A collection of comments from Albert Hung in AFR articles from 1994-2012
Note: Before going through the points I've identified through the series of AFR articles, I must warn that this is a substantially long read. I've done my best to try and simplify some of the comments that Albert made at times, but please do your research (i.e. look at dictionary, etc if needed) since some of these comments do require a preliminary understanding of finance at the very least.
Foreword:
I'm a lover of history, but I wasn't always. History is often one of those things people gloss over, or toss around as a word, and that was the way I viewed the word for virtually the first 2 decades in my life. However, that certainly changed when I met my mentor, Albert Hung. As readers would probably know, I alluded to him in my first post with regard to some of the investment lessons I had accumulated through having yumcha with him on a regular basis.
It is a great fortune for me that I end up getting to tap into the mind of an investor who has professionally had around 40 years of stock market experience. I do want to reiterate that this kind of relationship is rare, and indeed, I feel it is a duty to me, to continue preserving the wisdom that he has shared with me, to anybody who wants to listen.
Back to the question of history. I only started appreciating history when I began talking to Albert, and not in the superficial sense. When I mean "appreciating", I mean taking the initiative with history. Whether that means beginning to research events from the past, reflecting on mistakes made in the past, or drawing critical insight from the past. I remind my friends, I am not just a reader of history, but a user of history. If you ask any of my friends, I'm a very pragmatic, no-nonsense kind of person. That's just the way my personality works.
Albert has a way of explaining current events with reference to past events. It definitely reminds me of the quote that I make all too often from the American Poet, Mark Twain:
"History does not repeat itself but it rhymes"
For example, Incitec Pivot (ASX: IPL) is a fertiliser producing company (also makes explosives too), which had bought Southern Cross Fertilisers from BHP for a total of A$165m back in 2006. What was noteworthy, was that originally BHP had bought Southern Cross Fertilisers many years back, which was then called Queensland Fertiliser Operations, for A$550m. Effectively, the "trigger" was that the mining company valued the business for more than what was effectively paid by IPL. He knew this because of his recollection from the history of BHP. The share price of IPL eventually rallied when the market realised the value of the ammonium phosphate fertiliser business that IPL had acquired, with the price of the specific fertiliser rising from USD200 to USD1200.
This is just one of the many examples where history had helped Albert. This is not to say that it will guarantee success, but I took it upon myself to appreciate history more.
One of my tasks I set for myself creatively, was to read through all the commentary from my mentor in the AFR articles and try to summarise and synthesise all his comments. I found it an incredibly enormous task, with 600 pages of articles to get through ranging from 1994 to 2012.
For now, I have summarised all the comments through time. I do plan to synthesis and draw some critical commentary when I speak next with him, and that can be for another blog post. For now, I hope you enjoy the wisdom that I have sifted through the UNSW library database, from my mentor on the ASX markets.
