All Ords Report 31 May 2016
Does size really matter? Top 100 share Flight Centre (FLT) has proven to be no match for the smaller rival online company Webjet (WEB), so perhaps not.
However, it does matter if you are a fund manager, looking to invest in shares outside of the top 100 biggest stocks on our market, as the larger the fund, the harder it can be to move money into and out of smaller companies without moving the share price too much. You could wipe out your profit trying to buy enough shares.
But as an individual investor, you can have the upper hand, as you can move in and out of smaller shares, at the price you want, without moving the price much. But remember, the smaller the company, the more risk you may be taking, and you must have rules to buy and sell. Don’t invest blindly, without understanding how the price could unfold. This you gain by examining the historical price chart for the particular share.
Looking at the charts of WEB and FLT, WEB’s share price gains have outstripped FLT for the past two years. WEB is up 163 per cent from May 2014, while FLT has fallen by around 51 per cent. Remember though, every share has its day, which means there will be times when a share rises strongly and times when it falls, however now is not the time to be holding FLT.
Looking back to March 2016, FLT was trading at $44.72, and at the time of writing it had fallen to $33.70. Now, you may be thinking that FLT is ‘cheap’, and it’s time to buy. But is it? Remember, what you perceive as cheap could be expensive to someone else.
The point I want to make here is, why swim against the market when you can swim with it?
For some, this way of thinking is quite different to how you may be inclined to think about price, especially if you have a mindset that is attracted to buying ‘cheap’ and to make a quick profit. If you’re always looking for a discount, or things ‘on sale’ you could easily overlook the shares that are more likely to give you a solid profit over the medium term.
It’s also a matter of risk, but most who think about trying to buy ‘cheap’ are unlikely to consider how their risk has actually increased if they try to buy into stocks that have been sold down. Buying when a stock is rising is generally a much lower risk approach.
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What do we expect in the market?
The All Ordinaries Index (XAO), having closed at 5469.7 points last week, refused to be dampened by negativity about political and global issues.
My analysis has indicated for some time that after a solid run on the market, which has now extended well towards the end of May, that it is probable to see demand for Australian shares take a breather for one to four weeks, before the market can continue higher. However, the market surprised and continued to push towards 5500 points unabated. Given this, over the coming months the market is likely to continue to trade into a zone of resistance between 5600 and 5700 points.
Remember though, the next rise is unlikely to move straight up without pulling back at times along the run. The sell-off on the market today is part of ‘normal’ market activity and may be the start of one of these short declines. However, the XAO would need to fall below 5361 points to be confirmed.
The recent strength on the Australian share market indicates that the bears seem to be losing the battle to the bulls, which is interesting when I still hear so many people talking negatively about the market. But then, this is the story of the masses.
US rate rise
Global markets continue to focus on US interest rates and the likelihood of a rise in the near term. Given recent economic data, and commentary that has followed the ongoing release of this information, a rise in the US is probable over the coming months. The US Federal Reserve typically prepares the market months in advance and this has again been the practice this year.
While a US rate rise is likely to create some waves for share prices in the US, there have been times when commentary is negative and the market responds positively. I believe that Australia will feel the ripples from any US volatility and then continue higher. However, volatility will allow the Australian market to ebb and flow, which is important in sustaining the overall rise.
I don’t see a US rate rise as a big concern for investors, particularly if you have rules to buy and sell, including setting an initial stop loss for any investment you make. Besides, any temporary sell-off, followed by a further rise, may present opportunities to buy into quality stocks.
The Australian Bureau of Statistics reported that corporate profits were down by around 4.7 per cent for the first quarter of this year. The decline is likely to be largely due to mining, manufacturing, and financial services. Investors ought to take note of this figure and watch for future announcements.
Dale Gillham is Chief Analyst at Wealth Within