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Good afternoon,

Donald Trump caught COVID19 and sent the market into a bit of a mini-spin, falling about 100 points fairly rapidly on Friday afternoon.  I'd be surprised if the market wasn't up a fair bit on Monday.. futures pointing up 1.16% at the moment. 
US Markets were also down on Friday night, S&P 500 down 0.96% and the NASDAQ down 2.22%.  Quality and growth names the worst affected.  Worst performers were Tesla (TLSA, -7.38%) and DexCom (DXCM, -7.08%). 

Locally, our market closed the week down almost 3%, dragged lower by resources. 
Last week we talked about being short iron ore, long everything else in resources.  For context, here's a chart.  FMG & RIO  have both outperformed the rest Mining-ex-energy index I've created (clearly by different degrees) this year. 
Over the past 4 weeks, that outperformance has started to break down.  
I reckon this continues.  Iron ore price is unsustainably high (even though the fines price CFR Qingdao was up 5% last week, US$123.47/t.)

More relevant, is I'm building high conviction in this coal trade, both metallurgical and thermal.  Nice pickup from Citi shows current arbitrage opportunity of buying seaborne coal and selling locally in China.  This doesn't last - and I saw it back in 2013/2014 when my job was modelling the supply/demand of these coals.  Seaborne met and thermal coal prices to rise, WHC, NHC, CRN etc to outperform.
IFA Awards

I was pretty surprised and stoked to be selected as one of the 10 finalists for Independant Financial Adviser "Investment Adviser of the Year" award.  I find out if I win at the awards night on 29 October, which they are doing via Zoom this year. 
As my Dad always said, second is just the first loser!
My best investment idea

You lot are always asking me for my best investment ideas, and its pretty simple - its our Seneca Australian Shares Model Portfolio. 

We ticked over our first quarter with the portfolio and we've been able to generate outperformance, over and above the ASX 200 Accumulation Index, of 5.00% since we started on 17 June.

As a quick reminder,
  • it's a managed (by me) portfolio of my favourite 20 to 40 shares inside the ASX 200. 
  • It's our best ideas, properly diversified and weighted and
  • traded fairly actively to take advantage of the market moves. 
  • You don't pay any brokerage, you just pay us to manage your money.
You can read the monthly update here which is returns up to 30 September 2020.
Portfolio had a decent day yesterday, latest since inception returns up to 1 Oct are +5.1% vs -0.08% for the benchmark. 

In terms of volatility (not that its super-relevant after only 3-and-a-bit months) the annualised volatility of our portfolio returns is 16.2% vs the benchmark of 23.1% up to 30 September 2020.  Pretty good I reckon.
It goes without saying, if you want to invest, drop me an email.  There's no need to move your holdings or complete any paperwork.  The subscription is all digital acceptance via email.  We set you up and you just BPay in funds into the platform... simple. 
My best ideas for the rest of 2020

Coal

New Hope Coal (NHC) $1.30 & Whitehaven Coal (WHC) $1.10
Both stocks have been belted on thermal coal price declines and have barely recovered yet, despite recent strength in the coal price (blue) 
Each stock has its own nuanced investment thesis. 

Whitehaven (WHC) is more a pure play on the coal price, with quite a bit of debt (25% debt to equity) and fairly stable production from its two assets (Maules Creek & Vickery).  It doesn't break even until about US$90-$95/mT coal price, so its very leveraged to any upside though is probably burning c. $200-300m p.a at the current coal price.  It sells a bit of low quality met coal (called semi-soft coking coal) and high quality Newcastle-spec thermal coal...  That SSCC is harder to price cos it'll trade as a 60-something % of the low-vol HCC index price or a premium to the Newcastle spec thermal.. but look... doesn't matter, coal price goes up - WHC wins.

New Hope (NHC) on the other hand has got a few drivers and is arguably the highest quality pure play coal stock on the ASX.  It's assets have break even costs of c.US$50/mT, meaning it makes money in almost any coal price environment. It's only moderately geared and has plenty of headroom in its facilities with the bank.   

I see upside to consensus estimates from cost cutting/high margins (new management have done before) and earlier than expected New Acland stage 3 approval (court appeal being heard on 6 October and Qld govt just approved Adani mine.)  Politically speaking, I think in these challenging times jobs & growth win over the environment (not saying its right or wrong, just saying.)

This is above and beyond the coal price rebound I expect.  Similar conditions and political rumblings caused the 2016 price collapse... as you can see, supply dries up as only the best assets can continue to profit at low prices... it doesn't last long.

Both can double their share price. 
Other ways to play this are through the VanEck Coal ETF (KOL.NYSE) or BHP, through their 50/50 JV partnership with Mitsubishi in the Bowen Basin (BMA). 

Building Materials

The COVID-19 induced "improve my house if I'm going to spend heaps more time in it" theme will linger in my view.  While getting back to work is a priority, most people just aren't going to work exclusively from the office.  Most of the big companies I talk to say they'll need half the floorspace as people will be working 2 or 3 days a week at home.  (feel free to drop me a line and tell me what your company is planning)

So while the intial, electronic and furnishing spend might slow, the structural stuff like creating an office space, re-doing the bathroom, upgrading the applicances etc.  is still to come.