Commentary by Albert Hung (Investment Chairman of Alleron Investment Management) from 1994 to 2012 in AFR Articles:
Albert Hung (AH) was buying NAB for the medium term in 1994 for the expectation of the rising dividend ==> going higher in next year
The swords are a reminder in Towers Asset Management to cut losses when necessary for AH
AH compared earnings growth rates to nominal GDP growth rates, arguing that even 5 years is too short a timeline for comparison
Market slumps can happen due to locking in profits at the end of a quarter, and economic data was stopping an interest rate cut for now in 1997
In 1997, Alan Greenspan’s warnings of rising inflations ==> which probably meant hiking interest rates soon, pushed the ASX down as explained by AH
Retail seen as a defensive sector back in 1997 ==> businesses that wouldn’t be impacted by overseas economics like Asia, and in fact one could consider pharmaceuticals as well to be a "defensive" choice
Retail is defensive, and essentially dependent on domestic household spending, as opposed to resources, where exports were heavily reliant on China (although the country was facing problems in late 1997)
One off items should be dismissed and not worried about too much (but obviously check if they are "one off" first), was the case with NAB in 1997 who got pummelled with their Asian market exposure
Westpac was raising capital by issuing equity, and note that it only bought back 19m of 85m shares that it said it would buy ==> AH thinks the absence of a move with the price above $10, suggests they think it was too expensive, so Westpac wants the price to fall below $10, to buyback again
Banking stocks can stall from higher bond yields ==> concerns of tightened interest margins and increasing bad debts was a reason to worry about the stock prices according to AH
Worser than expected trade data (i.e. trade deficit) can push bond yields higher, which can hurt some of the banks
US buying Japanese Yen to support the currency is only a temporary solution, so markets should be in a wait and see approach in 1998 (given it is only viewed as a temporary safe haven)
If bond yields ‘peak’, you can potentially expect a downturn, and with that, a rise of equity markets in short-term
AH called out the potential US stock market bubble bursting in mid 1999, if the US were to tighten interest rates, particularly with Alan Greenspan’s commentary on signs of inflation rising which was a signal for a crash that was unnoticed by a lot of the market
Things become problems when nobody worries about it ==> take core PPI (producer price index) back in 1999 which people were not too concerned about it, given the energy price upside
Think about support levels in the indexes all the time, which can be influenced by short-term sentiment - 2750 points for All Ords in 1999, with AU treasury 10 yr bond yields at 6-7%
“Triple witching” = stock options, index options and index futures all expiring, leading to greater volatility in the late 1999
CBA was muted with a share price of $23 due to potential implementation risks of the friendly takeover bid for Colonial in 2000
If NAB decides not to pay a silly premium, and back away from a US takeover, the market will be surprised positively when it receives a buyback or special dividend at the end of year for 2000
Long rates edging up would suggest that the bond yield curve is steepening (think of the gap between the short-term yield and long-term yield)
Following the 9/11 Terrorist Attack at the World Trade Tower, a technical rebound was clearly in order after such a screaming sell off
EBIT multiples for resource stocks should be considered, and whether they have run ahead or not, to give an idea of these cyclical stocks (and whether they are at high-end or low-end of cycle)
Normally, we would see rallies in Xmas, but if the stock markets have run too hard, a consolidation (i.e. mean reversion downwards) is expected, as was the case in Dec 2001
AH suggests with Perpetual in 2002, the increase of a fully franked dividend by 43% was a signal of management’s confidence in growth opportunities going forward
AH’s argument for decline in 2002 for biotech stocks like Resmed, CSL and Cochlear, were due to bond yields rising, raising the discount rate in your discounted cash flow models used to value these biotech companies ==> more over, this suggested the wider shift of money from defensive back into cyclical stocks
High PE stocks present value if investors are comfortable with longer term outlook for these companies, whilst being able to look beyond short-term price pressure
ANZ jobs ads survey if disappointing, can weaken confidence in a strong recovery of stock markets
A structural problem in sectors can be that the stocks are trading at very high PEs, (as if priced for perfection) and with any uncertainty, investors will mark down the share price first ==> thus you would need several quarters of good results to recover ==> which was the case with Sonic Healthcare (had write downs as well) in 2002, maybe even affected by unfavourable Federal Budget outcomes at the time
