ratio 11.61 13.36 OK Expect continuation of strong first half results.

Guidance and commentsMargin of safety criteria Stock

10/05/2012Tatts Group

TTSValue

Breakout



StockASX Code

ModelStage



Dividend Yield 8.43% 4.47% OKFranking 100% Yes OK



TTSValue

Breakout



StockASX Code

ModelStage




Return on Equity 18% >15% OK But not marvellous



TTSValue

Breakout



StockASX Code

ModelStage





Debt/Equity Ratio 49.80% <60% OK Reliable cash flow makes it safer



TTSValue

Breakout



StockASX Code

ModelStage






Mkt Capitalisation 3.6b >$100m OKLiquidity (22-day Av) 12.5m Enough OK



TTSValue

Breakout



StockASX Code

ModelStage






Mkt Capitalisation 3.6b >$100m OKLiquidity (22-day Av) 12.5m Enough OK



TTSValue

Breakout

There were no big negatives here. I would, of course, like the PE ratio to be lower, but that is not a valid expectation for such a solid business. The return on equity is acceptable but not great. I would expect it to improve going forward once the negative pull from the loss of the Victorian poker machine business recedes.


Chart analysis

I have put a grid on the weekly bar chart to highlight the breakout that I am acting on. A complete breakout really requires a move to almost $3. However, the recent breakout is over the period from mid-2009 and, even more importantly, this breakout has come on a trending move. This will enable me to situate my stops closer to my entry price than if Tatts Group was not already trending.


Set sell stops

My stops are shown by the two parallel lines across the chart. The low in March was $2.31, so my soft stop is $2.30 and my hard stop is 98% of that price at $2.25.


Calculate position size I decided that because Tatts Group was already trending, I would move immediately to invest 6% of capital in it. The position size calculation was therefore based on a maximum risk of 1.5% of capital. However, because of the close stops, I was only risking 0.87% of capital back to my hard stop. On 10 May 2012 I was able to buy 45,600 shares for $2.63.

My complete investment plan with case studies

From www.bwts.com.au

For my slides and text

email [email protected]

34 Copyright Colin Nicholson

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