Where to go fishing? – Part 1 – Profitablity and Growth

A Day’s Fishing (circa 1923) – Edward Henry Potthast

The obvious answer is … where there are fish.

Slack Investor is always on the lookout for growth companies … particularly when he is on the BUY! Since retirement, I haven’t had much chance to be on the Buy side of a transaction lately – as there isn’t that flow of fresh new money coming into the coffers from employment. Pre-retirement, any new money would flow into the cash reserves of my Super (SMSF -Self Managed Super Fund). When a sufficient amount of cash had built up, I would look around for some company shares to buy.

However, with the expected inflow of a bit of cash with the impending sale of Altium, I am starting to look around for suitable receivers of Slack Investor loot. Slack Investor is “Going Fishing”. The first thing I want in my pond is profitable companies – but I also want them to have a record of growth. In the second part of this fishing series, I will try to narrow things down to companies that I would actually like to buy.

Measures of Profitability

Slack Investor likes a company, that he invests in, to not only make a profit – but to use its shareholder funds in the best way to make a profit. There are many ways to look at profitability, but Slack Investor is pretty lazy in this regard and you won’t find him forensically gazing over profit and loss statements from a company report. I prefer couple of simple ratios to get an overview – I am no expert accountant.

Return on Equity (ROE)

ROE = Net Income/Shareholder Equity

I have always used Return on Equity (ROE) as a simple measure to give an idea on how a company is growing. Strictly speaking, the ROE is more a measure of profitability and how well it grows each dollar of company funds.

The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing.
Investopedia

This metric is very easy to find in market aggregator sites such as Yahoo.com, Morningstar, or Investing.com. For a deep dive, I prefer Marketscreener.com – which has the advantage of showing Predicted ROE for the next few years on each companies financial page. One of the problems with ROE is that, companies with debt can present an inflated ROE.

Return on Invested Capital (ROIC)

ROIC = Net Profit (After Tax)/Average Invested Capital

The purest way of looking at how good a company is in converting shareholders money into profit is the ROIC. Unfortunately, this figure is harder to come by on the generic financial aggregator sites. This ratio is superior to the ROE as it accounts for the debt levels of a company – as the Average Invested Capital is the Average Equity – Average Debt.

Measure of Growth

Compound annual growth rate (CAGR)

A quick way of determining if a company is growing is the CAGR. It is often constructed from past , data. The “Compound Annual Growth Rate”—is the annualized rate of growth in the value of the Earnings, or Revenue, over a stated period. The maths is a bit complicated and best done on a spreadsheet or a search around the financial sites. I found limited CAGR data for stocks at Morningstar and finbox.com

CAGR is defined as the annualized growth rate in the value of a financial metric – such as revenue and EBITDA – or an investment across a specified period.
Wall Street Prep

Putting together Profitability and Growth

Fortunately there are some really nice blokes in the financial world that share the burden of responsibility to educate people about the share market as well as operating a profitable business. A shout out to Owen Raszkiewicz of the RASK Group. A great place to start your financial education with Owen is his Australian Finance podcast that he co-hosts with Kate Campbell. Slack Investor will often tune in to their discussions.

Below is a table Owen prepared in August 2023 that ranks Australian stocks in terms of their profitability (ROIC – Return on Invested Capital – Column F). He also shows, in the last column, the stock’s historical growth rate for the 5 years 2017-2022.

From Rask Media – ASX’s best companies published August 2023 – ranked in order of ROIC- Click on image to enlarge

This is a great place to start fishing, metrics for profitability and growth in one place. Pro Medicus is standing out here – High profitability (ROIC 55.48%) and high historical growth (5-yr CAGR 24.22%). A complete picture needs both of these metrics. For example, Woolworths has a high profitability (ROIC 41.28%) but is laggard in historical growth (5-yr CAGR 2.10%).

The next article in this series will look at how Slack Investor narrows these stocks down and then screens them further with the P/E Ratio to try to make sure that each potential buying stock is not overpriced.

Altium (ALU)- Thanks, so sad to see you go … and March 2024 – End of Month Update

Renesas CEO Hidetoshi Shibata (left) and Altium CEO Aram Mirkazemi (right) firming up the takeover deal – From Business News Australia.

It is with very mixed feelings that Slack investor reports on the likely takeover of Altium (ALU) – one of his major holdings (16.6% of total Portfolio) – by the Japanese Renesas Electronics Corporation.

Renesas will acquire all outstanding shares of Altium for a cash price of A$68.50 per share, representing a total equity value of approximately A$9.1 billion
Altium Press Release – February 15, 2024

Although this represents a tidy profit, as I first bought into Altium about 10 years ago when they were trading at $3.30, I will be genuinely sad to stop being a shareholder of this wonderful company. I envisaged holding Altium shares for a very, very, long time!

Slack Investor’s 10-yr journey as an Altium shareholder – Monthly price chart from incrediblecharts.com – click chart for better resolution

Why I originally bought into Altium?

Let’s get this straight, Slack Investor is no stock picking genius. My portion of profitable sold shares is only about 55%. That is, I have made losses on 45% of them – it is not that impressive! – but my overall performance results are good. This is because I follow the Peter Lynch philosophy – where you try to stay in the stocks that are performing well and “weed out” the stocks that are not doing well.

“Some stocks go up 20-30 percent – and they get rid of it and hold onto the dogs. And it’s sort of like watering the weeds and cutting out the flowers. You want to let the winners run.”
Peter Lynch – Legendary Investor and Fund Manager. From 1977 until 1990, he ran the Magellan fund where he averaged a 29.2% annual return for those years.

