Question of the Week

Questions of the Week

Co-founder of the Switzer Report
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1. What are your thoughts on the NAB share purchase plan?

I like the look of it because: 

  • The maximum issue price of $14.15 is 9.5% lower than the current market price of $15.64 (13/5); 
  • Traditionally, investing in bank shares at a discount to book value has been a sound investment strategy. NAB’s adjusted book value at 31 March (adjusted for the $3bn institutional placement) was $17.13 – the subscription price is thus 82.6% of book value; 
  • According to consensus estimates (source: FNArena), the major brokers have a target price for NAB of $18.28 per share. It is trading on a multiple (PE or Price Earnings ratio) of 13.7 times forecast FY20 earnings, but only 10.9 times forecast FY21 earnings; 
  • The brokers forecast total dividends of 68.3c for FY20 (30c has already been paid) and 100.6c for FY21. At $14.15, this puts the stock on a prospective yield of 7.1%; and 
  • New CEO Ross McEwan is in the driver’s seat at NAB and over the next few years, should improve NAB’s competitive position and standing with customers. 

The major risk for NAB is that the impact of COVID-19 (bad debts, fees forgone, reduction in lending volumes) is materially worse than the Bank has provided for, resulting in lower cash profits or even a net loss. In a worst–case scenario, the Bank needs to raise more capital to remain solvent. 

2. With the uncertainty in the housing market and current rental issues that are occurring at the moment, what are your thoughts on a more stable property investment that doesn’t have these issues like DHA (Defence Housing)? Long term, they seem like a safe and reliable investment. 

With DHA (Defence Housing Australia) properties, you receive a secure, arguably above market, guaranteed rental income for 10 to 15 years. 

The trade off – is that you buy a property and take the risk on the property’s value. What will it be worth at the end of the rental period? Will it be worth more or less? Who is going to buy it from you when DHA has finished? 

The same growth factors that drive any property’s value will apply to a DHA property. DHA properties are “safe and reliable” about the income you will receive, but not necessarily in regard to their capital value. 

I am not against DHA. I know many clients that have had a terrific investment experience with DHA. But it is like any property investment – you need to be comfortable that the property will, over the long term, increase in value.

3. What is your opinion on the new FANG ETF (ASX code:FANG)? 

Last week, I answered a similar question about how to invest in stocks such as Facebook, Amazon, Apple, Netflix and Google’s parent Alphabet, and said that there was no locally listed ETF that made this possible (outside Betashares NDQ which tracks the NASDAQ 100). I was wrong. 

There is a new ETF from ETF Securities, ASX Code FANG, which tracks an equally weighted index from the NYSE, FANG+. It consists of these 10 stocks: Facebook, Apple, Amazon, Netflix, Alphabet, Baidu, Alibaba, NVIDIA, Tesla and Twitter. 

It is unhedged. Fees at 0.35% are reasonable 

I am reserving judgement on the ETF until it develops more liquidity. 

4. I find it hard sometimes to know whether to sell at a loss or hold. I’ve previously gone by the logic that (1) if I do not need the money and (2) I think the shares will ultimately come good, then I can hold. However recently I am starting to question whether that is the right approach and if I would be better off selling at a loss and reinvesting the money. I would be keen to hear your views on that approach.

There is an old investment adage that goes “your first loss is your best loss”. If you are uncomfortable about holding a position, my advice would be to get out. Sometimes, this can be quite clarifying. 

A worse case is that if after realising the loss you feel you were wrong, you can always buy back those same stocks. 

Would you like your shares questions answered by Paul Rickard? Submit your question here.  

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances. 

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