Collected Wisdom: The 2014 scorecard

Consensus views reported in Collected Wisdom throughout the last year proved quite accurate… especially when it came to "sell" signals.

Summary:  This week we take a look at how the consensus view fared in 2014. Caltex, Echo Entertainment, Aristocrat Leisure and ResMed have soared after analysts tipped buying the stocks. Brokers also recommended selling Metcash and ALS, which have slumped over the year. But the consensus view has been wrong so far on Woolworths, Fortescue Metals Group, Iluka Resources, Flight Centre, Origin Energy and Cabcharge.

Key take-out: As of December 18, investors who had followed the consensus view to buy each of the 26 companies on Collected Wisdom’s publishing dates would have seen an average rise of around 2%, compared to a 2.6% fall on the S&P/ASX200 this year.

Key beneficiaries: General investors. Category: Shares.

The Collected Wisdom column has covered hundreds of Australia’s biggest companies this year, keeping investors updated about which stocks investment houses are recommending to their clients – and which ones they are advising to avoid.

But with 2014 finally coming to an end, it’s time to look at how the consensus view has fared … at least so far.  Moreover, what have been the companies that met expectations (whether they be positive or negative) and what were those that blindsided analysts?

It turns out brokers got it right – and wrong – on plenty of occasions. For the first six months of 2014, of the 26 companies covered as a “buy”, only four have performed negligibly. The rest have varied widely, with double-digit rises and falls throughout the list.

Most of the “buy” calls responsible for a bad performance belong to the resources and mining services sectors, headed by companies exposed to iron ore and oil and gas.

As of last Thursday’s close (December 18, 2014), investors who had followed the consensus view to buy each of the 26 companies on Collected Wisdom’s publishing dates would have, on average, seen a rise of around 2% – ahead of the 2.6% fall from the S&P/ASX 200 index since the start of the year. This is before dividends are brought into the mix.

On the selling side it’s much more difficult to find consensus among the newsletters – though the calls were far more accurate when this was accomplished. The eight stocks labelled as a “sell” in the first half of the calendar year have fallen 14% on average from the date when they were covered.

Take a look below for the six of the biggest winners and losers for the brokers this year from both their “buy” and “sell” recommendations.

When consensus got it right

Caltex ( 72%): At the beginning of the year (January 15) analysts had welcomed Caltex’s strategy to reduce its exposure to the fuel refinery business with the closure of its Kurnell refinery in NSW and instead focus on fuel retailing and convenience store sales. Since then the company has soared from $19.38 to $33.29 – a record high – as the company not only benefits from its strong retailing business, but also from higher margins in its refinery business amid the oil price slump late this year.

Echo Entertainment ( 51%): Analysts were quick to take advantage of Echo Entertainment’s slump to a record low of $2.18 in February this year over disappointing half-year results. Most called the fall a buying opportunity, with two upgrading their calls. They pointed out it was one of the cheapest casinos in the world at those share prices and that the company’s cost reduction programs and revenue initiatives would pay off throughout the year. That momentum has continued, with Echo forecasting double-digit earnings growth for the first half of 2014-15. The stock now trades at around $3.60.

Aristocrat Leisure ( 22%): The poker machine maker should generate even stronger earnings in the second half of the year, brokers had said back in June, and they were proved right. The company, which has its financial year ending on September 30, grew net profit for the year by 10% as it continued to gain market share in the US with the purchase of US group Video Gaming Technologies and boosted its sales online. It has been one of the best performing stocks in the S&P/ASX 200, climbing 22% to $6.45 since Collected covered it and 38% since the beginning of the year. By and large analysts remain optimistic about the company (see Collected Wisdom, Dec 1), though some believe growth is fully reflected in its share price at a price-earnings (P/E) multiple of around 20 times in 2014-15.

ResMed ( 36%): The sleep disorder equipment maker was covered four times as a “buy” during 2014, beginning on January 29 when it fell 4.9% to $5 over disappointing sales. The poor figures were largely as a result of disruption in the US, where the competitive bidding policy was hurting margins.  But ResMed holds technological superiority in treating sleep apnoea with its effective and comfortable products, analysts had said, which translates into superior growth in the medium to long term in the untapped market. Investors didn’t have to wait that long, with revenues beating expectations after new product launches – sending shares to a four-year high of $6.74.