Slack Investor is always on the lookout for growth companies … and Altium poked up its head and looked at me in 2014 from one of the financial sites that I read. The next step is a bit of independent research. My “go to” here is the most excellent Market Screener site. I went through my usual process for buying and checked the Market Screener/Financials tab for a reasonable projected Price/Earnings ratio, an established record of improvement in earnings, and a forecast Return on Equity (ROE) above 15%. Altium stood out here with no debt and a ROE of between 35 and 50. This company was growing!

After my initial purchase, I bought more parcels of ALU over the next two years as the shares continued to grow and their outlook projections were confirmed.

The Altium Story

Altium is an Australian-based software company that provides electronics design software to circuit-board engineers. These circuit boards are in every bit of technology that we own.

By the time Slack Investor had woken up to the Altium story, Aram Mirkazemi was the established CEO of Altium Limited. He came to Australia from Iran as a refugee in the 1980’s after a 6-month stint in a refugee camp in Pakistan. He did not speak English. After gaining qualifications in IT and engineering, he met Nick Martin, the founder of Altium, at a soccer game and Nick offered him a job. After an eventual falling out, Aram left to start his own software company. When Nick steeped down as CEO, Aram returned to Altium with a vision to make Altium a world player in printed circuit board design.

… in order to be able to change the way the electronics industry works you need to be able to standardise on one platform, like the graphics industry did with Photoshop or Microsoft’s dominance of the operating system and productivity tools market.

After several years of growth and gaining market share. The Altium board rejected an offer of $38.50 per share from Autodesk Inc back in June 2021 as they thought that the offer ‘significantly undervalues’ the companies prospects. The 2024 Renesas offer is yet to be approved by shareholders, but it seems that all the significant players are already “on board”. The offer A$68.50 per share in cash. represents a premium of approximately 34% to the pre-offer price.

All I can say is, it has been an honour to be part-owner (shareholder) of this great company – Thank you Aram and his team. I will be selling part of my holding this tax year (to spread the capital gain over two tax years) and wait for the cash offer to come through in 2025 for the remainder.

March 2024 – End of Month Update

More Happy Days in the stock market. As the troubled world marches on, all Slack Investor followed markets rose this month. The ASX 200 up 2.6%, the FTSE 100 up 4.2%, and the S&P 500 up 3.1%,

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Looking Forward Looking Back … and November 2023 – End of Month Update

Usually not much of a country and Western Fan, but Slack Investor is quite taken with this video of Slim Dusty in his rendition of Looking Forward Looking Back – where two Australian Music Legends (Don Walker and Slim Dusty) combine to make this beautiful Australian song. Slim must have been about 73 when this song was recorded in the year 2000.

Making sense of what I’ve seen
All the love we’ve had between
You and I, along the track
Looking forward, looking back
Looking Forward Looking Back – Don Walker (composer) (1951 – ) & Slim Dusty (vocals) (1924 – 2003)

This song is bitter-sweet to me as it was played at a good friend’s funeral … and I always get a little sad .. but then, I think of the good times I shared with my friend. My friend was also a keen investor and, I’m sure he wouldn’t mind me using this song to launch this post. It is a song of reflection … with a reminder to look forward as well.

Slack Five-Year Individual Share Performance

Though Slack Investor reports on his results on a yearly basis, the annual Nuggets and Stinkers post is a constant reminder of how, in successive years, a company can be “a nugget” … or “a stinker”. The market will often go in trends of overvaluation followed by a period of undervaluation – and the true measure of how the stock has performed is lost in these constant tidal changes. For my purposes (Slack!), a 5-yr measure of performance is about right – as this allows for the true performance of a quality stock to shine through.

I trawled through the Slack Portfolio to find stocks that I had owned for 5 years. I was suprised to find that, of my current 22 individual stocks or ETF’s that I own, I had held only 5 of these for 5 years. This is not what I expected from a Slack Investor and I had to drill down into the portfolio to realize that I had given my portfolio a big shake-up about 4-5 years ago. I had retired, injected a large portion of my work super into my SMSF, and also sold a few stocks to make way for a house purchase.

The 5 stocks that I had 5-yr data on were Altium, Macquarie Group. REA Group, CSL and Codan. The 5-yr Internal Rate of Return (IRR) figures give an “average” annual return for the 5-yr period and include dividends as well as any stock price growth. The results below, for the five years up to 30/06/23, are from my financial software – the free “Sunset” international version of Microsoft Money Australian Version. There are IRR calculators and Compound Annual Growth Rate (CAGR) calculators also available online. I have also included the CAGR Total Return (TR) till 30/06/23 for each of the Slack followed markets (in bold) for reference.

Stock	Symbol	5-yr IRR
Altium Ltd	ALU	14.8
Macquarie Group Ltd	MQG	12.7
S&P500 (TR)		12.2
REA Group Ltd	REA	11.3
CSL Ltd	CSL	8.4
ASX200 (TR)		6.3
FTSE100 (TR)		3.8
Codan Ltd	CDA	3.3

Digesting the above table, Slack Investor is generally pleased with the annual IRR over 5 years of the majority of held stocks. The exception is Codan (CDA) which has had a roller coaster ride in the price charts (see below) – and underperformed the ASX 200 index over 5 years. This stock needs further evaluation to see if I should continue to hold it in the Slack Portfolio.