Couple this with the government's preference for infrastructure-spending as a delivery mechanism for stimulus and you've got a heady cocktail of macro-tailwinds. 

Reliance Worldwide (RWC) $4.12
RWC held their investor day last week, posting a very impressive start to the year. US up 22%, EMEA up 8% and APAC up 2%.  While this might be a bit of 'lockdown catchup works' bump, and management conservatively advised against extrapolating the growth... I'm exrapolating the growth!  RWC has self-help margin improvements from cost out as well as the tailwind from home improvement.  It's got strong distribution platforms in the best regions for growth in my view.  Company is targeting 3-5% US LT revenue growth and 2-6% in EMEA (that means a mid-teens EPS growth number) and its only trading on 18x.
Boral (BLD) $4.58
We've been banging on about this for a while, but Boral Aus has significant exposure to housing starts and infrastructure spending.  
If new management and the strategic review restore the Australian business its former glory (>12% ROE) and can get the Nth American business to anywhere in the vicinity of its peers, this stock is 50-100% too cheap.
Pointerra (3DP)

While the stock might be exciting and in the news a lot, I haven't heard anyone publicly actually put together a coherent sentance about this stock. I hear a lot of Nearmap comparisons (wrong), I hear a lot of talk about Bevan Slattery (ok, but not relevant to whether you buy stock at 50c today or not) and I hear a lot of talk about it looking expensive for what its done to date (it is.)

For starters, these guys don't "create" 3D data. They aren't out flying drones or planes or buying satelitte imagery.  Pointerra helps the people who do that sort of thing store, organise, transform and analyse the images they capture.  The data storage part of the business is great, it's a good entry level buy for a local council or utilities company and Pointerra's fully-cloud hosted solution is as at least as good as the other products I've investigated. 

Pointerra is different because of two main reasons:
1. They create tools, workflows and applications for their customers to better use their 3D data. 
Now it's hard to know just how good they are at this, but I tell you what you can do, look at the rates of growth in existing customer spend with Pointerra. 

2. They offer a market place for customers to sell their 3D data. 
This might be capture-specialists looking to monetise their drone flights better, or more likely, an existing Pointerra customer who say, is doing electricity pole inspections (check for maintenance needs) using a drone.   

This customer captures a lot more 3D imagery beyond the state of their poles incidentally.  The ground, the flora/fauna, the weather, the roads, the tracks... the list goes on.  This might be specifically relevant to the utility company, but its relevant to the local council (for example), the wildlife monitoring people, the road department.  

So, while this isnt a huge part of the 3DP's business today, I think it could be a big driver of growth going forward. 

Stocks like this are often the same.  You look for the same tell-tale signs.  Integrated platform that's a niche category killer, increasing user growth, increasing ARPU, and a clear network effect.  If the big creators of 3D data (like the utilities in the US....) are using it, and its built into their workflows, all the contractors, suppliers and service-providers need subscriptions too.   Add in a good management team and you've got a mix that makes billion-dollar market caps.  

I'm buying on any weakness. 
There's one more stock I want to talk about... I think it can 10-20x its current share price, it's already profitable and its only of the radar of the most astute of investors (as far as I'm aware). 

BUT!  I'm still getting my clients set properly, so I'll perhaps reveal this one next week.  But I don't get excited like this very often. 
Movers & Shakers

Someone is clearly bullish the JHG results due out on 29 October.  
Payments (EML, Z1P, APT) generally had a good week.
As did all the COVID-19 rebound stocks (CTD, WEB, QAN, FLT, AIA)
Building mats also strong (RWC, BLD, JHX)
Mesoblast (MSB) didn't get the results from their trial that "investors" (read: gamblers) were hoping for.  Biotech... ffs, its so simple.  Just ignore it.  Yes you can make money if you get it right, but you won't.  So don't bother.  

Energy, mining, mining services, financials all got the rough end of the stick this week.
My good friend from UWA days, Mike Savas, won the rights to my $5.00 bet from last weekend. His submission was selected on the basis that I now nothing about UFC or American Football.  He suggested a multi with 3 NFL games and a UFC fight..  all of which he got correct, except for the UFC fight was decided by knockout not points (which we both selected to juice up the odds).  I have bet $5.00 per weekend since the 2nd lockdown started in Melbourne and have won NOTHING. Donuts.  Nada.  Zero.

I'm still flat about the not-so-mighty West Coast Eagles losing by 1pt last night.  Collingwood are ordinary at best but took their chances and WC were inaccurate.  I hope Port or the Lions win the GF from here but I've got absolutely no interest in watching AFL if the Coasters are out.  As for the NBA Finals, that's a snooze-fest and LA should sweep a beaten down and undersized Miami.  God knows what I'll do if Dictator Dan doesn't let me out of the house by next weekend. 

Oh and for those that have nothing better to do, I'm doing Ausbiz TV tomorrow (Monday) at 1.20pm if you want to tune in.

Have a good week
LL
Luke Laretive
CEO & Investment Adviser
Seneca Financial Solutions

T  +61 3 8639 1601  |   M  0451 122 656 | lukel@senecafs.com.au
Level 2 Professional Chambers
120 Collins Street Melbourne VIC 3000 
AFSL No. 492686
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