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Tough finish to the week

Daily Market Update (1)

Tough finish to the week, Cochlear (ASX:COH) rallies despite taking a hit, QBE Insurance (ASX:QBE) reports billion dollar loss

The ASX200 (ASX:XJO) dropped 1.3% on Friday, sending the benchmark to a 0.2% loss for the week despite a strong series of company reports.

Friday’s weakness was driven by the energy sector, which fell 3.6% and mining, -2.4%, with the likes of BHP (ASX:BHP) and Rio Tinto (ASX:RIO) given back some gains from earlier in the week.

Investors are clearly still coming to terms with what the economy looks like post-pandemic and the potential impacts of massive fiscal stimulus.

Across the week, it was Coles Group (ASX:COL) and Netwealth (ASX:NWL) among the biggest laggards, falling 9.6% and 13.8% respectively due to pessimistic comments on the near term outlook.

Reporting season continued, with Cochlear Ltd (ASX:COH) the report of note, announcing a 4% fall in revenue to $742.8 million, but reporting a 50% profit increase on the back of a number of one-off gains.

Shares finished 8.4% higher upon news the dividend would be reinstated amid signs that hearing implant surgeries were slowly returning to normal.

QBE Insurance (ASX:QBE) on the other hand reported a full year loss of $US$1.5 billion down from US$550 million in the year prior.

Despite the group seeing premium income increase 10.4% and renewal rates growing 9.8%; the dividend remains cancelled.

I’ve highlighted the regular challenging nature of insurance for investors, something reiterated by the significant cost increases for policy holders, but significant losses due to ballooning claims.

Beard trimming in vogue, garbage remains resilient, US markets close flat

Shaver Shop (ASX:SSG) reported an 85.5% increase in profit to $14.2 million, powered by a 102% increase in online sales in the half.

The company is clearly benefitting from two trends, the renewed popularity of facial hair and improving male hygiene brought on by the pandemic.

Revenue increased 15% with the profit margin adding 3.4% to 44.7% due to an increasing level of low cost, online sales. The dividend was increased 52.4% on the news and management confirmed no JobKeeper was received.

After a difficult few months for the company, Cleanaway (ASX:CWY) reported a somewhat straightforward finish to the year, announcing the largest dividend since 2008, up 12.5% on the previous year.

Revenue improved slightly by 2.2% to $1.17 billion with personal waste collection offsetting weakness in the city and industrial collection in the middle of Melbourne’s lockdown; shares fell 3.4% on the news.

US markets closed reasonably flat, the Nasdaq up just 0.07% and the S&P500 lower by 0.2%, sending the weekly losses to 1.6% and 0.7% respectively.

Once again it was increasing bond rates, which moved to 1.34%, that are putting pressure on markets, with the bond proxies including consumer staples and utilities among the hardest hit.

At the same time, Treasury Secretary Janet Yellen continues to advocate for significant stimulus to support failing small businesses and struggling families despite the threat of this overheating the economy.

One of my preferred asset classes, global smaller companies, continues to outperform, with the sector more connected to the real economy and less to the global tech giants. 

Margins in focus, dividends but not as we know them, extrapolating growth 

The surprise takeaway for the week was the resilience of profit margins across Australia’s largest businesses.

In the case of the Big Four banks, the expectation that near zero interest rates would result in a further contraction in their net interest margins has not come to fruition. 

A number of central bank policies including the Term Funding Facility (TFF) have ensured their cost of capital remains incredibly low, offering huge amounts of capital and powering the lending boom.

The case is similar to the likes of Wesfarmers’ Bunnings and Officeworks businesses, or SSG highlighted above, with the forced adoption of online sales offering lower cost fulfilment and inventory turnover, delivering significant operating leverage.

Whilst dividend announcements from the banking sector are another quarter away, they remain very much in focus during reporting season. 

Each of the major mining companies delivered record dividends, whilst a series of smaller, e-commerce powered companies also joined the club.

Finally, the question for investors as we move forward into 2021 is what is actually priced into company valuations today. I’m not suggesting a bubble is building, but rather assessing the appropriateness of current valuation on what are cyclical companies.

Whilst the short-term history has been strong for the likes of Domino’s (ASX:DMP), ARB Corporation (ASX:ARP), JB Hi-Fi Ltd (ASX:JBH), each is trading at a valuation that suggests current conditions will continue for the foreseeable future.

Disclosure: I own shares in Cleanaway (ASX:CWY)

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