There are strange days
Full of change on the way
But we’ll be fine, unlike some
I’ll be leaning forward, to see what’s coming
Looking Forward Looking Back – Don Walker (composer) (1951 – ) & Slim Dusty (vocals) (1924 – 2003)

I go to Market Screener Financials page for Codan to quickly see that the income for CDA is projected to increase for the next few years and the company is in a solid financial position. The projected Return on Equity (ROE) remains above 15% and, despite the dramatic price fall during 2021/2022 over earnings downgrades, the companies price trend so far in 2023, has been positive. This holding is currently on “watch” – but I remain a holder of CDA for now.

5-yr Price Chart of Codan (CDA) – from Investing.com

November 2023 – End of Month Update

Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

Due to a strong rebound this month Slack investor has cancelled his SELL Alert for the ASX200 that started at October 31 2023 due to a stop loss breach – and he now remains IN .

All Slack Investor overseas followed markets had a bumper month. The S&P 500 led the way with a massive rise of +8.9 %. More modest rises for the FTSE 100 +1.6% and the Australian stock market – the ASX 200 +4.5%.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Alphabet … Google It

Sundar Pichai, the CEO of Google and its parent company Alphabet looks ready to play the “evil genius”.

At around 15% of my investments, Alphabet (US:GOOGL) is a major holding in my portfolio. It is my biggest international holding. I first dipped into the stock back in 2019 and have been trying to top up (in small amounts) each year since.

Since Larry Page and Sergey Brin launched Google in 2004 with a killer search engine, the many tentacles of Google/Alphabet have spread into the everyday life of billions. Youtube alone had 2.6 bn annual users in 2022.

(Google’s search and advertising) is Alphabet’s best business, accounting for 80% of Google’s total revenue in 2022 including Google Search and other properties like Google Network ads and YouTube. The remaining 20% comes from Google Cloud (9.4%) and its apps, hardware and content businesses (10.4%).
From Intelligent Investor

Why keep investing in Alphabet?

Before any investment decision, Slack Investor will do a bit of research. Market Screener has a Financial page on each stock.

When the income chart looks like the above showing a track record of growth (prior to 2023) – and projected further growth up to 2025 – I’m interested. A look now at Slack Investors favourite finance indicators. A projected Return on Assets (ROE) of 24.5 in 2025 (well above 15%), a 2025 predicted PE ratio of 17.5 (very low for a growth stock), and plenty of cash on hand for further aquisitions – it all looks good.

Nitpicking

Despite admiring the skill of Alphabet management in aquisition and company growth, Slack Investor is not enamoured with everything this company does. There are some things that I find annoying. Back in 2017, they sudddenly dropped their popular Google Finance Portfolio feature. Slack Investor then migrated to Yahoo Finance to keep track of his portfolio. I note that Google Finance has recently reinstated its porfolio feature – but I have already moved.

To keep growing revenue, many of their channels are being further monetized. I love using Youtube for music, entertainment, and the millions of helpful “how to” guides. However, the ads at the start of the clips are tedious. This is an attempt to get people into Youtube (no ad) Premium at $13.99 per month.

I also had a recent battle to reduce the amount of data in my google account (Photos, Google Drive, gmail) to below the 15 Gb free limit. This is deliberatly not a simple process and seems to be designed to push people into more storage through a subscription starting at $2.49 per month.

These are relatively small quibbles though – and Slack Investor really doesn’t expect “something for nothing”. I continue to hold and a happy buyer of this company using an international e-broking account with CMC Markets – Alphabet, I hope, will be a very long-term holding.

Buying Shares the Slack Way

The last time Slack Investor wrote about how he buys shares was two years ago, and The Slack Buying Process is worth a read for the detail. I must admit that not much has changed in the method that I use. Two of the shares that I bought back then Alphabet (US:GOOGL) and Betashares NASDAQ 100 (ASX:NDQ) have done OK in that time period, but Coles (ASX:COL) has lagged a bit, but because of dividends, is not on the losing pile yet.

	Buying Price AUG 2021 (AUD)	Current Price SEP 2023 (AUD)
US:GOOGL	$195.45	$214.53
ASX:NDQ	$34.09	$36.28
ASX:COL	$17.94	$15.85

Regardless of these preliminary two-year results, nothing fundamentally has changed for these companies and will stick things out for at least a 5-yr period – and then judge performance.

Since retiring, not much buying and selling goes on in my stable pile. For the investing pile, as I am now mostly a fully-invested “Buy and Hold” type of bloke, I don’t get to buy very often. The only opportunities come when I sell something, or my dividends build up beyond my living expenses.

The first thing to do is get a list of companies that you might be interested in. Slack Investor is an avid reader of the financial press. I get heaps of buying ideas from investment sites such as the AFR, Livewire, Morningstar, ShareCafe, InvestSmart, Motley Fool, etc. I pay particular attention when any articles I read mention “growth”.

Unlike when I am buying fish, for buying shares, I really want to look at the “guts” of a company. For this purpose, my best friend is the excellent Market Screener site. I type in the company name and then look at the Financials Tab. This gives me an overview of what the company has done and what analysts project that a company will do. There are lots of things to look at when evaluating a company – Management team, past performance, level of debt, projected sales, etc. However, if I could boil down a company to its essence with just two financial measures, it would be these two discussed below.

Return on Equity (ROE)

The ROE is usually expressed as a percentage and is the Companies

ROE = Stated Net Income/ Shareholder Equity.

For an instant way to look at whether a company is profitable, they will report a positive ROE. It is an indicator of how well the company uses shareholder funds. If I was getting a 5% return on my money in the bank, my ROE for that investment would be 5%. Obviously a high ROE is good. Slack investor likes his investments to have an ROE of at least 15%.