However, Budget 2002, helped raise drug prices which were beneficial for pharmaceutical type companies
Rising AUD did benefit Qantas, given it is denominated in the local currency which is quite self-explanatory, as it gives an FX gain in the OCI (i.e. other comprehensive income) component of the income statement
May and June tend to be periods of tax focus selling, to offset capital gains and reposition portfolio holdings for stock markets for the new tax year - by locking in capital losses for the FY
AMP entering into the UK market and making losses through Pearl investment (which was not meeting capital requirements and was not disclosed timely), with a CFO change halfway, led to markets adopting a wait and see approach due to lack of clarity in 2002 ==> also timing of potential US war with Iraq by President Bush did not help
Success stocks are like great tennis players, e.g. Roger Federer (more likely to win than a foreign player) ==> there will be good success stories along the journey
AH believed that the chance for takeover of the small banks were limited by the Big 4 in 2002
AH preferred ANZ in 2002 as a 12 month stock pick because it was trying to achieve double-digit earnings growth by ‘working better’, instead of looking for aggressive acquisitions which other banks were doing
Intravenous immunoglobulin price of USD36-38/gram was normal in 2002 for CSL ==> although it was undercut by the Swiss Franc rising relative to USD, which increased CSL’s costs for R&D according to AH
People tend to cash in profits where there is uncertainty
“Genuine” earnings growth is growth driven by revenue expansion, rather than simply cost cutting - a high quality business can do this clearly
Constellation brands (wine producer) acquiring BRL back in 2003 was a fair deal, considering it had a debt level that could be financed easily
Back in 2003, CBA was exposed to bearish equity markets, with a less than robust balance sheet, and potential write down of acquisition of $10b for Colonial ==> market was negative because of overpaying Colonial according to AH ==> but he thinks market overreacting, given the quality of the loan book, with a larger mortgage portfolio (so they probably don’t need to raise more capital, at least a positive on a capital management perspective)
Boral was a beneficiary of construction activity in 2003, surprising markets, with delivered concrete prices rising, improving the EBIT margins and thus the share price
Discovery of growth not being sustainable can lead to consumer spending being withdrawn and that can hurt markets like 2003
US war with Iraq had led to bearish market in 2003
Albert stripped out Rebel Sport (owned by Harvey Norman), to realise that Harvey Norman’s core business was not good (see profit growth declining and margins falling)
Woolworths offers earnings certainty and is also a defensive play ==> cutting costs and expanding market share ==> a good bet in retail space during 2002
Putting risk premiums in stocks based on past performance, can unwind if there is failure to meet expectations ==> institutions may dump stock which pushes price down, e.g. Aristocrat ==> EVEN if they do not grow, but can maintain where they are, there’s a good chance the market will recognise this in future
Southcorp (old wine company) had the appointment of Mr Ballard, a CEO who was about to retire, being a surprise to AH ==> but AH was still positive he can do well with his packaging experience
In 2003, TLS’s dividend payout ratio was 82% and that was considered high for TLS by AH ==> Can it be sustained? The 6% yield could be a trap?
Promina in 2003, was cheaper than QBE on a P/B basis at around 1x
Merger of CPH and Challenger in 2003, led to Chris Cuffe being CEO, and he had good reputation ==> AH was not too concerned on his salary so long as he delivered results ==> BUT watch the performance fees paid from Challenger to CPH which goes to Mr Cuffe
SARS in HK, War in Iraq, currency upswing and accounting scandals, all set to disappoint markets in 2003
Property trusts looking interesting in 2003, but there will be concerns if vacancy rates are going up
In 2005, RBA hiked rates not because the economy was strong but because inflation was REAL ==> note if you have an economy slowing down, and inflationary pressure kicking in ==> it was NOT good ==> it can also put pressure on bank margins ==> And also highly geared REITs were exposed to floating rates or needing to refinance debt later
AH thought in 2005, China emerging as a superpower, and US with lower interest rates, justified the 1500 basis points increase to 4000 points in ASX ==> in relation to where the market could go, NUMBER 1, look at interest rate to know general direction of the economy
So long as large companies have surplus capital making above average earnings, they will continue to be re-rated (e.g. TLS, BHP, etc)