Metcash (-35%): The decision from Metcash to cut its dividend payout ratio in March to help fund the transformation of its business was a sure sign to brokers that investors should exit the stock – even after it had already plummeted 15% to $2.70. They said it would take a long time for the changes to trickle through to earnings and, moreover, they weren’t even certain the plan would get to the root of the problem: Metcash’s distribution-focused business model. Since then the stock has plunged to $1.75 – its lowest level since 2002 – in what analysts describe as a highly competitive environment.

ALS (-32%): This mining services company was looked at even more than ResMed, with five “sell” consensus recommendations, beginning on March 5, throughout the year. Shares fell from $7.10 to as low as $4.48 in November over earnings downgrades and a lack of visibility in the sector. While they have since bounced to $5 amid signs the minerals business may have stabilised, analysts remain wary. As discussed in the latest update, there have been bouts of optimism over the stock throughout 2014 but the downgrade cycle has continued to linger and timing a recovery is difficult.

When consensus got it wrong

Woolworths (-16%): A lacklustre sales performance from Woolworths’ Masters division in February wasn’t enough to deter analysts from having a positive outlook for the consumer staples stock – though in hindsight it should have been. While they believed the Masters result was troubling, they didn’t expect it to have a material effect on the group’s earnings in 2014. Fast forward 11 months, and the losses of Masters have continued to grow and the goal of a break-even result in 2016 has been abandoned. But that hasn’t been the only drag, with the core food and liquor business growing at less than half the rate of the rival Coles business in the first quarter of 2014-15.

Fortescue Metals Group (-52%): Investment houses were attracted to Fortescue earlier this year (April 23) due to its appeal as an iron ore producer that’s reducing its already low costs of production while removing debt. Most were confident that the iron ore price would remain high because of the continued growth in the consumption of steel in China. That has not been the case, with the iron ore price plummeting from around $US120 per tonne to a five-year low of under $70 per tonne. Most analysts have now downgraded their recommendations to “hold”. By and large, they think the issues aren’t going to be resolved any time soon and that Fortescue’s ability to repay debt is now at risk.

Iluka Resources (-33%): Analysts had described Iluka Resources as “moderately undervalued” following the mineral sands miner’s first-quarter report in April this year when it was trading at $8.91. They believed the company was at that stage at the low point of the cycle and that it would benefit from pricing power when demand began to recover. Despite a warm reaction to its half-year result, Iluka Resources was not spared from falling commodity prices and it has been in a downtrend ever since. At around $6 analysts are still bullish towards the company; they expect the zircon and titanium dioxide feedstock markets to tighten in 2015 and the falling Australian dollar to help earnings.

Flight Centre (-41%): The travel services company quickly shot to a record high of $55.57 after analysts had reaffirmed their “buy” recommendations on the stock in late February, but that’s where the joy ended for investors. Analysts had believed the Australian business would continue to drive sales despite the weakening Australian dollar, which had so far failed to deter overseas travel. But poor consumer sentiment, particularly from the federal budget, has hit the company hard. Last week the company sank to below $32 over an earnings downgrade, with the outlook for the Australian segment unclear.

Origin Energy (-16%): Investors who had bought Origin shares in June at $14.39 – when consensus rated it a “buy” – would have been satisfied up until September, when the stock peaked at $16.12. Analysts had issued their positive outlooks after the company purchased a stake in two exploration permits from Karoon Gas for $US600 million in cash, saying it was bought at an attractive price and that it was close to existing infrastructure.  Since then the company has not escaped the pain of lower crude oil prices (with shares falling to as low as $10.56 before recovering to above $11), though it is far less exposed than others such as Santos.

Cabcharge ( 10%): The taxi payments company has so far defied naysayers, climbing from $3.87 in mid-April – when most analysts rated it to a sell – to as high as $6.04 in September before falling to around $4.30. Analysts had said the company’s valuation neither reflected the regulatory risks from changes in Victoria and NSW, nor the threat from technological changes.  New entrants into the market like Uber would continue to impinge on the company’s earnings, they had said. While this certainly appears to ring true – and Cabcharge has been extremely vocal in trying to persuade governments to crack down on Uber –  the company has managed to perform better than expected in 2014 as it pursues its own technological initiatives.