Sadly, the ROE can sometimes be manipulated by the management team by using a number of tricks. They might use accounting loopholes to distort earnings, or hiding assets off the balance sheet – both of these tricks will inflate the ROE.

As the denominator of the ROE equation is just shareholder equity, it ignores the effect of borrowings. Companies can boost their ROE by taking on large loans (risk). Also, a company with a large cash reserve (desirable for potential take-overs and share buy backs) will be penalised in the ROE calculation.

By screening out companies with large debt and including only companies with a track record of good management,- you can try to mitigate these risks in ROE calculation. Slack Investor is always looking forward, and he likes to use the Projected ROE of Future Income/Shareholder Equity.

Price/Earnings Ratio (PE)

The PE Ratio is defined as a companies share price to its earnings per share.

PE Ratio = Current Share Price/ Current Earnings per Share.

Slack Investor is usually looking at “growth” companies with a relatively high PE Ratio. A high PE ratio could either mean that a company’s stock is overvalued, or that there is an expectation that there might be high growth rates in the future.

By itself, the PE Ratio can be misleading. Sometimes, the earnings of a company can be manipulated through accounting measures and, there is a flaw in this ratio as it does not account for the assets and liabilities of a company.

A PE ratio is best used when compared against similar companies in the same industry or, for a single company across a period of time. Slack Investor usually gets the jitters when the projected PE Ratio is over the 40-50 mark.

Putting it all together

	PE 2026	ROE % 2026
ASX	20	14
CPU	16	33
TNE	38	34
XRO	62	20
SEK	25	11
COH	38	23
RMD	18	22

I put all my possible “growth” stock buying options into a table and used Market screener Financials to get the projected (future) values for PE Ratio and ROE for 2026. I rejected XRO as it was too expensive (PE Ratio greater than 40) and ASX and SEK for low ROE ( <15%). TNE is a great company with good ROE and no debt, but slightly expensive (ROE 38). COH was also slightly expensive (ROE 38).

This left me with CPU (Computershare) and RMD (Resmed). Both good companies with good prospects. Lets have a look at the charts.

For now, Resmed (RMD) seems to be on a downward trend – and Computershare (CPU) on the up. The trend is your friend. This is not advice, but I bought some Computershare on the basis of the above analysis – slightly worried about the debt levels of CPU (which would tend to inflate the ROE), but I bought a small amount and will give this investment 5 years – then re-evaluate.

Financial Year 2023 Slack Results

“I believe in evidence. I believe in observation, measurement, and reasoning, confirmed by independent observers. I’ll believe anything, no matter how wild and ridiculous, if there is evidence for it.
Isaac Asimov – US Author and Biochemist

Good fortune has prevailed in FY 2023. After the tough investing year of FY2022, Slack Investor has stuck to his strategy of investing with growing companies that have an established earnings record and forward P/E ratios <50 (Mostly!). As always, there have been a few lapses, but that’s just part of being an investor.

I expect a bit of volatility in my (mostly “growth”) investment portfolio and I try to reassure myself that, despite the odd negative year in the Slack Investment Portfolio the Stable Income portfolio is doing its job and keeping Slack Investor with enough cash to keep things running. In the world markets, the FTSE 100 Total Return Index was up 7.8% (last FY up 5.7%). Dividends helped the Australian Accumulation Index to be up 10.6% for the financial year (last FY -7.5%). The S&P 500 Total Return Index is again full of optimism – and was up 19.7% (last FY -10.7%) for the same period. All of these Total Return Indicies include any accumulated dividends.

Slack Portfolio Results FY 2023

All Performance results are before tax. The Slack Portfolio is Slack Investor’s investment portfolio and, after the first negative year since starting this portfolio in 2010, I am delighted to be “Back in the Black” – with an annual FY 2023 performance of +17.9%. Full yearly results with benchmarks are shown in the table below.

FY2022 was another bumper year in real estate – particularly Brisbane -but there has been a welcome pause in housing prices for FY2023. For property, the actual falls in asset values is greater than that shown as Slack Investor is using the Total Return values supplied by CoreLogic. The Total Return is calculated from value change as well as the gross rental yield. I would have preferred calculations that include the net rental yield, but this will have to do. The Total Return is a more realistic figure when comparing real estate returns to stock market total returns, as it treats both asset classes as investments.

The share market was the place to be for FY 2023, with the Australian Share market Total Return Index (ASX200 Acc) up 10.6% and the Vanguard Diversified Growth ETF (VDGR), comprising mostly (68%) of International and Australian Shares, increasing by 11.2%. Inflation is again coming in big – with the CPI at +6.0% – reinforcing the need to have exposure to “growth assets” such as shares or property.