Promina went up because the insurance cycle turned, and Bluescope Steel went up because the price of hot-rolled coil had doubled ==> looking for "triggers" that send a stock soaring up ==> but key is NOT to buy into speculation since unsustainable, but if the argument is a growth story of demand in China/India, it COULD go HIGHER
Some investors got caught out by expecting the commodities fuelled bull run to continue rising ==> Some people thought as these resources are so abundant in Australia we would all have to benefit ==> But for many export companies, they are the buyers of raw materials and sellers of manufactured products ==> thus they're hurt twice as they can't put prices up to offset costs because the currency is so strong that it would price them out of the market
Risks were higher for some companies exposed to slowing economic growth at home and abroad but only those lacking diversity and pricing power would suffer ==> any expectation of a broad-based "confession season" from Australian companies was overstated as long as the economy was buoyed by the boom in demand and prices for commodities ==> Pricing pressure we are seeing, comes from raw materials prices going up, which still benefits Australia, so people should NOT be too concerned
Weaker AUD can present opportunity for resource companies for upside earnings surprise (EVEN if the softer currency DOVETAILED with falling spot prices for base metals and oil) ==> Eg Rio and BHP have locked in record contract terms for products like iron ore from Asian steel mills ==> any weakness in AUD would improve those terms
Too early to make portfolio adjustments on the basis of a softening AUD back in 2004
Utilities like AGL are a defensive play, but normally out-performers can only last if there are future growth opportunities (so that requires more from the likes of AGL)…
AH was surprised by the sign-on incentive that Trujillo (ex TLS CEO) got of $2.5m back in 2005 ==> however AH thinks someone different could be good for board and business strategy
Back in the 1970s, the oil price was USD105 which caused a global slowdown ==> AH's view of oil price rising to USD60 is just affecting minor industries like automotive and airline
AH looked at London metal exchange inventory levels over the last 5 years which was 500k tonnes and reduced in 2 years to 29k tonnes, a signal for supply reduction in base metals, and thus price rises driving the top line
He thought the energy supply business was risky because of the volatility of energy prices ==> if AGL could match projected demand with future supply arrangements, then future earnings could be more predictable ==> believed the acquisition of PNG Gas was good because their gearing was light relative to peers, so had a strong balance sheet, and it could benefit from economies of scale to compete in retail markets
Banks in 2005, were offering discounted variable mortgage rates and higher deposit rates to capture market share, which could CONTRACT interest margins
Increased delinquencies may be a problem, with 90-day overdue accounts in banks going up, with personal lending side a key focus to consider for banks
Decision to leave interest rates back in 2005 unchanged reduced the chance for recession, but reinforced the fact that positive economic growth was not there ==> brings forward earnings risk for companies
Holding interest rates, only benefits banks in short-term, so they can maintain their robust bad debts without much question
The sharemarket always runs ahead of reality
Strong dividend payout is good corporate governance, and it can improve ROE since carrying too much surplus capital would reduce the ROE
There is temptation for investors to take profit on shares after they go ex-div, ESPECIALLY with prospect of higher oil prices and their impact potentially on economic growth back in 2005
Buying value stocks where dividend yield was higher than bond yields was common in 2005
AH rode the commodity wave from 2004-05 but was then underweight the sector in 2006, noting that excitement was gone ==> since nobody was predicting a resource style boom, it will be back to good old fashion stock picking given no clear idea of where the next bull market would be
Look for stocks on individual basis, where there has been a change of strategy ==> synonymous to describing the search for a "trigger" that validates the energy argument for a stock
AH bought Alumina based on production profile over next 3 years being impressive, and Lihir Gold because of its 21m ounces of gold in reserve ==> he selectively picked these stocks since they were good quality companies with earning growth profiles ==> stock specific rather than a general opportunity across resources for 2006 should be noted
AH was looking for events that would generate significant increase in company’s earnings over the next 3 years ==> look at main profit drivers of ASX100 (they tend to represent the domestic economy) ==> NOTE if anything was happening to those ASX100 companies, you get a good idea of which segment was going through growth phase, and you can possibly extend the idea to situations outside ASX100
