I have never owned any stock from this sector because I think I can do better elsewhere in the market. Like most people, I shop at Woolies (WOW) and Coles (WES), buying our Coke or Mount Franklin Spring Water (made by Coca Cola Amatil or CCL) and general groceries etc. These are great businesses, but it is hard to think of them outperforming by much. Indeed, since my last review of this sector in January 2013, this sector has gained 7.3% against a 7.2% for the ASX 200. A good solid, predictable result and they pay solid dividends – currently 4.6%.
Don’t necessarily do what I do
That I do not invest in this sector should have no impact on others pursuing returns in this sector. I just think I should declare my own position. As I showed on Super TV this week, my portfolio optimiser suggests an aggressive investor might be overweight in this sector – largely due to the low expected volatility of this sector! Clearly I am prepared to accept more volatility in my own portfolio and ride the dips in search of better average returns.
Readers might refer to my definition of a high conviction portfolio and as outlined in this week’s ‘Questions of the Week’, but, in short, my high conviction stocks are the largest stocks by market capitalisation in a sector subject to a consensus recommendation of 2.5 or better (where 1 is a buy and 5 is a sell).
My conclusions at the last review six months ago were:
“None pass my 2.5 rule – and that failure is more or less peculiar to this sector. Possibly brokers have factored in the recent strong run in prices.”
“I wouldn’t buy either Woolworths (WOW) or Wesfarmers (WES) now (the sector is nearly back to +6% exuberance), but I might have been tempted when it was fairly priced by our measure!”
Back to the future
Turning to Table 1, only WOW and WES from the top 100 beat the ASX 200 (7.3%) in capital gains – and not by much. Goodman Fielder (GFF) did come in quite well (14.0%) from the bottom half of the top 200. GFF now just qualifies as a high conviction stock on the recommendation criterion, but it is not big enough by market cap as my definition insists on it being in the top 100 for inclusion.
The sector statistics, presented in Table 2, show that this sector is only just overpriced at 0.9% but its forecast capital gains are a modest 7.7%. While these statistics seem reasonable, recall it is a volatility bet – not one that brokers back with an outperform call.
It is also clear from Table 2 for readers who follow my column, this update is the first where the under/overpricing distribution across the sectors is reasonably tight. Gone is the massive underpricing in the materials sector and a general underpricing of the market at the start of July. The market is not too expensive to buy with an exuberance of 2.0%, but it does suggest investors might have been better off getting into the market earlier – or perhaps waiting a while.
When exuberance is folded into the capital gains to produce the last column called ‘adjusted capital gains’, it is clear that my modelling expects little from Financials or Telcos over the next 12 months – but they do pay good dividends. Staples has the 9th best adjusted forecast out of 11 sectors.
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 regards to your circumstances.
Also in the Switzer Super Report:
- Barrie Dunstan: On the campaign trail with your SMSF
- Thomas Rice: Why we love small-cap data company NEXTDC
- Penny Pryor: Buy, Sell, Hold – what the brokers say
- Tony Negline: Why the tax on pension income will never happen
- Grant Abbott: What happens to your SMSF when you die?
- Questions of the Week: REITs and high conviction funds