Yearly Performance (%) results since 2010

YEAR	SLACK FUND	MEDIAN BAL	VGARD GROWTH	ASX200Acc	RES BRIS	RES MELB	CASH	CPI
2010	6.6	9.8	12.3	13.1	10.8	26.9	4.2	3.1
2011	2.5	8.7	9.1	11.7	-2.4	0.9	4.4	3.7
2012	8.3	0.4	1.3	-6.7	1.3	-0.9	4.3	1.2
2013	26.5	14.7	18.6	22.8	7.7	8.3	3.2	2.4
2014	23.6	12.7	14.5	17.4	11.5	12.8	2.6	3.0
2015	2.4	9.6	11.8	5.7	7.7	15.6	2.5	1.5
2016	14.2	3.1	4.2	0.6	8.4	9.5	2.2	1.3
2017	19.5	8.1	8.8	14.1	6.5	17.7	1.9	1.9
2018	37.6	7.2	10.0	13.0	5.2	3.9	3.9	2.1
2019	19.7	6.2	9.8	11.5	1.7	-6.0	2.0	1.3
2020	9.4	0.3	0.6	-7.7	8.4	13.8	1.1	-0.3
2021	21.7	13.0	20.3	27.8	17.9	10.7	0.2	3.8
2022	-14.3	-2.5	-13.0	-6.5	25.6	3.1	0.3	6.1
2023	17.9	6.9	11.2	10.6	-4.1	-2.6	2.6	6.0

The Slack Fund yearly progress vs BENCHMARKS. The Median Balanced Fund (41-60% Growth Assets), Vanguard Growth Fund, ASX 200 Accumulation Index, Corelogic Residential Property Home Value (Total Return) Index in both Brisbane and Melbourne, and Cash (Australian Super Cash Fund) and Consumer Price Index (CPI)

Although I collect yearly figures, the 5 and 10-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results. The Slack Fund is still ahead of Benchmarks – but currently being challenged by Brisbane Residential real estate over a five-year period.

5-yr Average Annual Performance

Slack Investor 5-year compound annual rate of return – compared to benchmarks *– Click for better resolution.*

The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.

Growth of a $10000 Investment Since 2009

The rate of growth of $10000 invested by *Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.*

10-year compound annual rate of return

The Slack Fund has been around a while and, at last, I am generating some long term data (10-year compound “rolling” annual rate of return). Over this time frame, the Slack Fund has been performing very well. A 10-year annual rate of return of over 14% – Go Slack Fund!

However, the 10-yr rates of return of the Median Balanced Fund, Vanguard Growth fund, ASX200, and residential property in Brisbane and Melbourne are also great long term investments, generating a 10-year compound annual rate of return of 6-9% p.a. From the figures below, although it can add stability to a portfolio, Cash as a long term investment, is a poor choice.

Average 10-yr compound yearly return

YEAR	SLACK FUND	MEDIAN BAL	VGARD GROWTH	ASX200Acc	RES BRIS	RES MELB	CASH
2019	15.6	8.0		10.0	5.8	8.5	2.9
2020	15.9	7.0		7.8	5.5	7.3	2.6
2021	17.9	7.4		9.3	7.5	8.3	2.2
2022	15.2	7.1	8.1	9.3	9.9	8.7	1.8
2023	14.4	6.4	7.4	8.2	8.6	7.6	1.7

The Slack Fund average 10-yr compound yearly return vs BENCHMARKS. The Median Balanced Fund (41-60% Growth Assets), Vanguard Growth Fund, ASX 200 Accumulation Index, Corelogic Residential Property Home Value (Total Return) Index in both Brisbane and Melbourne, and Cash (Australian Super Cash Fund) and Consumer Price Index (CPI)

FY2023 Nuggets and Stinkers and … July 2023 – End of Month Update

“Life is not a bowl full of cherries, there’s good and bad stuff“
Fuzzy Zoeller (American professional golfer)

Fuzzy Zoeller does not always say wise things, but his quote above is on the money. Slack Investor takes the good with the bad.

The trampoline effect of stinkers becoming nuggets in consecutive years reared again, with REA making the transition this year. Also, Nuggets … might end on the Stinker pile the year after. Slack Investor puts more emphasis on growth over a multi-year period, but compiles the yearly Nuggets and Stinkers list …. because its fun!

Growth stocks (usually high Return on Equity (ROE >15%), as with other stocks, often have cycles of price – bouts of overvaluation followed by a period of undervaluation.

The percentage yearly returns quoted in this post include costs (brokerage) but, the returns are before tax. This raw figure can then be compared with other investment returns. I use the incredibly useful Market Screener to analyze the financial data from each company and extract the predicted 2o25 Price/Earnings (PE) Ratio, Dividend Yield, and Return on Equity (ROE), on the companies below. This excellent site allows free access (up to a daily limit) to their analyst’s data, on the financials tab for each stock, once you register with an email address.

Slack Investor Stinkers – FY 2023

Financial year 2023 was a welcome recovery in the technology sectors. All of Slack Investors followed markets Australia, the UK and the US having gains over the financial year 2023. However, Slack Investor is always ready for lessons in humility and still managed to pick up a few stinkers along the way.

Integral Diagnostics (IDX) -19% (Sold Oct 2022)

(IDX – 2025: PE 18, Yield 3.8%, ROE 10%) Integral Diagnostics provides medical imaging services at a number of urban and regional locations in Australia and New Zealand. This company was also one of my stinkers last year (FY2022 -39%) The sinking feeling that I got during my monthly chart reviews was just too much … and I finally gave into that negative energy in October 2022 – and sold. This, unfortunately, turned out to be the bottom of the market – and IDX has made a modest recovery since.

Computershare (CPU) -18% (Sold May 2023)

(CPU– 2025: PE 16, Yield 3.8%, ROE 29%) Computershare is well known to owners of some Australian shares as they run the registry for many Australian companies. It started as an Australian technology business in 1978 and since has become a major global player in financial services. Slack Investor just bought at a bad time … and I sold in May 2023 to make another share purchase. CPU seems to be a solid global business though – Will look at buying this one again.

