Weekend Wrap: Buying at all-time highs, Bapcor under offer, Which broker notes matter?

This article is an excerpt from our weekend newsletter – which talks all things markets plus some interesting data insights and memes.

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1. Buying At All-Time Highs

Buying the S&P 500 at all-time highs produces better returns than buying at any given day, based on total returns from January 1988 through to December 2023. 

Here’s what the forward returns look like (any day vs. new high):

• 3 month: 2.9% vs. 2.3%

• 6 month: 5.8% vs. 5.9%

• 1 year: 11.9% vs. 13.4%

• 2 year: 25.0% vs. 28.9%

• 3 year: 40.2% vs. 48.1%

I decided to crunch the numbers for the ASX 200 (any day vs. new high) – Note: The returns below are nominal but you get the picture

• 3 month: 1.8% vs. 0.9%

• 6 month: 3.6% vs. 2.5%

• 1 year: 7.1% vs. 6.7%

• 3 year: 22.8% vs. 15.1%

• 5 year: 41.0% vs. 16.5%

My initial reaction was ‘wow our market absolutely sucks’.

But if you think about it – AI is all the rage right now and Nvidia is at the forefront of this megatrend. The stock is up 205% in the past 12 months, up 3,350% in the past five years and now the world’s third-largest publicly listed company. Its 1Q24 EPS is up 544% year-on-year and 2,800% compared to where it was five years ago.

When you look back at our market – which is dominated by the $220bn market cap BHP, $210bn Commonwealth Bank and $140bn CSL – there’s not a whole lot of growth or megatrend-leverage going around. 

2. Buying Out Bapcor

There isn’t a week that goes by without another ASX-listed company receiving a takeover bid. On Tuesday, it was Bapcor. 

The automotive retailer has issued three profit downgrades in the past 12 months, tanking its share price by as much as 40% to levels not seen since March 2020.

Bain Capital stepped up with a $5.40 indicative, conditional and non-binding takeover offer or a 22.7% premium to its pre-announcement share price. 

What makes this takeover interesting?

1. Analysts were not surprised by the bid as Bapcor is seen as a good business

2. The bid was viewed as opportunistic following the recent share price slump and management issues – Bapcor has yet to find a permanent CEO and new chair

3. Bapcor has had a few recent performance issues, including poor cost management and investment inefficiencies. A turnaround would require significant investment and the need for a management overhaul

4. The $5.40 takeover offer implies a price-to-earnings multiple of 17, which is broadly in line with the stock’s five-year average PE

5. A few analysts saw the deal as an opening move, with possible interest from other major players like AutoZone (US$48bn market cap), O’Reilly (US$58bn market cap) and Marubeni (Nikkei-listed with US$48bn market cap)

The stock is trading at a 10% discount to the $5.40 offer, reflecting the risk of the deal falling through.

3. Which Broker Notes Matter?

Our Wraps contain a list of fresh broker notes – but which ones will move the share price? Here are a few things you should pay attention to.

Market cap: If it’s a large-cap company, say ASX 100 or above, the note is probably going to have little impact on the share price.

Who is it: Notes from brokers like UBS, Citi, JPMorgan, Morgan Stanley and Macquarie are more impactful than the local ones like E&P, Bell Potter and Cannacord. If a smaller broker releases a bullish note (e.g. xyz company is a Buy with 90% upside) – that’s more often than not a tool to build a relationship with the company.

Ratings: A double rating change (e.g. from Sell to Buy) is usually quite meaningful – something dramatic must have happened to warrant such a change. Keep an eye out for these.

‘Initiate’ – Initiating coverage brings new insights and data. When a major broker starts coverage, it often leads to some share price movement.

Share price target: If a broker upgrades a stock to Buy (from Neutral) but keeps the target price the same, is that really an upgrade? It’s always worth keeping an eye out for the percentage change in share price target.

3.5 Putting the Above to Work

I was about to move on to the next segment when I thought – I wouldn’t be doing you guys justice if I couldn’t pull up a few examples. The link in the dates will take you to the respective Morning Wrap.

Fri 31 May – CLSA upgraded Bega Cheese to Outperform from Underperform and raised its target price to $4.65 from $4.0. The stock opened 1.9% higher, rallied as much as 9.6% and finished the session 6.2% higher.

Mon 3 June – Citi initiated coverage of Stanmore Resources with a $4.0 target price (22% upside). The stock opened the session 3.4% higher, hit a brief high of 4.9% but closed up just 1.5%. 

Tue 4 June – CLSA upgraded Premier Investments to Outperform from Underperform but kept their target price unchanged at $32.0. The stock opened 0.6% higher, rallied as much as 3.1% but finished up just 1.1%. This gave the stock a brief kick but investors quickly realised there was no change in valuation/target price.

Thu 13 June – UBS initiated Codan with a Buy and $13.10 target (22.8% upside). The stock opened 2.3% higher and finished the session near best levels, up 6.7%.

Bottom line – Keep an eye out for double upgrades/downgrades and initiations.  

4. The Newborn Portfolio

Two weeks ago, I asked you to build a five-stock portfolio that’ll be fit for a newborn. The poll received 310 responses and here are some of the things I found interesting:

• Top mentions: BHP (89), CSL (71), WES (52), CBA (46), NDQ (38), VAS (36), MQG (33), SOL (31), QUAL (25), IVV (24)

• There was one mention of Nvidia (and it spelt the company as ‘Nvida’)

• Stocks I thought would be more popular: MIN (15), FMG (15), NXT (14), PLS (6), PDN (3)

• Mentions that surprise me: TNE (18),  TLX (13), DRO (9), YAL (7), SHL (6) 

5. The Smallest Top 20 

Resouro Strategic Resources is a Canadian-based mineral explorer focused on the development of its rare earth and titanium Tiros Project in Brazil. 

It made its ASX debut on Friday after successfully raising $8 million at 50 cents per share and finished the session at 64 cents.

I found its Top 20 Holders report to be pretty funny as those ranked #16 to #20 held less than 100,000 shares ($50,000 based on IPO offer price). 

Source: Resouro

That’s a pretty small price to pay to be a top 20 holder! 

6. Trading with Congress

US-based asset manager Tuttle Capital has listed (or tried to list) some pretty crazy ETFs in the past couple of years, including: 

• Inverse Jim Cramer ETF (liquidated in February 2024 after 10 months)

• Tuttle Capital Inverse Socially Conscious ETF (a work in progress)

• X2 Inverse Regional Banks ETF (still listed)

• The National Security Emerging Markets Index ETF (also going strong)

This week, they filed for a Congressional Trading ETF which invests in “companies that sitting members of United States Congress and/or their spouses also have reported to have invested in."