Let’s drink to 2013

Grab a gin and tonic and sit by the pool, advises Marcus Padley

Marcus Padley

AT THE END OF ANY INVESTMENT period – take calendar 2012, for instance – you can produce a list of the 10 best-performing stocks and the 10 worst-performing stocks of the year. The reality is that, despite all the highbrow debate, financial theory, complications, opinions and incessant blah blah blah, the only thing you ever really needed to know last year was what was going to be on that list. As we look forward to 2013 – surely a better year – all we need to do is guess what’s going to be on it in 12 months.

How do we do that? Simple. Over any period the stocks that move are not the stocks that do what is expected of them but the stocks that do things that aren’t expected. That’s what you have to work out.

If BHP Billiton hits its consensus forecasts, for instance, it won’t be on the list. Share prices move on new information and, by definition, unexpected information – on surprises rather than on expectations being fulfilled and forecasts being hit.

Everyone expected the iron ore price to be $120 at the beginning of this year, for instance. It’s already ahead of expectations so BHP is on the move.

Follow this through and you’ll quickly realise there is no money to be made out of consensus forecasts, out of what analysts already expect. What moves share prices is changes in consensus forecasts, changes in expectations, in things happening that no one expected.

In which case, to make money this year forget what’s cheap or expensive on current forecasts, forget what everyone knows – imagine instead what’s going to happen that no one expects; what’s going to surprise us. By definition you can’t know that, but that’s where the money is.

So ask yourself: “What does everyone expect at the moment?” Having answered that, ask yourself: “Where are they wrong?” Your job for 2013 is not to pore over the earnings and dividends forecasts and work out what has a low PE ratio and high yield. No, your job is to get a gin and tonic and go and sit by the pool, shut your eyes and imagine what’s going to happen that no one expects.

In 2012 the themes were pretty obvious. Anything to do with resources underperformed and anything to do with banks, REITs, healthcare, utilities, infrastructure, defensive stocks (gambling, food) outperformed, in some cases massively. CSL and ResMed, for instance, were up over 60%.

Although most people reading the list of 2012 performers, which includes the banks and Telstra, will tell you 2012 was the year “safe income” stocks got re-rated, the truth is that it wasn’t safe income at all. A lot of the best performers had below-average yields; it was a “reliable earnings” re-rating instead. Westfield, for instance, had no earnings growth and a low yield (4.7%) but was up over 30% last year.

Last year was not a chase for growth; on the contrary, everybody went risk averse and bought businesses with low-risk earnings streams – often regulated earnings – and not necessarily earnings growth. In fact, a lot of good performers were stocks with rather pitiful, often zero to 5%, earnings growth.

So last year all you had to know was that everyone would spend 2012 relentlessly moving from risky stocks to reliable ones. No one wanted surprises, the game was “avoid the bombs going off”. The way to do that was to buy boring stocks – and the usual pursuit of growth came down the list.

But this year is already looking different. The long-term repricing of “quality” over growth looks to be largely exhausted, so we need something else to run with. Here are some possibles – don’t laugh:

• Someone sells a term deposit and puts the money back into equities. Imagine that!

• The new Chinese regime upgrades official GDP (gross domestic product) forecasts; the resources sector goes into uptrend.

• The housing market leads a US economic recovery, driving cyclical growth stocks.

• Fear subsides and the “safety bubble” deflates. Suddenly a lot of boring stocks with no growth look heavily overbought.

• The $A falls and currency stocks come into focus.

• Retailers recover. At the moment there is no faith in retail earnings forecasts. But what if retailers change from “challenging outlook” and “we can’t provide earnings guidance” to “improving consumer outlook” and “expecting earnings growth of x% for the full year”? Consensus forecasts have some major retail stocks on a 10% to 13% gross yield. Imagine if that turned out to be true.

Now get yourself a gin and tonic and see what you can come up with.

Marcus Padley is a stockbroker with Patersons Securities and author of the daily stockmarket newsletter Marcus Today. For a free trial go to www.marcustoday.com.au


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