Dicker Data (DDR) -18% (Still held)

(DDR – 2025: PE 14, Yield 6.8%, ROE 42%) Dicker Data is the only Australian owned and ASX-listed major IT provider. It is a hardware, software and cloud distributor for most of the well known US IT companies (Microsoft, Cisco, HP, etc). The business is projected to continue to grow and, as the share price seems to have “bottomed out”, Slack Investor will continue to hold on because of the companies excellent projected PE, Yield, and ROE.

BetaShares Asia Technology Tigers ETF -7% (Sold Sep 2022)

(ASIA – 2023: PE 17, Yield 2.6%,) Growth in Asia … What could go wrong! Plenty it seems. These “technology tigers” that make up this ETF have been part of a global selloff of tech-related shares in Asia since 2021 as many US investors take flight from the China market due to US/China tensions.

This company was also one of my stinkers last year (FY2022 -33%) and was “on watch” during my monthly chart reviews. Sadly, the pain became too much and I unloaded near the bottom of the market again … and, it has since made a modest recovery. I have maintained at least some exposure to the Asian tech sector with with Vanguard FTSE Asia ex Japan ETF (VGE.ASX).

Slack Investor Nuggets – FY 2023

Nuggets made a comeback this Financial Year. Slack Investor continues to invest in high Return on Equity (ROE) companies with a track record of increasing earnings, Companies with these qualities sometimes behave as “golden nuggets”.

Technology One (TNE) +48%

(TNE – 2025: PE 37, Yield 1.5%, ROE 34%) This Software as a Service (SaaS) and consulting company continues to be profitable. This great business was also a nugget last year (+17%). A high 2025 PE of 37 (Expensive) is a little scary but, if the high Returns on Equity (34%) remain, on balance, this is OK. I found this company through the writings of Rudi Filapek-Vandyck – a great Australian Investor and writer, when he talks, Slack Investor listens.

Altium (ALU) +40%

(ALU – 2025: PE 34, Yield 2.3%, ROE 32%) Altium is an Australian based developer and seller of computer software for the design of electronic products worldwide. It focuses on electronics design systems for 3D printed circuit board (PCB) design. Slack Investor has part-owned this business since 2009 and has enjoyed the increasing value that ALU has created. This sector is very now … and remains a favourite of Slack Investor.

CarSales.com (CAR) +37%

(CAR – 2025: PE 28, Yield 3.0%, ROE 10%) CarSales.com is the go to for selling cars, boats and other vehicles. It does, in an efficient way, what the classified ads used to do. I have noticed that the Return on Equity is dropping (Now 10%) and will keep this company on watch – but I cant argue with the recent price rises.

BetaShare NASDAQ 100 ETF (NDQ) +36%

(NDQ – 2023: PE 26, Yield 1.0%) Exposure to the powerhouse of US Tech companies with the simplicity of an ASX ETF. Management fees are reasonable at 0.48% – Slack Investor remains a fan.

Pro Medicus (PME) +36%

(PME – 2025: PE 78, Yield 0.6%, ROE 46%) Pro Medicus is a developer and supplier of healthcare imaging software and services to hospitals and diagnostic imaging groups. Slack Investor actually met the CEO and co-founder of Pro Medicus, Dr Sam Hupert, at an investment seminar last year. His modesty, US foothold, and debt-free approach to expanding his business impressed me – I’m obviously glad I bought in – but the very high PE ratio (+78) is worrying – expensive.

REA Group (REA) +30%

(REA – 2025: PE 39, Yield 1.5%, ROE 29%) Like Carsales.com, REA has dominated the space left by the old newspaper classifieds in selling real estate in Australia. REA has expanded into India and other global locations. A high PE ratio (39) but while projected Return on Equity (ROE) remains high (29%), this is OK.

VanEck Wide Moat ETF (MOAT) +30%

(MOAT – 2023: PE 19, Yield 2.6%,) The Wide Moat ETF run by VanEck is a rules-based selection of “attractively priced US companies with sustainable competitive advantages” Sounds good doesn’t it. The management expense ratio of 0.49% is OK for such curated US exposure.

Slack Investor Total SMSF performance – FY 2023 and July 2023 end of Month Update

After a difficult 2022, FY 2023 is described by J. P. Morgan as being “kinder to balanced portfolios”. True That! The growth stocks that were punished last year bounced back strongly. In the Australian superannuation scene, the median growth fund (61 to 80% in growth assets) returned +9.2% for FY 2023. The ASX 200 chart shows a gradual climb for the financial year.

ASX 200 Weekly chart for FY 2023 – From Incredible Charts

After a tough FY 2022, the FY 2023 Slack Investor preliminary total SMSF performance looks like returning to form and coming in at around +18%. The 5-yr performance is a more useful benchmark to me – as it takes out the bouncing around of yearly returns. At the end of FY 2023, the Slack Portfolio has a compounding 5-yr annual return of around 10%.

The new financial year started of positively for Slack Investor markets. The ASX 200 + 2.9%; FTSE 100 +2.2%; and S&P 500 +3.1%. He remains IN for all index positions.

All Index pages (ASX Index, UK Index, US Index) and charts have been updated to reflect the monthly changes.

Advice for a young man … and June 2023 – End of Month Update

I was recently delighted when my 14-yr old nephew asked me what I thought he should invest in with his earnings from his part-time jobs.

Firstly, it is a compliment to an old bloke to be asked anything, and secondly, it is testament to the financial maturity of this fine young man that he would be thinking about the world of the share market while still at school.

If he was older and in a steady full-time job I would advise he automate his savings as much as possible and lash into index funds via a platform such as Stockspot, Pearler, Vanguard Personal, or Raiz)

His first investment would be in the order of a few thousand hard-earned dollars from part-time jobs. It is vital that the investment has good prospects and unlikely to lose money over a 5-yr period (no guarantees though!). Given that he would not feel the need to access the money for 5 years (hopefully longer!)