Eg researching media companies that published newspapers, AH realised that the classified advertising business was not showing much growth due to the presence of online job provider, Seek.com, which he bought into back in 2006
Eg IPL purchased Southern Cross Fertiliser from BHP for $165m ==> note that IPL was opportunistic, because BHP had sold the asset cheaply to IPL (deeming it ‘non core’) ==> NOTE that Southern Cross was actually Western Mining’s prior to purchase by BHP, and it was valued at $450m ==> moreover, forward PE of 11.6x gave the suggestion of cheap value in the acquisition of Southern Cross Fertilisers back in 2006
Buying stocks purely based on takeover potential IS risky ==> it’s similar to buying a lottery ticket… so a dangerous game
OSH is often treated as 2nd tier in local oil sector, since it is an offshore producer for oil ==> AH viewed delay of oil production as a temporary setback only
KKR trying to take over Coles Myer in 2006, but nobody knows what will happen except the inner circle - Solomon Lew flew in to defend takeover from KKR paying $17b to acquire at the time
AH figured that the govt offering a 14% dividend yield was certainly still worth it despite the questionable operational prospects of TLS in 2006 ==> but some say expectations of cash flow growth was lagging dividend growth
AH reckoned it was natural for Private Equity funds to be willing to pay more for Qantas since their investment mandate was based on taking more risk…
He felt the Coles Myer strategy of rebranding about 200 Bi-Lo stores to Coles, also including 160 Kmart stores was risky to execute…
No fresh news in the external market for Jan 2007, yet optimism spillover over from holidays and so gaining through momentum only, rather than fundamentals…
Changes by federal govt in super guarantee laws allowed people to put $1m into superfund without paying any tax, meaning more money would come into the markets, although it must be done before 1 July 2007
AH bought into WA newspapers, believing the switch from resources to media sector in 2007 was correct, for large cap growth stocks ==> AH recognised the above market returns it would generate in terms of EPS growth, but also held CSL, Henderson Group and AXA Asia Pacific during 2007
Weaker oil price in the USD50 range would calm fears of future inflation, that reduced the prospect of higher interest rates ==> oil is a significant ingredient for energy sources, and a fall in energy costs would mean total costs would come down
In early 2007, resources sector weakening, but investors were rushing into more defensive stocks that had more certain earnings growth ==> this included insurance companies like QBE and AXA Asia Pacific, and retail companies like WOW
In 2007, fears of bad debts hitting financial institutions was something to watch out for ==> domestic banks were no so much related to the sub-prime loans situation in the US, but there were concerns that favourable operating environment may not last and that bad debt charges could rise, especially for the Big 4
The FED had allayed concerns of sub-prime home loan market, with the prospect of lower interest rates (traders expected 3 rate decreases in 2017)
AH was worried that direct property investment vehicles with investments in US shopping malls could be affected by lower retail sales from subprime loan situation, e.g. Westfield had 59 shopping centres worth $23b in the US, making up 1/3 of their total asset value
Ominously, the last time the average return for AUS share fund managers exceeding 26% for the year, was back in YE of June 1987
AH said WA Newspaper was the subject of a takeover when Kerry Stokes built a strategic 15% stake into the company following media ownership law changes ==> said that the takeover speculation simply helped to realise Alleron’s target price earlier than expected in late 2007
AH believed the deal of Wesfarmers taking over Coles would go through, because of how vocal they were about turning around the business ==> they were also willing to pay $16.47/share in cash for a 13% stake in Coles
Billabong’s financials were hurting with a soaring AUD (i.e. weakening USD), given that US makes up 45% of their sales ==> still a good company with quality track record, but people were uncertain about the direction of the market, causing the stock to fall in 2008
Large companies will mean it takes longer to judge whether any single person is delivering on results
Supermarket operators are probably the only truly defensive stocks in retail when an economic downturn hits, but even they can suffer from changes in buying habits for the short-term
Westpac used a scrip bid of $19b because the cost of borrowing was too high following woes in the global US credit markets, for St George to be taken over in 2008
