Update

You Missed the Boat 10 Years Ago: Here It Comes Again

Do you remember where you were in September 2008?

Lehman Brothers, the US investment bank collapsed. Heralding the disaster of the Global Financial Crisis (GFC). And seeing the S&P 500 index make its biggest nosedive in a year. Down 38.49%.

We’d recently purchased a new home. Which was now worth less than what we paid. I was reading ‘Toughen Up’ — the true story of how Michael Hill built his publicly listed jewellery company [NZX:MHJ]. He did it after his uninsured dream home burnt down at the age of 39.

In 2008, wealth everywhere was in free-fall.

Then, in 2009, it started to bounce back. Governments announced bank bailouts. Quantitative Easing (QE), where they pump the markets with money. And some of the loosest monetary policy ever seen, with low interest rates that persist until this day.

Late 2008 was the time to begin buying assets. Or start a fund. A share or property portfolio.

Because the forces of demand and supply got broken. And fell out of alignment.

Investors needed cash. Banks were tightening credit. There were more shares and properties up for sale than demand to buy them. And it’s under that scenario that prices can make stomach-dropping falls.

COVID-19 correction

Last week in the markets was hell. It looked and felt like 2008. A hot poker rammed straight back into that old wound.

But it’s also a little easier having been there before. Because you have some sense of what may happen.

In a low interest-rate environment, investors still need yield. Fear eliminates hunger. But once that recedes, the hunger comes back, stronger than ever.

This week, governments started making noises about supporting economies through coronavirus. Offering some relief for markets. A balm for investor fear.

Then rates got cut.

And so, the hunger comes back raging. A bounce has been evident in the past few days.

How is Coronageddon different from the GFC?

In some ways, it is more threatening; in other ways, less.

• The coronavirus threatens earnings. The sell-off we’ve been seeing is because investors — especially the larger funds — are concerned about negative impact on business earnings. The GFC came about due to a credit, banking, and liquidity crisis.
• So the GFC was a shock. Governments were able to respond rapidly to support banks and get the money supply moving again.
• The coronavirus could continue to damage earnings over the next few reporting quarters. And even further, if it continues to spread. Factories and schools shutter. Stores close.
• But the coronavirus has yet to kill very large numbers of people. At worst, experts see it halving global growth — but not halting it altogether.
• March will be mission critical. A pandemic-like spread could throw the markets into crash territory. Equally, support from central banks and governments and/or rapid roll-out of a vaccine could restore the situation.

As value investors, we simply look for value. If that value sits on top of a good proposition to preserve our capital over the long-run. Plus dividend income while we wait for growth and ride the roller-coaster. Then that’s a good bet in my book.

So, for the brave, the time now is to buy and top-up. Which is exactly what we’re doing. And in some cases — which we’ll note below — we’re buoyed by watching insiders, directors, and the like buying shares in the businesses they run.

It is true: our portfolio has gone through the mincer. This can happen in financial markets. There’s been a burn-off. Revealing some fertile ground beneath.

Besides top-up opportunities suggested in our portfolio, we’re also commencing coverage on a new company: AVJennings Ltd [ASX:AVJ].

An AVJennings development. Source: AVJennings.com.au

AVJennings is one of Australia’s oldest homebuilders. Founded in Melbourne in 1932 by Sir Albert Victor Jennings. With a vision of the ‘Australian dream’ — building a better life through home ownership.

Now, don’t get me wrong. This business got hammered in the Australian property decline. And may still be a volatile investment. But here’s what we like about it:

• The business focuses on building suburban homes at the more affordable end. It’s not into speculative inner-city high-rises, where costs can balloon.
• Land holdings are attractive. Here in Auckland, the company is developing Ara Hills in Orewa and Hobsonville Point. Including larger Australian holdings, it posts a P/B of 0.6, or a book value per share of nearly A$1. Note — the current share price is below $0.60.
• Dividend yield currently sits at a healthy (projected) 7% — though in the seasonally tough property market, this can get cut.
• P/E sits around 9, long-term debt is below 50% of equity, and current margins are around the 6.7% mark. While the price-to-earnings is attractive, the margins are below what we see with the likes of our other home builder in the UK — Crest Nicholson [LSE:CRST].
• In the latest FY20 results released last week, the company is showing a steady hand — managing to increase revenue and assets in a tough, drought-ridden market. I won’t go into full detail here — review those for yourself in the company’s investor section.
• RBA rate cards could further fuel demand for home building.

The risks of buying a homebuilder in a seasonal and inflated Australasian housing market should be fairly evident. Sometimes sites can be difficult to sell. Prices can fall. Margins get squeezed (as we’ve seen).

But, overwhelmingly, people want to live in Australia and New Zealand. And the demand for new homes built by an established builder with economies of scale should — short of a total pandemic or property crash — continue on…

Important: Dividend announcement

As we enter AVJ, please note that it’s about to go ex-dividend. Meaning: if you buy after this time, you won’t receive the next dividend payment. Though there may be a price drop to reflect this.

Distribution Amount A$ 0.012 (per share)

Ex Date: Thursday March 5, 2020

Record Date: Friday March 6, 2020

Payment Date: Friday March 27, 2020

Portfolio update

Positive news got lost in the market melt. In particular, March is looking to be a very happy month for income-focused investors as dividends roll in.

Both Aviva [LSE:AV] and General Motors [NYSE:GM] go ex-dividend this week.

GM has an ex-dividend date of March 5, 2020 and payable date of March 20, 2020. The declared cash rate is USD 0.38.

Aviva has an ex-dividend date of March 5, 2020 and payable date of 1 April 2020. The declared cash rate is GBP 0.03938.

Kina Securities [ASX:KSL] had a tantalising ‘preliminary final report’ which got caught up in the coronavirus meltdown. You can view the entire report here. Here’s what whets our appetite:

• Revenue and profits looking to be up 27%
• Interest margin up 16%
• ROE up 11%
• Dividend up 16%

Kina announced a cash dividend with ex-dividend date of March 3, 2020 and payable date of April 9, 2020. The declared cash rate is AUD 0.064.

Director Andrew Carriline acquired 24,000 shares in an on-market trade.

Greg Pawson also acquired 134,229 shares in the exercise of performance rights.

Tassal Group [ASX:TGR] was down on the virus fears impacting front-line food producers and exporters. As we’ve said before, this fear (and sell-off) might have gone too far. In the past few days, we’ve also seen directors in the company top-up with significant acquisitions of shares in the company.

Here is our current portfolio and comments:

 Current as of 3 March 2020 at 9pm GMT.

We’re not out of the woods yet. This portfolio got thumped — though less than many others in Coronageddon. There’s still the earnings impact in the pipe.

Could be better or worse than expected with corresponding price increases or falls.

I guess I’m on the optimist’s side. Which you must be to invest in this market.

For those less optimistic but wanting some professional assistance, we now have a wholesale managed-accounts solution. As a Lifetime Wealth subscriber, you may have us run trades in your account if you qualify.

Do click here for more info — or touch base with John Ling on [email protected] or 020 415 88515 to discuss the opportunity.

There’s been a burn-off out there. And the market is still on fire. As I said at our last event, when you’re buying businesses, you ride the risks of not only the business, but the market and economy in which it sits. Increasingly, that’s global.

Want to prevail? You’ll have to toughen up.

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor

Important disclosures

Simon Angelo owns shares in AVJennings Ltd [ASX:AVJ].