Fundamentals don’t fail, says APP’s Wright

Source: The Australian  28th June 2017

The winner of the Researcher of the Year award says covering a wide range of stocks gives him an edge over more specialised analysts.

For the second year running, Russell Wright of APP Securities was the top researcher, with the judges saying he was “a clear winner”.

It might seem that analysts who specialise in a particular sector, such as retail or insurance for instance, might do better, but Wright covers a broad number of stocks across the market.

Wright says analysts who cover a particular sector can be concerned about staying close to the companies in that sector so can be reluctant to put a “sell” recommendation on stocks.

“But if you’re a broad analyst with a long history of experience and pedigree, you know which ones are a buy and which ones are a sell, and it doesn’t concern you to piss them of by calling it a sell,” he says. Being too close to a company can also cause analysts to lose objectivity and “be led down the garden path with inappropriate information”, Wright says.

The award was decided on a combination of four areas: what analysts were recommending at the time of an earnings downgrade by a company; what they were recommending before a takeover being announced; what they were recommending one year ago on the 10 best performing shares in the ASX200 from 1 July last year; and what they were recommending on the 10 worst performing.

Of course, researchers don’t always get it right, as Australian Stockbrokers Foundation chairman Danny Dreyfus noted when he presented the award.

For example, on January 29 Morgan Stanley identified Aconex as a “key pick (as a) structural growth story” and rated it a buy, but later that day the company announced a profit downgrade, resulting in a share price fall of 45 per cent.

And sometimes when analysts do get it right, the timing is wrong. A Deutsche Bank analyst upgraded his rating on UGL from hold to buy on the morning of October 7, stating “the risk/reward is appealing”. But before investors had a chance to act on that advice and buy the shares at $2.14 each, the company went into a trading halt and Cimic announced a takeover bid at $3.15. Wright says that in his 25 years as a researcher he has made his share of bad calls, but none last year. He says he made three standout recommendations over the past 12 months: a buy on travel insurer Cover-More when it was trading at $1.13 before it was taken over by Zurich at $1.94; a sell on Aconex before its profit downgrade; and calling out Blackmores and Bellamy’s as “hugely overvalued”.

He uses a fundamental value methodology when assessing a stock. “Fundamental value — it means you look at the returns you’d expect to receive over the lifetime of ownership of the stock rather than just hope to sell it for a higher value because you think it’s a hot potato,” he says.

“I cannot ever recommend internet stocks and in the internet boom I could not value them on the basis of turnover. I only look at fundamentals and that allows me never to be led astray by whatever is a hot item at the moment, like an Amazon or a Facebook. I could not possibly buy these stocks.” Another advantage to the fundamental value methodology is that because it values everything with the same method, it can be used to compare stocks in different sectors.“I can compare BHP to NAB. I can determine which ones at a relative value is more appealing. Most other broking firms cannot do that. They don’t have a unified approach to valuation methodology,” Wright says.