Research houses who assessed fund managers need to be looked at… In the old days, they used to ask if you did a DCF, and if you did not, they would not consider you worthy of a rating… Raters should focus on performance RATHER than a rigid set of check points ==> noted by AH in post GFC of June 2008, which also sparked Fed Govt to review the ratings agencies in AUS
Fosters (wine producer) was planning a major corporate restructure in 2008, with disheartening US operations, despite them owning key brands like Penfolds, Rosemount and Wolf Blass
The banks in the post GFC phase faced some very tough times, and the last of those tough times happened in the recession of the early 1990s, which almost led to the demise of Westpac
CBA bought Bankwest for $2b, and Westpac bought St George for over $12b during the post GFC phase, noted by AH
Cuts in dividends for the banks were never welcome, especially for retirees, but if a company’s share price had plummeted, it was worth remembering that even if dividend was pruned, overall yield is still likely to be solid when tax benefits of fully franked dividends were factored in
Biota was a pharma company held by Alleron, which was quite exciting at the time in 2008, with GSK’s decision to triple annual production capacity for Relenza to 190m courses by end of 2009
AH found JB-Hifi a relatively attractive business in 2008, although you had to be careful of Dick Smith as a peer ==> people liked the CEO’s entrepreneurial spirit in JBH however
In 2010, NAB had a deal to buy AXA Asia Pacific
The market is always teaching you - if you don’t pay attention it charges a pretty severe tutor’s fee
AH had honestly been on the WRONG side of both the resources and banks rising up again, despite him avoiding it back in post 2008
AH's success evidently comes from his management mantra at Alleron - “if you can be easily duplicated, it will be difficult to maintain your competitive edge across multiple years” ==> he prefers to observe management from afar rather than perform company visits (which can be easily biased)
For “energy”, stocks into which Alleron had developed an insight, must display a trigger, which is an objective fact or event that validates why things are changing ==> an insight trigger must be pinpointed PRIOR to stock entry according to AH
Eg: Stockland’s 1/3 of 3 share issues which was NOT to strengthen the balance sheet, but for expansion
Eg: IPL buying Southern Cross Fertilisers for $165m to buy from BHP when it costed Western Mining about $800m to buy it originally ==> fertiliser prices soared from USD200 to USD1200
Melbourne IT was one of Albert’s 4 baggers in the 1999 period, being a registry business for web addresses, with a lot of growth potential in the tech bubble
Failure by Albert, was McGuigan Wines, which claimed to be the lowest cost producer in the wine industry ==> in fact management had forecast double-digit earnings growth, and Albert perceived that as a signal for major consolidation in the wine industry being over ==> there would be a return of pricing power as oversupply appeared to be ending ==> the stock underperformed and lost one vital account ==> contradicting Alleron’s conviction that it was a price maker and NOT a price taker ==> so AH immediately exited
Resmed was the ONLY name added during the GFC in 2008 by AH
There were controls regarding strategic Australian assets being acquired by offshore investors ==> i.e. they cannot own more than 15% of the ASX, back in 2010 ==> Alleron held the ASX stock
AH thinks it is rare that media stocks, which move against economic cycles, could be bought at their current low PE multiples in 2011
AH stresses that it is vital to look for "energy" that will manifest in a stock for the next 6-9 months, and affect the stock for the next 2-3 years
Retailers have growth when they have good management ==> i.e. who are able to roll out stores across country to capture benefits from economies of scale ==> adding more stores means more able to generate sales growth, thus margins could also go up too according to AH
AH notes that SABMiller’s bid for Foster Brewings, given in 2011 since it owns brands like VB, Carlton, Draught, etc ==> was viewed as a prized asset because it shared 90% of beer sales with just one other competitor, being Lion ==> with Foster having the highest beer margins in the developed world
Final thoughts
As another note to my readers, this is obviously just a first draft of summarising all that I have understood from my mentor throughout all the AFR articles in which he has been present. As you can imagine, this was a mammoth task for me, but if I learnt anything from him over the regular catch up sessions I've had with him, it's that history is important.
What I've found incredible throughout sifting through all these AFR articles, has been the fact that a lot of these situations I've been reading about from 1 to 2 decades ago, were describing events which were happening today, to some extent.
After all, there is some merit to Albert's wise words which I constantly remind myself of:
"The share market always runs ahead of reality"