For a first investment, I would add the criteria that it should be a well-known Australian company that might appear in the news occasionally and remind him that he is a part-owner … and an investor!

If he was already 18, it would be “off to the races” and we would immediately set up a broker account in his own name and he would begin to experience the magic of being a shareholder. Being under 18 complicates things a little as minors are not allowed to directly own shares- we need to enlist his parent’s help.

If the parent already has a broker account the best way to start is for the parent to buy the shares on his behalf. When he turns 18, my nephew can start his own account with a broker (e.g. Self Wealth, Commsec, Pearler) and the parent can use an off-market transfer (get the form from the broker) to get the shares into my nephew’s hands as a “gift” including any dividends earned. During this brief holding period, any dividends and any capital gain will count as taxable income in the parents name – but this is a small price to pay to tap my nephew’s enthusiasm.

Alternatively, you could open a broker account in their name (as the trustee for “Nephews name”). The process is a little more complicated and is explained in detail by SelfWealth.

The Nuts and Bolts of Stock Selection

Naturally, I would address this problem in a methodical way and set up a list of Slack owned companies – I couldn’t recommend a company that I didn’t own myself. Some of my favourite stock metrics are gathered from the excellent Market Screener site on the financials page for each stock.

My number one metric for looking at companies is their Return on Equity (ROE), estimated for the year 2024 – Slack Investor is looking forward. This gives me an idea about whether a company is making an investment dollar grow. Higher the better, I start getting curious about a company when ROE is above 15%.

The projected Price Earnings ratio in 2024 is next – I don’t like the P/E Ratio to get above 40, as this indicates the current price of the company is 40 times its earnings (expensive) – but some exceptions are made if the company is growing fast (High ROE). The yield (dividend) is not that important to a young investor, it is the total growth that counts.

Stock	Symbol	2024 ROE	2024 P/E	2024 Yield	Price 30/06/23	% Price below consensus
CSL Ltd	CSL	18%	30	1.5%	$277.38	-18%
Wesfarmers	WES	30%	22	3.9%	$49.34	Fair Value
Coles	COL	31%	22	3.9%	$18.42	Fair Value
Altium	ALU	32%	41	1.9%	$36.92	-6%
Macquarie Bank	MQG	13%	14	4.2%	$177.62	-10%
Car Sales	CAR	10%	28	2.8%	$23.82	-3%
RealEstate.com	REA	29%	41	1.3%	$143.03	-7%

Analysis of some Slack Investor owned stocks using the projected Return on Equity (2024 ROE); price earnings ratio in 2024 (2024 P/E); 2024 Yield; and the current price (30 June 2023); and current discount from the average analyst perceived value – marketscreener.com – Financials Tab

Looking at the figures, even though the stock price of CSL hasn’t really gone anywhere in the last 3 years, it would be my first pick as it is currently 18% below its fair value price (by a consensus of analysts). It is such a strong Australian company that really thinks of the future by continuing to increase its spend on research and development each year.

Wesfarmers (Bunnings, K-Mart, Officeworks, etc) and Coles look OK too because of their high Return on Equity (ROE) – they also have the benefit that you can continually pop in to see how your business is going. Altium has languished in price this last few years but remains a great company for the future – if my nephew was interested in the “tech” space.

This isn’t advice, Unless, of course, you are my nephew!

June 2023 – End of Month Update

The financial year closes and looking at the 12-month charts for FY 2023 – Slack Investor concludes … “It was better than last year”!

Slack Investor remains IN far all followed markets. The ASX 200 (+1.6%) and FTSE 100 (+1.1%) drifted slightly upward for the month. It is boom-time in the US with the S&P 500 rising 6.5%. The US index had moved more than 15% above its stop loss, so I have moved the stop loss upward to 4048.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

The Long View

“Astronomie”, Georg Leopold Hertel and François Boucher, 1750 – 1778 – Rijksmuseum, Netherlands

What exactly these angelic cherubs are up to in this etching will remain a mystery to Slack Investor, but he would say that looking at things from a distance is a worthwhile trait in the stock market world. Slack Investor is currently in Europe on holiday and the geographical distance and time zone shift have helped him take more of a holiday from the markets … and just let them get on with it – without interference!

Take the long view

There are some scary headlines and plenty of volatility on the stock markets with worries about inflation and international bank collapses. Slack Investor will just pass on some sage advice. Here is the secret to being a good investor …

Don’t get caught up in what happens in three months, six months, or 12 months. It’s about the next five to seven years.
Paul Taylor, head of investments for Fidelity Australia and Portfolio Manager for the Fidelity Australian Equities Fund

Paul Taylor is no mug … his Australian Equities Fund is of the managed fund variety and, despite a slug of 0.85% p.a. in management fees, his fund has kept pace or slightly bettered the performance of the ASX 200 Accumulation index over the 5 and 10-yr periods. Even though the managers of the fund appear to know what they are doing, the difficulty of beating index funds over every time period is shown by the negative relative performance over 1 and 7-yrs.

Fidelity Australian Equities Fund performance compared to the ASX 200 Accumulation index – up to the end of February 2023.

Now, Slack Investor completely agrees with Mr Taylor, when investing in equities (shares), you should be locking them up for at least 5 years so that any volatility will be swamped by the beautiful long-term march of increasing value for Australian and International Shares. See the latest Vanguard Long Term Chart to see what I mean.

