Specific Stock Cycles - Aussie Stock Forums

1. ## Specific Stock Cycles

ANZ

If you were born after 1975, you probably don't remember the last time Australia had a recession. And if you had invested in the big banks from 1995, you would have made a compound return of between 8 to 16 times your original investment. So with all the good times, how can you tell what the next bottom cycle in the banks would look like?

Using bad debts as a key measure:

1992 - Bad debts \$1.9B from \$55B in loans, ratio 29 to 1.
2014 - Bad debts \$1B from \$520B in loans, ratio 520 to 1.

So the ratio is 17 times better in 2014 than 1992.

It is looking like 1992 was the peak ratio for bad debts as that was the last recession, and 2014 the trough for bad debts with record low rates.

So if we get back to a similar peak ratio during the next recession, applying the 29 to 1 ratio in bad debts, would increase it by \$17B, with ANZ making a \$7B profit, that would be looking at a pre-tax loss of about (\$10B) and after tax loss of about (\$7B).

APRA and Basel have put together requirements that some analysts think would require an additional capital buffer of around that figure of \$7B, which doesn't seem to be coincidence.

If your timeline horizon is more than half a cycle (2-3 years) I'd be waiting, as recent history has shown it's taken 3 years of bad debt increases for ANZ to hit it's peak in bad debts, and 2015 is looking to be year 1.

2. ## Re: Specific Stock Cycles

ANZ

Last 10 years earnings excluding bad debts, using formula of NPAT + Bad Debts:

\$Billion
3.5, 4.1, 4.7, 5.1, 5.9, 6.3, 6.6, 6.8, 7.4, 8.2

Steady consecutive growth of a rounded figure of 5-15% through the 10 years, and even in 2008, 2009, 2010, which shows when 1 variable is taken out the rest has been in a consistant pattern.

Last 10 years of bad debts.

\$Billion
0.5, 0.4, 0.5, 1.9, 3, 1.7, 1.2, 1.2, 1.1, 0.9

Peak Bad Debts rise above pattern in 2008, 2009, 2010.

Last 10 years of NPAT:

\$Billion
2.9, 3.6, 4.1, 3.2, 2.9, 4.5, 5.3, 5.6, 6.2, 7.2

Earnings knocked off pattern in 2008, 2009, 2010 by Bad Debts peak.

My hypothesis is that 2015 will be the equivilent of 2007, as the first year of the bad debt increases, both have been relatively small, but it's the next 2-3 years that do the damage as the bear phase comes into play.

http://www.news.com.au/finance/busin...-1227487741926

MR Smith said ANZ was at the bottom of its bad and doubtful debts cycle, but he doesn't expect a significant decline in asset quality any time soon. "The question to ask is: Are we at the bottom of the cycle? And I guess the answer to that is: Yes," he said.

Misc Info - Bottom PE when the ASX drops at least 15% in the last 20 years is between 8-11. If there is an earnings decline in the next couple of years, any forward PE of under 10 would be good value IMO.

3. ## Re: Specific Stock Cycles

Restating that last paragraph:

Misc Info - Bottom PE of ANZ when the ASX drops at least 15% in the last 20 years is between 8-11. If there is an earnings decline in the next couple of years (need to use forward earnings that incorporate peak bad debts), any forward PE of under 10 would be good value, but it is just as important to know where your earnings will approximately bottom as that can vary more than PE.

4. ## Re: Specific Stock Cycles

Comparing ANZ and BHP Boom Cycles in the past 30 years to the All Ords and seeing what the rewards are:

ANZ 1995 to 2007 (7 Times Higher Gains)

Screen Shot 2015-09-03 at 2.21.59 PM.png

ANZ 2012 to 2014 (2 Times Higher Gains)

Screen Shot 2015-09-03 at 2.19.47 PM.png

BHP 1989 - 1997 (6 Times Higher Gains, not sure why there's dots)

Screen Shot 2015-09-03 at 2.23.27 PM.png

BHP 2003 to 2008 (3 Times Higher Gains, compared to 0%)

Screen Shot 2015-09-03 at 2.24.52 PM.png

5. ## Re: Specific Stock Cycles

Another type of company that goes in cycles are Listed Investment Companies that trade at a Premium/Discount to their Net Tangible Assets (Shares that they hold). It is similar to a PE in that investors allocate a subjective value to their assets.

ARG - Argo Investments (Listed Investment Company)

Screen Shot 2015-09-03 at 2.27.10 PM.png

You can see the extreme swings in Discount to Premium (so ideally buy at a discount and sell at premium) marked by black dots. The biggest swings from Discount to Premium are:

1996-1997: +24%
2001-2003: +27%
2011-2014: +16%

With all this information about big gains based on timing and cycles, it's of course extremely difficult to know these opportunities occur and easy in hindsight, so it is as much to highlight the nature of cycles rather than just timing for gains.

6. ## Re: Specific Stock Cycles

I read once that stocks that trade in foreign currency, have their overall returns determined more by currency fluctuations than actual stock / company itself.

These are a list of International ETF's on my watchlist that trade on USD, but because of the currency situation now, it's not something I'm looking at short-term:

VTS, VEU, VGS, IVV, IOO, IXJ, IAA, IEU, IEM, IBK, IZZ

They're all Index ETF's ranging from S&P, Asia, Europe, China but they all are unhedged in USD.

So I've highlighted in black dots, the best times in the past 50 years to get in based on USD improvements:

Australia_exchange_rate_1970_2011.jpg

You can see for example between 1975-1985 any U.S Currency Stock or Index would be worth double, if all other variables were neutral.

Graph cuts off at 2012 but we're at 70c now.

7. ## Re: Specific Stock Cycles

IOOF Holdings (yellow) v All Ordinaries (black)

Screen Shot 2015-09-10 at 6.59.25 PM.png

Thought I'd explore the idea of an Index multiplier. What you can see is that IFL as a domestic wealth management company is highly leveraged to the All Ordinaries. In fact it tends to multiply it's moves to the upside and downside, very roughly around 2 times.

I've found a few industries that tend to do this such as banks, wealth managers, commodities, discretionaries.

So it may be a good play at the right time in the cycle.

8. ## Re: Specific Stock Cycles

CBA

Screen Shot 2015-09-16 at 1.52.04 AM.png

1991 - 1994 (4 Years) Bear
1994 - 1998 (4 Years) Bull
1998 - 2002 (4 Years) Bear
2002 - 2007 (5 Years) Bull
2007 - 2011 (4 Years) Bear
2011 - 2015 (4 Years) Bull
2015 -

Keep in mind some big cyclical factors for CBA Earnings: Bad Debts, Interest Rates, House Prices are at their favourable peaks and likely to start heading the other way.

9. ## Re: Specific Stock Cycles

Originally Posted by shouldaindex
Comparing ANZ and BHP Boom Cycles in the past 30 years to the All Ords and seeing what the rewards are:

ANZ 1995 to 2007 (7 Times Higher Gains)

Screen Shot 2015-09-03 at 2.21.59 PM.png

ANZ 2012 to 2014 (2 Times Higher Gains)

Screen Shot 2015-09-03 at 2.19.47 PM.png

BHP 1989 - 1997 (6 Times Higher Gains, not sure why there's dots)

Screen Shot 2015-09-03 at 2.23.27 PM.png

BHP 2003 to 2008 (3 Times Higher Gains, compared to 0%)

Screen Shot 2015-09-03 at 2.24.52 PM.png

Promising charts

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