Slack Investor is still “pretend hurting” from his own last year’s (FY22) annual Slack performance (-14.3%). However, he realises his 5-yr and 10-yr performance is the critical measure for his Slack Fund. As these returns p.a. (13.5% (5-yr) and 15.2% (10-yr), are comfortably above benchmarks, I have reconciled the poor one year figures as just part of the volatility of owning mostly growth shares.

Contribute regularly to your savings

Whether adding to your super, or investment savings, the best way to do this is to add regularly, without even thinking about it. Set up an automatic personal deduction from your salary to your super – or automatically contribute to your savings through a vehicle that is in sync with your risk tolerances (e.g. Stockspot, Pearler).

As my super was accumulating, it was mostly in broad-based index funds (Australian and International). My other investments were mostly in individual companies.

While it’s possible to beat index funds, it’s not easy to do over the long run … and as it isn’t worthwhile for most of us to try.
Paul Samuelson, American Nobel prize winner in economics – from johncbogle.com

Slack Investor has some exposure to index-type ETF’s but continues to dabble in individual companies. Despite the above warning, Slack Investor will continue to “have a crack” at stock selection and portfolio management – but only while his long-term performance still stands up.

Imperfections in the Brickwork and … December 2022 – End of Month Update

Detail from the Pen and Ink “Behind Armstrong Street Shops” – the remarkably talented Bren Luke, 2022.

Slack Investor is always on the lookout for new investments … and nothing attracts the jaundiced Slack Eye more quickly than continuous long term results.

Brickworks Ltd (BKW:ASX) have just had their AGM presentation. I was very impressed by the claim that they have maintained, or increased, normal dividends for the last 46 years!

Dividend record – Brickworks 2022 AGM presentation – Brickworks

Tracking the share price of BWK:ASX since 1968 – Brickworks 2022 AGM presentation – Brickworks

As well as being a very good maker of bricks, Brickworks operates as an investment company and own a 26.1% stake of the diversified investing house Washington H. Soul Pattinson (SOL:ASX). SOL, in turn have holdings in

TPG Telecom – Australian telecommunications provider
Brickworks Limited – Clay and concrete production for the construction industry
New Hope Group – Coal and oil mining and energy generation
Tuas Limited – Telecommunications provider
Apex Healthcare Berhard – Malaysia-based pharmaceutical production
Pengana Capital Group Limited – Fund management
Aeris Resources – Mining and exploration activities

Now Slack Investor does not want to get all preachy here, as as everyone has to draw their own line in the sand – These things are very subjective. I looked up New Hope Mining on the excellent Morningstar Sustainalytics site to get an idea on how well the company is ranked in terms of Environment Sustainability and Governance (ESG).

ESG Risk rating for New Hope Corp. Ltd. – from Sustainalytics

New Hope Group ranked 14571 out of 15559 in terms of ESG risk rating – on a worldwide basis. I personally would feel uncomfortable being a part owner of a thermal coal miner given the current state of the planet.

So despite the most excellent management and performance of BWK, while they still own an interest in the New Hope Group, I will look elsewhere for investments.

Puff Puff MOAT

On the subject of digging deep, I have been a long term holder of the VanEck Morningstar Wide Moat ETF (MOAT:ASX). Slack investor has many vices – Wine and beer just being just two of them … so again, I won’t lecture – as these things are very personal. However, some of the sins that my mother rubbed into me as being “particularly evil” are smoking and gambling. I will do my best to avoid ownership of these type of stocks in deference to my dear Mum.

I noticed back in 2021 that this MOAT ETF had Phillip Morris International as one of its top 10 holdings. According to the Yahoo Finance site – Phillip Morris is 2.5% of the MOAT holdings! Owning a part of a multinational tobacco company that is a leading part of Big Tobacco didn’t really sit well with Slack Investor.

According to the Global Burden of Disease Study, in 2015 alone, smoking caused more than one in ten deaths worldwide and killed more than 6 million people, resulting in a global loss of nearly 150 million disability-adjusted life-years
The Lancet

Slack Investor marked MOAT as an ETF to get rid of, despite liking the concept of its construction – “companies with sustainable competitive advantages”. I had a feeble attempt at shareholder activism and emailed VanEck about this … and enquired whether thy might screen the MOAT ETF with an ethical filter … to get rid of tobacco and gambling stocks – they replied with a polite “no”.

Modified (to protect the innocent!) email from VanEck to Slack Investor

I finally got around to attempt to sell MOAT this month and I thought I should just check the VanEck holdings MOAT site and look at their complete holdings list. Lo and behold … at 29/12/2022, Phillip Morris has now gone from their holdings list! So, for now, MOAT is a keeper!

If at a loose end during the holidays and need a distraction, Slack Investor highly recommends the free exhibition “Streets of Your Town” at the Ballarat Art Gallery, VIC. Bren Luke is an amazing artist, his exhibition runs till 5th Feb 2023.

December 2022 – End of Month Update

The year closes and, I’m not sure if Slack Investor was naughty (probably?)… but, there was no “Santa Rally” this month. All followed markets took a dive in December. The ASX 200 down 3.4%, the FTSE 100 down 1.6%, and the S&P 500 down 5.9%,

Due to the return of all followed share markets to more normal valuations, I have returned my stop-loss upper-limits to 15%. This means that when I work out my stop loss value, I add another 15% to it, this is my upper limit. If the stock price exceeds the upper limit, I will adjust my stop loss upwards. This method helps to lock in some gains if they occur.

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.